oversight

Review of Management Activities for Denver Northeast Apartments, Mitchell 66 Apartments, and Rotella Park Manor, Mitchell Management, Denver, Colorado

Published by the Department of Housing and Urban Development, Office of Inspector General on 2002-03-15.

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

                               Audit Report
                               District Inspector General for Audit
                               Rocky Mountain District




           Mitchell Management
                       Denver, Colorado

     Review of Management
      Activities for Denver
     Northeast Apartments,
   Mitchell 66 Apartments, and
       Rotella Park Manor
                         2002-DE-1001
                         March 15, 2002

Department of Housing and Urban Development
District Office of Inspector general For Audit
633 17th Street, 14th Floor
Denver, CO 80202-3607
                                         Audit Report
                                         District Inspector General for Audit
                                         Rocky Mountain District
                                         Report: 2002-DE-1001          Issued: March 15, 2002



TO: Larry Sidebottom, Director, Denver Multifamily HUB, 8AHMLA




FROM: Robert C. Gwin, District Inspector General for Audit, 8AGA

SUBJECT:        Mitchell Management
                Denver, Colorado
                Review of Management Activities for Denver Northeast Apartments, Mitchell
                   66 Apartments, and Rotella Park Manor


We performed an audit of the management activities of Mitchell Management, the management agent
for three HUD insured multifamily projects located in the Denver, Colorado area. The three
multifamily projects are Denver Northeast Apartments, Mitchell 66 Apartments, and Rotella Park
Manor.

The overall objective of the audit was to assess Mitchell Management’s operations and each of the
three projects’ compliance with HUD requirements. More specifically, the objectives were to
determine the reliability of the organization’s management controls for maintenance, use of project
funds, ensuring tenant eligibility, HUD subsidy, and other management activities.

We appreciate the courtesies extended by the personnel of Mitchell Management and the on-site staff
at the three projects Denver Northeast Apartments, Mitchell 66 Apartments, and Rotella Park Manor.
In addition, we appreciate the information and cooperation provided by the staff of the HUD Office of
Multifamily Housing.

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

Should you have any questions, please contact Ernest Kite, Assistant District Inspector General for
Audit, at (303) 672-5452.
                                     2002-DE-1001




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Executive Summary
We performed an audit of Mitchell Management, the Management Agent responsible for
managing three HUD insured multifamily projects located in the Denver, Colorado area. The
multifamily projects that Mitchell Management manages are Denver Northeast Apartments,
Mitchell 66 Apartments, and Rotella Park Manor Apartments.

Mitchell Management, as Management Agent, is responsible for ensuring that the HUD insured
properties are maintained in accordance with HUD standards and requirements. Mitchell
Management’s management control structure was not adequate to ensure that housing operations
at the HUD insured properties were in compliance with HUD requirements. Management
Controls for project maintenance, cash collections and accounting, tenant eligibility
determination, and HUD subsidy payments are not reliable and need to be strengthened to
improve the multifamily projects’ housing operations. As a result of Mitchell Management’s
ineffective management control structure, the management agent is not meeting its management
responsibility to ensure compliance with HUD requirements and to maintain the projects in
decent, safe, and sanitary condition.

We found that the projects were not maintained in a decent, safe, and sanitary condition. The
overall effect of not performing the necessary maintenance of the projects and related housing
units is that the tenants are occupying units that fail to meet the minimum HUD requirements for
being decent, safe, and sanitary. Furthermore, deficient maintenance of the projects’ buildings
and surrounding grounds affects the tenants’ ability to live in a healthy and hazard-free
environment. In addition, the projects had excessive vacant units that had not been repaired
timely. The vacant units need to be repaired timely in order to accommodate those families
waiting for available housing. As a result of the deficient maintenance, the projects are unable to
generate the maximum amount of revenues that is needed to fund the projects’ operations.

The Management Agent needs to improve its occupancy procedures over the three projects’
tenant and security deposit accounting records, and the tenant eligibility determination and
continued occupancy documentation. This needs to be done to bring the projects’ occupancy
procedures in conformity with HUD requirements, as well as, to improve the Management
Agent’s administrative control and oversight over its tenant occupancy activities.

The Management Agent has not established the minimum required accounting records for the
three projects and those that are being kept are not maintained timely and accurately. The records
that have not been properly established and maintained are the tenant accounts receivable and
security deposit subsidiary ledgers and the accounts payable ledgers. The accounting for tenant
activities has been basically on a cash basis rather than on an accrual basis. This situation, plus
the fact that the accounting records are not being maintained in a timely manner, limits the
Management Agent’s ability to properly administer and monitor its housing activities.

Also, the Management Agent needs to establish better control over the receipt and deposit of its
project rents and miscellaneous monies. Improvement is needed to ensure that monies are timely
deposited into the projects’ bank accounts.




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Our review identified basically the same conditions that had been presented in reports issued by
HUD and in reports issued by the projects’ independent public accountant. Even with these
previous reports identifying needed management changes and improvements, we found that
limited changes had been made by the Management Agent in the operations of the HUD insured
projects.


                                The overall objective of the audit was to assess Mitchell
 Audit Objectives               Management’s operations and each of the three projects’
                                compliance with HUD requirements. More specifically, the
                                objectives were to determine the reliability of the organization’s
                                management controls for maintenance, use of project funds,
                                ensuring tenant eligibility, HUD subsidy, and other management
                                activities.

  Properties are not            We found that the three projects, Denver Northeast Apartments,
  maintained in a decent,       Mitchell 66 Apartments, and Rotella Park Manor, are not being
  safe, and sanitary            maintained in a decent, safe, and sanitary condition. The
  condition                     conditions we found were basically the same as had been
                                identified by HUD in their previous inspections of the projects.
                                While HUD has pointed out the need to establish adequate
                                procedures to correct the identified maintenance deficiencies, the
                                Management Agent has not taken the necessary corrective
                                action. As a result, maintenance deficiencies continue to exist.

                                In addition, the lack of maintenance to vacated units has resulted
                                in the projects having a large number of unrentable vacant units
                                in each project at any given point in time. These vacancies
                                continue even though the projects have needy families on the
                                projects’ waiting lists for available apartments. The high number
                                of vacancies has reduced the projects’ rental income and limited
                                the amount of funding available to finance project operations and
                                maintenance.

                                The maintenance procedures in place at the projects at the time
                                of our review were informal and ineffective and lacked any
                                meaningful oversight and supervision by the management agent,
                                Mitchell Management.

                                Mitchell Management needs to improve its occupancy
  Improved controls
                                procedures over the three projects’ tenant and security deposit
  needed over occupancy
                                accounting records, and the tenant eligibility determination and
  procedures
                                continued occupancy documentation. This needs to be done to
                                bring the projects’ occupancy procedures in conformity with
                                HUD requirements, as well as, to improve the Management
                                Agent’s administrative control and oversight over its tenant
                                occupancy activities.

                                For the three projects, the Management Agent has not
                                established the required tenant accounts receivable and tenant
                                security deposit subsidiary ledgers that are to be posted and
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                       maintained on an accrual basis and in a timely manner. The
                       tenant records kept by the projects were on a cash basis and
                       primarily only recorded payments by its tenants. The
                       Management Agent bookkeeper maintains the official tenant
                       records for the projects, however these records were not
                       maintained on a current basis. In fact, these records had not been
                       posted for up to seventeen months. In addition, the tenant
                       records kept by the Management Agent bookkeeper were used
                       only to support accounting entries to the projects’ general ledger
                       and were not to supplement the daily occupancy operations at the
                       projects. As a result, the Management Agent and its project staff
                       are unable to readily identify the balance due from any of its
                       tenants. Any determination of a tenant accounts receivable
                       balance can only be obtained by utilizing informal records kept
                       at the on-site project office.

                       The Management Agent was not processing security deposit
                       refunds for its vacated tenants in a timely manner. More
                       specifically, the security deposit refunds had not been processed
                       for some tenants even though the tenants had vacated their units
                       up to six or more months prior.

                       For two of the projects, Denver Northeast Apartments and
                       Mitchell 66 Apartments, the Management Agent was not
                       adequately documenting its tenant eligibility and continued
                       occupancy certifications. As a result, the projects were unable to
                       support the eligibility of its tenants and ensure the amount of rent
                       being charged to its tenants was correct.

                       The books and accounts being maintained by the Management
The books of account   Agent, Mitchell Management, for the three projects were not
are not complete and   being kept in accordance with HUD requirements. The books
accurate               and accounts for these projects did not contain all of the records
                       and were not complete and accurate. More specifically, the
                       following deficiencies were noted:

                       ·   Accounting records were not kept current;
                       ·   Subsidiary ledgers for accounts payable were not kept;
                       ·   Inaccurate allocation of costs between projects; and
                       ·   Required independent audit reports were submitted late.

                       The accounting responsibilities for the projects have been vested
                       with the Management Agent bookkeeper that has been unable to
                       post and maintain the records in a timely manner. As a result,
                       the Management Agent has had limited financial information
                       with which to administer and monitor its HUD insured projects.
                       In addition, without current financial information, the
                       Management Agent has been unable to ensure that its project
                       funds are being properly and effectively used for project
                       activities.

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                    The Management Agent needs to improve management controls
Improved controls   over cash receipts to ensure that all cash collections are properly
needed over cash    collected, deposited, and recorded in the projects’ books of
receipts            account. The system for Tenants Accounts Receivable at Denver
                    Northeast Apartments and Mitchell 66 Apartments is informal
                    and less than adequate for collecting monies owed to the
                    projects. Laundry income for Denver Northeast Apartments and
                    Mitchell 66 Apartments is received, deposited, and recorded into
                    the books of account by the Bookkeeper of the Management
                    Agent. All of the functions for handling and recording laundry
                    revenue for the two projects should not be vested in the same
                    individual. In addition, cash receipt deposits for the projects
                    have not been made timely.

                    Improved controls are needed over the handling and depositing
                    of project revenues in order to insure that the monies are
                    properly received and recorded. Furthermore, timely deposits
                    increase the availability of the monies for project use.

Auditee Comments    The results of the audit were discussed with officials of the
                    Management Agent during the course of the audit, and at an exit
                    conference on February 11, 2002. The draft audit report and
                    related audit findings and recommendations were provided to the
                    Management Agent at the exit conference, for their review and
                    comment. The Management Agent officials provided their
                    written response to our draft audit report on March 14, 2002.
                    Their complete written response is included in Appendix 1.

                    The Management Agent Officials stated that a formal written
                    response would be submitted after the final report is issued.
                    According to their written response, they are aware of the items
                    of concern contained in the draft report and have instituted
                    corrective procedures to correct all deficiencies. Their response
                    includes a brief status update for each project. A MIO plan for
                    Denver Northeast, addressing all maintenance and repairs
                    indicated, has been submitted to HUD for review. Mitchell 66 is
                    under contract for sale and Rotella Park Manor is in the final
                    stages of negotiation for sale.




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Table of Contents
Management Memorandum ....................................................................................i

Executive Summary............................................................................................... iii

Table of Contents ...................................................................................................vii

Abbreviations ...................................................................................................... viii

Introduction............................................................................................................. 1

Findings and Recommendations

         1. Deficient Maintenance Procedures and Controls....................................... 5
         2. Improvement Needed Over Occupancy Procedures...........................19
         3. Books and Accounts Not Maintained In Accordance with HUD
            Requirements ..........................................................................................25
         4. Improved Controls Needed over Cash Receipts..................................31

Management Controls ...........................................................................................35

Follow-up on Prior Audits ....................................................................................37

Appendices

         1. Auditee Comments .................................................................................39
         2. Distribution .............................................................................................41




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Abbreviations:
HUD     Department of Housing and Urban Development




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Introduction
Three projects, Denver Northeast Apartments, Mitchell 66 Apartments, and Rotella Park Manor,
were established to provide decent, safe, and sanitary dwelling accommodations for eligible
residents in Denver and Thornton, Colorado. Mitchell Management was created to ensure,
among other duties, that these properties were maintained and operated according to the HUD
standards and requirements.

Denver Northeast Apartments is owned by Denver Northeast Associates. Mitchell 66 Apartments
is owned by Mitchell 66 Associates, LLP. Rotella Park Associates, Ltd owns Rotella Park
Manor. Mr. Bertram Bruton is the general partner of each of these Associates, as well as, the
owner of Mitchell Management, which is the management agent for all three projects.

In 1979, Denver Northeast Associates was established to obtain an interest in, develop, and
operate Denver Northeast Apartments. Denver Northeast Apartments is financed under Section
221(d)(4) of the National Housing Act, with rental assistance under Section 8 of the National
Housing Act. This project has 17 units, all of which are eligible for Section 8 housing assistance
payments.

The construction of Mitchell 66 Apartments was completed in 1976. Mitchell 66 is financed
under Section 236 of the National Housing Act, with rental assistance under Section 8 of the
National Housing Act. This project has 86 units, 83 of which are eligible for Section 8 housing
assistance payments. The subsidized units are covered under two HUD Housing Assistance
Payments Contracts.

The construction of Rotella Park Manor Apartments was completed in 1983. Rotella is financed
under Section 221(d)(4) of the National Housing Act, as amended, with rental assistance under
Section 8 of the National Housing Act. This project has 81 units, all of which are eligible for
Section 8 housing assistance payments.

The Colorado Housing and Finance Authority is the mortgage holder and servicer for Denver
Northeast Apartments. The Federal National Mortgage Association is the mortgage holder, while
GMAC Commercial Mortgage Corporation is the mortgage servicer for Mitchell 66 Apartments.

The Colorado Housing and Finance Authority was the mortgage holder and servicer for Rotella
Park Manor Apartments. However, the Colorado Housing and Finance Authority accelerated the
mortgage for Rotella Park Manor Apartments, and consequently assigned the mortgage to HUD.
As of June 28, 2001, HUD became the mortgage holder and servicer for Rotella Park Manor
Apartments and has subsequently initiated foreclosure proceedings.

Mitchell Management has been the only management agent for both Denver Northeast and
Mitchell 66 Apartments. Rotella Park Manor has undergone several management agent changes
during its existence.

Mitchell Management managed Rotella Park Manor from 1982 through 1992. Due to poor
management, in 1993, the Colorado Housing and Finance Authority and HUD required a new
management company to operate Rotella Park Manor. The project owner hired a new

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management company, but in 1996, the new management company was terminated and the
management of the Rotella Park Manor project was again given to Mitchell Management. Due to
the distressed financial condition of the project, Mitchell Management was granted an
administrative fee of $8 per unit per month, rather than a management fee. In July 1999, HUD
notified the project owner that the project needed to hire a separate “Arm’s Length” management
company to manage the project. Presently, the project has not obtained the services of a new
management agent.

During the audit period, HUD had conducted several reviews of the projects and their related
management operations. The conditions presented in this report parallel those reported by HUD
in their previous reports. The results of the HUD reviews are briefly discussed below by project:

        Denver Northeast Apartments

        The HUD Real Estate Assessment Center conducted physical inspections of Denver
        Northeast Apartments in 1999 and 2000. Based upon the inspections, the project was
        given low scores in both years because of numerous health and safety violations that were
        found. In March 2000, the project was referred to the HUD Departmental Enforcement
        Center for enforcement action. The referral was based upon the deficiencies noted in the
        project’s physical condition in the 1999 inspection. The condition of the property and
        dwelling units are contrary to the provisions of the Regulatory Agreement and the HUD
        Housing Assistance Payments Contract.

        Mitchell 66 Apartments

        The HUD Real Estate Assessment Center conducted physical inspections of Mitchell 66
        Apartments in 1999 and 2000. The project was given low scores for both years because
        of needed maintenance and health and safety deficiencies that were noted. Such
        deficiencies are contrary to the provisions of the Regulatory Agreement and the HUD
        Housing Assistance Payment Contract.

        Rotella Park Manor

        The HUD Real Estate Assessment Center conducted a physical inspection of Rotella Park
        Manor in 1999. The project received a very low physical condition score due to the
        numerous health and safety violations that were identified. As a result, Rotella Park
        Manor was referred to the HUD Departmental Enforcement Center in November 1999 for
        enforcement action. In 2000, the HUD Real Estate Assessment Center conducted an
        additional physical inspection of Rotella Park Manor. Again, the project received a very
        low physical condition score due to the numerous health and safety violations that were
        identified.

        In March 1999, the Denver Multifamily HUB conducted a Comprehensive Management
        Review of the project. The Denver Office gave the project an overall unsatisfactory
        rating because of the numerous HUD contract violations that were found. The review
        pointed out deficiencies in three major categories: Maintenance and Security, Financial
        Management, and General Management Practices.

Our audit identified similar conditions as those presented in previous HUD review reports.
Although HUD did not perform a management review of the Denver Northeast Apartments or

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Mitchell 66 Apartments projects during our audit period, we identified deficiencies in the
management and operations of these two properties that were similar to the deficiencies HUD
noted during their review of Rotella Park Manor. We found that the organization’s management
controls for maintenance, cash, and tenant eligibility, for the three projects, are not reliable
enough to ensure compliance with HUD requirements. We found that the properties were not
being maintained in a safe, decent, and sanitary condition. Mitchell Management was created to
ensure, among other duties, that the projects were maintained according to the standards of HUD.
Mitchell Management has not performed all of its obligations, since the controls are not reliable
enough to ensure compliance with HUD requirements.


                                The overall objective of the audit was to assess Mitchell
 Audit Objectives and           Management’s operations and each of the three projects’
 Methodology                    compliance with HUD requirements. More specifically, the
                                objectives were to determine the reliability of the organization’s
                                management controls for maintenance, use of project funds,
                                ensuring tenant eligibility, HUD subsidy, and other management
                                activities.

                                To accomplish our objectives, we reviewed the procedures in
                                place over the key areas of operations for each project. The key
                                areas included maintenance, project funds, tenant eligibility, and
                                HUD Section 8 subsidy. We interviewed officials of Mitchell
                                Management and staff at the projects Denver Northeast
                                Apartments, Mitchell 66 Apartments, and Rotella Park Manor.
                                In addition, we interviewed HUD officials of the Denver
                                Multifamily HUB. We also examined the various accounting
                                and other documents of these organizations.

                                Our audit generally covered the period January 1, 1999 through
  Scope
                                December 31, 2000, and was expanded, as necessary, to fully
                                accomplish our audit objectives. We conducted our review from
                                February 2001 to May 2001. Our audit was performed in
                                accordance with generally accepted government auditing
                                standards. The completion of our review was interrupted by
                                situations that necessitated reassignment of staff.

                                Considering our scope adjustment, our review was performed in
  Generally accepted            accordance with generally accepted government auditing
  government auditing           standards.
  standards




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Findings
Finding 1
Deficient Maintenance Procedures and Controls

In accordance with HUD Regulations, the three projects managed by Mitchell Management are to
be maintained in a decent, safe, and sanitary condition. In addition, the properties are to be free
of health and safety hazards. We found that the three projects, Rotella Park Manor, Denver
Northeast Apartments, and Mitchell 66 Apartments, are not being maintained in a decent, safe,
and sanitary condition. The conditions we found were basically the same as had been identified
by HUD in their previous inspections of the projects. While HUD has pointed out the need to
establish adequate procedures to correct the identified maintenance deficiencies, the management
agent has not taken the necessary corrective action. As a result, maintenance deficiencies
continue to exist.

In addition, the lack of maintenance to vacated units has resulted in the projects having a large
number of unrentable vacant units in each project at any given point in time. These vacancies
continue even though the projects have needy families on the projects’ waiting lists for available
apartments. The high number of vacancies has reduced the projects’ rental income and limited
the amount of funding available to finance project operations and maintenance.

The maintenance procedures in place at the projects at the time of our review were informal and
ineffective and lacked any meaningful oversight and supervision by the management agent,
Mitchell Management.


                                 The Regulatory Agreement between HUD and each of the three
 Project properties and          projects, Rotella Park Associates, Denver Northeast Associates,
 units must be in good           and Mitchell 66 Associates, requires the owners to maintain the
 repair and condition, and       mortgaged premises, accommodations, and the grounds and
 habitable                       equipment appurtenants in good repair and condition. The
                                 physical condition standards required by HUD under the
                                 Regulatory Agreements and the related HUD regulations and
                                 handbooks, stipulate that the project units must be decent, safe,
                                 sanitary, and in good repair and habitable. The site components,
                                 such as fencing, grounds, lighting, parking lots, walkways, etc.,
                                 are to be free of health and safety hazards and be in good repair.
                                 The Regulatory Agreements also state that without the prior
                                 written approval of the Secretary, owners shall not permit the use
                                 of the dwelling accommodations of the project for any purpose
                                 except the use which was originally intended.

                                 In addition, the HUD Housing Assistance Payments contracts
                                 with the three projects contain similar requirements that the
                                 projects and related dwelling units are to meet the decent, safe,

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                             and sanitary standards. HUD housing assistance payments are
                             only to be paid to those dwelling units that meet the HUD
                             housing standards.

                             The projects are to establish and maintain a reserve fund for
                             replacements and to make monthly deposits to the reserve fund.
                             The fund is to be used to finance capital items such as nonroutine
                             repairs of building roofs, heating systems, etc.

                             Our review found that the three projects, Rotella Park Manor,
Properties are not decent,   Denver Northeast Apartments, and Mitchell 66 Apartments,
safe, sanitary, and in       were not being maintained according to HUD’s physical
good repair                  condition standards. More specifically, we noted that the
                             properties:

                                 Ø Are not decent, safe, sanitary and in good repair; and

                                 Ø Have excessive unrepaired vacant units.

Prior HUD inspections        Previously, HUD conducted several inspections of the projects
have found the projects      and has found them to be in an unacceptable physical condition.
in an unacceptable           Dwelling units have been found to not fully comply with the
physical condition           decent, safe, and sanitary condition required by HUD. In
                             addition, the grounds of the projects have not been free of health
                             and safety hazards, and in good repair.

                             At the time of our review, the latest inspections that had been
                             conducted by the HUD Real Estate Assessment Center were in
                             September 2000 for Rotella Park Manor and in November 2000
                             for Denver Northeast Apartments and Mitchell 66 Apartments.
                             The maintenance deficiencies noted by HUD included the
                             following items listed by project:

                             Rotella Park Manor
                                Ø Unrepaired balcony roofs/floors;
                                Ø Damaged and/or missing roof shingles;
                                Ø Broken or missing breezeway windows;
                                Ø Damaged steps;
                                Ø Damaged, inoperable, or missing light fixtures;
                                Ø Damaged or burned surrounding property fence; and
                                Ø Potholes/Loose materials in the Parking lots Driveways
                                     and Roads.

                             Denver Northeast Apartments
                                Ø Inoperable smoke detectors,
                                Ø Broken windows,
                                Ø Holes in the ceiling, and
                                Ø Parking lots contain cracks, potholes, etc.

                             Mitchell 66 Apartments
                                Ø Mold and mildew,

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                                  Ø   Ceilings: water stains and peeling paint,
                                  Ø   Floor covering damage,
                                  Ø   Holes in exterior walls, and
                                  Ø   Broken windows.

                               We inspected the grounds and selected units within the three
Projects’ physical
                               projects in February and March 2001 and found that many of
condition is still deficient
                               those conditions identified by the HUD Real Estate Assessment
                               Center still existed. The following pictures of Rotella Park
                               Manor illustrate the physical condition of the grounds of the
                               project.




                               Broken window in a breezeway at Rotella Park Manor.




                               Water damage caused by broken boiler located in the hallway of
                               a Rotella Park Manor building.




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Uncovered drainage pipe located in front of one of the buildings
at Rotella Park Manor.

These three deficiencies as pictured here existed at the time of
our inspection on February 27, 2001. Similar deficiencies were
noted in HUD's previous inspection on September 28, 2000,
approximately five months earlier. Corrective action was not
taken by the project management agent to address these
maintenance deficiencies.

The following pictures illustrate the maintenance deficiencies we
noted during our March 29, 2001 inspection of selected units at
the two projects Denver Northeast Apartments and Mitchell 66
Apartments.




Broken window located in the infant’s bedroom of an apartment
at Denver Northeast Apartments.




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                            Tiles are missing from the bathtub of a unit in Mitchell 66
                            Apartments. Mold and mildew are in the grout areas of the
                            bathtub.




                            Paint peeling from the ceiling in one tenant’s bathroom in
                            Mitchell 66 Apartments.

                            Similar deficiencies as these had been noted in HUD’s previous
                            inspections of the projects on November 6, 2000. We found
                            instances whereby the management agent had not taken
                            corrective action to correct these deficiencies.

                            The overall effect of not conducting the necessary maintenance
Tenants are not living in   of the projects and related housing units is that the tenants are
a safe and hazard-free      occupying units that fail to meet the minimum HUD
environment                 requirements for being safe, decent, and sanitary. Furthermore,
                            deficient maintenance of the projects’ buildings and surrounding
                            grounds impacts the tenants’ ability to live in a healthy and
                            hazard-free environment.

Excessive vacant units in   At the time of our review, the projects being managed by
an unrepaired condition     Mitchell Management had a high number of vacant units that
                            were not ready to be rented. Some of these units had been

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vacant for up to 16 months. The impact was that units were not
being used to house needy tenants who were on the projects’
waiting lists for available apartments.

For Rotella Park Manor, 6 out of the 81 total units available in
the project, or 7 percent, were vacant at the time of our review.
Out of the 19 units that were vacant in 2000, there were 11 units
that remained vacant longer than two months. For the units that
remained vacant over two months, the number of months that the
units were vacant ranged from 3 months to 16 months. The
number of units vacant in any one month during 2000 ranged
from 3 units to 10 units per month.

During our inspection of vacant units, we noted that one unit has
been vacant since June 1999. This unit was being used to
cannibalize small maintenance parts for other dwelling units in
the project. Management officials stated that this was done since
the project could not afford to purchase the parts they needed for
other occupied units. During our inspection of this unit, the
management officials advised us not to open the refrigerator.
The officials explained that the power to the refrigerator had
been shut off before the last tenant was evicted and the food has
spoiled and is infested with maggots. The kitchen of this unit is
shown in the following picture.




Food and containers left in this unit after it was vacated in June
1999, therefore, the unit was subject to infestation.

For Denver Northeast Apartments, 1 out of the 17 total units
available in the project, or 6 percent, were vacant at the time of
our review. Of the 6 Denver Northeast Apartment’s units that
were vacant in 2000, there were 5 units that remained vacant
longer than two months. For the units that remained vacant over
two months, the number of months that the units were vacant
ranged from 4 months to 10 months.

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                          For Mitchell 66 Apartments, 10 out of the 86 total units available
                          in the project, or 12 percent, were vacant at the time of our
                          review. Of the 25 Mitchell 66 Apartment’s units that were
                          vacant in 2000, there were 24 units that remained vacant longer
                          than two months. For the units that remained vacant over two
                          months, the number of months that the units were vacant ranged
                          from 3 months to 11 months.

                          During our inspection of the vacant units, we noted that one of
                          Mitchell 66’s units has been vacant since June 2000. This unit
                          was being used for storage and for parts. Items that are needed,
                          such as doorknobs, drawers, light fixtures etc., are taken from
                          this unit and used to replace the needed item in other units. This
                          is illustrated in the following picture.




                          Tiles and bathtub parts taken from a vacant unit to replace parts
                          in occupied units at Mitchell 66 Apartments.

                          When the units remain vacant, the vacant units are often
Vandalization of vacant   vandalized resulting in increased repairs and related costs to be
units increases           funded by the project. For example, someone had recently tried
maintenance expenses      to bust in the front door of one of Mitchell 66 Apartments’ units.
while decreasing income   The doorframe will have to be replaced.
available for repairs
                          Project officials apprised us that they must continually repair the
                          vacant units that are vandalized. This takes maintenance staff
                          time and materials to repair the damaged units and thereby
                          reduces the amount of time and materials that the project could
                          use on other needed project maintenance efforts.




                                         11
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                       Damaged door jam of a vacant unit caused by someone kicking
                       in the door.

                       Units that are vacant for extended periods of time also prevent
Excessive vacancies    the projects from realizing the maximum rental income from the
reduce the amount of   units. This loss in project revenue greatly impacts the projects’
rental income to the   ability to meet its financial obligations. Reduced project revenue
projects               limits the amount of monies available to perform needed project
                       repairs and upkeep. Limited funds to finance dwelling units
                       repairs further impacts the projects’ ability to rehabilitate vacant
                       units for occupancy. Unrepaired units cannot be rented to those
                       needy families on the projects’ waiting list resulting in the loss
                       of rental income. Thus, the cycle continues. Only when the
                       units are rented can this endless cycle be broken.

                       During the last three fiscal years ending December 31, 2000, the
                       projects have shown a significant loss in project revenues from
                       the excessive vacancies and that the amount of lost rental
                       income, for the most part, is increasing each year. This is
                       illustrated in the following chart:

                         Fiscal                                               Denver
                          Year         Rotella Park       Mitchell 66        Northeast
                          1998             $ 29,740          $ 19,073          $ 2,734
                          1999                43,049           13,770             6,906
                          2000                49,670           47,408            16,979
                        TOTALS             $ 122,459         $ 80,251          $ 26,619

                       This chart shows that Rotella Park Manor, Mitchell 66
                       Apartments, and Denver Northeast Apartments have lost
                       revenues totaling $122,459, $80,251, and $26,619, respectively,
                       for not renting its vacant units during the three-year period
                       ending December 31, 2000. These funds could have greatly
                       improved the projects’ ability to finance needed repairs.
                                      12
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                            Management agent and project officials apprised us during the
                            course of our review that they have been unable to perform
                            needed repairs to its units because of a shortage of operating
                            funds. This has been further illustrated by the fact that many of
                            the suppliers for maintenance parts and/or services have required
                            the projects to prepay purchases before the goods and/or services
                            were provided. Also, Rotella Park Manor was unable to pay the
                            monthly deposit into the projects reserve for replacement
                            account as required by HUD.

                            In our opinion, one of the main contributing factors for the
                            absence of financing needed repairs to the projects has been the
                            loss of revenues from unoccupied vacant units.

                            The maintenance procedures in place at the projects at the time
                            of our review were informal and ineffective and lacked any
                            oversight and supervision by the management agent, Mitchell
                            Management. More specifically, we noted that the projects:

                                Ø Lacked an effective unit inspection and work order
                                  system,
                                Ø Exercised limited control and supervision of its
                                  maintenance staff, and
                                Ø Received limited oversight and direction from the
                                  projects’ management agent.

                            These three areas are discussed below.

                            First, the projects did not have an effective inspection and work
Inspection and work         order system. At the time of our review, the projects were not
order system is deficient   always performing a move-out inspection of each vacated unit.
                            If an inspection was performed, the inspection form often times
                            did not fully identify the repairs that were needed. Furthermore,
                            needed repairs were not documented in the projects’ work order
                            system to show what repairs were needed and whether it was
                            subsequently repaired. As a result, the projects’ staff could not
                            readily identify what maintenance work was needed or what
                            repairs if any should be charged to the vacated tenant.

                            In addition, the projects did not always perform a move-in
                            inspection with the new incoming tenant to ensure that the
                            dwelling unit was suitable for renting and that all previously
                            identified repairs had been made. In one of the sample cases we
                            reviewed, we identified that the tenant had moved into the unit
                            without all of the previously identified repairs being corrected.
                            As a result, the new tenant had to request needed repairs to be
                            made immediately after the tenant moved into the unit. Without
                            the project performing all needed repairs before a tenant moves
                            into a unit, the project has a limited basis with which to charge
                            the new tenant for any applicable repairs.

                                           13
                                                                              2002-DE-1001


                            The projects have not implemented a formal procedure to
                            perform the required annual inspection of each dwelling unit.
                            We noted that when the projects do perform an interim annual
                            inspection, any identified maintenance deficiencies are not
                            always recorded on the projects’ work order system. As a result,
                            the projects have limited assurance that all needed repairs are
                            clearly identified and assigned to its maintenance staff for
                            correction. In addition, we observed that damages were not
                            clearly identified as being tenant caused and therefore, no
                            charges were assessed against the tenant for their caused
                            damages.

                            The projects did not fully utilize its work order system to record
                            all needed maintenance requests and items. In addition, the work
                            orders in most instances did not identify exactly what work was
                            performed showing time and materials used nor identify whether
                            such repairs were chargeable to the tenant or not. As a result, the
                            projects are unable to clearly show that all needed maintenance
                            repairs were performed and whether the repairs were for tenant
                            caused damages and chargeable to the applicable tenant. If
                            tenants are not charged or do not pay for their unit damages, then
                            project funds that are limited must be used to finance the repairs.

                            Second, the projects lacked sufficient control and oversight over
Control and oversight of    its maintenance staff and related maintenance work. While the
maintenance staff and       maintenance staff at the projects perform maintenance work, the
related work is deficient   nature and extent of the staffs’ maintenance efforts is not clearly
                            identified. Not all maintenance is reflected on the projects’ work
                            order system and in those instances where work orders are used,
                            details of the maintenance services provided is not shown. As a
                            result, the projects are unable to clearly identify what
                            maintenance repairs have been performed and which repairs
                            remain to be made. Without a formal maintenance record
                            keeping system, project management has reduced accountability
                            over its maintenance staff and related work.

                            The projects have also followed the practice of allowing project
                            staff, including maintenance employees, to perform certain
                            maintenance activities, such as cleaning and repairing vacated
                            dwelling units, under a separate contract. In such instances, the
                            staff prepares a contract proposal of what work is to be done and
                            the lump sum cost amount of the contract. Once the work is
                            performed, the contract proposal is submitted to the management
                            agent for payment.

                            The contract proposals generally describe the work to be
                            performed, such as, cleaning a particular vacant unit. They do
                            not, however, specify the details of the work to be performed.
                            The proposals did not identify the amount of time that would be
                            needed to fulfill the contract proposal. According to the

                                           14
                                                                             2002-DE-1001

                            maintenance staff we interviewed, the proposals are signed and
                            dated when the proposals are submitted to the management agent
                            for payment. This means that work is performed without a
                            formal signed contract proposal and the proposal is the document
                            used to process a payment by the management agent. Without
                            details of the work to be performed, the projects’ management
                            cannot identify the nature and extent of the proposed work nor to
                            identify the actual maintenance work and related time
                            performed.

                            Project staff apprised us that the contract work, which is to be
                            performed after regular work hours or on weekends, is generally
                            performed during the employees’ regularly scheduled workweek.
                            The addition payment for contract work during regularly
                            scheduled hours would constitute duplicate compensation.
                            Without sufficient records to identify exactly when the contract
                            work is performed, project management is unable to ensure that
                            its employees are not performing contract work at a time when
                            the staff is being compensated as regular project employees.

Management agent            Third, the projects receive limited oversight and direction from
oversight and direction     the management agent in connection with project maintenance.
of maintenance activities   The responsibility for ensuring that the projects perform the
is deficient                needed repairs rests with the management agent, Mitchell
                            Management. However, the project managers have not been
                            given specific guidance and direction on what procedures are to
                            be followed in connection with unit inspections, assigning and
                            using work orders for necessary repairs, controlling maintenance
                            staffs’ time and performance, and assessing tenants for tenant
                            caused damages. In addition, the management agent has not
                            taken the necessary actions to ensure that the projects are
                            carrying out their maintenance responsibilities and duties in an
                            effective and timely manner.

                            HUD in its previous site inspections has identified numerous
                            health and safety violations at the projects but the management
                            agent has not taken the initiative to ensure that such identified
                            maintenance deficiencies are corrected. This is evident from the
                            fact that many of these previously identified maintenance
                            deficiencies had not been corrected when we conducted our
                            inspection of the projects.

                            Furthermore, the projects continue to show an increase in the
                            number of vacant units that are unsuitable for renting to needy
                            tenants. Better oversight and action is needed by the
                            management agent to reduce this trend. The management agent
                            needs to establish and maintain an effective and timely
                            maintenance system.




                                           15
                                                                  2002-DE-1001


Recommendations   We recommend that the Denver Multifamily HUB:

                  1A    Require the management agent to establish and
                        implement an effective inspection and maintenance work
                        order system for the projects that will insure that needed
                        project maintenance and repairs are properly and timely
                        performed. This would include:

                            •   Unit inspections are conducted within conformity
                                with HUD requirements and identified
                                maintenance deficiencies are properly reflected in
                                the project’s work order system.

                            •   Project and unit repairs are properly recorded and
                                documented in the project’s work order system
                                and clearly showing the work performed, time
                                involved, and materials used with a notation as to
                                whether such repairs are chargeable to the
                                particular tenant for tenant caused damages.

                            •   Use of contract proposals for performing
                                maintenance work by project staff is
                                discontinued. Additional maintenance work
                                performed outside of the employees’ regular 40-
                                hour workweek should be compensated to the
                                employee as over time.

                            •   Vacant units are promptly cleaned and repaired in
                                order that the units can be leased to a new tenant.

                            •   Sufficient oversight and monitoring is
                                implemented by the management agent over the
                                maintenance activities of the projects and take
                                any needed action to ensure that the projects and
                                related units are properly maintained.

                            •   All previously HUD identified maintenance
                                deficiencies for the projects are promptly and
                                properly corrected.

                            •   The reserve for replacement fund for Rotella Park
                                Manor will be fully funded and the required
                                monthly payments to the fund will be made.

                  1B    Provide the necessary guidance and direction to the
                        management agent for the project to ensure that that
                        Recommendation 1A is implemented. If the management
                        agent is unable or unwilling to implement the
                        recommendation, then HUD should take any other
                        appropriate action to ensure compliance.

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                                              2002-DE-1001


1C   After the procedures in Recommendation 1A above have
     been implemented, ascertain that the projects’ established
     procedures conform with HUD requirements, and are
     effectively ensuring that needed project repairs and
     maintenance are being properly performed.




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Finding 2

Improvement Needed over Occupancy Procedures

Mitchell Management, as the Management Agent for the three HUD insured projects, Denver
Northeast Apartments, Mitchell 66 Apartments, and Rotella Park Manor, needs to improve its
occupancy procedures over the projects’ tenant and security deposit accounting records and
tenant eligibility and continued occupancy documentation. This needs to be done to bring the
projects’ occupancy procedures in conformity with HUD requirements, as well as, to improve the
Management Agent’s administrative control and oversight over its tenant occupancy activities.

For the three projects, the Management Agent has not established the required tenant accounts
receivable and tenant security deposit subsidiary ledgers that are to be posted in a timely manner
and maintained on an accrual basis. The tenant records kept by the projects were on a cash basis
and primarily only recorded payments by its tenants. The Management Agent bookkeeper
maintains the official tenant records for the projects, however these records were not maintained
on a current basis. In fact, these records had not been posted for up to seventeen months. In
addition, the tenant records kept by the Management Agent bookkeeper were used only to support
accounting entries to the projects’ general ledger and were not to supplement the daily occupancy
operations at the projects. As a result, the Management Agent and its project staff are unable to
readily identify the balance due from any of its tenants. Any determination of a tenant accounts
receivable balance can only be obtained by utilizing informal records kept at the on-site project
office.

The Management Agent has not established and maintained the required tenant security deposit
subsidiary ledgers in conformity with HUD requirements or in a timely manner. In addition, the
Management Agent was not processing security deposit refunds for its vacated tenants in a timely
manner. More specifically, the security deposit refunds had not been processed for some tenants
even though the tenants had vacated their units up to six or more months prior.

For the Denver Northeast Apartments and Mitchell 66 Apartments projects, the Management
Agent was not adequately documenting its tenant eligibility and continued occupancy
certifications. As a result, the projects were unable to support the eligibility of its tenants and
ensure the amount of rent being charged to its tenants was correct. Also, the on-site staff for the
Denver Northeast Apartments project was utilizing the incorrect contract rents when it prepared
its monthly HUD Housing Assistance Payment Voucher for submission to the Colorado Housing
and Finance Authority for processing. As a result, the Colorado Housing and Finance Authority
had to correct the monthly voucher before it could be submitted to HUD for payment. Had this
not been done, HUD would have paid the incorrect Housing Assistance Payment amount.



  Specific tenant                The Regulatory Agreements and Housing Assistance Payments
  accounting, selection,         Contracts between the project owners and HUD for the three
  and occupancy                  projects stipulate certain provisions to be followed in the leasing
  requirements are to be         and occupancy of the project units to low and moderate income
  followed                       families. These requirements are detailed in certain HUD
                                 handbooks.

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                                                                              2002-DE-1001

                           For each of three projects, the Project Owners’ and Management
                           Agents’ Certification state that the Management Agent will
                           establish and maintain a comprehensive system of records,
                           books, and accounts in a manner conforming to HUD directives.

                           HUD requires accounting records to be maintained for
                           transactions dealing with the projects’ tenants. The provisions,
                           as set out in the Financial Operations and Accounting
                           Procedures for Insured Multifamily Projects Handbook, stipulate
                           that subsidiary tenants accounts receivable and security deposits
                           ledgers be maintained on a current and accurate basis. These
                           records are to detail the projects’ transactions with their tenants
                           and serve as a subsidiary ledger for certain accounts in the
                           projects’ official general ledger. The tenant subsidiary records
                           form the key record for accounting for tenant transactions on a
                           daily basis. These subsidiary records are to be maintained on an
                           accrual basis and reflect the monthly rental assessments, charges
                           for tenant caused damages, security deposit fees, tenants
                           payments, and a ready balance of any funds due the projects by
                           the individual tenants.

                           Under the provisions of the Regulatory Agreement and Housing
                           Assistance Payments Contracts with HUD, the project owners
                           are to follow certain requirements for the leasing and continued
                           occupancy of the project dwelling units. More specifically, the
                           projects are to properly document the eligibility of their tenants
                           before their move-in to the projects and to annually recertify the
                           tenants’ eligibility afterwards. The certifications form the basis
                           for the tenant’s monthly rent.

Tenant accounting and      At the time of our review, the Management Agent for the three
leasing requirements not   projects was not maintaining and documenting the required
fully implemented or       tenant accounting records. Basically, the tenant accounting
documented                 records were not being maintained in accordance with HUD
                           requirements and in a current and accurate manner.
                           Furthermore, the Management Agent was not maintaining and
                           documenting the required selection and occupancy records for
                           two of the projects. The tenant files did not always support
                           tenant eligibility. Without the required tenant accounting and
                           eligibility records, the Management Agent could not readily
                           identify the financial status of its individual tenants or support
                           their program eligibility. These areas are discussed below.

                           The tenant accounting records kept by the projects did not
Required tenant            comply with HUD requirements. The tenant records kept by the
accounting records were    projects were on a cash basis and primarily only recorded
not kept on a formal and   payments by the projects’ tenants. The projects’ tenant records
current basis              did not provide for the accrual of monthly rental charges and
                           other tenant charges. Amounts due from individual tenants
                           could not be readily identified and were based on informal
                           records kept at the project.

                                          20
                                                                           2002-DE-1001


                          The official tenant records were maintained at the Management
                          Agent’s central office by the Management Agent bookkeeper.
                          The bookkeeper has not maintained the tenant records on a
                          current basis. At the time of our review, the records were not
                          posted current with some not having been posted or updated for
                          over seventeen months. At the time of our review in May 2001,
                          the Management Agent bookkeeper had not posted tenant
                          transactions to tenant subsidiary records since December 1999
                          for the projects Denver Northeast Apartments and Mitchell 66
                          Apartments and since June 2000 for Rotella Park Manor.

                          The long delay in recording tenant transactions prevents the
                          Management Agent, as well as the project owners, from having
                          any meaningful information with which to monitor and
                          administer its HUD subsidized projects. The tenant accounting
                          records, when brought current, only supported entries to the
                          projects’ general ledger and were not used to monitor and control
                          the amounts due from tenants at the individual projects.

                          At the time of our review, the required subsidiary ledgers for the
Tenant security deposit   tenant security deposit transactions were not maintained.
transactions not fully    Instead, informal records were maintained at the projects that
documented or             primarily reflected security deposit collections. The accounting
processed timely          for the disposition of security deposit accounts when a tenant
                          vacated from a dwelling unit was not always fully documented
                          or processed in a timely manner.

                          Information relating to a vacating tenant is furnished by the
                          projects to the Management Agent bookkeeper. Then, as
                          applicable, the bookkeeper processed the security deposit refund.
                          The bookkeeper also identified and recorded the appropriate
                          accounting entries for the vacating tenant to the projects’ books
                          of account.

                          However, the processing of tenant security deposits was not
                          performed in a timely manner. At the time of our review, the
                          security deposit refunds for several vacated tenants had not been
                          processed; some of them up to six or months after the tenant had
                          vacated the project unit. The impact is that vacating tenants who
                          may be entitled to a security deposit refund are not refunded
                          their deposit timely.

                          Without a subsidiary ledger, the Management Agent is unable to
                          readily identify what their total security deposit escrow account
                          balance should be at any given point in time or what security
                          deposits of vacating tenants have not been properly processed.
                          Furthermore, the absence of such records also hampers the
                          Management Agent from processing any claim against a vacated
                          tenant who may owe money to the projects in excess of their
                          tenant security deposit amount.

                                         21
                                                                               2002-DE-1001


                             The HUD Regulatory Agreements and Housing Assistance
Deficiencies noted in        Payments Contracts for the three projects, Denver Northeast
the implementation and       Apartments, Mitchell 66 Apartments, and Rotella Park Manor,
enforcement of tenant        set out the program requirements governing eligibility of tenants
selection and occupancy      for admission to dwelling units and the conditions of continued
requirements                 occupancy. Accordingly, Mitchell Management has formulated
                             written policies and procedures that detail the tenant selection
                             and occupancy requirements. However, we have identified
                             deficiencies in the implementation and enforcement of these
                             requirements for the two projects, Denver Northeast Apartments
                             and Mitchell 66 Apartments.

                             We identified deficiencies in the implementation and
Lack of sufficient
                             enforcement of the tenant selection procedures. In order to
documentation to
                             verify tenant eligibility, the Owner/Management Agent is
support tenant eligibility
                             required to verify information about tenants, and either place
                             copies of the documents, or a list of the documents and
                             information on them, in the tenants file. The tenant files did not
                             always contain documentation to support tenant eligibility.

                             Of the eight tenant files we reviewed, that are maintained at the
                             Denver Northeast/Mitchell 66 Apartments’ leasing office, six of
                             the tenant files did not contain documentation verifying that the
                             tenant met the eligibility requirements. Two of the deficient files
                             were for Denver Northeast Apartments tenants and four were for
                             Mitchell 66 Apartments tenants. The following are the types of
                             documentation that were not located in the tenant files:

                                     §   Income verifications;
                                     §   Proof of social security numbers (i.e. social security
                                         cards or other equivalent proof) for applicable
                                         members of the family;
                                     §   Background check; and
                                     §   Credit/eviction check.

                             Without proper documentation to support tenant eligibility, the
                             Management Agent lacks assurance that the tenants are in fact
                             eligible and the amount of tenant rent is accurate. The lack of
                             documentation being maintained in the tenant files is a result of
                             the project staff not implementing and the Management Agent
                             not enforcing the tenant eligibility policies and procedures.

                             The required annual certifications were not always being
Annual certifications        performed in a timely manner. Of the eight tenant files
not performed timely         maintained at the Denver Northeast and Mitchell 66 Apartments’
                             leasing office that we reviewed, four of the tenant files showed
                             that the annual recertification were not completed timely.
                             Additionally, five of the tenants were not notified of the rent
                             charges resulting from the recertification prior to the effective
                             date of the rent change. As evidenced by the tenants’ signatures

                                            22
                                                                               2002-DE-1001

                            on the lease amendments, these tenants were notified of the new
                            rent charge after the effective date of the rent change.

                            The late completion of the tenant recertifications delay the
                            tenants from paying the correct rent based upon their income in
                            accordance with HUD requirements. This situation, in our
                            opinion, stems from the lack of an effective tracking and follow-
                            up system by the project office staff to monitor and ensure that
                            the recertifications are performed timely and the applicable
                            tenant rents are corrected and adjusted as needed.

                            The contract rents, and therefore the tenant assistance payments,
Inaccurate contract rents   that were documented in the tenant files for Denver Northeast
being used                  Apartments were inaccurate. The onsite project staff was not
                            utilizing the most current HUD approved rent schedule.
                            Therefore, the Housing Assistance Payment Vouchers requesting
                            the tenant assistance payments, submitted to the contractor
                            administrator, Colorado Housing and Finance Authority, were
                            not correct.

                            Because of the incorrect approved rent schedule being used on
                            the monthly Housing Assistance Payment Voucher, the Colorado
                            Housing and Finance Authority has had to adjust the monthly
                            voucher to reflect the correct assistance payment based on the
                            approved Contract Rent amounts. This had to be done before the
                            voucher could be submitted to HUD for payment. Had the
                            Contract Rent amounts not been adjusted each month, HUD
                            would have paid the incorrect Section 8 Housing Assistance
                            payment to the project.

                            This situation has occurred because the onsite project staff has
                            not received a copy of the most current HUD approved rent
                            schedule. The Management Agent is responsible to provide their
                            staff with the most current approved rent schedule. It is also the
                            Management Agent’s responsibility to ensure that the Housing
                            Assistance Payments Vouchers submitted are true and current,
                            and all of the amounts are calculated in accordance with HUD
                            requirements.

                            Overall, the deficiencies discussed above point out the need for
Ineffective Management      improved oversight and direction of the accounting and leasing
Agent oversight             activities of these HUD insured projects. The primary
                            responsibility for oversight of the projects’ activities relating to
                            its tenants’ activities rests with the Management Agent, Mitchell
                            Management.

                            The Management Agent has assigned the responsibility for the
                            accounting of the tenant related activities to its Management
                            Agent bookkeeper. The bookkeeper has been unable to maintain
                            the required tenant accounting records in a timely manner and in
                            conformity with HUD requirements. As a result, the projects’

                                           23
                                                                    2002-DE-1001

                  on-site staff have not had detailed and timely tenant accounting
                  information to properly administer their functions with the
                  projects’ tenants.

                  The Management Agent has not provided sufficient oversight
                  and monitoring of its on-site project staff for the Mitchell 66 and
                  Denver Northeast projects to ensure that all of the required
                  policies and procedures relating to its tenant leasing and
                  occupancy activities are being followed.


Recommendations   We recommend that the Denver Multifamily HUB:

                  2A    Require the project owners for the three projects to
                        establish and properly maintain the required tenants
                        accounts receivable and security deposit subsidiary
                        ledgers. The owners should take the necessary steps to
                        ensure that the subsidiary ledgers are maintained on an
                        accrual basis and posted timely. In addition, the
                        disposition of the tenants’ security deposit balances for
                        vacated tenants should be processed in a timely manner.

                  2B    Require the project owners for the Mitchell 66 and Denver
                        Northeast projects to provide the necessary guidance and
                        action to ensure that the tenant eligibility and continued
                        occupancy requirements are properly documented in the
                        project files.

                  2C    Require the project owner for Denver Northeast
                        Apartments project to provide the on-site staff with the
                        correct contract rents and to ensure that the monthly
                        Housing Assistance Payment Voucher is properly
                        completed before it is sent to the Colorado Housing and
                        Finance Authority for processing.

                  2D    Provide the necessary guidance and assistance to the
                        project owners in implementing the recommendations
                        above and once the recommendations have been
                        implemented, review the corrective action to ensure that
                        they are being properly maintained and are within HUD
                        requirements.




                                 24
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Finding 3

Books and Accounts Not Maintained in Accordance
with HUD Requirements
The books and accounts being maintained by the Management Agent, Mitchell Management, for
the three projects, Denver Northeast Apartments, Mitchell 66 Apartments, and Rotella Park
Manor, were not being kept in accordance with HUD requirements. The books and accounts for
these projects did not contain all of the required records and were not complete and accurate.
More specifically, the following deficiencies were noted:

      ·   Accounting records were not kept current;
      ·   Informal subsidiary ledgers were kept for tenants’ accounts receivable and for security
          deposits;
      ·   Subsidiary ledgers for accounts payable were not kept;
      ·   Inaccurate allocation of costs between projects; and
      ·   Required independent audit reports were submitted late.

The Management Agent has not ensured that the HUD required accounting records have been
established and maintained for the three projects. Furthermore, the accounting responsibilities for
the three HUD insured projects have been vested with the Management Agent bookkeeper that
has been unable to post and maintain the records in a timely manner.

As a result, the Management Agent has had limited financial information with which to
administer and monitor it’s HUD insured projects. In addition, without current financial
information, the Management Agent has been unable to ensure that its project funds are being
properly and effectively used for project activities.


                                The Regulatory Agreements and HUD Housing Assistance
 HUD prescribed books
                                Payments Contracts with the three projects require that the
 of account are to be
                                accounting books of account for the projects to be maintained in
 maintained in an               conformity with HUD requirements. The Management
 accurate and timely
                                Agreements between the projects and the projects’ Management
 manner                         Agent, Mitchell Management, also contain similar requirements
                                for maintaining the books of account in accordance with HUD
                                requirements. The Management Agreements state that the
                                management agent will establish and maintain a comprehensive
                                system of records, books, and accounts in a manner conforming
                                to the directives of the Secretary, and otherwise satisfactory to
                                the Owner.

                                HUD requirements for maintaining the projects’ books of
                                account are detailed in HUD handbooks. The accounting records
                                are to be kept in accordance with generally accepted accounting
                                principles that require double entry, accrual accounting and the
                                preparation of full financial statements. Furthermore, the records
                                are to be kept on an accurate and timely basis.
                                                25
                                                                           2002-DE-1001


                          The books and accounts for the three projects were not
The books and accounts    maintained in accordance with HUD requirements. More
are not maintained in     specifically:
accordance with HUD
requirements              ·   Accounting records were not kept current;
                          ·   Informal subsidiary ledgers were kept for tenants’ accounts
                              receivable and for security deposits;
                          ·   Subsidiary ledgers for accounts payable were not kept;
                          ·   Inaccurate allocation of costs between projects; and
                          ·   Required independent audit reports were submitted late.

                          These are discussed below:

Accounting records are    At the beginning of the audit, the Management Agent informed
not kept current          us that the books were not current. All of the entries to update
                          the General Ledger, including the monthly postings, had not
                          been entered. For example, the records that the Management
                          Agent uses to track tenants’ accounts receivable and security
                          deposits had not been prepared in several months. As of the
                          completion of our site work in May 2001, the Management
                          Agent had not prepared these records for the projects Denver
                          Northeast Apartments or Mitchell 66 Apartments since
                          December 1999, and not since June 2000, for Rotella Park
                          Manor. As a result, the entries in the projects’ general ledger
                          were not posted current. With incomplete and non-current
                          financial records, the Management Agent is severely hampered
                          in being able to properly administer its projects.

Required subsidiary       For the three projects, the Management Agent has not
ledgers for tenant’s      established the required tenant accounts receivable and tenant
accounts receivable and   security deposit subsidiary ledgers that are posted and
security deposits were    maintained on an accrual basis and in a timely manner. The
not established           tenant records kept by the projects were on a cash basis and
                          primarily only recorded payments by its tenants. The
                          Management Agent bookkeeper maintains the official tenant
                          records for the projects, however these records were not
                          maintained on a current basis. In fact, these records had not been
                          posted for up to ten months. In addition, the tenant records kept
                          by the Management Agent bookkeepers were used only to
                          support accounting entries to the projects’ general ledger and
                          were not to supplement the daily occupancy operations at the
                          projects. As a result, the Management Agent and its project staff
                          are unable to readily identify the balance due from any of its
                          tenants. Any determination of a tenant accounts receivable
                          balance can only be obtained by utilizing informal records kept
                          at the on-site project office. This item is discussed in further
                          detail in Finding 2.




                                         26
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                           The Management Agent has not established and maintained the
                           required tenant security deposit subsidiary ledgers in conformity
                           with HUD requirements or in a timely manner. In addition, the
                           Management Agent was not processing security deposit refunds
                           for its vacated tenants in a timely manner. More specifically, the
                           security deposit refunds had not been processed for some tenants
                           even though the tenants had vacated their units up to ten or more
                           months prior. This item is discussed in further detail in Finding
                           2.

                           Subsidiary ledgers were not being maintained for the projects’
No subsidiary ledger for   accounts payable accounts. Entries in connection with the
accounts payable           accounts payable accounts had not been posted timely. As a
                           result, the Management Agent was unable to identify the exact
                           composition and balance of the accounts payable accounts.

                           The Financial Operations and Accounting Procedures for
                           Insured Multifamily Projects Handbook details how the accounts
                           payable account is to be maintained. Basically, the account is
                           used to accumulate the amount of bills and/or invoices received
                           by the project that are to be paid. Once a payment is made by
                           the project for the bills and/or invoices, the account is to be
                           reduced by the payment amount. The account is to be supported
                           by a subsidiary ledger detailing the composition of the accounts
                           payable balance.

                           The Management Agreements for the three projects provide
                           guidance concerning information that the Owner should receive
                           on a monthly basis. According to the Management Agreement,
                           the Agent is to furnish the Owner with a schedule of accounts
                           payable by the tenth of each month.

                           At the time of our review, the Management Agent bookkeeper
                           was not posting the projects’ invoices and related payments on a
                           timely basis. Furthermore, in some instances, account payable
                           entries that were made were inaccurate or posted to the wrong
                           account. Instead of recording invoices or bills and subsequent
                           payments to the accounts payable account, some entries were
                           made directly to the expense accounts. For example, a payment
                           was charged directly to the expense account rather than to the
                           accounts payable account. The net result was that the expense
                           was overcharged and accounts payable was overstated.

                           We noted that since the accounts were not posted on a current
                           basis entries were sometimes posted to the wrong fiscal year.
                           For example, the Denver Northeast Apartment project’s 1999
                           Health Insurance Expense was recorded as an expense to the
                           2000 fiscal year books of account instead of being expensed to
                           the 1999 fiscal year records. This resulted in the insurance
                           expense being understated on the 1999 fiscal year records and
                           overstated on the 2000 accounting records. This error in our

                                          27
                                                                           2002-DE-1001

                           opinion occurred because the accounting records are not being
                           posted currently. In addition, the lack of a subsidiary ledger
                           being used for the accounts payable accounts for the projects’
                           records ultimately makes it difficult for the Management Agent
                           to know what accurate amount of debt is owed.

                           When allocating costs between projects, the bookkeeping
Inaccurate allocation of   typically was not timely, complete, and/or accurate. The shared
costs between the          expenses were not split or prorated between the projects and
projects                   posted to the books on a monthly basis. For example, the
                           prorated health insurance expense for more than one project was
                           typically posted in lump sum amounts to the books of account at
                           the end of the year. Our analysis of the recorded expenses
                           showed that transactions were not entered correctly, both in
                           terms of amounts and in terms of debits and credits.

                           In addition, all of the shared expenses were not being prorated
                           between the applicable projects. For example, the Public Service
                           Company utility expenses for the leasing office of the Denver
                           Northeast Apartments and Mitchell 66 Apartments projects were
                           not being allocated between the two projects. Instead, all of the
                           expense was being charged to Mitchell 66 Apartments books of
                           account. As a result, the Mitchell 66 Apartments project is
                           paying for the expenses of another project, contrary to the
                           provisions of the Regulatory Agreement.

                           Normally, the amount shown as due from or the receivable on
                           the books of one project should agree with a corresponding
                           amount, a payable, on the other project’s books of account. At
                           the time of our review the accounts payable on Denver Northeast
                           project's books did not match the accounts receivable on
                           Mitchell 66 project’s books. Our analysis of the differences
                           between the accounts revealed that the shared expenses for the
                           two projects were not being reported accurately on both of the
                           projects' books.

                           Under the terms of the Regulatory Agreements and Housing
Annual independent         Assistance Payments Contracts for the three projects, an
audit reports not          independent audit of the projects’ books of account is to be
performed timely           performed on an annual basis. The audited financial reports are
                           to be submitted to HUD electronically within the time periods
                           specified by HUD.

                           The required audited financial reports have not been timely
                           conducted and submitted to HUD. The 1998 Financial
                           Statements for the three projects were not submitted to HUD by
                           the deadline date of August 31, 1999. HUD electronically
                           received the 1998 Financial Statements for:

                           ·   Denver Northeast Project on October 6, 1999;
                           ·   Mitchell 66 Apartments on September 24, 1999; and
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                                                                              2002-DE-1001

                           ·   Rotella Park Manor on October 8, 1999.

                           These 1998 Financial Statements were all received after the due
                           date of August 31, 1999, twenty-four to thirty-eight days late.

                           For the following fiscal year, fiscal year 1999, the audited
                           financial statements for the Denver Northeast Apartments and
                           Mitchell 66 Apartments projects were submitted from nine
                           months to over a year late to HUD. The audit reports due HUD
                           by April 1, 2000-were received for:

                           ·   Denver Northeast project on April 27, 2001 and
                           ·   Mitchell 66 Apartments project on January 7, 2001.

                           At the time of our site work in May 2001, the Rotella Park
                           Manor Audited Financial Statements for 1999 had not been
                           submitted to HUD.

                           One of the reasons that the annual audits could not be performed
                           was that the projects’ books of account were not being posted
                           and maintained in a timely manner. The required audits could
                           not be performed until after all of the projects’ accounting entries
                           had been posted. At the time of our site review in May 2001, the
                           accounting records in many instances had not been posted for the
                           2000 fiscal year.

                           Overall, the books and accounts for the three projects have not
Limited financial          been maintained in accordance with HUD requirements. In
information available to   addition, the accounting records have not been posted and kept
administer and monitor     in a timely and accurate manner. As a result, the Management
its projects               Agent, Mitchell Management, has had limited financial
                           information with which to administer and monitor its HUD
                           insured projects. In addition, without current financial
                           information, the Management Agent is unable to ensure that its
                           project funds are being properly and effectively used for project
                           activities.

                           Mitchell Management, as management agent for the three HUD
                           insured projects, has not implemented nor fully maintained the
                           required accounting books of account for the three projects. All
                           of the accounting functions have been assigned and/or
                           undertaken by the Mitchell Management bookkeeper. The
                           bookkeeper, which maintains the accounting records for other
                           non-HUD funded projects and activities, has been unable to
                           maintain the HUD projects’ books of account in a timely and
                           accurate manner.




                                          29
                                                                 2002-DE-1001


Recommendations   We recommend that the Denver Multifamily HUB:

                  3A   Require the project owners to have the Management Agent
                       establish the HUD required books of account for the three
                       projects and to maintain the books in a timely and accurate
                       manner. If the management agent is unable or unwilling to
                       maintain the projects’ records in the required manner, then
                       require the project owners to obtain a different qualified
                       management agent to administer the projects.

                  3B   Provide the projects’ Owners with the necessary technical
                       assistance to establish the minimum required books and
                       accounts.

                  3C   Require the projects’ owners to take the necessary action
                       to have the required annual independent audit performed
                       and submitted to HUD for those fiscal years where audit
                       reports have not been prepared and submitted to HUD.

                  3D. After the recommendations 3A and 3B have been
                      implemented, review the established books of account for
                      the three projects and ensure that the project records are
                      being maintained in conformity with HUD requirements
                      and in a timely and accurate manner.




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Finding 4

Improved Controls Needed Over Cash Receipts
The Management Agent needs to improve its management controls over cash receipts to ensure
that all cash collections are properly collected, deposited, and recorded in the projects’ books of
account. Laundry income for Denver Northeast Apartments and Mitchell 66 Apartments was
received and held for up to twelve months before being deposited. All of the functions of
receiving and recording the laundry revenues were vested in the Management Agent Bookkeeper
who also recorded such transactions on the projects’ books of account. This procedure negates
the basic internal control component that the handling of cash assets be separate and apart from
the recording of such asset transactions on the books of account. Procedures can also be
improved to ensure that rental receipts are promptly deposited in accordance with HUD
requirements and with the policy that has been established by the Management Agents for its
projects.

Delaying the deposit of program receipts not only increases the possibility for such monies to be
misplaced or even misused but also prevents the monies from being used by the projects for
needed operating activities. Also, the proper separation of duties for handling and recording cash
receipts helps to improve the integrity of the projects’ cash management system and its related
staff members.


                                 The Regulatory Agreements and Housing Assistance Payments
 Adequate cash receipt           Contracts between HUD and the three projects, Rotella Park
 controls and timely             Associates, Denver Northeast Associates, and Mitchell 66
 deposits are to be made         Associates, state that the owner is obligated to comply with the
                                 HUD Regulations and requirements. These requirements are
                                 delineated in various HUD Handbooks.

                                 The Financial Operations and Accounting Procedures for
                                 Insured Multifamily Projects Handbook details the cash
                                 management controls to be implemented by the project owner
                                 and specifies that the project owners are to maintain effective
                                 controls and accountability over its cash.

                                 The Financial Operations and Accounting Procedures for
                                 Insured Multifamily Projects Handbook requires that persons
                                 making up deposits shall not handle the accounts receivable or
                                 the general ledger. The same Handbook states that as far as
                                 possible, all cash collections should be deposited on the day
                                 received. This same requirement is made in the Regulatory
                                 Agreements between HUD and the projects whereby monies
                                 received for the projects are to be deposited immediately into the
                                 project accounts.

                                 The management agent, Mitchell Management, has established
                                 its own requirement for the three projects whereby rent receipts
                                 are to be deposited once they reach a $500 threshold.
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                                                                             2002-DE-1001


                           The Management Agent has failed to maintain effective controls
Lack of effective
                           and accountability over its cash receipts. Our review found that:
controls over cash
receipts
                           Ø Laundry income for two projects, Denver Northeast
                             Apartments and Mitchell 66 Apartments, is not deposited
                             timely and the key functions of receiving, recording, and
                             depositing such revenue is vested in the same management
                             agent employee; and

                           Ø Deposits of cash receipts from tenants for all three of the
                             Mitchell Management projects are not being made timely.

Deficient controls over    Our review identified that laundry income for Denver Northeast
project laundry revenues   Apartments and Mitchell 66 Apartments was allowed to
                           accumulate for up to twelve months before the monies were
                           deposited. More specifically, laundry income received by
                           Mitchell Management from April 1, 2000 through February 28,
                           2001 was not deposited into the operating accounts of Denver
                           Northeast Apartments and Mitchell 66 Apartments until March
                           28, 2001. Laundry income held for Denver Northeast
                           Apartments during this time totaled $318.05, while the laundry
                           income held for Mitchell 66 Apartments totaled $698.88.

                           This situation occurred because laundry income for these two
                           projects was sent directly to the Bookkeeper of the Management
                           Agent. The Bookkeeper explained that the monies were kept
                           until such time as the Bookkeeper could get a deposit slip from
                           the projects in order to make the deposits into the project’s bank
                           account. Only after our inquiry and request were the monies
                           deposited by the Bookkeeper.

                           This practice by the Bookkeeper deviates from HUD’s timely
                           deposit of project revenues requirement, as well as, places the
                           monies in jeopardy of possibly being lost or stolen. In addition,
                           the handling of project monies by the Bookkeeper, who also
                           deposits and records such revenues to the project’s official books
                           of account, allows all key functions to be vested in the same
                           individual. A proper control system over cash receipts would be
                           for the functions of handling cash to be separate from the
                           functions of recording the cash receipt transaction on the
                           accounting records.

                           Laundry revenues for the Rotella Park Manor project are
                           received directly at the project site office and deposited by the
                           site staff into the project’s bank account. This same practice is
                           needed for the laundry receipts for the Denver Northeast and
                           Mitchell 66 projects. Laundry revenues for these two projects
                           should be received directly by the projects’ site office and
                           deposited by the site administrative staff. This would allow the
                           monies to be deposited timely and to separate the functions of

                                          32
                                                                         2002-DE-1001

                         handling monies from the accounting functions maintained by
                         the management agent Bookkeeper.

Timeliness of rental     During the audit period, the Management Agent did not ensure
income deposits needed   that rental income was deposited timely as required for its three
                         projects, Rotella Park Manor, Denver Northeast Apartments, and
                         Mitchell 66 Apartments. Details follow.

                         Rotella Park Manor

                         For the time period of October 1, 2000 through December 31,
                         2000, Rotella Park Manor made eleven deposits into its
                         operating account. Monies were held anywhere from two to
                         twenty days before deposits were made. More specifically:

                         Ø Four of the eleven deposits were held from five to ten days
                           before the monies were deposited.

                         Ø Four of the eleven deposits were held for over ten days
                           before the monies were deposited. The amounts of these
                           four deposits ranged from $2,335 to $3,554.

                         Ø For one of the four deposits held over ten days, the monies
                           were collected between November 1, 2000 and November 3,
                           2000; however, the deposit of $2,790 was not made until
                           November 21, 2000. The amount of the deposit was $2,790.

                         Denver Northeast Apartments

                         For the time period of October 1, 2000 through December 31,
                         2000, Denver Northeast Apartments made nine deposits into its
                         operating account. Monies were held anywhere from one to
                         twelve days before deposits were made. More specifically:

                         Ø Two of the nine deposits were held from five to ten days
                           before the monies were deposited.

                         Ø One of the nine deposits was held for 12 days before the
                           monies were deposited.

                         Mitchell 66 Apartments

                         For the time period of October 1, 2000 through December 31,
                         2000, Mitchell 66 Apartments made twenty deposits into its
                         operating account. Nine of these twenty deposits were held from
                         five to ten days before the monies were deposited.

Failure to comply with   These two areas discussed above illustrate that the projects are
                         not depositing their monies timely. Not only does this deviate
HUD requirements
                         from HUD’s requirements but also from the policy that has been


                                       33
                                                                   2002-DE-1001

                  set by Mitchell Management whereby monies that reach the
                  threshold of $500 are to be promptly deposited.

                  Retaining program monies for a period of time, such as up to
                  twelve months, increases the possibility for the funds to be
                  misplaced or even misused. Delays in making timely deposits
                  prevent the monies from being used by the projects for needed
                  operating activities. In addition, the separation of duties of
                  handling program monies from the functions of recording such
                  receipts in the accounting records helps to improve the integrity
                  of the projects’ cash management system and its related staff
                  members.


Recommendations   We recommend that the Denver Multifamily HUB:

                  4A. Require the Management Agent to implement necessary
                      procedures to ensure that project revenues are timely
                      deposited into the appropriate project’s bank account and
                      to provide for the separation of the duties of handling
                      laundry receipts from the duties of recording such
                      revenues on the books of account by the Management
                      Agent Bookkeeper, and

                  4B.   Review and evaluate the procedural changes for
                        compliance with HUD requirements after the procedural
                        changes have been made under item 4A above.




                                 34
                                                                                  2002-DE-1001



Management Controls
In planning and performing our audit, we obtained an understanding of Mitchell Management’s
management controls that were relevant to our audit. Management is responsible for establishing
effective management controls. Management controls, in the broadest sense, include the plan of
organization, methods and procedures adopted by management to ensure that its goals are met.
Management controls include the processes for planning, organizing, directing, and controlling
program operations. They include systems for measuring, reporting, and monitoring program
performance.


                               We determined the following management controls were
 Management controls
                               relevant to our audit objectives:
 assessed
                               · Accounting books and records;
                               · Cash management;
                               · Procurement and contract administration;
                               · Capital improvements and maintenance;
                               · Compliance with HUD tenant eligibility requirements;
                               · Segregation of duties;
                               · Proper execution of transactions and events;
                               · Accurate and timely recording of transactions and events;
                                   and
                               · Ensure that the findings of audits and other reviews are
                                   promptly resolved.

                               The following audit procedures were used to evaluate the
 Assessment procedures         management controls.
                               · Interviews with Management Agent and projects staff;
                               · Review of maintenance actives and related records;
                               · Review of the cash disbursement records and files related to
                                  the eligibility and use of HUD program funds;
                               · Review of cash receiving, depositing, and recording records;
                               · Review of the maintenance of the books and accounts;
                               · Review of tenant eligibility and occupancy policies and
                                  procedures;
                               · Interviews with HUD Office of Multifamily HUB program
                                  officials and review of applicable HUD records and files;
                               · Interviews with Colorado Housing and Finance Authority
                                  officials, and review of pertinent Authority records.

 Significant Weaknesses        A significant weakness exists if management controls do not
                               give reasonable assurance that resource use is consistent with
                               laws, regulations, and policies; that resources are safeguarded
                               against waste, loss, and misuse; and that reliable data is obtained,
                               maintained, and fairly disclosed in financial statements and
                               reports.

                                              35
                                                 2002-DE-1001


Our audit identified the following significant weaknesses:
·   The projects are not being maintained in a decent, safe, and
    sanitary condition;
·   Vacant units are not timely rehabilitated and ready for
    occupancy in a reasonable length of time (loss of revenue);
·   Tenant are not always charged for tenant caused damages
    (loss of revenue);
·   Required annual and move-out physical inspections are not
    always being performed and/or documented;
·   Required reserve for replacement deposits are not being
    made for one of the projects;
·   The established tenant eligibility and occupancy policies and
    procedures are not consistently being implemented, nor
    enforced;
·   Books and accounts are not complete, nor accurate.
·   Effective controls and accountability over cash receipts are
    not being maintained.

These deficiencies are discussed in the Findings section of the
report.




               36
                                                                            2002-DE-1001



Follow-up on Prior Audits
The HUD Office of Inspector General for Audit previously performed a limited review of
Rotella Park Manor Apartments. A memorandum was issued on October 19, 1998 and
explained that the preliminary review had not indicated any instances of fund
misappropriation. At that point, there were three Management Improvement Operation
Plan deficiencies, which had not been completed. The Colorado Housing and Finance
Authority were to continue to monitor and require completion of the items.

There has not been any HUD Office of Inspector General for Audit reviews or audits of
the operation and/or management of Denver Northeast Apartments and Mitchell 66
Apartments.

This is the first HUD Office of Inspector General for Audit review of the activities of the
management agent, Mitchell Management.

During our audit period, there were no Management Reviews performed by HUD for
Denver Northeast Apartments and Mitchell 66 Apartments. However, HUD performed a
Comprehensive Management Review of Rotella Park Manor on March 11, 1999. The
overall rating of the review was unsatisfactory because of the numerous contractual
violations. The contracts that were violated by the Owner include the Regulatory
Agreement, HAP Contract, and Management Certification. The unsatisfactory rating was
based on three major categories of findings: Maintenance and Security, Financial
Management, and General Management Practices.

The Colorado Housing and Finance Authority completed Management Reviews and
Physical Inspections of Denver Northeast Apartments on September 20, 1999, and
November 27, 2000. Both management reviews resulted in an overall rating of
satisfactory for management operations. However, the Physical Inspection reviews noted
deficiencies. The November 2000 review identified items that required immediate
attention, including smoke detectors, broken windows, and inoperable furnaces.

During our review of Mitchell Management, including the three projects, Denver
Northeast Apartments, Mitchell 66 Apartments, and Rotella Park Manor Apartments, we
found most of these same conditions still exist. Although, HUD did not perform a
management review of the Denver Northeast Apartments or Mitchell 66 and the Colorado
Housing and Finance Authority’s management review was satisfactory, we identified
deficiencies in the management and operations of these two properties that were similar
to the deficiencies HUD noted during their review of Rotella Park Manor. The
introduction section of the report explains the prior HUD reviews in more detail, and the
finding section of the report explains our results in more detail.




                                            37
                                                                             2002-DE-1001



As of the end of our site work, May 2001, the latest audits performed of the three projects
by an independent public accountant were for the 1999 fiscal year. The results of the
audits are summarized by project.

     Denver Northeast Apartments

     The audit report contained a finding that the project was not properly documenting
     the move-in/move-out inspections. The auditor recommended that procedures be
     performed to assure that the forms were properly completed upon occupancy.

     Mitchell 66 Apartments

     The audit report contained findings dealing with the lack of evidence in many cases
     supporting that tenant social security numbers were verified and that move-
     in/move-out inspection forms were not being fully completed or documented. The
     auditor recommended that procedures be implemented to correct these deficiencies.

     Rotella Park Manor

     The 1999 audit report contained three findings. The first finding stated that the
     project kept the tenant security deposits in an interest bearing account, however, the
     accrued interest earned was not being paid when the security deposits were
     refunded. The second finding pointed out that the project had not made the required
     monthly deposit of $8,100 for a three month period into the restricted “Management
     Improvement and Operating” plan escrow account, leaving a shortfall of $24,300.
     The third finding stated that the project had not been making the necessary monthly
     deposits into the Reserve for Replacement escrow account. The reason given for
     not making the deposits was that the project had encountered cash flow problems.

Our review disclosed that for the most part these same conditions still existed at the time
of our review. These items are discussed in detail in the Findings section of this report.




                                            38
                        2002-DE-1001



Appendices
Appendix 1

Auditee Comments




                   39
     2002-DE-1001




40
                                                                             2002-DE-1001


Appendix 2

Distribution
Mel Martinez, Secretary, S, Room 10000
Alphonso R. Jackson, Deputy Secretary, SD, Room 10101
Robert L. Woodson, Jr., Chief of Staff, S, Room 10000
Camille T. Pierce, Senior Advisor to Deputy Secretary, SC, Room 10100
Philip A. Musser, Deputy Chief of Staff for Intergovernmental Affairs, S, Room 10214
Matthew F. Hunter, Assistant to the Secretary for White House Liaison, S, Room 10216
Nancy L. Segerdahl, Press Secretary/Senior Communications Advisor to the Secretary, S,
    Room 10226
Marcella E. Belt, Chief Executive Officer, S, Room 10220
Pamela H. Patenaude, Assistant Deputy Secretary for Field Policy and Management, M,
    Room 7108
Gloria R. Parker, Chief Information Officer, Q, Room P-8206
Angela M. Antonelli, Chief Financial Officer, F, Room 10234
Richard A. Hauser, General Counsel, C, Room 10110
A. Bryant Applegate, Special Counsel, C, Room 10126
Ronald A. Rosenfeld, President, Ginnie Mae, T, Room 6100
Melody H. Fennel, Assistant Secretary for Congressional and Intergovernmental Relations, J,
    Room 10120
John C. Weicher, Assistant Secretary for Housing/Federal Housing Commissioner, H,
    Room 9100
Roy A. Bernardi, Assistant Secretary for Community Planning and Development, D, Room 7100
Michael M. Liu, Assistant Secretary for Public and Indian Housing, P, Room 4100
William C. King, Director, Office of Departmental Equal Employment Opportunity, EU,
    Room 2134
Frank L. Davis, Director, Office of Departmental Operations and Coordination, I, Room 2124
Armando Falcon, Director, Office of Federal Housing Enterprise Oversight, O
David E. Jacobs, Director, Office of Healthy Homes and Lead Hazard Control, L, Room P-3206
Steven Wagner, Deputy Director, Center for Faith-Based and Community Initiatives, K,
    Room 10184
Larry L. Thompson, General Deputy Assistant Secretary for Policy Development and Research,
    R, Room 8100
Kenneth L. Marcus, General Deputy Assistant Secretary for Fair Housing and Equal Opportunity,
    E, Room 5100
Carole A. Jefferson, General Deputy Assistant Secretary for Administration, A, Room 10156
David C. Williams, Acting Inspector General, G, Room 8256
James A. Heist, Assistant Inspector General for Audit, GA, Room 8286
Mary E. Dickens, OIG Central Files, GF, Room 8266
Larry E. McGhee, Departmental ALO, FMA, Room 2206
Susan M. Forward, Secretary’s Representative, Boston, 1AM
Michael G. Carlson, Secretary’s Representative, New York, 2AM
James E. Blackmon, Secretary’s Representative, Atlanta, 4AM
Beverly E. Bishop, Secretary’s Representative, Chicago, 5AM
Louis G. Ybarra, Secretary’s Representative, Ft. Worth, 6AM
Stan V. Quy, Secretary’s Representative, Kansas City, 7AM
Evelyn Meininger, Secretary’s Representative, Denver, 8AM

                                             41
                                                                            2002-DE-1001

John J. Phillips, Secretary’s Representative, San Francisco, 9AM
Martha C. Dilts, Secretary’s Representative, Seattle, 0AM
Kevin J. Keogh, Regional Director, HUD - Boston Office, 1AS
Marisel C. Morales, Regional Director, HUD - New York Office, 2AM
Milton R. Pratt, Regional Director, HUD - Philadelphia Office, 3AS
Jim Chaplin, Regional Director, HUD - Atlanta Office, 4AS
Joseph P. Galvan, Regional Director, HUD – Chicago Office, 5FM
Cynthia A. Leon, Regional Director, HUD - Ft. Worth Office, 6AM
Macie L. Houston, Regional Director, HUD - Kansas City Office, 7AM
John K. Carson, Regional Director, HUD - Denver Office, 8AM
Richard E. Mallory, Regional Director, HUD - San Francisco Office, 9AM
John W. Meyers, Regional Director, HUD - Seattle Office, 0AM
Eliot C. Horowitz, Special Assistant to the FHA Commissioner, H, Room 9110
Frederick Tombar, Acting DAS for Multifamily Housing Programs, HT, Room 6106
Frederick C. Douglas, Acting DAS for Single Family Housing, HU, Room 9282
Vernice Buell, Associate Deputy Assistant Secretary (Single Family Audits), HU, Room 9282
John H. Pentecost, Program Advisor (Multifamily Audits), HT, Room 6106
Clinton S. Bradley, Program Advisor (Multifamily Audits), HTS, Room 6124
Helen M. Stackhouse, Audit Liaison Officer, HF, Room 6232
Bettye Adams, Field Audit Liaison Officer, 6AF, Room 26
The Honorable Dan Burton, Chairman, Committee on Government Reform
The Honorable Henry A. Waxman, Ranking Member, Committee on Government Reform
The Honorable Joseph Lieberman, Chairman, Committee on Government Affairs
The Honorable Fred Thompson, Ranking Member, Committee on Governmental Affairs
Sharon Pinkerton, Senior Advisor, Subcommittee on Criminal Justice, Drug Policy & Human
    Resources
Andy Cochran, House Committee on Financial Services
Clinton C. Jones, Senior Counsel, Committee on Financial Services
Stanley Czerwinski, Director, Housing and Telecommunications Issues, U.S. GAO
Steve Redburn, Chief Housing Branch, Office of Management and Budget
Linda Halliday, Department of Veterans Affairs, Office of Inspector General
William Withrow, Department of Veterans Affairs, OIG Audit Operations Division
Acquisition Librarian, AS, Room 8141
Larry Sidebottom, Director, Denver Multifamily HUB, 8AHMLA
Bertram Bruton, Mitchell Management




                                            42