oversight

Bay Towers Multifamily Mortgagor Operations Project Number 012-11031, Far Rockaway, NY

Published by the Department of Housing and Urban Development, Office of Inspector General on 2000-12-07.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

         Navigate by Using "Page Up" and "Page Down" Keys.
         Hyperlinks on Table of Contents (TOC) at the bottom of
                               each Page




                     AUDIT REPORT




                     BAY TOWERS
         MULTIFAMILY MORTGAGOR OPERATIONS
               PROJECT NUMBER 012-11031
              FAR ROCKAWAY, NEW YORK

                             2001-NY-1001

                         DECEMBER 7, 2000



                          OFFICE OF AUDIT
                        NEW YORK/NEW JERSEY




T.O.C.                                                            EXIT
                                                                 Issue Date
                                                                         December 7, 2000
                                                                Audit Case Number
                                                                        2001-NY-1001




TO:    Deborah VanAmerongen, Director, New York Multifamily HUB, 2AH


FROM: Alexander C. Malloy, District Inspector General for Audit, 2AGA


SUBJECT:      Bay Towers
              Multifamily Mortgagor Operations
              Project Number 012-11031
              Far Rockaway, New York


In response to your request, we conducted an audit of the books and records of the multifamily
project, Bay Towers, Project Number 012–11031, (herein called the Project). The results of our
audit are provided within this audit report, which contains three findings with recommendations
for corrective action.

Within 60 days please provide us, for each recommendation in this report, a status report on: (1)
the corrective action taken; (2) the proposed corrective action and the date to be completed; or
(3) why action is considered unnecessary. Also, please furnish us copies of any correspondence
or directives issued because of the audit.

Should you or your staff have any questions contact Edgar Moore, Assistant District Inspector
General for Audit, at (212) 264-8000, extension 3976.




T.O.C.                                                                                   EXIT
Management Memorandum




                        THIS PAGE LEFT
                            BLANK
                        INTENTIONALLY




T.O.C.
2001-NY-1001              Page ii        EXIT
Executive Summary
We conducted an audit of the books and records of the multifamily project, Bay Towers. The
objective of our review was to determine whether the Owners and Management Agent complied
with requirements of the Regulatory Agreement.




                                  We concluded that the Management Agent generally
  Results
                                  complied with regulations and requirements of the U.S.
                                  Department of Housing and Urban Development (HUD),
                                  including those regarding the use of project funds for
                                  reasonable operating expenses and necessary repairs.
                                  However, our review disclosed that the Agent did not
                                  comply with the provisions of the Regulatory Agreement
                                  and other HUD requirements that pertain to: (1) computing
                                  and remitting Section 236 excess income to HUD; (2) using
                                  project funds to pay legal fees relating to the filing of
                                  bankruptcy petitions by the Owners; (3) maintaining
                                  documentation on an account receivable and a loan
                                  payable; and (4) the writing off of an account receivable
                                  and a loan payable.

                                  Specifically, we found that contrary to HUD requirements,
  Excess Income Was               the Management Agent did not properly compute excess
  Neither Computed                income due HUD; as a result, excess income due HUD in
  Correctly nor remitted          the amount of $199,205 was not remitted. Furthermore, we
  to HUD                          noted that the HUD New York State Office (NYSO) may
                                  have inadvertently given approval to the Project to retain
                                  future excess income amounts collected.

                                  We also found that the Management Agent charged
  Ineligible Legal Fees           ineligible legal fees that pertain to the filing of petitions of
  Charged To Project              bankruptcy by the Owners of the Project. As a result, the
                                  Project has been deprived of $77,000, which should have
                                  been used for reasonable project operating expenses. In
                                  addition, the Management Agent wrote-off a $201,312
                                  account receivable, due from the Project’s Owners; and a
  Questionable Write-Offs
                                  $174,677 loan payable, without obtaining HUD’s written
                                  approval. Consequently, we believe that the Project could
                                  be deprived of funds from a collectible receivable, and that
                                  its loans payable balance may be understated.


T.O.C.                                                                                 EXIT
                                      Page iii                                      2001-NY-1001
Executive Summary


                     As a result, we recommend that the HUD NYSO make a
   Recommendations   determination on whether (a) the $199,205 in excess
                     income collected and retained by the Agent during the
                     period March 31, 1998 through March 31, 2000 should be
                     remitted to HUD; and (b) the NYSO’s April 10, 2000
                     approval to allow Bay Towers to retain future excess
                     income collected should be rescinded. We also recommend
                     that the Owners be required to immediately reimburse the
                     Project’s operating account for the $77,000 in legal fees
                     charged to the Project. In addition, we recommend that the
                     amounts for the account receivable and the loan payable be
                     put back on the Project’s books until HUD makes a
                     determination on their authenticity.

                     On November 8, 2000, we held an exit conference with
  Exit Conference
                     officials of the Agent to discuss the results of our draft
                     findings and recommendations. The Officials provided us
                     with written responses to the findings, which we included
                     in its entirety as Appendix B of this report. We also
                     provided a summary and an evaluation of their responses
                     at the end of each finding.




T.O.C.
2001-NY-1001             Page iv                                        EXIT
 Table of Contents

 Management Memorandum                                                   i



 Executive Summary                                                     iii



 Introduction                                                           1



 Findings

 1     The Agent Incorrectly Computed Excess Income
       Due HUD                                                          3


 2     Ineligible Legal Fees Were Charged to the Project                9


 3     The Agent’s Write-Offs Of An Account Receivable and
       A Loan Payable Are Questionable                                13




 Management Controls                                                  19



 Follow Up On Prior Audits                                            21



 Appendices
     A Schedule of Ineligible and Unsupported Costs                   23

     B Auditee Comments                                               25


     C Distribution                                                   29

                                 Page v                      2001-NY-1001

T.O.C.                                                                 EXIT
Table of Contents




Abbreviations

HUD                 U.S. Department of Housing and Urban Development
NYSO                New York State Office
RAP                 Rental Assistance Program
TPA                 Transfer of Physical Assets
NYC-HPD             New York City Department of Housing Preservation and
                    Development




T.O.C.
2001-NY-1001                       Page vi                                 EXIT
Introduction
Bay Towers, which was constructed in 1973, is a 375 unit multifamily project located in Far
Rockaway, New York. The original Mitchell-Lama mortgage of $13,670,000 was refinanced in
1977. Specifically, the original mortgage was recast into a $5,476,900 first mortgage, which is
insured under Section 223(f) of the National Housing Act and an uninsured second mortgage of
$8,943.600. The Project has an interest reduction contract under Section 236 of the National
Housing Act. The Project has a Rental Assistance Payment (RAP) Contract with HUD for 75
units, and also receives Section 8 rental assistance from the New York City Housing Authority
for approximately 58 units. The New York City Housing Development Corporation is the
servicing mortgagee; however, applications for rental increases are submitted to HUD for
approval.

Bay Towers Company owns the Project. There have been two unauthorized transfers of physical
assets (TPA). One in 1986, this resulted in Bay Towers Associates becoming a limited partner
in Bay Towers Company. In this regard, a TPA was submitted to HUD but was never approved.
The second in 1992, during this one DAL Realty was made a general partner of Bay Towers
Company without the approval of HUD. The President of DAL is also the President of the
Management Agent, U.S. Housing Management, Inc., and is the general partner for Bay Towers
Company. U.S. Housing Management, Inc. has managed the Project since November 1991. The
financial books and records are maintained at the Management Agent’s office at 326 Third
Street, Lakewood, New Jersey.




                                    The objective of our review was to determine whether the
 Audit Objectives                   Owners and Management Agent complied with
                                    requirements of the Regulatory Agreement.


                                    To accomplish our objectives, we interviewed HUD New
 Audit Scope and                    York State Office officials as well as officials and staff
 Methodology                        members of the Agent. We obtained an understanding of
                                    the applicable HUD program requirements and internal
                                    control procedures employed by the Agent. We examined
                                    audited financial statements and other reports submitted to
                                    HUD.

                                    We reviewed and verified cash disbursements made by the
                                    Agent and the Owners on behalf of the Project. We verified
                                    project rental income and recomputed Section 236 Excess
                                    Income using the rent rolls and other accounting
                                    information. We also conducted an inspection of the Project
                                    to ensure that necessary repairs were completed.
                                         Page 1                                   2001-NY-1001

T.O.C.                                                                               EXIT
Introduction



               The audit generally covered the period January 1, 1998
               through December 31, 1999, and where appropriate, was
               extended to cover other periods. The audit fieldwork was
               performed between January 3, 2000, and August 2000.

               The audit was conducted in accordance with generally
               accepted governmental auditing standards.




T.O.C.
2001-NY-1001       Page 2                                       EXIT
                                                                                         Finding 1


       The Agent Incorrectly Computed Excess
                 Income Due HUD
Contrary to HUD requirements, the Management Agent did not properly compute excess income
due HUD; as a result, excess income due HUD was not remitted. Furthermore, the HUD NYSO
may have inadvertently given approval to the Project to retain future excess income amounts
collected. We attribute this to the Agent’s failure to follow HUD’s procedures for calculating and
remitting excess income. Accordingly, we recommend that the HUD NYSO make a
determination on whether excess income in the amount of $199,205, which was collected and
retained by the Agent during the period from March 1, 1998, through March 31, 2000, should be
remitted to HUD.




                                     Section 4 (I) of the Regulatory Agreement provides that
          Criteria                   ”…owners agree to remit to the Secretary on or before the
                                     tenth day of each month the amount by which the total
                                     rentals collected on the dwelling units exceeds the sum of
                                     the approved basic rentals for all occupied units, which
                                     remittance shall be accompanied by a monthly report
                                     approved by the Secretary…”

                                     HUD Housing Notice 98-10 changed the method of
                                     computing excess income (rent collected in excess of the
                                     basic rent) so that it would be computed on a unit-by-unit
                                     basis based on the rent roll effective with rents collected on
                                     March 1, 1998. The notice also required all excess income
                                     as calculated by these revised procedures to be remitted to
                                     HUD without delay on a monthly basis.

                                     HUD Housing Notice 99-28 permitted former non-insured
                                     State Agency Section 236 assisted projects, whose
                                     mortgages were refinanced under Section 223(f) (Mitchell-
                                     Lama projects), to apply to HUD for approval to retain a
                                     portion of the excess income for specified purposes. These
                                     projects may retain excess income retroactively to October
                                     21, 1998, the date that Congress authorized these owners to
                                     retain excess income. However, all past due, unpaid excess
                                     income should have been paid in full to HUD before future
                                     excess income may be retained, with the exception of


                                          Page 3                                     2001-NY-1001


T.O.C.                                                                                    EXIT
Finding 1


                                Mitchell-Lama projects that may have been holding such
                                income while awaiting further instructions from HUD.

                                During our review we learned that the monthly reports of
   Excess Income Reports Were   Section 236 excess income that were submitted to HUD by
   Not Correctly Prepared       the Agent during the period March 1998 through August
                                1998 were not properly prepared. These reports were
                                prepared using the old forms and instructions that had been
                                superseded. Agent officials were not aware that effective
                                March 1, 1998 the method of computing excess income
                                was changed by HUD Housing Notice 98-10. As a result,
                                Excess Income reports submitted to HUD for this period
                                showed that no money was due HUD. However, our audit
                                of rental collections for the period March 1998 through
                                August 31, 1998, revealed that a total of $43,539 of excess
                                rental income had been collected during this period;
                                accordingly, the monthly amounts collected should have
                                been remitted to HUD.

                                After learning of the new procedures, the Agent used the
                                correct forms in September 1998; however, the excess
                                income calculation was not mathematically correct.
                                Subsequent to this, the Agent correctly calculated excess
                                income for the periods from October 1998 through
                                December 1999. However, the Agent chose not to remit the
                                excess income to HUD. Agent employees indicated that the
                                Project could not afford to pay the excess income to HUD;
                                therefore, the excess income collected was used for project
                                operations.

                                On March 31, 2000, Bay Towers Company requested
 Bay Towers Request To          approval from HUD to retain all of its excess income per
 Retain Excess Income           HUD Housing Notice 99-28. They requested to retain all
 Collected                      excess income collected from February 2000 retroactive
                                back to October 21, 1998, as well as any future excess
                                income to be collected. The purpose of this request was to
                                use these funds to meet project-operating shortfalls and to
                                cover future repair costs for on-going projects. On April 10,
                                2000, the HUD NYSO, Director, Project Management
                                approved Bay Tower’s request for retention of excess
                                income retroactive to October 21, 1998 for the purposes
                                cited above. The excess income to be retained totaled
                                $145,204.




T.O.C.
2001-NY-1001                        Page 4                                           EXIT
                                                                             Finding 1



                               The HUD NYSO was not aware that prior excess income
 Questionable Eligibility To   reports were not prepared correctly. Accordingly, HUD did
 Retain Excess Income          not know that excess income collected and due HUD for
 Collected                     periods prior to October 21, 1998 had not been remitted, as
                               required. As a result, Bay Towers may not have been
                               eligible for approval for retention of Section 236 excess
                               income. HUD Housing Notice 99-28 provides that for
                               former non-insured Section 236 projects whose mortgages
                               were refinanced under Section 223(f) (Mitchell-Lama
                               projects), excess income could be retained retroactively to
                               October 21, 1998. If excess income collected during this
                               period was remitted to HUD, the Agent could apply for a
                               refund for the project. However, all past due amounts
                               (excess income collected prior to October 21, 1998) must
                               have been paid in full before future excess income could be
                               retained.

                               We calculated that the Agent collected a total of $56,606 in
                               excess income during the period from March 1, 1998
 $56,606 Was Owed To HUD       through October 20, 1998; however, this amount was not
 Prior To October 21, 1998     remitted to HUD. As a result, we believe that the $56,606
                               should have been remitted to HUD prior to the Project
                               being approved to retain future excess income collected.
                               Furthermore, we believe that since the Agent did not
                               request approval to retain all excess income collected until
                               March 31, 2000, all excess income collected prior to this
                               date should have been remitted to HUD.

                               We determined that the Agent collected a total of $199,205
                               of excess income for the period March 1, 1998 through
                               March 31, 2000; which should have been remitted to HUD
                               on a monthly basis as required by the regulations. This
                               amount consists of $56,606 due for the period from March
                               1998 through October 20, 1998; $109,565 due for the
                               period October 21, 1998 through December 31, 1999; and
                               $33,034 collected by the Agent but not remitted during the
                               period January 2000 through March 31, 2000. Since this
                               excess income was not remitted to HUD on a monthly basis
                               and since the Project did not request approval to retain
                               excess income until March 2000, we do not believe that the
                               Project is eligible to retain any excess income collected.




                                            Page 5                            2001-NY-1001


T.O.C.                                                                            EXIT
Finding 1


                         Accordingly, we believe that the NYSO should determine
A HUD Determination is   whether or not Bay Towers should be required to remit to
Needed                   HUD the $199,205 in excess income collected from the
                         period March 1, 1998 through March 31, 2000.




Auditee Comments         The auditee comments provide that in April 2000, HUD
                         New York Field Office permitted the Bay Towers project to
                         retain excess income based on the Projects difficulties
                         meeting operating expenses, the need for immediate and
                         future repairs and completion of ongoing renovations and
                         improvements. HUD’s verbal communications to U.S.
                         Housing indicated that all excess income retroactive to
                         March 1998 could be retained.

                         The Project regrets any misunderstanding over the filing of
                         the excess income worksheets and any administrative
                         problems that may have been caused HUD. However,
                         regardless of what excess income may have been owed
                         HUD, Bay Towers cannot afford to pay excess income to
                         HUD at this time. The Bay Towers project has been
                         substantially improved while under its present management
                         and ownership and more than 1.5 million dollars have been
                         invested in the Project. Since the Project is still in need of
                         funds to undertake improvements, any excess income that
                         HUD permitted the Project to retain has already been
                         allocated and disbursed. Therefore, any revocation of
                         previous determinations that excess income be retained
                         would substantially prejudice the Project and ongoing
                         improvements.



 OIG Evaluation of       OIG’s position is unchanged. HUD Housing Notice 98-10
 Auditee Comments        provides that all past due excess income must be paid in
                         full to HUD before future excess income can be approved
                         for retention. HUD staff must approve requests for
                         retention of excess income in writing and excess income
                         can only be retained beginning October 21, 1998.
                         Therefore, at a minimum, the $56,606, which was due for
                         the period prior to October 21, 1998, should be paid if the
                         Project is going to be considered eligible for approval for
                         retention of excess income. HUD Housing Notice 99-28
                         states that all excess income is the property of the Federal

2001-NY-1001                 Page 6


T.O.C.                                                                         EXIT
                                                                 Finding 1


                   Government and must be remitted to HUD monthly without
                   any delay for any reason. As a result, we also believe that
                   the excess income due HUD should not be offset against
                   prior or future contributions to project operations.




 Recommendations   We recommend that the HUD NYSO:

                   1A.    Make a determination as to whether the $199,205
                          in excess income collected for the period March 31,
                          1998 through March 31, 2000 should be remitted to
                          HUD. At a minimum, the Agent should be required
                          to remit the $56,606 in Section 236 excess income
                          collected during the period prior to October 21,
                          1998 (The date Congress acted to allow retention of
                          excess income).

                   1B.    Determine whether the NYSO’s April 10, 2000
                          approval to allow Bay Towers to retain future
                          excess income collected should be rescinded.




                                Page 7                           2001-NY-1001


T.O.C.                                                                       EXIT
Finding 1




               (THIS PAGE LEFT BLANK INTENTIONALLY)




T.O.C.
2001-NY-1001                Page 8                    EXIT
                                                                                          Finding 2


      Ineligible Legal Fees Were Charged to the
                        Project
Contrary to HUD regulations, the Management Agent charged ineligible legal fees that pertain to
the filing of petitions of bankruptcy by the Owners of the Project. As a result, the Project has
been deprived of $77,000, which should have been used for reasonable project operating
expenses. We attribute this to the Agent’s belief that these costs were allowable project expenses.
Accordingly, we recommend that the Owners be required to reimburse the Project the total
amount of these costs.




                                      The Regulatory Agreement, Section 8, provides that,
        CRITERIA                      “Owners shall not file any petition in bankruptcy, or for a
                                      receiver, or in insolvency, or for reorganization or
                                      composition, or make any assignment for the benefit of
                                      creditors or to a trustee for creditors or permit adjudication
                                      in bankruptcy…”

                                      Also, Section 6(b) of the Regulatory Agreement, provides
                                      that owners may not without the prior written approval of
                                      the Secretary: “... Assign, transfer, dispose of, or encumber
                                      any personal property of the project, including rents, or pay
                                      out of any funds, other than from surplus cash, except for
                                      reasonable operating expenses and necessary repairs.”

                                      The Partnership Bay Towers Company owns Bay Towers
                                      project. Bay Towers Company has a limited partner “Bay
                                      Towers Associates” and a General Partner “DAL Realty,
                                      Co. The President of DAL Realty Co. is also the President
                                      of the Project’s Management Agent, US Housing
                                      Management, Inc.

                                      We found that in June 1996 the Owners of the project, Bay
                                      Towers (Bay Towers Company) and its General Partner
     Owners File For
                                      (DAL Realty Co., Inc.) separately filed voluntary petitions
     Bankruptcy
                                      under Chapter 11 of the Bankruptcy Code. Bay Towers
                                      Company having incurred accounts payable in excess of $1
                                      million and having a substantial doubt about its ability to
                                      continue as a going concern, precipitated this filing for

                                          Page 9                                      2001-NY-1001


T.O.C.                                                                                     EXIT
Finding 2


                               bankruptcy. In March 1997, while facing a disputed notice
                               of acceleration and Uniform Commercial Code (UCC) sale,
                               the limited partner of Bay Towers Company (Bay Towers
                               Associates) filed for relief under Chapter 11 of the
                               Bankruptcy Code.

                               The Management Agent indicated that the building services
    Bankruptcy Legal Fees      union had obtained a judgment against Bay Towers
    Paid With Project          Company for back wages and wrongful termination of
    Funds.                     employees, which had forced the owners to file for
                               bankruptcy protection. As a result, during the period from
                               January 1, 1998 through December 31, 1999 a total of
                               $77,000 in legal fees related to these bankruptcy filings
                               were charged to the Project.

                               The Management Agent believed that the legal fees and
                               costs associated with the filings and administration of the
   Agent Believed Bankruptcy   bankruptcies were allowable project costs. We disagree;
   Legal Fees Were Allowable   and believe that the costs associated with the bankruptcies
   Project Expenses.           are the expenses of the Owners, which should not have
                               been charged to the Project. Accordingly, we believe that
                               the Owners of Bay Towers should reimburse the Project’s
                               operating account the total amount of the bankruptcy cost
                               that was paid with project funds.




                               Officials of Bay Towers stated that there are circumstances
  Auditee Comments             where the owners may be liable for the legal fees; however,
                               they believe that the particular circumstances of the Project
                               and its Chapter 11 reorganization warranted paying the
                               legal fees out of project funds. The owners believe that
                               there was no alternative but to file for bankruptcy, which
                               benefited the Project and not the Owners. The legal fees
                               were incurred to protect the Project from failure. Should
                               HUD insist the owners are responsible for the $77,000 in
                               legal fees, capital contributions of approximately 1.5
                               million dollars more than compensate the Project for the
                               legal fees.




T.O.C.
2001-NY-1001                       Page 10                                          EXIT
                                                                  Finding 2




                    OIG’s position is unchanged. The Regulatory Agreement
OIG Evaluation of   prohibits the use of project funds except from surplus cash
Auditee Comments    for other than reasonable operating expenses and necessary
                    repairs. In addition, the Regulatory Agreement prohibits
                    owners from filing for bankruptcy. Accordingly, we
                    believe that the Project funds used to pay bankruptcy
                    related legal fees benefited the owners by preserving their
                    ownership interests and were not a reasonable and
                    necessary project expense. Therefore, we believe that the
                    bankruptcy related legal fees should be reimbursed to the
                    Project’s operating account.




 Recommendations    We recommend that the NYSO:

                    2A.    Instruct the owners of Bay Towers to reimburse the
                           Project’s operating account for the $77,000 in legal
                           fees and related costs that was charged to the
                           Project, which resulted from petitions of bankruptcy
                           being filed by the owners.




                                Page 11                           2001-NY-1001

T.O.C.                                                                EXIT
Finding 2




               THIS PAGE LEFT
                   BLANK
               INTENTIONALLY




2001-NY-1001    Page 12


T.O.C.                          EXIT
                                                                                        Finding 3


        The Agent’s Write-Offs Of An Account
         Receivable And A Loan Payable Are
                    Questionable
Contrary to HUD requirements, the Management Agent wrote-off an account receivable that was
due from the Project’s Owners, and a loan payable, without obtaining HUD’s written approval.
We attribute this to the Agent’s failure to follow HUD requirements; and to the Agent’s and
Owner’s failure to maintain proper documentation of all financial instruments related to the
Project. Consequently, the Project may be deprived of a $201,312 receivable, which could be
used to pay for necessary operating expenses, if collected. Furthermore, its loans payable balance
may be understated by $174,677. As a result, we recommend that the amounts for the account
receivable and the loan payable be put back on the Project’s books until HUD makes a
determination on their authenticity.




                                     The Regulatory Agreement, Section 9 (a) provides that
         CRITERIA                    “Owners shall provide for the management of the project in
                                     a manner satisfactory to the Secretary...”

                                     Section 9(c) of the Regulatory Agreement provides that
                                     “...Owners shall keep copies of all written contracts or other
                                     instruments, which affect the mortgaged property, all or any
                                     of which may be subject to inspection by the Secretary or
                                     his duly authorized agents.”

                                     Furthermore, Section 6 of the Regulatory Agreement
                                     provides that “Owners shall not without the prior written
                                     approval of the Secretary...(b) Assign, transfer dispose of,
                                     or encumber any personal property of the project, including
                                     rents, or pay out of any funds, other than from surplus cash,
                                     except for reasonable operating expenses and necessary
                                     repairs.”

                                     In examining the December 31, 1998, financial statements,
    A $201,312 Account               we learned that various assets and liabilities were written
    Receivable, Due From             off and charged to the Project’s capital account as a prior-
    Owners, Was Written              period adjustment. Included in the assets written-off was an
    Off                              account receivable entitled “Due from Project Owners” in
                                     the amount of $201,312.

                                         Page 13                                     2001-NY-1001

T.O.C.
                                                                                          EXIT
Finding 3



                             The $201,312 account receivable had been on the Project's
 IPA Did Not Obtain          books since at least January 1992. However, the Project’s
 Verification From Owners    California based Independent Public Accountant (IPA)
                             stated that the prior year’s financial statements did not
                             contain a reference about the account receivable (a note to
                             the financial statements). The IPA was also unable to obtain
                             information regarding the receivable from the Owners of
                             Bay Towers. As a result, the IPA provided the Agent with
                             the adjusting journal entries and the Agent without
  HUD Written Approval       obtaining written approval from HUD, wrote-off the
  Was Not Obtained           account as of December 31, 1998.

                             Included in the liabilities that were written-off was a loan
                             payable, which was unsecured and in the amount of
  A 174,677 Loan Payable
                             $174,677. The financial statements for the year ended
  Was Written-Off
                             December 31, 1996, indicated that a loan in the amount of
                             $234,864 was obtained from the New York City
                             Department of Housing Preservation and Development
                             (NYC-HPD). The loan was in connection with a 1984
                             transfer of partnership interest and for organization fees.
                             The loan was payable in seven annual installments of
                             $33,512 commencing on April 1, 1985. The IPA informed
                             us that after consulting with the Owners and the Agent, he
                             was unable to verify the loan payable. Accordingly, an
  Neither Owners Nor         adjusting entry was prepared and the Agent wrote-off the
  Agent Verification; Nor    payable. Again, the Agent did not obtain written HUD
  HUD Written Approval       approval prior to writing off the amount. As a result, we are
                             not certain that all available means to verify this account
                             was exercised.

 Loan Payable May Be An      Although the above loan was recorded in the Project’s
 Owner’s Obligation          records, we believe that it may have been the Owners’
                             obligation; inasmuch as, the loan was for organization fees,
                             which are usually expenses that are paid by the Owners.
                             The Regulatory Agreement prohibits the use of project
                             funds, from other than surplus cash, for this type of
  $60,187 In Project Funds   expense. However, records indicate that the Project may
  Was Used As A Payment      have paid $60,187 on this payable since at December 31,
  On The Loan Payable        1996, the balance of the payable had been reduced to
                             $174,677. No additional payments had been made up to the
                             date the payable was written-off the books.




2001-NY-1001                     Page 14


T.O.C.                                                                            EXIT
                                                                          Finding 3



                            Accordingly, we believe that a determination should be
   A HUD Determination Is   made whether this loan was an obligation of the Project or
   Needed                   the Owners. If it is determined that the loan payable is an
                            obligation of the Project, the obligation should be re-
                            established on the books unless NYC-HPD provides
                            documentation showing that the loan has been paid or
                            forgiven. If the loan payable is not an obligation of the
                            Project, then the Owners should provide documentation to
                            show whether payments on the loan were made from non-
                            project funds or from surplus cash. If payments on the loan
                            were made with project funds, the Owners have a liability
                            to the Project. Accordingly, we believe that the Owners
                            should be required to reimburse the Project’s operating
                            account for the $60,187 if project funds were used to make
                            payments on the loan payable.

                            In both cases the IPA stated that he was unable to verify the
                            amounts written off with the Agent or the Project’s
                            Owners. However, regulations provide that the Agent and
                            Owners have a fiduciary relationship with HUD to properly
                            maintain all documents, papers and instruments, which
                            affect the mortgaged property. Furthermore, prior written
                            approval from HUD must be obtained before assets are
                            disposed of or encumbered. Since written HUD approval
                            was not obtained, we believe that the amount written-off
                            for the account receivable “Due from project Owners’” and
                            the loan payable-unsecured, should be put back on the
                            books of the Project. The Agent and Owners should then be
                            required to submit documentation to HUD so that a
                            determination can be made as to the authenticity of the
                            amounts.




                            The auditee commented that they have no proof, written or
Auditee Comments            otherwise that the account receivable existed, therefore, the
                            Project’s current CPA firm has written off the account since
                            the Project will never receive any of these apparently non-
                            existent monies. With regard to the loan payable, the
                            auditee again comments that there is no indication that the
                            loan exists. HUD refers to a $60,187 payment on the loan,
                            yet the Project, its managers and accountants have no
                            records of the loan or any payments on the loan. It also

                                        Page 15                            2001-NY-1001


T.O.C.                                                                          EXIT
 Finding 3


                    appears that the New York City Department of Housing
                    Preservation and Development, the lender, has no record of
                    this loan. Both the account receivable and the HPD loan, if
                    they ever existed, originated more than ten years ago. None
                    of the parties involved appear to have records, which date
                    back ten years. However, in the absence of any records, we
                    respectfully submit that our auditors properly “wrote-off”
                    these items.




OIG Evaluation of   The fact that the audited financial statements listed both the
                    account receivable and the loan payable is evidence that
Auditee Comments    this asset and liability existed. As a result, we believe that
                    the owners have a fiduciary relationship through the
                    requirements of the Regulatory Agreement to keep copies
                    of all written contracts or other instruments, which affect
                    the mortgaged property. The Regulatory Agreement also
                    requires the Owners to obtain written approval from HUD
                    prior to disposing of any property of the Project. Since a
                    written approval from HUD was not obtained we are not
                    certain that all available means to verify the authenticity of
                    the amounts written off were made. Accordingly, OIG
                    believes that the amounts should not have been written-off
                    without proper HUD approval and verification.




  Recommendations   We recommend that HUD NYSO instruct the Agent and
                    Owners to:

                    3A.      Put the $201,312 account receivable “Due from
                             Owners,” and the $174,677 loan payable back on
                             the books of the project Bay Towers.

                    3B.      Submit documentation to HUD so that a
                             determination can be made as to whether the
                             account receivable of $201,312 is authentic. If
                             determined to be real, the Owners should be
                             instructed to repay these funds to the operating
                             account of the Project, or show that the receivable
                             has been satisfied. HUD should also consider
                             assessing an accrued interest charge if the amount is
                             still owed by the Owners.

 2001-NY-1001             Page 16


T.O.C.                                                                    EXIT
                                                    Finding 3



         3C.   Submit documentation to HUD so that a
               determination can be made as to whether the loan
               payable has been satisfied. If the loan is an
               obligation of the Owners the loan payable should be
               removed from the Project books. The Owners
               should then be instructed to reimburse the Project’s
               operating account for the $60,187 paid on the loan
               with project funds.




                    Page 17                           2001-NY-1001


T.O.C.                                                    EXIT
Finding 3




               (THIS PAGE LEFT BLANK INTENTIONALLY)




2001-NY-1001                Page 18


T.O.C.                                                EXIT
Management Controls
In planning and performing our audit, we considered the management controls of the
Management Agent in order to determine our audit procedures, not to provide assurance on
controls. Management controls include the plan of organization, methods and procedures
adopted by management to ensure that goals are met. Management controls include the process
for planning, organizing, directing and controlling program operations. Management controls
also include the systems for measuring, reporting and monitoring program performance.




                                  We determined the following management controls were
 Relevant Management
                                  relevant to our audit objectives:
 Controls
                                  Program Operations – Policies and procedures that
                                  management has implemented to reasonably ensure that a
                                  program meets its objectives.

                                  Validity and Reliability of Data – Policies and procedures
                                  that management has implemented to reasonably ensure
                                  that valid and reliable data are obtained, maintained and
                                  fairly disclosed in reports.

                                  Compliance with Laws and Regulations – Policies and
                                  procedures that management has implemented to
                                  reasonably ensure that resource use is consistent with laws
                                  and regulations.

                                  Safeguarding Resources – Policies and procedures that
                                  management has implemented to reasonably ensure that
                                  resources are safeguarded against waste, loss and misuse.

                                  We assessed all the relevant controls identified above.

                                  It is a significant weakness if management controls do not
                                  provide reasonable assurance that the process for planning,
                                  organizing, directing and controlling program operations
                                  will meet an organization’s objectives.

                                  Based on our review, we believe that significant
Significant Weaknesses            weaknesses exist in the areas of “Validity and Reliability of
                                  Data” (see finding 1) and “Compliance with Laws and
                                  Regulations” (see findings 1, 2 and 3).



                                      Page 19                                     2001-NY-1001


T.O.C.                                                                               EXIT
Management Controls




                      THIS PAGE LEFT
                          BLANK
                      INTENTIONALLY




2001-NY-1001           Page 20


T.O.C.                                 EXIT
Follow Up On Prior Audits
This was the first audit conducted by the Office of the Inspector General. An Independent Public
Accountant performed prior audits of the Project for the 12-month periods ended December 31,
1998 and December 31, 1999. The reports do not contain any findings.




                                         Page 21                                   2001-NY-1001


T.O.C.                                                                                 EXIT
Follow Up On Prior Audits




                            THIS PAGE LEFT
                                BLANK
                            INTENTIONALLY




2001-NY-1001                 Page 22


T.O.C.                                       EXIT
                                                                                      Appendix A

Schedule Of Ineligible and Unsupported Costs


Finding                            Ineligible 1/         Unsupported 2/


1                                                           $199,205
2                                    $77,000
3                                                            375,989

                                     $77,000                $575,194



1/        Ineligible costs are costs charged to a HUD-financed or insured project or activity that
          the auditor believes are not allowable by law, contract, or Federal, State, or local
          policies or regulations.


2/        Unsupported costs are costs charged to a HUD-financed or insured project or activity
          and eligibility cannot be determined at the time of audit. The costs are not supported by
          adequate documentation or there is a need for a legal or administrative determination on
          the eligibility of the cost. Unsupported costs require a future decision by HUD program
          officials. This decision, in addition to obtaining supporting documentation, might
          involve a legal interpretation or clarification of Departmental policies and procedures.




                                         Page 23                                     2001-NY-1001


T.O.C.                                                                                    EXIT
Schedule Of Ineligible and Unsupported Costs




                                    THIS PAGE LEFT
                                        BLANK
                                    INTENTIONALLY




2001-NY-1001                           Page 24


T.O.C.                                               EXIT
                             Appendix B

Auditee Comments




                   Page 25       2001-NY-1001


T.O.C.                              EXIT
Appendix B




2001-NY-1001   Page 26


T.O.C.                   EXIT
                   Appendix B




         Page 27                2001-NY-1001


T.O.C.                  EXIT
Appendix B




2001-NY-1001   Page 28


T.O.C.                   EXIT
                                                                                    Appendix C

Distribution
President, U.S. Housing Management, Inc., Lakewood, New Jersey (2)
Deputy Secretary, SD, Room 10100
Chief of Staff, S, Room 10000
Special Assistant to the Deputy Secretary for Project Management, SD, Room 10100
Assistant Secretary for Administration, S, Room 10110
Assistant Secretary for Congressional & Intergovernmental Relations, J, Room 10120
Senior Advisor to the Secretary, Office of Public Affairs, S, Room 10132
Director of Scheduling and Advance, AL, Room 10158
Counselor to the Secretary, S, Room 10234
Deputy Chief of Staff, S, Room 10266
Deputy Chief of Staff for Operations, S, Room 10226
Deputy Chief of Staff for Programs and Policy, S, Room 10226
Deputy Assistant Secretary for Public Affairs, W, Room 10222
Special Assistant for Inter-Faith Community Outreach, S, Room 10222
Executive Officer for Administrative Operations and Management, S, Room 10220
Senior Advisor to the Secretary for Pine Ridge Project, W, Room 10216
General Counsel, C, Room 10214
Director, Office of Federal Housing Enterprise Oversight, O, 9th Floor Mailroom
Assistant Secretary for Housing/Federal Housing Commissioner, H Room 9100
Office of Policy Development and Research, R, Room 8100
Assistant Secretary for Community Planning and Development, D, Room 7100
Assistant Deputy Secretary for Field Policy and Management, SDF, Room 7108
Government National Mortgage Association, T, Room 6100
Assistant Secretary for Fair Housing & Equal Opportunity, E, Room 5100
Chief Procurement Officer, N, Room 5184
Assistant Secretary for Public and Indian Housing, P, Room 4100
Chief Information Officer, Q, Room 3152
(Acting) Office of Departmental Operations and Coordination, I, Room 2124
Chief Financial Officer, F, Room 2202
Office of Deputy General Counsel, CB, Room 10220
Director, Enforcement Center, V, 200 Portals Building, 1250 Maryland Avenue SW, Washington,
DC 20024
(Acting) Real Estate Assessment Center, X, 1280 Maryland Avenue, SW, Suite 800, Washington,
DC 20024
Director, Office of Multifamily Assistance Restructuring, Y, 4000 Portals Building, 1280 Maryland
Avenue SW, Washington, DC 20024

Secretary’s Representative, New York/New Jersey, 2AS
Director, MF HUB, 2AH
Assistant General Counsel, New York/New Jersey, 2AC
Assistant Deputy Secretary for Field Policy and Management, SDF, Room 7108
Deputy Chief Financial Officer for Finance, FF, Room 2202
Director, Office of Budget, FO, Room 3270

                                         Page 29                                    2001-NY-1001


T.O.C.                                                                                  EXIT
Appendix C


CFO, Mid-Atlantic Field Office, 3AFI
Office of housing/Federal Housing Commissioner, HF, (Attn: Audit Liaison Officer,
     Room 9116)
Departmental Audit Liaison Officer, FM, Room 2206
Acquisitions Librarian, Library, AS, Room 8141


Steve Redburn, Chief
Office of Management and Budget
725 17th Street, NW Room 9226
New Executive Office Building
Washington, DC 20503


Deputy Staff Director
Counsel Subcommittee on Criminal Justice
Drug Policy & Human Resources
B373 Rayburn House Office Building
Washington, DC 20515


The Honorable Henry A. Waxman
Ranking Member
Committee on Governmental Reform
2204 Rayburn Building
House of Representatives
Washington, DC 20515-4305


The Honorable Joseph Lieberman
Ranking Member
Committee on Governmental Affairs
706 Hart Senate Office Building
United States Senate
Washington, DC 20510


The Honorable Dan Burton
Chairman
Committee on Government Reform
2185 Rayburn Building
House of Representatives
Washington, DC 20515-6143




2001-NY-1001                            Page 30


T.O.C.                                                                              EXIT
                                                         Appendix C


The Honorable Fred Thompson
Chairman
Committee on Governmental Affairs
340 Dirksen Senate Office Building
United States Senate
Washington, DC 20510-6250


Director, Housing & Community Development Issue Area,
  United States General Accounting Office
441 G Street, NW, Room 2474
Washington, DC
(Attention: Judy England-Joseph)


Ms. Cindy Fogleman
Subcommittee on General Oversight & Investigations
O'Neill House Office Building, Room 212
Washington, DC 20515




                                               Page 31     2001-NY-1001


T.O.C.                                                        EXIT