oversight

Limited Review-Lorenz Hotel, Project No. 136-38029 Property Disposition Program Redding, 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-1802
       March 25, 2002


       TO:            Janet Browder
                      Director, San Francisco Multifamily Hub, 9AHM


                      //SIGNED//
       FROM:          Mimi Y. Lee
                      District Inspector General for Audit, 9AGA

       SUBJECT:       Limited Review – Lorenz Hotel, Project No. 136-38029
                      Property Disposition Program
                      Redding, California


       In response to a request from the U.S. Department of Housing and Urban Development’s
       (HUD’s) Sacramento Multifamily Program Center, we completed a limited review of
       commercial rent activities at Lorenz Hotel located at the city of Redding, California. We found
       Shasta Housing Development Corporation (SHDC) violated its sales contract and grant deed of
       the property by retaining $53,484 in commercial rent.

       BACKGROUND

       The Lorenz Hotel is a 77-unit low-income housing project once owned by the Shasta Housing
       Development Corporation (a California non-profit community entity) located in Redding,
       California. HUD funded a $7 million rehabilitation of the Lorenz and sold it to SHDC in 1995
       for one dollar. The project is a six-story former hotel built in the 1920s. HUD and SHDC
       executed an agreement for Housing Assistance Payments (HAP) where HUD provides long-term
       Section 8 rental assistance to low-income people. In addition to the lobby used by the residents,
       there is commercial rental space on the ground floor that houses a church, restaurant, barbershop,
       and other small businesses.

       In September 1995, SHDC and Christian Church Home of Northern California (CCH) signed a
       management agreement in which CCH would manage and market both the commercial and
       residential spaces. In July 1997, SHDC revised the management agreement so CCH would no
       longer be responsible for managing and marketing the commercial spaces. As a result, SHDC
       collected both the rents and the security deposits of the commercial space from July 1997 to July
       1999. SHDC subsequently returned management of the commercial space to CCH and sold,




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       Audit Memorandum No. 2002-SF-1802                                                 Lorenz Hotel Project


       with HUD’s approval, the hotel to CCH for one dollar. SHDC then changed its name to
       Community Revitalization and Development Corporation (CRDC) in October 2000.

       The Office of Inspector General received a request from HUD’s Multifamily Program Center in
       Sacramento for an audit of the Lorenz project. The request expressed concern with SHDC’s
       handling of the project’s commercial security deposits and rents as well as certain outstanding
       liabilities.

       OBJECTIVE, SCOPE, AND METHODOLOGY OF LIMITED REVIEW

       The objectives of our review were to:

              1. Determine whether the rents and deposits SHDC collected from the Lorenz Hotel
                 commercial tenants from July 1997 to June 1999 were handled in accordance with
                 HUD requirements; and

              2. Determine the disposition of the outstanding liabilities of $19,059 and $8,059, dating
                 from June 30, 1996 and June 30, 1998, respectively, as noted by the public
                 accountant’s report accompanying statements of financial position of the Lorenz
                 Hotel as of June 30, 1998.

       We did the following work to accomplish our objectives:

              •   Interviewed knowledgeable official from HUD’s Sacramento Multifamily Program
                  Center;

              •   Interviewed the current director of Community Revitalization and Development
                  Corporation, official of property manager CCH, the commercial tenants at the Lorenz
                  Hotel, and reviewed commercial tenant records on rental payments, where possible;

              •   Reviewed the Lorenz Hotel books and records maintained by property management
                  agent Christian Church Home of Northern California;

              •   Reviewed the HUD sales contract and grant deed for the Lorenz Hotel;

              •   Examined records provided by SHDC (now known as Community Revitalization and
                  Development Corporation) in support of payments made on behalf of the project; and

              •   Reviewed the commercial lease agreements.

       Most of SHDC’s accounting records for the project were supposedly destroyed, and were not
       generally available for our review.

       A formal examination of SHDC’s management controls was not necessary for our objectives.
       Therefore, our conclusions are not based on any reliance on such controls.

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       Audit Memorandum No. 2002-SF-1802                                               Lorenz Hotel Project




       The limited review generally covered the period from July 1997 through June 1999 and was
       conducted during the period from February 2001 through end of February 2002.

       We performed this limited review in accordance with generally accepted government auditing
       standards.

       SUMMARY

       We concluded SHDC violated its sales contract and grant deed of the Lorenz Hotel by retaining a
       net of $53,484 of commercial rent. We discuss this issue in detail in the following finding
       section.

       Regarding liabilities of $19,059 and $8,059 reported in the project’s June 30, 1998 financial
       statements, we concluded the following:

          •   The $19,059 was part of a $65,000 loan SHDC obtained from the Redding
              Redevelopment Agency in August 1995 as a working capital advance during the initial
              rent-up period for the Lorenz Hotel. The loan has since been fully repaid and is no longer
              an issue.

          •   The $8,059 supposedly represented SHDC’s liability to the Lorenz Hotel for commercial
              rents it retained. Since SHDC’s accounting books and much of its records were
              destroyed, SHDC was unable to show how it arrived at this amount. Nevertheless, as
              described in the following finding, we independently computed the amount of
              commercial rents and deposits SHDC retained based on available evidence.

       FINDING

                           SHDC Improperly Retained Commercial Rental Income

       SHDC disregarded requirements contained in the property’s sales contract and grant deed by
       improperly retaining a net of $53,484 in commercial rents. This reduced the project’s ability to
       readily meet its financial obligations and provide for future monetary needs.

       The HUD sales contract to SHDC for the property required it to use net income from all
       commercial rental space for the exclusive use of the property. While the contract was silent on
       handling of security deposits, those deposits are an obligation of the project. Therefore, the
       deposits should be available for future refund to tenants.

        SHDC took over management of         SHDC entered into an agreement with Christian Church
                                             Home of Northern California (CCH) in September 1995
        commercial space in 1997.
                                             for CCH to manage the Lorenz Hotel. Under the
       agreement, CCH was to collect and disburse all rents and other amounts received from both the
       residential and commercial tenants. Such receipts were to be deposited in a separate account in

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       Audit Memorandum No. 2002-SF-1802                                              Lorenz Hotel Project


       the name of the project. In July 1997, SHDC amended the agreement with CCH so that SHDC
       would take over the management of the commercial space. CCH was only responsible for
       management of the residential portion of the hotel and would not provide accounting services for
       the commercial spaces. SHDC was to manage commercial activities and agreed to make all
       financial information available to CCH for auditing and other purposes.

                                           When SHDC took over administration of commercial
        SHDC disregarded HUD’s
                                           activities, it disregarded HUD’s requirements and
        requirements.
                                           deposited receipts into its general account and
       commingled them with non-project funds. Further, SHDC stated these financial records had
       been destroyed. Consequently, SHDC was not able to provide a complete accounting of the
       receipts and disbursements.

       Despite the near complete lack of financial records, we concluded SHDC collected $158,224 in
       rents and $2,692 in security deposits from July 1997 through June 1999. We calculated the
       amounts by reviewing the lease agreements and confirming this information by interviewing the
       tenants. We also considered records provided by CCH and SHDC showing it paid $35,430
       [$20,358+$15,072] for project expenses on behalf of the commercial tenants and $72,002
       [$69,310+$2,692] to CCH that was deposited in the project’s account. Thus, our analysis
       showed SHDC improperly retained a net of $53,484.

                      Tenant                 Security    Rent from       Rent from   Total
                                             Deposit July 1,1997 to July 1, 1998 to
                                                      June 30, 1998 June 30, 1999
          Photographer                          $800         $9,600          $9,600 $20,000
          Hair salon                             692          8,304           8,304  17,300
          Nonprofit organization                              9,600           9,600  19,200
          Restaurant                                         40,908          40,908  81,816
          Barber shop                            200          2,700           2,700   5,600
          Church                               1,000          6,400           9,600  17,000
                          Total receipts      $2,692        $77,512        $80,712 $160,916
             Less payments by SHDC
          Payment to CCH                                                                    $69,310
          Security deposit
          reimbursement to CCH                                                                2,692
          Direct payments to vendors                                                         20,358
          Additional direct payments to
          vendors                                                                           15,072
                        Total payments                                                    $107,432
                   Net amount retained                                                     $53,484




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       Audit Memorandum No. 2002-SF-1802                                                  Lorenz Hotel Project




        The retention of these monies            The retention of these monies negatively impacted the
        negatively impacted the project          Lorenz Hotel. Based on the Lorenz Hotel’s annual
        financially.                             financial statements, the project had negative surplus cash
                                                 positions (that is, current obligations exceeding cash
       balances). For June 30, 1998 and 1999, the negative balances were $26,351 and $12,948
       respectively. Although the project’s financial position was improving, these monies are not
       available for the project’s future needs to assure the housing and commercial spaces are properly
       maintained and the project meets other financial needs.

       AUDITEE COMMENTS

       The CRDC provided its written response to our draft audit memorandum which is included as
       Attachment A.

       The CRDC did not dispute the fact that staff working for the SHDC improperly retained
       commercial rental income and deposits. However, CRDC for a variety of reasons did not concur
       with dollar amount of funds retained by SHDC that was established in our review.

       The CRDC claimed there were no outstanding security deposits. SHDC and Christian Church
       Home (CCH) each made deposits of $5,000 in regard to the Tree House apartment development.
       At the time when those deposits were released, SHDC agreed that the amount that was owed for
       the Lorenz Hotel commercial deposits were to be deducted from the $5,000 that was due to
       SHDC. The CRDC provided a copy of the letter from CCH explaining the agreement that was
       reached to pay back the outstanding amount of the deposits.

       The CRDC claimed the amount paid by the restaurant was an open question. The restaurant was
       continually behind in rent. Rent was never paid when it was due. The amount paid seemed to
       change monthly.

       The CRDC stated that the amount of the space occupied by SHDC changed as the organization
       downsized. Between July 1, 1998 and August 31, 1998, the number of employees declined from
       three to two. For all of the period in 1999, there was only one employee in the office. The
       CRDC believed that the amount owed for rent by SHDC should be reduced.

       The CRDC provided a summary of cash disbursements from their accounts relative to Lorenz
       Hotel expenses during the period in question. The CRDC stated they believe that this record of
       disbursements was a more accurate reflection of what actually transpired.




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       Audit Memorandum No. 2002-SF-1802                                              Lorenz Hotel Project


       OIG EVALUATION OF AUDITEE COMMENTS

       We reviewed the supporting documentation CRDC provided as to the settlement of the security
       deposits in an amount of $2,692 with CCH. We independently verified this with CCH’s
       representative. Accordingly, we have adjusted our audit finding from $2,692 to $0 for the
       security deposits reimbursement to CCH.

       The CRDC did not provide any evidence or support as to the amount of rent SHDC collected
       from the restaurant from July 1, 1997 to June 30, 1999. Therefore, we did not adjust our audit
       findings with regard to the amount of commercial rent that was collected from the restaurant.

       We did not take any exception to the SHDC’s use of office space at the Lorenz Hotel in our draft
       audit memorandum. The CRDC incorrectly thought the item under "nonprofit organization total
       rent $19,200" in our draft audit memorandum meant SHDC. The rent collected was from a
       different nonprofit organization.

       The CRDC prepared a summary of cash disbursements related to the Lorenz Hotel for the period
       July 1, 1997 to June 30, 1999. The CRDC stated the financial records had been destroyed.
       Consequently, CRDC was not able to provide a complete accounting of the receipts and
       disbursements related to the Lorenz Hotel. The CRDC was able to provide adequate supporting
       documentation for $20,358 in direct payments to vendors. We previously accepted this amount
       in our draft audit memorandum. Based upon CRDC’s response, we subsequently performed an
       additional review and analysis of cash disbursements. Accordingly, we have adjusted our audit
       findings to accept an additional $15,072 in direct payments to vendors.

       RECOMMENDATION

       We recommend you require SHDC, now known as Community Revitalization and Development
       Corporation, to return $53,484 to the project.

                                                   *****

       Within 60 days, please furnish us a status report on the recommendation stating: (1) the
       corrective action taken, (2) the proposed corrective action and date to be completed, or (3) why
       action is considered unnecessary. Also, please furnish us with copies of any correspondence or
       directives related to the review.

       If you have any questions concerning this report, please call Joseph Chaves, Assistant District
       Inspector General for Audit, at (415) 436-8101.

       Attachment A – Written Auditee Comments
       Attachment B – Distribution




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       Audit Memorandum No. 2002-SF-18XX                     Lorenz Hotel Project

                                                            ATTACHMENT A


                                 WRITTEN AUDITEE COMMENTS




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       Audit Memorandum No. 2002-SF-18XX       Lorenz Hotel Project




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       Audit Memorandum No. 2002-SF-18XX            Lorenz Hotel Project


       Auditee comments are to be obtained.]




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       Audit Memorandum No. 2001-SF-18XX                                        Lorenz Hotel Project

                                                                              ATTACHMENT B


                                           DISTRIBUTION


       Director, Multifamily HUB, 9AHM
       Sacramento Multifamily Program Center, 9GHM
       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
       House Committee on Financial Services, U.S. House of Representatives
       Senior Advisor, Subcommittee on Criminal Justice, Drug Policy and Human Resources, U.S.
               House of Representatives
       Community Revitalization and Development Corporation, Redding, California
       Christian Church Home of Northern California, Oakland, California




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