oversight

Housing Authority of the City of Durham, Durham, North Carolina

Published by the Department of Housing and Urban Development, Office of Inspector General on 2004-08-02.

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

                                                               Issue Date
                                                                       August 2, 2004
                                                               Audit Case Number
                                                                      2004-AT-1012




TO:           Michael A. Williams, Director, Office of Public Housing, 4FPH

              Margarita Maisonet, Director, Departmental Enforcement Center, CV




FROM:         James D. McKay
              Regional Inspector General for Audit, 4AGA

SUBJECT:      Housing Authority of the City of Durham
              Durham, North Carolina


                                      INTRODUCTION

We completed an audit of the Housing Authority of the City of Durham’s (Authority)
management controls over development activities. Our audit was initiated as a result of the audit
of the Department of Housing and Urban Development’s (HUD) oversight of Public Housing
Agency development activities with related nonprofit entities. Our objective was to determine
whether the Authority had adequate controls to ensure assets were properly safeguarded and
whether it was in compliance with applicable laws, regulations and HUD requirements, as they
pertained to development activities.

To accomplish our objectives we reviewed applicable HUD regulations, the Authority’s Annual
Contributions Contract (ACC), and other requirements. We also: interviewed appropriate
Authority and HUD North Carolina State Office of Public Housing management and staff,
reviewed Authority and Development Ventures, Inc., (DVI) books, records, and minutes of
Board meetings, and, reviewed HUD files and reports.

We conducted our field work from October 14, 2003, through March 12, 2004, and covered the
period January 1, 2000, to September 30, 2003. We performed our audit in accordance with
generally accepted government auditing standards.
We discussed our audit results with Authority officials during our review and met with them for
an exit conference on June 17, 2004. At the exit conference, Authority officials generally agreed
with the Finding and stated that they were not taking issue with anything in the report. The
Authority provided written comments to our draft on June 29, 2004, and, contrary to their
statements at the exit conference, generally disagreed with the report. The complete text of the
Authority’s comments, along with our evaluation of the comments can be found in Appendix D
of this report. In addition, supporting documentation provided by the Authority is available for
review upon request.

In accordance with HUD Handbook 2000.06 REV-3, within 60 days, please provide us, for each
recommendation without a management decision, a status report on: (1) the corrective action
taken; (2) the proposed corrective action and the date to be completed; or (3) why action is
considered unnecessary. Additional status reports are required at 90 days and 120 days after
report issuance for any recommendation without a management decision. Also, please furnish us
copies of any correspondence or directives issued because of the audit.

Should you or your staff have any questions, please contact me at (404) 331-3369, or Gerald
Kirkland, Assistant Regional Inspector General for Audit at (865) 545-4369.

                                               SUMMARY

The Authority violated its ACC contract with HUD by inappropriately advancing funds and
guaranteeing loans for non-Federal development and other activities that were not approved by
HUD. As of September 30, 2003, the Authority had advanced at least $1,994,955 from its
Conventional Public Housing General Fund to DVI, DVI projects, and other entities. The
Authority also violated its Turnkey III Administrative Use Agreement (Agreement) when it
inappropriately advanced or failed to require loan repayments totaling at least $2,803,579.
Appendix B of this report shows the amounts owed the Authority from the various entities.
Also, in violation of its ACC, the Authority guaranteed a $350,000 loan obtained by a Limited
Liability Company (LLC) and executed a Promissory Note for a $1.5 million line of credit on
behalf of another LLC. The Authority also failed to properly allocate operating costs to other
entities. Further, the Authority has not completed several of its development efforts, thus we
question its ability to successfully complete its HOPE VI Revitalization Plan. These actions
occurred because the Authority Board of Commissioners and management did not establish and
implement sufficient controls to monitor activities and ensure transactions adhered to Federal
regulations. Further, the Board did not adequately fulfill its fiduciary responsibilities to oversee
Authority operations, and management disregarded HUD requirements and instructions. These
actions reduced funds available to operate and maintain the Authority’s conventional public
housing and deprived tenants of needed housing.

As a result of our discussions with HUD officials, the Deputy Assistant Secretary, Office of
Public Housing Investments, required reviews of all drawdowns of HOPE VI funds. Similarly,
the Director of Public Housing required the Authority to obtain approval for any other
drawdowns of HUD funds.



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We also identified other management and financial weaknesses that we will address in a
subsequent audit report.

We recommend the Director, Office of Public Housing:

    •   Require the Authority to repay $3,454,660, or current balance owed, to its Conventional
        Public Housing General Fund or Turnkey III program, as appropriate.

    •   Require the Authority to obtain release of any currently encumbered assets, including the
        Promissory Note for a $1.5 million line of credit with Wachovia Bank and the loan
        guaranty for a $350,000 loan obtained by Fayette Place, LLC.

    •   In coordination with the Office of Public Housing Investments, continue to perform
        reviews of all drawdowns of funds until HUD determines the Authority is properly
        administering its programs.

    •   Perform a comprehensive review of the Authority’s capacity and ensure the Authority
        takes appropriate measures to address any capacity issues to successfully complete
        activities in accordance with the HOPE VI Grant Agreement and Revitalization Plan. If
        the review finds the Authority does not have the capacity to complete the activities, or
        finds the Authority in serious default of the Grant Agreement or regulations, terminate
        the Grant and recapture the remaining $27,590,236, or current balance, of unused funds.

    •   Issue a Notice of Substantial Default in accordance with Section 17(C) of the ACC.
        Should the Authority fail to cure the default, require the Authority to convey title to the
        projects, or deliver possession and control of the projects to HUD

Other recommendations include advising the Authority not to make further advances or
encumber assets without prior written approval from HUD, requiring the Board of
Commissioners to establish adequate controls, and requiring the Authority to develop and
implement an acceptable cost allocation plan.

We also recommend the Director, Departmental Enforcement Center, in consultation with the
Director, Office of Public Housing, Greensboro, North Carolina, take administrative actions
against the former Executive Director, Interim Executive Director and Board members, including
issuing Limited Denials of Participation or debarments, as appropriate.

                                             BACKGROUND

The Authority was created in 1949 under North Carolina law to provide safe and sanitary
housing for persons of low and moderate income. A seven member Board of Commissioners
governed the Authority. Deloris C. Rogers has served as the Chairperson since February 24,
2000. The Board of Commissioners accepted the resignation of James R. Tabron, the former
Executive Director, in April 2003. Frank Meachem currently serves as the Authority’s Interim
Executive Director.


                                                3
The Authority is required to develop and operate public housing complexes in compliance with
its ACC with HUD. The Authority administered 13 Conventional Public Housing communities
consisting of 2,133 dwelling units. It also managed a Section 8 Program consisting of 2,834
housing choice vouchers. As of June 20, 2003, the Authority had 1,496 applicants on the public
housing program waiting list and 3,244 applicants for the Section 8 Program.

The Authority is the parent company of two wholly owned not-for-profit subsidiaries: Learning
Assistance, Inc., an educational foundation created in 1987 to increase educational, employment,
and economic opportunities for Authority residents; and DVI, a housing development
corporation created in 1985 to develop low-income properties. Neither of the subsidiaries have
employees. The Authority’s Board of Commissioners serves concurrently as the Board of
Directors of both subsidiaries. The Authority’s Executive Director normally serves as the
Secretary/Treasurer for DVI. Currently, the Interim Executive Director is serving as the
Secretary/Treasurer. The Authority also holds a majority interest in East Durham Properties,
LLC.

DVI also owns or has an ownership interest in at least five apartment complexes and an
industrial center, the Golden Belt Center. The apartment complexes are: Northtowne
Apartments, Woodridge Commons Apartments, Edgemont Elms Townhomes, Fayette Place
Apartments, and Preiss-Steele Place. The Golden Belt Center is comprised of 9 buildings
totaling about 180,000 square feet. The complex is in dire need of renovations and is largely
unoccupied.

Appendix C provides additional information about the various entities.

The Authority’s financial records were maintained primarily at its central office located at
330 East Main Street, Durham, North Carolina.




                                               4
Finding 1: The Authority Inappropriately Advanced Funds and Guaranteed Loans

The Authority violated its ACC contract with HUD by inappropriately advancing funds and
guaranteeing loans for non-Federal development and other activities that were not approved by
HUD. As of September 30, 2003, the Authority had advanced at least $1,994,955 from its
Conventional Public Housing General Fund to DVI, DVI projects, and other entities. The
Authority also violated its Turnkey III Agreement when it inappropriately advanced or failed to
require loan repayments totaling at least $2,803,579. Also, in violation of its ACC, the Authority
guaranteed a $350,000 loan obtained by a LLC and executed a Promissory Note for a $1.5
million line of credit on behalf of another LLC. The Authority also failed to properly allocate
operating costs to other entities. Further, the Authority has not completed several of its
development efforts, thus we question its ability to successfully complete its HOPE VI
Revitalization Plan. These actions occurred because the Authority Board of Commissioners and
management did not establish and implement sufficient controls to monitor activities and ensure
transactions adhered to Federal regulations. Further, the Board did not adequately fulfill its
fiduciary responsibilities to oversee Authority operations, and management disregarded HUD
requirements and instructions. These actions reduced funds available to operate and maintain the
Authority’s conventional public housing and deprived tenants of needed housing.

Criteria:

Part Two, Section 401(D) of the ACC allows the Authority to withdraw monies from the General
Fund only for (1) public housing development costs, (2) operating expenditures, (3) purchase of
investment securities approved by the Government, and (4) other purposes specified in the ACC
or specifically approved by the Government.

Part Two, Section 313 of the ACC specifically prohibits the Authority from transferring,
conveying, assigning, leasing, mortgaging, pledging, or otherwise encumbering project assets
including rent, revenues, and income. Further, Section 506(2) states that such pledges or
encumbrances are considered a substantial default of the contract.

Title 24 of the Code of Federal Regulations, Part 904, sets forth requirements for the Turnkey III
program. It provides that any reserves remaining after the sale of the last home must be paid to
HUD. However, HUD formally waived the requirement for the return of such funds and
executed an ACC Amendment for Loan Forgiveness with the Authority on April 16, 1993.

The Administrative Use Agreement for Proceeds of Sales of Homeownership Projects that the
Authority entered into on April 16, 1993, provides that the Board of Commissioners is
responsible for ensuring that proceeds from sales are used in accordance with the requirements of
the Agreement.

The Office of Management and Budget’s (OMB) Circular A-87 establishes principles for
determining the allowable costs incurred by State, local, and federally recognized Indian tribal
governments (governmental units) under grants, cost reimbursement contracts, and other
agreements with the Federal Government. To be allowable under Federal awards, costs must be
necessary and reasonable for proper and efficient performance and administration of Federal
                                              5
awards. A cost is reasonable if, in its nature and amount, it does not exceed that which would be
incurred by a prudent person under the circumstances prevailing at the time the decision was
made to incur the cost. The question of reasonableness is particularly important when
governmental units or components are predominately federally funded. In determining
reasonableness of a given cost, consideration shall be given to whether the cost is of a type
generally recognized as ordinary and necessary for the operation of the governmental unit or the
performance of the Federal award.

Inappropriate Advances of Conventional Public Housing Funds

In violation of its ACC, the Authority inappropriately advanced funds from its Conventional
Public Housing General Fund to DVI, DVI projects and other entities without HUD approval.
These entities used the funds for non-Federal developments and other activities that were not
approved by HUD. As of September 30, 2003, the entities owed the Authority $1,966,117. DVI
and its related entities owed almost $1,694,000. Appendix B shows the amounts owed by each
entity. As discussed later in this Finding, the Authority also paid another $28,838 for closing
costs on properties purchased by East Durham Properties, LLC, which was not recorded as a
receivable due from the LLC.

The Authority inappropriately advanced at least $848,099 to DVI, or directly paid vendors, for
expenses pertaining to the Golden Belt Center. The Golden Belt Center is an industrial facility
intended for mixed use or economic development, not housing.

With HUD approval, the Authority transferred Fayetteville Gardens, formerly a 200-unit public
housing complex, to Fayette Place, LLC. DVI has a 99 percent ownership interest in Fayette
Place, LLC. However, without HUD approval the Authority also used at least $367,777 from its
Conventional Public Housing General Fund to pay fees associated with the financing of the
Fayette Place project.

Fayette Place, LLC pursued tax-exempt bonds to fund the necessary renovations to convert the
complex into privately owned low-income housing. In 2002, Fayette Place, LLC received a
bond allocation for $7.8 million of tax exempt bonds with an additional 4 percent of Low Income
Housing Tax Credits. The tax credits were to be sold to investors to generate additional funds
for renovations. In order to obtain the bonds, Fayette Place, LLC had to demonstrate that it had
necessary credit enhancements to fund the remaining renovation costs. This had to be done by
December 31, 2002, or the bond allocation would be lost. DVI applied for Federal Housing
Administration mortgage insurance under Part 221 (d)(4) of the National Housing Act of 1937,
as amended.

Fayette Place, LLC obtained a $350,000 bank loan to fund the initial closing so it would not lose
the bonds. Further, Fayette Place, LLC obtained a $7.8 million a line of credit to fund the
issuance of the bonds. However, as of March 12, 2004, the necessary credit enhancements had
not been obtained. Thus, there are insufficient funds to make the renovations. As such, Fayette
Place, LLC has not been able to sell the bonds. In the interim, the Authority is paying fees,
including interest on the line of credit, associated with the financing. The Authority estimated
the annual amount of the fees at $376,000 until final closing occurs, but could not provide an

                                               6
estimated closing date for the project. As of September 30, 2003, Fayette Place, LLC owed the
Authority $367,777.

In a letter to the Authority attorney, the Interim Executive Director stated that payment of the
fees was not budgeted nor anticipated and may result in reducing salaries and other related
expenditures. According to the recently resigned Director of Finance, if the 221 (d)(4)
application is not approved, the Authority will be crippled because it will have to immediately
pay about $1 million in development costs and about $2 million within 2 years. HUD’s North
Carolina Office of Housing has not yet determined whether the application will be approved.
Further, when the Authority transferred the property to Fayette Place, LLC, 126 of the families
were provided Section 8 vouchers. Subsequently, most of them moved from the property. We
visited the property and noted that most of the units were vacant.

The Authority Violated its Turnkey III Administrative Use Agreement

The Authority violated its Turnkey III Agreement when it inappropriately advanced about $2
million of the funds to DVI for renovation and other expenses of the Golden Belt Center. The
Authority also failed to require DVI to fully repay loans the Authority made for the purchase of
Northtowne Apartments and Woodridge Commons Apartments. Appendix B shows the balance
owed the Authority by the various entities of $2,597,065 as of September 30, 2003. Also,
without authorization the Authority used Turnkey III funds to pay property taxes for Fayette
Place Apartments, $134,790, and to pay longevity bonuses to Authority staff, $71,724. In total,
the Authority inappropriately advanced or failed to require loan repayments totaling at least
$2,803,579.

HUD was not aware the Authority used Turnkey III funds for Golden Belt until the Authority
submitted its financial statements for the fiscal year ended December 31, 2000, which included a
finding on an outstanding loan of Turnkey III funds to Golden Belt. The Authority did not
request HUD’s approval to use Turnkey III funds on the Golden Belt project until July 18, 2001.
However, at the time of the request, the Authority had already advanced about $2 million to
renovate and maintain part of the site. Estimated costs to complete renovations were $12
million. HUD approved the Authority’s request to amend the Turnkey III Agreement to permit
proceeds to be used for economic development. The October 23, 2001, approval letter stated the
Golden Belt Center was authorized a loan of $1,804,670, with repayment over a 30-year period
with initial payments deferred for 3 years. In February 2002, the Authority requested HUD to
forgive the loan. HUD denied the request for debt forgiveness, but increased the deferred
payment period to 5 years. As of September 30, 2003, Golden Belt owed the Authority
$1,343,874 for the Turnkey III loan (See Appendix B).




                                               7
In November 2003, we toured the Golden Belt Center. The buildings were mostly vacant. A
handful of small businesses occupied one small building and a job-training agency occupied a
small portion of another building. The unrenovated buildings were laden with lead based paint
creating a serious health hazard. The following photographs show portions of the buildings.




              Exterior of a typical unrenovated building.




              First floor of Building #2.




                                               8
              Second floor of Building #2 showing severe lead base paint. Similar
              examples were observed during our walk through of other buildings.

Further, as shown in the following picture, the Authority was using some of the facility as
storage space.




              Stoves stored on the first floor of Building #6.

The Authority also advanced Turnkey III funds to DVI to purchase Northtowne Apartments and
Woodridge Commons Apartments. The loans were made pursuant to the Authority’s Turnkey III
Use Agreement, which permitted the funds to be used for a revolving loan development fund.
As the loans were repaid, the funds were to be placed back into the revolving fund to ensure
program continuity. Even though DVI sold Northtowne in August 2003 the $231,094 balance
due on the loan was not returned to the Turnkey III revolving loan fund. DVI made limited
                                                9
repayments to the Authority for the Woodridge note before the Authority subordinated its note so
DVI could obtain a bank loan. DVI used Woodridge Commons Apartments as equity to obtain a
bank loan for $800,000 and used the funds to pay cost overruns on Golden Belt. Subsequently,
DVI discontinued making payments on the Turnkey III loan, which had a balance due of
$1,022,097. HUD was not aware the Northtowne loan was not repaid or that the Authority
subordinated its Woodridge note. Because the Authority did not require the funds to be repaid, it
violated the terms of its Turnkey III Agreement. As such, the Authority should repay the
$231,094 and $1,022,097 to its Turnkey III program from non-Federal funds.

On October 30, 2003, the Authority requested to use recaptured Turnkey III funds for general
operating uses along with development expenses associated with Fayette Place. In its January 6,
2004, response the Greensboro HUD office approved the request to use funds for general
operating purposes, as long as its use was specifically for the Low Income Public Housing
Program. The use of funds for Fayette Place was denied. However, despite HUD denying its
request and even though the Authority’s former Finance Director advised the Executive Director
that paying the taxes would be improper and against HUD’s instructions, the Authority used
$134,790 of Turnkey III funds to pay taxes for Fayette Place. Further, prior to receiving HUD’s
response, the Authority paid longevity bonuses to staff totaling $71,724 from Turnkey III funds.
We confirmed with the PIH Director that he did not authorize payment of the longevity bonuses.

Inappropriate Loan Guarantee

In violation of Part Two, Section 313 of the ACC, Authority management provided a loan
guaranty for a $350,000 loan obtained by Fayette Place, LLC. The Chairperson of the
Authority’s Board of Commissioners and the former Executive Director signed the loan guaranty
in December 2002. However, the minutes of the Authority’s Board of Commissioners meetings
do not indicate the loan guaranty was discussed or approved by the Board. The guaranty is
unsecured and does not identify specific Authority assets as collateral; however, the Authority
could be responsible for the balance of the loan should Fayette Place, LLC default on the loan
payments.

Inappropriate Promissory Note

In June 2003, in violation of Part Two, Section 313 of the ACC, the Authority’s Board
Chairperson executed a Promissory Note for a $1.5 million Line of Credit with Wachovia Bank
on behalf of East Durham Properties, LLC. The Authority’s Interim Executive Director also
signed the Promissory Note. East Durham Properties, LLC was created to purchase properties to
be included in the Authority’s HOPE VI project. Wachovia Bank provided funds from the line
of credit to pay 90 percent of the purchase cost of each property. East Durham Properties, LLC
provided the remaining 10 percent. As properties are purchased, the Authority requests HUD
approval of the properties and release of HOPE VI funds so the Authority can purchase the
properties from East Durham Properties, LLC at cost.

East Durham Properties, LLC purchased at least 13 properties with total contract sales prices of
$395,231. Since the Authority holds a 99 percent ownership interest in East Durham Properties,
LLC, it appears the Authority is purchasing properties prior to receiving HUD approval. Should

                                               10
properties acquired by East Durham Properties LLC not be approved for purchase with HOPE VI
funds, the Authority’s risk is increased because East Durham Properties might be unable to pay
the associated loan funds used to purchase the properties. Also, the Authority paid $28,838 from
its Conventional Public Housing General Fund for closing expenses for the purchases on behalf
of East Durham Properties, LLC. The Authority did not record the $28,838 as a receivable due
from the LLC.

Despite our request for the Authority to provide us with all information pertaining to any loans,
loan guarantees, notes, and related entities, it did not initially disclose to us the existence of the
inappropriate $350,000 loan guaranty, the $1.5 million Promissory Note, or the existence of East
Durham Properties, LLC. We identified these independently of the Authority. The Authority
subsequently provided information on the items when specifically requested. The Authority
would not or could not assure us that it had disclosed all of its or related entitys’ loans, loan
guarantees or lines of credit.

Unoccupied Project

The Authority also constructed a 30-unit low-income public housing project, Laurel Oaks, which
was substantially completed in 1999. The Authority was preparing to lease the units to low-
income tenants. However, the project is currently unoccupied, because the Authority failed to
properly record an easement for water and sewer lines. Subsequently, a neighboring property
was sold and the new owner refused to grant the Authority an easement. The Authority has been
in litigation with the property owner. In the interim, the substantially completed, but unoccupied
project, has been vandalized. Meanwhile, as of June 20, 2003, the Authority had 1,496
applicants on the public housing program waiting list and 3,244 applicants for the Section 8
Program. Further, the Authority lost the potential rent revenue and operating subsidy that would
have been generated from occupied units.

Inadequate Cost Allocation

During our survey, we determined the Authority did not have an acceptable cost allocation plan;
however, we did not expand the scope of audit to include a detailed review of cost allocations.
Authority staff, equipment, and office space were being used to perform non-Authority business
without appropriate allocation of costs. Only salary costs were allocated, however, the Authority
based the allocation on how much time supervisors thought their staff spent on various programs
or working for other entities rather than on the percentage of time staff actually worked on
programs or for other entities, or some other acceptable allocation method. Many of the entities
the Authority is involved with did not have staff. The Authority allocated some salary costs to
three projects owned by DVI: Edgemont Elms Apartments, Preiss-Steele Apartments, and
Woodridge Apartments. However, no costs were allocated to DVI or the Golden Belt Center.
Yet, neither DVI nor Golden Belt had staff.

On February 13, 2004, the Authority’s Independent Public Accountant (IPA) issued a qualified
opinion on the Authority’s financial statements for the fiscal year ended December 31, 2002.
The IPA’s qualified opinion was based in part on the Authority’s failure to properly and
consistently allocate costs among proprietary funds. The IPA could not reasonably determine the
effect of this departure from Generally Accepted Accounting Principles on the proprietary funds.
                                                11
Conclusion

Given the Authority’s record of misuse of funds, ACC violations, and the inability to efficiently
administer or complete its developments, we question whether additional Federal funds should
be provided to the Authority for any development activities, including HOPE VI funds.

The National Housing Act of 1937, Section 6(j)(4) establishes methods for recovering diverted
funds. It provides that HUD may terminate assistance, withhold allocations, reduce future
assistance payments, and take other measures. Further, Section 6 provides that upon occurrence
of a substantial default, HUD may take possession of the project. Title 24 of the Code of Federal
Regulations, Part 24.305, provides causes for debarment. One such cause is the commission of
an offense indicating a lack of business integrity or business honesty that seriously and directly
affects the present responsibility of a person. Further, a person may be debarred for violating the
terms of a public agreement so serious as to affect the integrity of an agency program.

The actions by the Board, former Executive Director, and Interim Executive Director caused the
Authority to violate the terms of the ACC and the Administrative Use Agreement for Proceeds of
Sales of Homeownership Projects. The violations seriously affected the Authority’s operations,
deprived low-income tenants of needed housing, and placed Authority assets at substantial risk.
Those actions warrant HUD taking steps to protect its interest and prevent further risk to
Authority residents and the Federal Government.

RECOMMENDATIONS

We recommend the Director, Office of Public Housing:

1A. Require the Authority to repay $1,966,117, or current balance owed, to its Conventional
    Public Housing General Fund from non-Federal funds representing funds it advanced to
    DVI, DVI projects and other entities.

1B. Require the Authority to repay $1,022,097, or the current balance owed, to its Turnkey III
    program from non-Federal funds representing funds it loaned for the purchase of
    Woodridge Commons Apartments.

1C. Require the Authority to repay the $231,094, or current balance owed, to its Turnkey III
    program from non-Federal funds representing funds it loaned for the purchase of
    Northtowne Apartments.

1D. Require the Authority to repay $134,790 to its Turnkey III program from non-Federal
    funds representing funds it used to pay Fayette Place property taxes.

1E. Require the Authority to repay $71,724 to its Turnkey III program from non-Federal funds
    representing funds it used to pay unauthorized longevity bonuses.




                                                12
1F. Require the Authority to repay $28,838, or current balance owed, to its Conventional
    Public Housing General Fund from non-Federal funds representing funds used to pay
    closing costs on properties purchased by East Durham Properties, LLC.

1G. Require the Authority to obtain release of any currently encumbered assets, including the
    Promissory Note for a $1.5 million line of credit with Wachovia Bank and the loan
    guaranty for a $350,000 loan obtained by Fayette Place, LLC.

1H. Seek legal guidance and require the Authority to terminate the $1,804,670 loan to DVI for
    Golden Belt, and require the funds to be returned to the Turnkey III program to be used for
    other housing purposes as approved by HUD.

1I.   Advise the Authority not to make further advances or encumber assets without prior written
      approval from HUD.

1J.   Require the Authority to develop and implement an acceptable cost allocation plan in
      compliance with the OMB’s Circular A-87.

1K. Require the Board of Commissioners to establish sufficient controls to monitor the
    Authority’s activities and ensure transactions adhere to Federal regulations.

1L. Request the Mayor of the City of Durham or the City Council, as appropriate, to replace
    Board members who did not fulfill their fiduciary responsibilities.

1M. In coordination the Office of Public Housing Investments, continue to perform reviews of
    all drawdowns of funds until HUD determines the Authority is properly administering its
    programs.

1N. Perform a comprehensive review of the Authority’s capacity and ensure the Authority takes
    appropriate measures to address any capacity issues to successfully complete activities in
    accordance with the HOPE VI Grant Agreement and Revitalization Plan. If the review
    finds the Authority does not have the capacity to complete the activities, or finds the
    Authority in serious default of the Grant Agreement or regulations, terminate the Grant and
    recapture the remaining $27,590,236, or current balance, of unused funds.

1O. Issue a Notice of Substantial Default to the Authority in accordance with Section 17(C) of
    the ACC. Should the Authority fail to cure the default, require the Authority to convey title
    to the projects, or deliver possession and control of the projects to HUD.

We recommend the Director, Departmental Enforcement Center:

1P. In consultation with the Director, Office of Public Housing, Greensboro, North Carolina,
    take administrative actions against the former Executive Director, Interim Executive
    Director and Board members, including issuing Limited Denials of Participation or
    debarments, as appropriate.




                                               13
                                MANAGEMENT CONTROLS

Management controls include the plan of organization, methods and procedures adopted by
management to ensure that its goals are met. Management controls include the processes for
planning, organizing, directing and controlling program operations. They include the systems
for measuring, reporting, and monitoring program performance.

We determined the following management controls were relevant to our audit objectives:

   o Compliance with Laws and Regulations – Policies and procedures management has
     implemented to reasonably ensure that resource use is consistent with laws and
     regulations.

   o Safeguarding Resources – Policies and procedures that management has implemented to
     reasonably ensure that resources are safeguarded against waste, loss and misuse.

To assess the relevant controls, we:

   o Interviewed Authority staff;

   o Reviewed the Authority’s general ledgers, bank statements, and other accounting and
     administrative reports;

   o Reviewed the Authority’s financial statements,

   o Reviewed the minutes of board meetings for the Authority and DVI.

A significant weakness exists if management controls do not provide reasonable assurance that
resource use is consistent with laws, regulations, and policies; and that resources are safeguarded
against waste, loss, and misuse.

Based on our review, we identified the following significant weaknesses:

   o Compliance with Laws and Regulations – Without HUD approval, and in violation of its
     ACC, Authority management inappropriately advanced at least $1,994,955 from its
     Conventional Public Housing General Fund. Also, in violation of its Turnkey III Use
     Agreement, the Authority inappropriately advanced or failed to require loan repayments
     totaling at least $2,803,579. Also, the Authority provided a loan guaranty for a $350,000
     loan obtained by a LLC and executed a Promissory Note for a $1.5 million line of credit
     on behalf of another LLC. The Authority also failed to properly allocate operating costs
     to other entities in accordance with the OMB’s Circular A-87.

   o Safeguarding Resources - Authority management inappropriately guaranteed loans
     needed to fund development activities of affiliated non-profit entities.



                                                14
                             FOLLOW-UP ON PRIOR AUDITS

OIG conducted an audit of the Authority’s Public Housing Programs and issued Audit Report
No. 97-AT-202-1005, dated September 24, 1997. The report included two findings. The first
finding pointed out that improvements were needed in maintenance procedures. The OIG
reported that 27 of 30 housing units inspected failed HUD’s Housing Quality Standards and had
a total of 165 violations. The second finding pointed out that the Authority had overstated scores
for two of the 12 indicators in its Public Housing Management Assessment Program certification
score. The scores were overstated because the Authority (1) did not have accurate data for
maintenance work orders, and (2) did not fail some units that had Housing Quality Standard
violations. The report included four recommendations. The recommendations were closed
following corrective action. The findings did not affect our audit objective.

James E. Kinkead, PC, Certified Public Accountant, IPA, completed the audit of the Authority’s
financial statements for the 12-month period December 31, 2001. The report did not include any
findings.

The IPA issued a qualified opinion on Authority’s financial statements for the 12-month period
ended December 31, 2002. The qualified opinion was based in part on the Authority’s failure to
properly and consistently allocate costs among individual proprietary funds in a manner
consistent with generally accepted accounting principles. The report contains 18 findings.




                                               15
                                                                                      Appendix A

     SCHEDULE OF QUESTIONED COSTS AND FUNDS PUT TO BETTER USE



        Recommendation               Ineligible1/        Funds Put to Better Use 2/

               1A                   $ 1,966,117
               1B                     1,022,097
               1C                       231,094
               1D                       134,790
               1E                        71,724
               1F                        28,838
               1G                                              $     350,000
               1G                                                  1,500,000
               1H                                                  1,804,670
               1N                                                 27,590,236
              Total                 $ 3,454,660                 $ 31,244,906




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


2/   Funds Put To Better Use are quantifiable savings that are anticipated to occur if an OIG
     recommendation is implemented resulting in reduced expenditures in subsequent period
     for the activities in question. Specifically, this includes costs not incurred, de-obligation
     of funds, withdrawal of interest, reductions in outlays, avoidance of unnecessary
     expenditures, loans and guarantees not made, and other savings.




                                              16
                                                                    Appendix B


AUTHORITY ACCOUNTS RECEIVABLE AS OF SEPTEMBER 30, 2003



                                 Conventional
                                Public Housing        Turnkey III
           Entity/Account       General Fund         Retained Funds
    Golden Belt1                       $ 848,099           $ 1,343,874
    Woodridge1                            152,449            1,022,097
    Fayette Place1                        367,777                    --
    Northtowne1                                 --             231,094
    Voucher Ledger                        222,266                    --
    Edgemont Elms1                        139,901                    --
    DVI                                   108,552
    Oxford Commons1                        77,018                    --
    Not Given                              29,049                    --
    Learning Assistance, Inc.              21,006                    --
    Total                             $ 1,966,117          $ 2,597,065


1
    Entities related to DVI .




                                 17
                                                                                     Appendix C

           DESCRIPTION OF RELATED ENTITIES AND DEVELOPMENTS

The Authority is the parent company of two wholly owned not-for-profit subsidiaries: Learning
Assistance, Inc., an educational foundation created in 1987 to increase educational, employment
and economic opportunities for Authority residents; and DVI, a housing development
corporation created in 1985 to develop low-income properties. Neither of the subsidiaries have
employees. The Authority also holds a majority interest in East Durham Properties, LLC.

East Durham Properties, LLC was formed on March 28, 2003, for the purpose of engaging in the
purchase, development, ownership and sale of real property within the state of North Carolina.
The Authority created it to purchase properties to be included in the HOPE VI project. The
Authority has a 99 percent interest in East Durham Properties, LLC. The remaining 1 percent
interest is held by The Community Builders, Inc.

DVI is the sole owner of three properties, Northtowne Apartments, Woodridge Commons
Apartments, and Golden Belt Center. The Authority’s Affordable Housing Division managed
Northtowne Apartments and Woodridge Commons Apartments. The Authority’s Special
Programs Division managed Golden Belt.

A tobacco company donated the Golden Belt Center to DVI in December 1997 in exchange for a
$450,000 tax write-off. The facility, built in part in 1901, is intended for mixed use or economic
development purposes, primarily as an incubator for start-up and small businesses, not for
housing purposes. It is comprised of nine buildings totaling approximately 180,000 square feet.
The facility is largely unoccupied and in need of substantial rehabilitation, estimated at about
$12 million.

DVI also had a partial ownership interest in three privately owned low-income housing
complexes: Edgemont Elms Townhomes, Preiss-Steele Place Apartments, and Fayette Place
Apartments.

Edgemont Elms is a low-income housing tax credit project. DVI owns a 1 percent general
partnership interest in Edgemont Elms Limited Partnership, which owns Edgemont Elms
Apartments. The National Equity Fund (tax credit investor) owns the remaining 99 percent
limited partner interest. The Authority’s Affordable Housing Division managed Edgemont
Elms.

Preiss-Steele is a low-income tax credit elderly facility. DVI owns a 1 percent general
partnership interest in Oxford Commons Limited Partnership, which owns Preiss-Steele Place
Apartments. The National Equity Fund owns the remaining 99 percent limited partner interest.
The Authority’s Affordable Housing Division managed Preiss-Steele.




                                               18
Fayette Place Apartments is a planned rehabilitation low-income tax credit and tax-exempt bond
project. Currently, DVI owns a 99 percent managing membership interest in Fayette Place, LLC,
which owns Fayette Place Apartments. Creative Housing Development Strategies, Inc., (CHDS)
has the remaining 1 percent interest. The ownership structure is temporary. Once final closing
occurs, CHDS will transfer its 1 percent to DVI, and DVI will transfer its 99 percent to National
Equity Fund. Final closing was anticipated in October or November 2003; however, as
discussed in the Finding this did not occur.

DVI also is the parent company of two wholly owned for-profit subsidiaries: CHDS and New
Millennium Initiative, LLC. CHDS is a housing development corporation created in 1992 to be
the general partner in the Oxford Commons Limited Partnership and other lawful purposes as
directed by DVI. New Millennium was created in 1999 for the purpose of acquiring, renovating
and operating the Golden Belt Center. DVI currently owns a 99 percent managing membership
interest and CHDS owns the remaining 1 percent membership interest.




                                               19
                   Appendix D

AUDITEE COMMENTS




       20
21
22
23
Comment 1




            24
Comment 2




            25
Comment 3




            26
27
Comment 4




            28
29
Comment 5




            31
Comment 6




            32
33
Comment 7




            34
35
36
37
38
39
Comment 8




            40
41
Comment 9




            42
43
Comment 10




             44
45
Comment 11




             46
47
48
49
Comment 12




             50
51
52
53
                          OIG Evaluation of Auditee Comments



Comment 1     Our review of the Authority’s records during our fieldwork showed that
              balances owed the General Fund were not being cleared even earlier than
              2002, as claimed by the Authority. For example, the balance of amounts
              owed by Golden Belt began increasing significantly at the beginning of
              2001. Similarly, the balance owed by Woodridge began increasing at the
              beginning of 2000.

              While HUD permits paying expenses from the General Fund, repayments
              must be made timely to clear the accounts. Allowing balances to increase
              for several years is inappropriate. The Authority reasoned that the
              accounts were not cleared because of vacancies and decreasing collections
              at the non-profit developments. If the non-profit developments were
              having financial difficulties, it is not HUD’s responsibility to cover those
              detriments with public housing funds.

              The schedule of accounts receivable and the documentation provided to
              support the schedule is insufficient to support changing the balances in our
              report. The schedule is a summary of the amounts owed the Authority less
              amounts owed by the Authority and funds available to be paid to reimburse
              the Authority.

              The supporting documents provided are computer printouts of General
              Ledger accounts “Interfund Due To” and “Interfund Due From.” These
              accounts did not exist on the general ledger at September 30,2003. Further,
              the documentation only shows transactions from January 1, 2004, to May
              31, 2004. The documents also show several journal entries with notations
              that significant amounts were reclassified or adjusted. The Authority did
              not provide any explanation or support for the entries. The amounts shown
              on the schedule as funds available to be paid to the Authority are
              meaningless unless the amounts are actually paid.

              We did not revise this section of the Finding.

 Comment 2 As stated in the Finding, the Authority did provide inappropriate advances
           for Golden Belt. However, the amount inappropriately advanced was not
           $1.3 million as stated by the Authority; it was about $2 million. HUD
           subsequently approved a loan of $1,804,670, representing funds already
           advanced. Unless the Authority has evidence to the contrary, HUD did not
           authorize any additional advances of funds for Golden Belt.
                                              54
            The Authority is correct in that the loans to Northtowne and Woodridge
            were authorized by the Turnkey III Use Agreement, which we stated in the
            Finding. However, the Authority allowed DVI to stop making payments
            on the Woodridge loan. The Authority claimed the proceeds from the sale
            of Northtowne were returned to the Authority. At the time of our review,
            the funds had not been repaid to the Turnkey III revolving loan fund and
            the Authority has not provided any additional documentation supporting
            the funds were repaid.

            We did not question the Authority’s legal status regarding the
            subordination of the Woodridge loan. We questioned that the loan
            payments were not made. However, since the Authority has a Deed of
            Trust granting it the power to sell Woodridge to satisfy the loan, it should
            consider doing so.

Comment 3   The Authority did obtain approval from the HUD Field Office to use funds
            recaptured from Turnkey III loans for general operating purposes, as long
            as its use was specifically for the Low Income Public Housing Program.
            However, longevity salary payments do not qualify as general operating
            purposes for the Low Income Public Housing Program. The approval also
            was not obtained until January 2004, after the longevity salary payments
            had already been paid in December 2003. The January 2004 letter from the
            Field Office also denied the Authority’s request to use the funds for
            development expenses associated with Fayette Place. Despite being told
            that the funds could not be used for expenses associated with Fayette Place,
            the Authority proceeded to loan $134,790 to Fayette Place, LLC to pay
            past due property taxes.

            Based on the Authority’s comments we revised the caption on this section
            of the Finding and added the ineligible $134,790 used to pay Fayette Place
            taxes and the $71,724 used for longevity salary payments.

Comment 4   The Authority’s claim that it did not encumber any of its projects with the
            execution of an unsecured guaranty is incorrect. Execution of the loan
            agreement violated the ACC regardless of whether the loan guaranty was
            secured by specific assets. The ACC specifically prohibits encumbrance of
            projects, any rents, revenues, income, or receipts there from or in
            connection therewith. The issue is not that the Authority pledged any
            assets. The encumbrance exists because the Authority could be liable for
            the debt, which places its ACC projects, and their rents, revenues, income,
            and receipts at risk.

            We did not revise this section of the Finding.



                                            55
Comment 5   The issue is not that the purchases of the properties by East Durham
            Properties, LLC might have been done to circumvent HUD’s approval
            process. The issue is whether the Promissory Note for the $1.5 million
            Line of Credit violated the ACC. While the properties are not subject to an
            ACC, the Authority is the managing member and 99 percent owner of the
            LLC. We believe the Authority’s assets, including its ACC projects are at
            risk given the Authority is 99 percent owner and the LLC has no source of
            income, as far as we know, to pay the loan.

Comment 6   The Authority’s claim that public funds were not used to purchase the
            properties is incorrect. The Authority paid closing expenses on behalf of
            the LLC totaling $28,838 for the purchases of 13 properties. Those
            expenses were paid from the Authority’s Conventional Public Housing
            General Fund. Thus, public funds were used and put at risk. Further, we
            did not find any evidence the Authority established an account receivable
            showing the funds due back to the General Fund from the LLC.

            We revised the recommendations to include requiring the Authority to
            repay the $28,838 from non-Federal funds.

Comment 7   The Authority provided information on many issues that affected the
            progress of the Laurel Oaks project. However, the Authority knew that it
            did not have an easement for the sewer line at the time construction
            commenced on the project. It continued to develop the project and
            substantially completed it knowing it could not be occupied without the
            easement. Because of the Authority’s neglect, the project has remained
            unoccupied for approximately 5 years, public funds have been spent on
            needless litigation costs, and low-income families on the waiting list have
            been deprived of housing. The Authority’s mismanagement of the Laurel
            Oaks project leads to questions about the ability of the Authority to
            administer development activities.

            We did not revise this section of the Finding.

Comment 8   As stated in the Finding, the allocation plan used by the Authority was not
            acceptable. While it did provide for allocation of some costs, it did not
            allocate those costs to all cost centers. For example, it did not allocate any
            costs to DVI or Golden Belt, even though neither had any employees and
            their operations were completely dependent upon use of Authority
            resources.     Further, the method used for allocating salaries was
            inappropriate. Salary costs, at least for non-management personnel, should
            be based on actual time worked, not an estimate by the managers. For
            example, maintenance staff should record their time on work orders. The
            work orders would then become the basis for charging their salaries and
            fringe benefits. Similarly, office staff should track their time spent
            performing duties for the various programs/entities.

                                            56
             Further, the IPA audit for fiscal year 2002 found the Authority failed to
             properly allocate certain general administrative costs. The costs were
             initially charged to the low-rent public housing program and then allocated
             to other programs via a monthly journal voucher. However, the Authority
             did not prepare journal vouchers to allocate costs for 6 months of the fiscal
             year. This resulted in the low-rent public housing program bearing
             additional costs of $98,139.

             We did not revise this section of the Finding.

Comment 9    We recognize that the Board must rely at least to some extent on
             information and guidance provided by others, such as the Executive
             Director, IPA, and HUD. However, ultimately it is the Board’s
             responsibility to ensure the Authority administers its programs in
             accordance with requirements. While the Board shares this responsibility
             with the Executive Director and other Authority management, neither the
             IPA nor HUD oversees the Authority’s daily activities. The Board should
             not expect the IPA or HUD to identify all weaknesses or inappropriate
             activities, especially if the Authority does not inform them of certain
             activities.
Comment 10   While the Board may have established policies and procedures for the free
             flow of pertinent, timely and accurate information, those policies and
             procedures were ineffective. As will be discussed further in a subsequent
             report, the Board was not fully apprised of all Authority activities. It was
             evident throughout our audit and from our review of Board minutes that
             Board members often were not informed of activities. For example, while
             certain critical information was provided to the Finance Committee, it was
             never provided to the full Board. To further illustrate the lack of flow of
             information, following is an email we received from one Board member on
             June 30, 2004, the day after we received the Authority and Board
             comments:

                    “As of 2:15pm today, the Board has not received a complete
                    & final response to the OIG Audit Report , released to the
                    Board on June 12, although there is a press conference
                    scheduled today at 4:00pm, leaving very little time for
                    review or corrections. Below is an e-mail sent earlier in
                    response to the "Board Response" drafted by Finance
                    Committee Chair & Commissioner Robert Glenn. Since no
                    other document has been produced to the Board, one can
                    only assume that the original "Board Response" will be the
                    draft used.



                                             57
As mentioned below and in the amended "Board Response"
(attached), there should be a distinct difference between the
"Board" (which is comprised of the 7 members appointed by
the Mayor & City Council: Rogers, Glenn, Woods,
Farrington, Rich, Niemann, & Robinson) and the Finance
Committee of the Board (which is comprised of only a
portion of the Board, usually 3; current members are
Glenn-Chair, Rogers, & Niemann).

Although a committee is normally an arm of the Board and
reports to the Board, the DHA Finance Committee has
evolved to be a separate entity, normally making decisions,
attending meetings, and receiving information by itself. It is
rare that the Board knows about meetings and appointments
before they happen and even more rare that the Board
knows the full information and actions taken in those
meetings and appointments.

Thus, at several points in the original "Board Response", it
is inaccurate to substitute the "Board", when in fact, it was
only the Finance Committee and possibly some other select
Commissioners. One can only use their experience to base
these claims, so below are the points of disagreement:
     1. Statement: "The Board meets with the IPA
[Independent Public Accountant] at the beginning and end
of the audit process."
         Response: To my knowledge, in the 3 years that I
have served on the Board, the Finance Committee and
Administration has met with the IPA and not the Board.

     2. Statement: "The Board meets with HUD officials,
in exit conferences, following site visits and audits..."
         Response: To my knowledge, in the 3 years that I
have served on the Board, the Finance Committee and
Administration has met with HUD officials and not the full
board.      In most instances, the meetings are not
preannounced and are only noted within an Administrative
report in the Board package.

                   For instance, the Board was not
informed of the OIG Exit Interview on June 17 (originally
scheduled for June 10) and it was only through a mishap,
that I, a Board member found out that meeting (i.e. The
Board was not informed of the meeting by the Finance
Committee or Administration). Even after the meeting, the
Finance Committee did not report on the meeting until after

                        58
                   the local newspapers wrote about the meeting and there was
                   a request about a report from that meeting. Even now,
                   there has not been a full report of the meeting - only an
                   incomplete synopsis.

                        3. Paragraph: "The Authority Did Not Adequately
                   Disclose All Requested Information To Auditors"
                            Response: The Finance Committee met with the
                   OIG auditors before and after the audit. The Board did not
                   authorize the Committee to do so. Before the audit, it was
                   the Finance Committee and not the Board, that advised the
                   auditors that if there was any information needed that the
                   auditors felt was not forthcoming, the auditors should call
                   members of the Finance Committee. The Board did not
                   know that there was or might have been a problem with
                   information. In! fact, the Board rarely knew when the
                   auditors were at the agency.

                         4. At the appropriate points, it also needs to be stated
                   that the Board not only relies on the IPA, Administration, &
                   Counsel but also on the Finance Committee. The Board
                   relies on their experience as well as their frequent
                   interaction with the Administration to provide a full,
                   detailed picture of the Agency to the Board. If the
                   information is not flowing from the Finance Committee to
                   the Board, the Board is misguided, similar to not receiving
                   information from the IPA, Administration or Counsel.

                   It is unknown if the final draft will incorporate these
                   distinctions, as even an updated draft has not been provided
                   by this time. If so, it only shows that by strategic planning,
                   preparation and communication (an issue that has never
                   been properly addressed by the Board), many of the
                   problems the Agency faces can be avoided”.

Comment 11   The Board also further elaborated on the individual segments of the
             Finding. These discussions were similar to those provided by the
             Authority to which we have already responded.

Comment 12   The Board also provided its proposed corrective action for each of the
             recommendations. The Board should discuss corrective actions with the
             responsible HUD officials.




                                           59
Based on the Board’s comments, we clarified the Finding to show that the
Board did not adequately fulfill its fiduciary responsibilities to oversee
Authority operations and that management disregarded HUD requirements
and instructions. We also added a recommendation to request the Mayor of
the City of Durham or the City Council, as appropriate, to replace Board
members who did not fulfill their fiduciary responsibilities.




                              60