oversight

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)

                                                     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.




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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.



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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


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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.

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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



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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.




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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.




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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




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Audit Memorandum 2002-SF-1801        Mayor’s Office of Housing and Nonprofit Developers


                                                                 ATTACHMENT A




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Audit Memorandum 2002-SF-1801        Mayor’s Office of Housing and Nonprofit Developers


                                                                 ATTACHMENT A




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Audit Memorandum 2002-SF-1801        Mayor’s Office of Housing and Nonprofit Developers


                                                                  ATTACHMENT B




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Audit Memorandum 2002-SF-1801        Mayor’s Office of Housing and Nonprofit Developers


                                                                  ATTACHMENT B




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Audit Memorandum 2002-SF-1801        Mayor’s Office of Housing and Nonprofit Developers


                                                                  ATTACHMENT B




                                                                  ATTACHMENT B


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Audit Memorandum 2002-SF-1801        Mayor’s Office of Housing and Nonprofit Developers




                                                                  ATTACHMENT B



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Audit Memorandum 2002-SF-1801        Mayor’s Office of Housing and Nonprofit Developers




                                                                  ATTACHMENT B



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Audit Memorandum 2002-SF-1801        Mayor’s Office of Housing and Nonprofit Developers




                                                                  ATTACHMENT B



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Audit Memorandum 2002-SF-1801        Mayor’s Office of Housing and Nonprofit Developers




                                                                 ATTACHMENT C



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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




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