oversight

Complaint-Apache Trace Apartments Guymon, Oklahoma

Published by the Department of Housing and Urban Development, Office of Inspector General on 2002-06-03.

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

                                                                  U.S. Department of Housing and Urban Development
                                                                  Southwest Regional 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



June 3, 2002                                                      2002-FW-1803


MEMORANDUM FOR:                    J. Tom Miller
                                   Director
                                   Oklahoma State Multifamily Program Center, 6IHM

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

SUBJECT:           Complaint—Apache Trace Apartments
                   Guymon, Oklahoma


Based upon your complaint, we performed a limited review of Reid and Gary Strickland
Company’s (RGS) Cost Certifications of Apache Trace Apartments located in Guymon,
Oklahoma.1 The complaint alleged RGS made false claims in its required construction cost
certification for Apache Trace Apartments. Our objectives were to determine the validity of the
complaint and whether RGS submitted any unallowed costs in its cost certifications. We could not
substantiate that RGS submitted any false claims. However, we concluded RGS claimed $25,393
more than HUD regulations allowed.

To accomplish our objectives we interviewed HUD and RGS personnel. Further, we reviewed cost
documentation provided by RGS to the HUD Office. We reviewed the General Requirements and
Other Fees-Paid by Contractor portions of the cost certifications. Our scope included expenses
from December 1, 1997, through September 15, 2000.

During our review, we noted HUD mistakenly disallowed legal fees twice during its review of
RGS’ cost. Thus, HUD needs to increase its next distribution to RGS by the $9,387. Therefore, we
recommend HUD’s Oklahoma Multifamily Program Center disallow $16,006 from RGS’ next
distribution.2

We provided a draft of the memorandum to RGS representatives and HUD's Oklahoma
Multifamily Office on May 3, 2002. We asked for comments from RGS by May 22, 2002. RGS
did not provide comments. HUD's Oklahoma Multifamily Program Center Director agreed with
our findings.



1
    FHA Number 117-31185.
2
    Total amount determined ineligible $25,393 less the effect of the duplicate disallowance of legal fees of $9,387.
                                                                                                   2


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

If you have, any questions contact William W. Nixon, Assistant District Inspector General for
Audit, at 817-978-9309.

Attachment
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                                                                                      ATTACHMENT

Background.

HUD provides insurance under Section 221(d)(4) of the National Housing Act to assist private
industry in providing comfortable and attractive rental accommodations for moderate-income
families. Housing developed under Section 221 is intended to be of modest design that is pleasant
and efficient and in keeping with the HUD’s goals of providing affordable housing. G.C.
Buildings, Inc. (the owner) financed the construction of Apache Trace Apartments with the
proceeds of a loan from GMAC Commercial Mortgage Corporation (GMAC). HUD insured the
loan against default.

Apace Trace Apartments, located in Guymon, Oklahoma, is a Section 221(d)(4) insured project
with 144 market rate units.3 RGS and the owner signed a cost plus not to exceed construction
contract for $5,930,254 on December 1, 1997. The owner requested and HUD approved $13,056 in
change orders bringing the maximum construction contract to $5,943,310. RGS began construction
in December 1997.

On June 22, 1998, when the project was approximately 55 percent complete, a fire destroyed a
substantial portion of the project. RGS filed a lawsuit against the owner disputing the distribution
of the fire loss insurance proceeds paid by its insurance company. The lawsuit also determined the
payment for the work necessary to bring the project back to the pre-fire loss condition. RGS and
the owner entered into a Memorandum of Understanding on April 21, 1999, specifying rebuilding
requirements to bring the project to the pre-fire loss condition and a new completion date.

On September 15, 2000, HUD approved construction as complete. Apache Trace began leasing
units in June 2000. The owner assigned Apache Trace to HUD in May 2001. As of June 2001,
Apache Trace had a 50 percent occupancy rate.

HUD regulations required separate cost certifications when there is new and rehabilitation work
performed. Thus, HUD required two cost certifications:

        1. A cost certification for the original construction, this included the construction before the
           fire and the construction to finish the project after the fire damage reconstruction and
        2. A cost certification for the fire damage reconstruction. HUD did not finance the fire
           damage reconstruction costs. RGS’ insurance paid for the fire damage reconstruction and
           the RGS escrowed the monies at GMAC.

Objectives, Scope, and Methodology.

Our objectives were to determine the validity of the complaint and whether RGS submitted any
disallowed costs in its cost certifications. To accomplish our objective we interviewed HUD’s
Oklahoma Multifamily Program Office personnel and RGS personnel. Further, we reviewed cost
3
    FHA Number 117-31185.
                                                                                                            4


documentation submitted to the Oklahoma Multifamily Program Office by RGS. The review
included analysis of the expenses, including supporting documentation, and a determination of their
allowability per HUD regulations.

Our scope included expenses from December 1, 1997, the signing of the construction contract
through September 15, 2000, the final inspection date. We performed our fieldwork from
December 26, 2001, through March 4, 2001.

RGS’ Cost Certifications Contained Ineligible Costs.

Our review concluded RGS claimed $25,393 in ineligible costs per HUD regulations.4 Specifically,
RGS claimed ineligible costs for equipment, documentation, overhead, travel, personnel,
restaurants, and other costs.

Criteria.

HUD’s regulation regarding Cost Certification is Directive 4470.2 REV-1 Chapter 5, titled
Allowable Costs to be Reported on Form HUD-92330-A. We relied on the following clauses in
Chapter 5 5-3 of the Directive during our review of RGS’ Cost Certification General
Requirements and Other Costs-Paid for by the Contractor:

           §   The contractor is to certify to the actual costs incurred in completing the project.

           §   The contractor can only include actual amounts paid in cash, for labor, materials for
               construction, equipment and fixtures, field engineering, sales taxes, workmen's
               compensation insurance, social security, public liability insurance, job overhead, and
               all other expenses directly connected with construction, and including general
               overhead expenses.

           §   The contractor cannot include in General Requirements any item of general overhead
               expense, “such as the salary of any employee whose activities are confined to work in
               the main office or any branch office of the contractor.”

           §   For self-owned equipment, the contractor may certify to the cost of fuel, lubrication,
               normal expenditures for its equipment, maintenance, repair, and depreciation or 85
               percent of the local lease rates for identical equipment.

           §   When certifying for 85 percent of the local lease rates, the charges cannot exceed the
               purchase price of the equipment.




4
    This does not include costs that HUD’s Oklahoma Multifamily Program Center had previously disallowed.
                                                                                                      5



RGS claimed $25,393 of ineligible costs.

In its cost certifications, RGS claimed $25,393 for costs unallowable per HUD regulations.
Specifically, these types of costs include equipment, documentation, overhead, travel, personnel,
restaurant gift certificates, and other costs. See the following table.

                               Summary of RGS’ Ineligible Costs
                             Ineligible Costs           Amount
                             Equipment                        $ 7,808
                             Documentation                      7,526
                             Other                              4,304
                             Overhead                           4,112
                             Personnel                            726
                             Travel                               582
                             Restaurants                          335
                             Total                            $25,393

Ineligible Equipment Expenses.

RGS included in its cost certifications $7,808 in ineligible equipment expenses. Specifically,
these expenses included claiming more than 85 percent of the local lease rate. Additionally, RGS
claimed 85 percent of maintenance and repair costs in addition to the local lease rate for a 1994
GMC pick-up.

Directive 4470.2 REV-1 Chapter 5 5-3 H states for self-owned equipment, RGS may certify to
the cost of fuel, lubrication, normal expenditures for its equipment, maintenance, repair and
depreciation or 85 percent of the local lease rates for identical equipment. In addition, when
certifying for 85 percent of the local lease rates, the charges cannot exceed the purchase price of
the equipment.

RGS claimed 85 percent of the local lease rate for the small tools and field office trailer. RGS
used the Compilation of Nationally Averaged Rental Rates & Model Specifications for
Construction Equipment (Green Book) to determine its lease rates. However, for the small tools
and field office RGS exceeded 85 percent of the lease rate printed in the Green Book. For
instance, RGS charged $25 per day for a miter saw when the Green Book amount was $22.
Further, for the field office trailer RGS claimed $240 when the Green Book amount was $204.
For these two items, RGS claimed $249 for small tools and $3,507 for the field office trailer
more than allowed. In total, RGS over-claimed $5,887 for similar items.

Additionally, HUD previously disallowed $54,500 of ineligible expenses regarding the 1994
GMC pick-up (truck) because RGS exceeded the truck’s total cost of $18,000. However, in
RGS’ cost certifications, it also included equipment maintenance and repair expenses for the
                                                                                                   6


truck. HUD regulations only allow the 85 percent of local lease rate or the normal expenditures
for maintenance and repair, not both. Also, HUD regulations require that the 85 percent of the
local lease rate not exceed the purchase price of the equipment. Since RGS already claimed
more than the truck’s original cost and HUD had disallowed the excess, RGS could not also
claim the normal expenditures for maintenance and repair. Contrary to this, RGS charged $1,921
for the lease rate and maintenance and repair on the truck.

HUD’s Oklahoma Multifamily Program Center should disallow the $7,808 of ineligible
equipment expenses.

Ineligible Documentation Expenses.

RGS included in its cost certifications $7,526 in ineligible documentation expenses.
Specifically, these expenses included $7,182 of expenses incurred prior to the date the owner and
RGS signed the construction contract, $171 for sending documents to the consultants regarding
the lawsuit filed after the fire on June 22, 1998, $169 for copies made at RGS’ main office and a
$4 error. HUD Directive 4470.2 REV-1 Chapter 5 5-3 A. 1. required RGS’ cost certifications to
contain only expenses directly connected with construction. However, none of these
documentation expenses were directly related to construction. Thus, RGS claimed $7,526 of
ineligible documentation expenses and HUD should disallow the amount.

Other Ineligible Expenses.

RGS included in its cost certifications $4,304 of other ineligible expenses. Specifically, these
expenses included $2,762 expenses incurred prior to the date RGS and the owner signed the
construction contract and $1,542 for towing the field office to and from Guymon, Oklahoma.
HUD Directive 4470.2 REV-1 Chapter 5 5-3 A. 1. required RGS’ cost certification to contain
only expenses directly connected with construction. However, none of these expenses are
directly related to construction. Thus, RGS claimed $4,304 in ineligible other expenses and
HUD should disallow the amount.

Ineligible Overhead Expenses.

RGS included in its cost certifications $4,112 in ineligible overhead expenses. Specifically,
these expenses included $2,237 for copies made at RGS’ home office and $1,875
reimbursements to Strickland Management Corporation5 for telephone and long distance calls.
Telephone calls and copies are not directly related to construction. Thus, RGS claimed $4,112
ineligible overhead expenses and HUD should disallow the amount.

Ineligible Personnel Expenses.

RGS included in its original construction cost certification $727 in payroll expenses for a job
clerk who worked in the RGS’ main office. HUD Directive 4470.2 REV-1 Chapter 5 5-3 B. 4.

5
    Strickland Management Corporation is an identity-of-interest company of RGS.
                                                                                                   7


required the salary of an RGS employee whose activities were confined to work in the main
office or any branch office of RGS, shall not be included in General Requirements section of the
cost certification. HUD regulations did not allow RGS to claim a main office employee’s payroll
expense. Thus, RGS claimed $727 in ineligible personnel expenses and HUD should disallow
the amount.

Ineligible Travel Expenses.

RGS included in its cost certifications $582 for ineligible travel expenses. Specifically, these
expenses included $423 for travel by RGS’ owner regarding the fire damage lawsuit, $156
incurred prior to the date RGS and the owner signed the construction contract, and a $3 error.
HUD Directive 4470.2 REV-1 Chapter 5 5-3 A. 1. required RGS’ cost certification to contain all
expenses directly connected with construction. Because these travel expenses do not directly
relate to actual construction, RGS submitted $582 of ineligible travel expenses. HUD should
disallow the amount.

Ineligible Restaurant Expenses.

RGS included in its cost certifications $335 in ineligible restaurant expenses. Specifically, these
included restaurant gift certificates for the Project Superintendent’s birthday and meetings held at
restaurants. HUD Directive 4470.2 REV-1 Chapter 5 5-3 A. 1. required RGS’ cost certification
to contain only expenses directly connected with construction. The restaurant expenses were not
direct construction costs. Thus, RGS claimed $335 of ineligible restaurant expenses and HUD
should disallow the amount.

HUD underpaid $9,387 RGS in a prior disbursement.

RGS’ original cost certification amounted to $6,081,248. However, this amount exceeded the not
to exceed contract of $5,943,310 by $137,938. When HUD reviewed the cost certifications HUD
disallowed $147,325. However, in the $147,325, HUD mistakenly disallowed legal fees of $25,646
twice. Because HUD cannot pay more for the construction than allowed by the contract, even with
the error, the most RGS should receive for the duplicated disallowed legal fees is $9,387.6


                                   HUD’s Underpayment to RGS
             RGS’ Original Construction Cost Certification Amount              $6,081,248
             Total of Not to Exceed Construction Contract                      $5,943,310
             Difference                                                          $137,938
             Amount HUD Disallowed                                              $147,325
             Maximum Returnable to RGS                                             $9,387




6
    $147,325 - $137,938 = $9,387
                                                                 8


Recommendation:

We recommend the Oklahoma Multifamily Program Center Director:

1A. Disallow $16,0067 from RGS’ next disbursement.




7
    $25,393 - $9,387 = $16,006
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                                SCHEDULE OF QUESTIONED COSTS




                                                                                 Ineligible Cost1

1A Disallow $16,006 from RGS’ next disbursement                                     $16,006




1 Ineligible costs are costs charged to a HUD-financed or insured program or activity that the auditor believes are
  not allowable by law, contract, or federal, state, or local policies or regulations.
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DISTRIBUTION

Apache Trace Apartments
Guymon, Oklahoma

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

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
                                               11


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