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, EXIT 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. 2 EXIT 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 3 EXIT 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 4 EXIT 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. 5 EXIT 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 6 EXIT Audit Memorandum No. 2002-SF-18XX Lorenz Hotel Project ATTACHMENT A WRITTEN AUDITEE COMMENTS EXIT Audit Memorandum No. 2002-SF-18XX Lorenz Hotel Project 8 EXIT Audit Memorandum No. 2002-SF-18XX Lorenz Hotel Project 9 EXIT Audit Memorandum No. 2002-SF-18XX Lorenz Hotel Project Auditee comments are to be obtained.] 10 EXIT Audit Memorandum No. 2002-SF-18XX Lorenz Hotel Project 11 EXIT Audit Memorandum No. 2002-SF-18XX Lorenz Hotel Project 12 EXIT Audit Memorandum No. 2002-SF-18XX Lorenz Hotel Project 13 EXIT Audit Memorandum No. 2002-SF-18XX Lorenz Hotel Project 14 EXIT 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 EXIT
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)