oversight

Hillcrest Apartments � Upfront Grant Lafourche Parish Housing Authority Lafourche Parish, Louisiana

Published by the Department of Housing and Urban Development, Office of Inspector General on 2002-04-05.

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

                                                         U.S. Department of Housing and Urban Development
                                                         Southwest District Office of Inspector General
                                                         819 Taylor Street, Room 13A09
                                                         Fort Worth, Texas 76102

                                                         (817) 978-9309 FAX (817) 978-9316
                                                         http://www.hud.gov/oig/oigindex.html



April 5, 2002                                            2002-FW-1802

MEMORANDUM FOR:                 E. Ross Burton
                                Director, Multifamily Housing Division, 6AHM

                /SIGNED/
FROM:           D. Michael Beard
                District Inspector General for Audit, 6AGA

SUBJECT:        Hillcrest Apartments – Upfront Grant
                Lafourche Parish Housing Authority
                Lafourche Parish, Louisiana


In response to a complaint, we reviewed a $7.7 Million Upfront Grant HUD provided to the Lafourche
Parish Housing Authority (Authority). The purpose of the review was to determine if the Authority
properly used HUD funds in the development of City Place I & II.

In performing the review, we interviewed HUD staff, Authority personnel, contractors, and others. We
also reviewed and analyzed relevant documentation supplied by HUD, the Authority, and contractors.

We issued discussion drafts to the Authority on November 9, 2001, and February 12, 2002. The
Authority provided responses on November 21, 2001, and March 7, 2002. Also, HUD officials
provided comments to the November 9, 2001 draft on December 4, 2001. We met with HUD officials
on March 5, 2002, and with the Authority’s Executive Director on March 6, 2002. The Authority
provided a written response on March 7, 2002. As a result of our discussions with the Authority’s
Executive Director and HUD officials and their written responses, we modified our draft including
eliminating one finding. Additionally, we have included applicable parts of their response in the finding.

In developing the new properties, the Authority effectively sole-sourced the developer, who in turn sole-
sourced the contractor. HUD provided information on the reasonableness of the cost of the new
developments and is confident that the amount paid was reasonable. However, due to financial
difficulties, one of the new developments has already reverted to the Authority and it appears the other
development might also revert to the Authority. We are recommending HUD continue to monitor the
status of these developments to ensure HUD does not incur any unnecessary expenses resulting from
default or foreclosure on the loan.

Within 60 days, please furnish this office, for each recommendation in this memorandum, the status on:
(1) corrective action taken; (2) the proposed corrective action and the date to be completed; or (3)
                                                                                                          2


why action is not considered necessary. Also, please furnish us copies of any correspondence or
directives issued related to this memorandum.

If you have any questions, please call William Nixon, Assistant District Inspector General, at 817-978-
9309.

Attachment
                                                                                                           3


                                                                                          ATTACHMENT

Background and Introduction.

Multifamily Disposition and Upfront Grant Program.

Under the Upfront Grant Program (Grant), HUD provides grants and loans for rehabilitation,
demolition, rebuilding, and other related development costs as part of the disposition of a HUD-owned
multifamily housing project. HUD must make a determination that a grant or loan would be: more cost-
effective than project-based rental assistance; economically viable on a long-term basis; and preserve
affordable rental housing in a tight rental market.

Overall, the purpose of multifamily disposition is to “dispose of projects in a manner that will protect the
financial interests of the federal government.” According to Section 203 of the Multifamily Housing
Property Disposition Reform Act of 1994, the disposition must be the least costly among “reasonable
alternatives” and address goals of:

     a. Preserving certain housing so they are available to and affordable by low-income persons;
     b. Preserving and revitalizing residential neighborhoods;
     c. Maintaining existing housing stock in a decent, safe, and sanitary condition;
     d. Minimizing the involuntary displacement of residents;
     e. Maintaining housing for the purpose of providing rental housing, cooperative housing, and
        homeownership opportunities for low-income persons;
     f. Minimizing the need to demolish projects;
     g. Supporting fair housing; and
     h. Disposing of such projects in a manner consistent with local housing market conditions.

Hillcrest Apartments.

In 1981, HUD insured Hillcrest Apartments (Hillcrest) under Section 223(f) of the National Housing
Act. Hillcrest had 202 units at 3 sites located in Larose, Raceland, and Thibodaux, Louisiana. At the
time of default, Hillcrest's 3 developments had 157 occupied units, and the majority of its tenants had
very low income. When HUD took possession, the complex was vacant. Since HUD subsidized
Hillcrest through a Section 8 Housing Assistance Program contract, the complex was eligible for an
Upfront Grant. HUD provided Section 8 subsidy for all Hillcrest residents.

In August 1997, HUD foreclosed on Hillcrest’s mortgage and paid the outstanding mortgage of
$3,338,409. HUD needed to foreclose on the property due to owner neglect.1 Instead of selling the
property to recover some of its losses, HUD transferred it to the Lafourche Parish Housing Authority



1
    To-date, HUD has not imposed administrative sanctions against the owner.
                                                                                                     4


(Authority) for $10 in September 1998. HUD also paid an additional $2.2 million2 in demolition and
holding costs. HUD provided the Authority a $7.7 million Grant to replace the housing.




2
    Excludes tenant relocation costs.
                                                                                                        5


Housing Authority of Lafourche Parish and its nonprofit.

In September 1998, HUD awarded the Grant to the Authority. The Authority transferred the Grant
funds to its nonprofit, Community Development Corporation of Lafourche. The nonprofit then loaned
the funds at 1 percent interest to two profit entities: City Place Thibodaux and City Place Lockport,
both limited partnerships. The City Place Partnerships, wholly owned by the developer (Miller and
Associates), also obtained FHA insured loans totaling $7.5 million.3 Miller and Associates used the
Grant and FHA loaned funds to build the two new developments in Lafourche Parish. Since the Grant
Agreement was between the Authority and HUD, we have addressed the finding to the Authority.

According to HUD’s intranet, the Authority has 276 low-rent units and 379 Section 8 vouchers. The
Authority is located at S-750 Triple Oaks Drive, Raceland, Louisiana 70394.




3
    Actual mortgage amount was $7,598,100.
                                                                                                          6


Finding 1 - The Authority Effectively Sole-Sourced the Developer and
            Contractor.

Contrary to procurement regulations and the Grant Agreement, the Authority’s nonprofit corporation
awarded the development contract to Miller & Associates after receiving only one proposal, and
without directly soliciting other experienced real estate developers. The nonprofit did not make a full
attempt at competition, as it only ran an advertisement in the local newspaper and not in neighboring
major metropolitan areas of New Orleans or Baton Rouge. Hence, the Authority did not obtain
adequate development alternatives. Further, Miller & Associates sole-sourced the $13.6 million
construction contract. The Authority contended they undertook all actions with HUD knowledge.
Nevertheless, the Authority did not follow procurement requirements.

Procurement Requirements

For procurements by competitive proposals, federal regulations 4 require the entity to solicit proposals
from an adequate number of qualified sources. If the Authority procured a contract by non-competitive
proposals, the regulations 5 require that one of the following apply: (1) item available from only one
source; (2) public exigency or emergency; (3) agency authorizes; or (4) after solicitation of a number of
sources, competition is determined inadequate. Additionally, HUD’s Grant Agreement required three
quotes “shall be obtained for any type of goods or services that cost $10,000 or more, unless HUD
gives prior concurrence.”

The Authority Effectively Sole-Sourced Miller & Associates

Violating these requirements, the Authority’s nonprofit corporation awarded the development contract
after receiving only one proposal, and without directly soliciting other experienced real estate
developers. The nonprofit did not make a full attempt at competition, as it only ran an advertisement in
newspapers in Lafourche Parish. The nonprofit did not place advertisements in the nationwide
Commerce Business Daily or neighboring metropolitan areas of New Orleans or Baton Rouge. Miller
& Associates’ office was located in Lake Charles, about 190 miles from the Authority. 6 Incidentally,
Miller & Associates did not rely upon the advertisement for notification, the Executive Director informed
the owner personally.

The Authority’s advertisement did not fully describe the scope of the project. The advertisement stated
the Authority sought qualifications from “individuals and/or agencies to perform such services as
organization, consultation, application, development, administration, fiscal management and the provision
of resident initiatives for affordable housing programs.” The Authority may have received a larger
response if the advertisement stated it sought a developer to build apartments, with the possibility that a
HUD grant would fund 50 percent of the development costs at 1 percent interest.

4
    24 CFR 85.36(d)(3)(ii).
5
    24 CFR 85.36(d)(4)(i).
6
    Miller & Associates also performed accounting services for the Authority.
                                                                                                               7



Based upon HUD’s “Previous Participation Certification,” Miller & Associates’ only previous
participation in HUD projects and Section 8 contracts was as a general partner of one 28-unit complex.

Miller & Associates Sole-Sourced the $13.6 Million Construction Contract

Miller & Associates negotiated the $13.6 million construction contract with only one contractor. Miller
& Associates did not prepare any cost estimates to determine if the construction cost was reasonable.
Also, the contractor did not provide any support for its cost to construct the new developments. HUD
did perform cost analysis and HUD has confidence in the costs.

Miller & Associates and the Authority contend the developer was technically not considered a grantee
subject to federal procurement regulations. The Authority structured funding of the projects such that
Miller & Associates borrowed the grant funds from the Authority’s nonprofit. They contend there were
no federal procurement requirements that they had to follow in awarding the construction contract.

However, the 1996 Grant guidance stated that the purchaser had to obtain three quotes on each repair
over $10,000. In our opinion, the developer was the purchaser performing the repairs (or rebuilding).
Even if not specifically directed to compete the construction contract, competition would have ensured
the developer obtained the best price for the construction.

Moreover, Miller & Associates negotiated a lump-sum contract with the Contractor. If the Authority’s
nonprofit had contracted for the construction, FHA guidance would have required it to use a cost-plus
contract unless it used competitive bidding in the award of a lump-sum contract. A cost-plus contract
requires certification of the costs actually incurred. The cost analyst hired by Miller & Associates to
substantiate the construction cost also recommended a cost-plus contract.

During the review, the contractor did not allow access to his records of actual cost, and did not certify
to the actual cost because Miller & Associates used a lump-sum contract.7 According to HUD officials,
they performed a cost analysis and have confidence that the construction costs were reasonable.

Authority’s Response

In its response, the Authority stated:

         “The Authority did not intentionally attempt to sole-source this or any other services. The
         CDC selected the developer in Sept. 1997. The developer in turn selected the contractor
         some time thereafter. The draft Grant Agreement was not provided until mid 1998 and
         the final Grant Agreement not executed until Sept. 1998. Therefore, the Authority was
         unaware of what requirements the Grant would contain when it selected the developer.


7
    In subsequent follow-up, it appears the contractor has closed his office in New Orleans and moved out of
    Louisiana.
                                                                                                           8

           The Authority and the CDC did attempt to satisfy the procurement responsibilities by advertising
           locally. When only one response was received, the CDC accepted the proposal. We wrote to
           Jason Gamlin, State Coordinator, HUD transmitting a copy of the advertisement. Presently and in
           the past, the Authority has always advertised locally for professional and other services and
           equipment. Our letter to Mr. Gamlin, specifically states only one response was received and
           accepted. The PHA looked to HUD for guidance in this and all projects it undertakes. Why
           didn't HUD respond to the PHA in Sept. 1997 when this letter was reviewed and advise that the
           proper procurement was not followed? This was new program area the PHA had no expertise in.
           We discussed all aspects of this project with the New Orleans and/or Fort Worth Offices of
           HUD.

           The Authority has attended a seminar hosted by HUD-Cultivating Capacity in early 2000.
           This seminar has provided a great insight to the responsibilities of a nonprofit. It was very
           beneficial and had it been provided prior to 1997, I feel certain that the most of the
           situations you cited could have been avoided.”

With or without HUD's knowledge, the Authority's procurement violated regulations and the Grant
Agreement. Furthermore, as an entity that receives HUD grants, the Authority should have realized that
it would have to follow procurement requirements when developing these complexes. However, the
Authority did inform and seek HUD's guidance throughout the process. Further, the Authority has
obtained additional instruction on procurement. As a result, we are not making any recommendations
regarding the Authority's procurement practices.

Since the Authority did not comply with the procurement regulations in its selection of the developer,
HUD has no assurance that the Authority obtained the best development proposal from the most
experienced developer. This, combined with the fact that Miller & Associates did not use competition
when awarding the construction contract, meant that neither the Authority nor Miller & Associates could
provide assurance it spent the Grant in the most efficient or effective manner. Consequently, the
Authority might have been able to build the units for less and thus, decreasing the rents. However,
because HUD has confidence in the cost, we did not question the cost of the contract.

One of the complexes8 has reverted to the Authority because Miller & Associates could not operate it
successfully. According to its response, the Authority has taken action to increase the affordability of
the complex. Specifically, the Authority reduced the rents on 20 2-bedroom units and set the payment
standard in the Section 8 Program at 110 percent of fair market rents. In conversations with Miller &
Associates, it appears the owner may not be able to continue operating the other complex (City Place
I).9 Thus, it might also revert to the Authority. Therefore, HUD should closely monitor the operations
of City Place I to ensure HUD does not incur any unnecessary expenses resulting from default or
foreclosure. Further, HUD should continue to ensure the Authority has the capacity to operate these
complexes.

We recommend that HUD’s Multifamily Branch:

8
    City Place II in Lockport, Louisiana.
9
    Located in Thibodaux, Louisiana.
                                                                                                       9



1A.   Monitor the status of the City Place I development to ensure it does not incur any unnecessary
      expense resulting from default or foreclosure.
                                                                               10


                                        DISTRIBUTION

Lafourche Parish Housing Authority, Lafourche Parish, Louisiana
Miller & Associates, 511 North Thompson, Iowa, LA 70647
Principal Staff
Regional Director, 6AS
CFO, 6AF
Director, Accounting, 6AAF
Director, Office of Multifamily Disposition Center, 6AHM (4)
Fort Worth ALO, 6AF (2)
Housing ALO, HF (Room 9116)
Department ALO, FM (Room 2206)
Acquisitions Librarian, Library, AS (Room 8141)

The Honorable Mary L. Landrieu
United State Senate
Washington, D.C. 20510

Armando Falcon
Director, Office of Federal Housing Enterprise Oversight
1700 G Street, NW, Room 4011, Washington, D.C. 20515

Sharon Pinkerton
Sr. Advisor, Subcommittee on Criminal Justice, Drug Policy &
Human Resources
B373 Rayburn House Ofc. Bldg., Washington, D.C. 20515

Cindy Fogleman
Subcommittee on General Oversight & Investigations, Room 212
O'Neill House Ofc. Bldg., Washington, D.C. 20515

Stanley Czerwinski
Associate Director, Housing. & Telecommunications Issues
US GAO, 441 G St. NW, Room 2T23, Washington, DC 20548

Steve Redburn
Chief, Housing Branch, OMB
725 17th Street, NW, Room 9226, New Exec. Ofc. Bldg., Washington, D.C. 20503

The Honorable Fred Thompson
Chairman, Committee on Govt Affairs,
340 Dirksen Senate Office Bldg.
U.S. Senate, Washington, D.C. 20510
                                                        11




The Honorable Joseph Lieberman
Ranking Member, Committee on Govt Affairs,
706 Hart Senate Office Bldg.
U.S. Senate, Washington, D.C. 20510

The Honorable Dan Burton
Chairman, Committee on Govt Reform,
2185 Rayburn Building
House of Representatives, Washington, D.C. 20515-6143

Henry A. Waxman
Ranking Member, Committee on Govt Reform,
2204 Rayburn Bldg.
House of Rep., Washington, D.C. 20515-4305

Andrew R. Cochran
Sr. Counsel, Committee on Financial Services
2129 Rayburn, HOB
House of Rep., Washington, D.C. 20510