U.S. Department of Housing and Urban Development Office of Inspector General Pacific/Hawaii District 450 Golden Gate Avenue, Box 36003 San Francisco, California 94102-3448 Audit Memorandum 2002-SF-1801 March 25, 2002 TO: Steven B. Sachs Director, Community Planning and Development, 9AD //SIGNED// FROM: Mimi Y. Lee District Inspector General for Audit, 9AGA SUBJECT: Mayor’s Office of Housing and Nonprofit Developers Use of Various HUD Funds to Replace Geneva Towers San Francisco, California We completed a review of the use of HUD funds for the development of three housing projects in the Visitacion Valley neighborhood of the City of San Francisco: Heritage Homes, Britton Court, and John King Senior Community. The projects were built to replace housing lost through HUD’s demolition of a multifamily project known as Geneva Towers. HUD funds included Community Development Block Grant (CDBG) and HOME Investment Partnerships (HOME) Program funds administered by HUD’s Office of Community Planning and Development (CPD) and Section 202 and Property Disposition Upfront Grant funds administered by HUD’s Office of Multifamily Housing. We conducted the review at the Mayor’s Office of Housing (MOH) and the offices of two nonprofit organizations, Mercy Charities Housing California (Mercy Charities) and Housing Conservation and Development Corporation (HCDC). Generally, we found no significant deficiencies, problems, or weakness in the systems and procedures used by MOH and Mercy Charities to administer HUD funds. However, HCDC did not establish written procedures for procurement of service contracts and the MOH did not adequately monitor HCDC’s process for selecting a general contractor or development consultants. According to MOH officials, HCDC is not currently receiving any HUD funds from the City for development of multifamily housing projects. BACKGROUND Geneva Towers was a high rise subsidized multifamily property located in San Francisco’s Visitacion Valley neighborhood. The Assistant United States Attorney (AUSA) indicted the owner of Geneva Towers as a result of an OIG investigation. Problems with Geneva Towers started in 1986 when the owner failed to maintain the complex. HUD foreclosed and assumed Audit Memorandum 2002-SF-1801 Mayor’s Office of Housing and Nonprofit Developers ownership of the complex on June 6, 1991. Problems continued to plague Geneva Towers. In 1992, HUD considered a massive renovation of the site. The District HUD the Secretary's Representative at the time believed Geneva Towers should be torn down and replaced with new developments. Community support for the plan was strong as long as the fear of urban renewal was eliminated. Another concern was the need for expensive and time-consuming asbestos removal at Geneva Towers. In the end, HUD decided replacement was the best alternative. On February 14, 1995, HUD and the City and County The City of San Francisco and of San Francisco signed a Memorandum of HUD entered into an agreement to Understanding (MOU) for the development and develop replacement housing in revitalization of Visitacion Valley. Among other Visitacion Valley. things, the MOU committed HUD to: providing relocation assistance and Section 8 vouchers to the residents of Geneva Towers; allocating Section 8 funds for project based assistance for 150 units of family housing and 50-100 units of elderly housing; and ensuring bid documents for all HUD assisted construction in Visitacion Valley contained a plan to hire 30 percent of their total construction workforce from a designated pool of applicants from the neighborhood. In return, the City of San Francisco agreed to: lend $1.5 million of its housing funds to a nonprofit housing development corporation to purchase the site known as 150 Britton Street for future affordable housing; work with nonprofit housing corporations to locate and obtain site control on Visitacion Valley properties appropriate for 50- 100 units of elderly housing and a senior center; and work with nonprofit housing corporations to construct 300 units of new affordable family housing. Subsequently, HUD and the City, through the MOH, provided funds to nonprofit developers for the construction of three projects in Visitacion Valley. Mercy Charities developed Heritage Homes, 146 HUD funds from CPD and units of low-income family housing on the site Multifamily Programs came to Geneva Towers previously occupied. Mercy also $24,148,139. developed John King Senior Community, a 91-unit senior project built with HUD Section 202 funds, San Francisco City bond funds, and San Francisco hotel tax funds. HCDC was the original developer of Britton Street Housing, a 92-unit low-income family project. HUD awarded both the CDBG funds and the HOME funds to the City and County of San Francisco through noncompetitive entitlement grants using formulas based on economic and census data. The CDBG and HOME funds used to develop the Geneva Towers replacement projects were administered through MOH, which passed the money on to the developers. HUD gave the Section 202 Capital Advance and the Property Disposition Upfront Grant directly to the developer. The following table summarizes the distribution of HUD funds for the various projects. 2 Audit Memorandum 2002-SF-1801 Mayor’s Office of Housing and Nonprofit Developers DISTRIBUTION OF HUD FUNDS CDBG HOME SECTION 202 PROPERTY TOTALS TO GENVEA TOWERS CAPITAL DISPOSITION UP REPLACEMENT PROJECTS ADVANCE FRONT GRANT (CPD funds (CPD funds (Multifamily (Multifamily through through MOH) Programs directly Programs directly to MOH) to developer) developer) Heritage Homes $2,518,799 $6,270,000 $8,788,799 Britton Court $2,276,600 $5,679,840 $7,956,440 John King Senior Community $7,402,900 $7,402,900 TOTALS $4,795,399 $5,679,840 $7,402,900 $6,270,000 $24,148,139 On May 18, 1999, Bank of America, the source of an $8,000,000 construction loan for Britton Court, issued a letter of default citing HCDC’s failure to adequately staff or manage the project and the Bank’s lack of confidence in HCDC’s ability to complete it in a timely manner and within budget. As a result, MOH and HCDC enlisted Mercy’s assistance to manage the development of the project. On June 23, 1999, HCDC and Mercy entered into a MOU to act as partners for completing the construction, rent-up, and ongoing operation of Britton Court. The MOU indicated Mercy would be the managing general partner with sole responsibility for managing the construction process through to timely completion. Mercy assumed sole responsibility for managing the construction budget, reviewing and processing construction disbursements, managing the accounting procedures and preparing financial reports, ensuring compliance with loan agreements and partnership agreements, and other necessary fiscal management tasks. OBJECTIVES, SCOPE, AND METHODOLOGY OF REVIEW Our overall objective was to determine if the City and County of San Francisco and the nonprofit developers used HUD funds efficiently and in accordance with applicable laws and regulations. Specifically, we looked at three affordable housing projects that were proposed as replacements for units lost when Geneva Towers was torn down. The projects were: Heritage Homes, Britton Court, and John King Senior Community. The review included: (1) pre-site work at OIG and HUD’s offices; (2) on-site work at the City of San Francisco, including MOH, the Mayor’s Office of Community Development, and the Human Rights Commission; and (3) on-site work at the offices of Mercy Charities and HCDC. Our review covered program years from April 1, 1997 through March 31, 2000, and was conducted during the period February 2001 through August 2001. The review was conducted in accordance with generally accepted government auditing standards. 3 Audit Memorandum 2002-SF-1801 Mayor’s Office of Housing and Nonprofit Developers To accomplish our objectives we: ü Reviewed pertinent laws, regulations and OMB Circulars; ü Interviewed HUD staff and auditee staff; ü Reviewed MOH’s and developers’ procurement and grant administration processes; ü Reviewed grant and loan files at HUD and the auditees’ offices; and ü Selectively tested construction disbursements to ensure that costs were allowable, fully supported and eligible. In planning and performing our review, we considered the management controls over procurement, disbursements, and record keeping of MOH and the nonprofit developers in order to determine our auditing procedures and not to provide assurance on management controls. Management controls include the plan of organization, methods, and procedures adopted by management to ensure its goals are met. They include the systems for measuring, reporting and monitoring program performance. We assessed the controls relevant to the auditees’ use of HUD funds. For the assessment, we obtained an understanding of the design of relevant policies and procedures and whether they had been placed into operation. We tested disbursements to determine propriety and proper recording. Generally, we found MOH and Mercy Charities to be in compliance with HUD requirements. However, HCDC did not establish adequate policies and procedures for procuring service contracts, and MOH did not ensure that subrecipient HCDC adhered to Federal procurement standards. FINDING The City and County of San Francisco Did Not Assure HCDC Adhered to Required Procurement Standards for the Award of Contracts HCDC could not show what process it used to select three construction consultants for the development of Britton Court; an affordable family housing project built using CDBG and HOME Program funds. In the case of the general contractor, HCDC advertised and distributed a Request for Qualifications (RFQ), which described a selection process, but it did not follow the process. As a result, HCDC awarded the contract to the general contractor who scored highest in the second phase of the selection process. Thus, there is no assurance HCDC hired the construction consultants or the general contractor in a consistent or effective manner in accordance with Federal procurement standards, so as to provide open and free competition and ensure the awards were made to the offerors who were most responsive and advantageous in regard to price, quality, and other factors considered. These deficiencies occurred because MOH 4 Audit Memorandum 2002-SF-1801 Mayor’s Office of Housing and Nonprofit Developers did not adequately monitor HCDC’s procurement process and HCDC lacks written procurement policies and procedures. Title 24 of the Code of Federal Regulations (24 CFR), 24 CFR Part 84 and OMB Circular Part 84 and Office of Management and Budget A-110 provide requirements for (OMB) Circular A-110, Subpart C, provide identical procurement by grant recipients. Federal procurement requirements applicable to and nonprofit recipients of Federal funds. The intent of the requirements is to ensure all procurement is conducted in a manner to provide open and free competition and awards are made to the offeror whose bid or offer is most responsive to the solicitation considering price, quality and other factors. (24 CFR 84.43 and OMB Circular A-110, Subpart C, Section 43) All recipients are required to establish written procurement procedures. The procedures must ensure solicitations for goods and services clearly state the requirements the bidder must fulfill and all factors to be used in evaluating proposals. (24 CFR 84.44 and OMB Circular A-110 Subpart C, Section 44) Procurement records and files for purchases in excess of the small purchase threshold shall include at a minimum: the basis for contractor selection; justification for lack of competition when competitive bids are not obtained; and the basis for the award cost or price. (24 CFR 84.46 and OMB Circular A-110 Subpart C, Section 46) Financial records, supporting documents, statistical records, and all other records pertinent to an award shall be retained for a period of three years from the date of submission of the final expenditure report. (24 CFR 84.53 and OMB Circular A-110 Subpart C, Section 53) The City and County of San Francisco, through MOH did not adequately monitor MOH, awarded CDBG and HOME program funds to subrecipients’ procurement HCDC for the development of Britton Court. As process. required, the City established procedures to monitor subrecipients' process for the award of service contracts. Although MOH performed substantial monitoring of HCDC’s performance in other areas, including the progress of construction, MOH should have ensured HCDC adhered to required procurement procedures. MOH officials believed this was the sole responsibility of the City’s Human Rights Commission, the City agency responsible for monitoring procurement for most City departments, including MOH. MOH did not adequately monitor the procurement process as required, nor did it ensure HCDC had appropriate procurement procedures established. Thus, it did not fulfill its responsibility to ensure HCDC established or followed Federal procurement standards. Although HCDC partnered with another nonprofit HCDC’s experience in development organization for the development of one of new housing did not include a condominium project and completed one project of the type or scale of Britton Court. 5 Audit Memorandum 2002-SF-1801 Mayor’s Office of Housing and Nonprofit Developers condominium project on its own, MOH believed Britton Court would be a leap to a different level of development. This was particularly important in this case, because MOH was concerned that HCDC lacked the capacity and experience in developing new housing of this type and scale. HCDC’s primary programs did not include similar activities. Officials of MOH told us they had some concerns about HCDC's capacity to manage this project from the start but believed HCDC was ready for a chance to demonstrate increased capacity. When problems occurred during the construction phase, MOH was instrumental in bringing in a more experienced organization as managing general partner to bring the project back on track. HCDC's written policies and procedures did not HCDC’s written procedures did include procurement of service contracts. HCDC not address procurement of hired three construction consultants, but did not retain services. procurement records to show a reasonable basis for contractor selection. If HCDC followed the procedures it published in its RFQ, HCDC's records indicate it would have selected a different general contractor. HCDC hired a new Executive Director in July 2001. He agreed HCDC should have clear written procedures for procurement. In response to our draft audit memorandum, HCDC’s Board of Directors passed a resolution establishing policies for obtaining goods and services using Federal funds. The President of the Board has made a commitment to establishing written procedures that are consistent with Federal procurement standards. HCDC’s RFQ for a general contractor stated the HCDC did not follow the process scores from Phase 1 (evaluation of submissions) and described in its RFQ. Phase 2 (interviews) would be combined to select the general contractor. However, HCDC did not combine the scores. Instead, HCDC submitted only the Phase 2 scores to the City's Human Rights Commission. Based on those scores, Nibbi-Lowe was ranked the highest with 88.3 points. Roberts-Obayashi, with 85 points was second. If the two scores were combined in accordance with the stated provisions of the RFQ, Roberts-Obayashi would have been ranked the highest with a score of 87.8, and Nibbi-Lowe second with 77.8. When the spread from the lowest score to the highest was only 30 points, the ten-point difference was significant. There is nothing inherently wrong with the process HCDC actually used to select the general contractor, in which the first round of scores was only the basis for a short list of candidates and the final selection was made based only on the second round of scoring. The problem was HCDC established and published one procedure and then changed the process halfway through. Federal procurement standards were not followed, and HCDC is in violation of 24 CFR Part 84 and OMB Circular A-110 as indicated above. HCDC could not show how it hired the three construction consultants or why they were selected. HCDC relied on the consultants to manage the development process, including construction of the Britton Court project. Well into the construction process, investors and lenders insisted HCDC accept a more experienced partner to take over construction management and get the project back on track. MOH officials said the consultants were not only capable, but also necessary for the successful completion of the project 6 Audit Memorandum 2002-SF-1801 Mayor’s Office of Housing and Nonprofit Developers and the investors insisted on their retention. Nevertheless, there is no assurance services were obtained in the most effective manner, so as to provide open and free competition and ensure the award was made to the offerer who was most responsive and advantageous in regard to price, quality, and other factors considered. In the case of the general contractor, HCDC did not award the contract to the correct firm. Given the procedures it established, HCDC should have chosen Roberts-Obayashi who HCDC's selection panel rated significantly higher than Nibbi-Lowe. The Director of MOH agreed MOH could develop better procedures to review and ensure subrecipients have adequate written procedures for administering HUD funds. He did not agree with our conclusion that the incorrect general contractor was hired. He explained the process HCDC actually used is consistent with the City’s procedures and is acceptable under Federal guidelines. However, he acknowledged HCDC did not word the RFQ correctly. MOH does not believe there was a significant problem with the procurement. MOH feels HCDC’s procurement error was a minor occurrence in the overall success of the development and steps have already been taken to prevent a recurrence. Officials from MOH said they made it clear to HCDC it needs to develop more capacity before MOH will approve any additional funds for multifamily development. Until such time as HCDC establishes written procurement policies and procedures in compliance with Federal procurement standards, we believe HCDC should be restricted from HUD funding for multifamily development projects. AUDITEE COMMENTS MOH and HCDC provided written comments in response to the draft audit memorandum. The full text of MOH and HCDC’s written comments is included in this report as Attachment A and Attachment B, respectively. We met with officials from both entities for an exit conference on March 11, 2002. In response to the auditees’ comments, we have made changes to the audit memorandum that we considered appropriate. Neither MOH nor HCDC disputed the facts as we reported them, but both generally disagreed that there was any ill effect from HCDC’s procurement of services. The auditees made it clear they believe HCDC could not have hired better firms for general contractor and construction consultants. In the case of the general contractor, they do not believe there was any restriction of open and free competition, since the RFQ was openly published. MOH agreed it would compile a manual incorporating both Federal and City procurement requirements for use in MOH-funded projects. The director believes MOH already has adequate monitoring procedures. In response to our review, HCDC has already passed a board resolution establishing a policy that all procurements made with Federal funds will be in compliance with OMB Circular A-110, Subpart C. 7 Audit Memorandum 2002-SF-1801 Mayor’s Office of Housing and Nonprofit Developers OIG EVALUATION OF AUDITEE COMMENTS We do not agree there was no ill effect as a result of HCDC’s lack of written procurement policies and procedures. If an established process can be changed in the middle of the procurement, there is no assurance it cannot be changed just because someone did not like the results. If there was an overriding and justified reason for not hiring the contractor indicated by the process, this reason must be fully documented. In the case of the consultants, they may have been qualified and they may have performed at a high level of competence. However, there is no way to determine if there were better choices, if other contractors were considered, or why these firms were selected, because HCDC did not document the procurement process. We concur with MOH’s proposed action to compile a manual incorporating both Federal and City procurement requirements in order to establish and implement effective monitoring policies for subrecipient procurement activities. Although HCDC has established a policy to comply with Federal procurement standards, we believe they still need to develop written operating procedures to successfully implement the policy. RECOMMENDATIONS We recommend the Director of CPD: 1A. Require MOH to establish and implement effective monitoring policies to ensure subrecipients implement and follow adequate procurement procedures and policies required by Federal laws and regulations; and 1B. Advise the City of San Francisco that it should not provide HCDC with additional CDBG and/or HOME funds for multifamily development projects until it can show that adequate policies and procedures are in place to assure compliance with Federal procurement standards. ***** Within 60 days, please give us a status report on the recommendations stating (1) the corrective action taken, (2) the proposed corrective action and the date to be completed, or (3) why action is considered unnecessary. Also, please furnish us copies of any correspondence or directives related to this review. 8 Audit Memorandum 2002-SF-1801 Mayor’s Office of Housing and Nonprofit Developers If you have any questions concerning this report, please call Joseph Chaves, Assistant District Inspector General for Audit at (415) 436-8101. Attachment A - Auditee Comments – Mayor’s Office of Housing Attachment B - Auditee Comments – Housing Conservation and Development Corporation Attachment C - Distribution 9 Audit Memorandum 2002-SF-1801 Mayor’s Office of Housing and Nonprofit Developers ATTACHMENT A 10 Audit Memorandum 2002-SF-1801 Mayor’s Office of Housing and Nonprofit Developers ATTACHMENT A 11 Audit Memorandum 2002-SF-1801 Mayor’s Office of Housing and Nonprofit Developers ATTACHMENT B 12 Audit Memorandum 2002-SF-1801 Mayor’s Office of Housing and Nonprofit Developers ATTACHMENT B 13 Audit Memorandum 2002-SF-1801 Mayor’s Office of Housing and Nonprofit Developers ATTACHMENT B ATTACHMENT B 14 Audit Memorandum 2002-SF-1801 Mayor’s Office of Housing and Nonprofit Developers ATTACHMENT B 15 Audit Memorandum 2002-SF-1801 Mayor’s Office of Housing and Nonprofit Developers ATTACHMENT B 16 Audit Memorandum 2002-SF-1801 Mayor’s Office of Housing and Nonprofit Developers ATTACHMENT B 17 Audit Memorandum 2002-SF-1801 Mayor’s Office of Housing and Nonprofit Developers ATTACHMENT C 18 Audit Memorandum 2002-SF-1801 Mayor’s Office of Housing and Nonprofit Developers DISTRIBUTION Director, Community Planning and Development, 9AD Director, Multifamily Hub, 9AHM Primary Field Audit Liaison Officer, 6AF Departmental Audit Liaison Officer, FM Principal Staff Regional Directors Acquisitions Librarian, Library, AS Subcommittee on Oversight and Investigations, U.S. House of Representatives Associate Director, Housing and Telecommunications Issues, U.S. General Accounting Office Chairman, Committee on Governmental Affairs, U.S. Senate Ranking Member, Committee on Governmental Affairs, U.S. Senate Chairman, Committee on Government Reform, U.S. House of Representatives Ranking Member, Committee on Government Reform, U.S. House of Representatives Senior Advisor, Subcommittee on Criminal Justice, Drug Policy and Human Resources House Committee on Financial Services Mayor’s Office of Housing, San Francisco, California Housing Conservation and Development Corporation, San Francisco, California Mercy Housing California, San Francisco, California 19
Mayor's Office of Housing and Nonprofit Developers Use of Various HUD Funds to Replace Geneva Towers San Francisco, California
Published by the Department of Housing and Urban Development, Office of Inspector General on 2002-03-25.
Below is a raw (and likely hideous) rendition of the original report. (PDF)