oversight

Somerset Point Nursing Home, Multifamily Equity Skimming, Shaker Heights, Ohio

Published by the Department of Housing and Urban Development, Office of Inspector General on 2004-08-09.

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 for Audit, Region V
                                                 Ralph H. Metcalfe Federal Building
                                                 77 West Jackson Boulevard, Suite 2646
                                                 Chicago, Illinois 60604-3507

                                                 Phone (312) 353-7832 Fax (312) 353-8866
                                                 Internet http://www.hud.gov/offices/oig/



                                                                         MEMORANDUM NO.
                                                                              2004-CH-1803

August 9, 2004

MEMORANDUM FOR: Preston A. Pace, Jr., Director of Columbus Multifamily Housing
                  Hub, 5EHMLA
                Margarita Maisonet, Director of Departmental Enforcement
                   Center, CV


FROM: Heath Wolfe, Regional Inspector General for Audit, 5AGA

SUBJECT: Somerset Point Nursing Home
         Multifamily Equity Skimming
         Shaker Heights, Ohio

                                      INTRODUCTION

We reviewed the books and records of Somerset Point Nursing Home (Project) to determine
whether the owner/management agent used the Project’s funds in compliance with the Regulatory
Agreement between HUD and the Somerset Point Limited Partnership and HUD’s requirements.
The Somerset Point Limited Partnership and/or Associated Motor Inns, the Somerset Point
Nursing Home’s identity of interest management agent, inappropriately used $329,255 of Project
funds when the Nursing Home was in a non-surplus cash position and/or had defaulted on its
FHA-insured mortgage.

                                       BACKGROUND

The Somerset Point Nursing Home is a combination of a 50-bed skilled nursing facility and a 90
unit assisted living facility in Shaker Heights, Ohio. The Project was insured under Section 232 of
the National Housing Act, and the Regulatory Agreement was executed on June 1, 1994. The
Project’s owner is Somerset Point Limited Partnership, of which SOMSOL, Inc. is the General
Partner. The president of SOMSOL, Inc. is also the president of Associated Motor Inns. The
Project defaulted on its FHA-insured mortgage in November 2002.


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                              METHODOLOGY AND SCOPE

Our review covered the period between September 1, 2001 and August 31, 2003. The review
period was extended as necessary. We interviewed HUD’s staff, State of Ohio officials, and
employees of the: Project; Somerset Point Limited Partnership; General Partner; current and
former management companies; Independent Public Accountant; and the Project’s mortgage
company. We reviewed the Project’s files including: general ledgers; canceled checks; invoices;
Regulatory Agreement; and Audited Financial Statements for Fiscal Years 2000 to 2002. We
also reviewed: HUD Handbooks 4370.1 REV-2, 4370.2 REV-1, and 4381.5 REV-2; 24 CFR
Parts 24 and 232; Title 12 of the United States Code Sections 1715z-4a, 1715z-19, and 1735f-
15; and Section 1303.32 of the Ohio Revised Code.

                                   RESULTS OF REVIEW

The Somerset Point Limited Partnership and/or Associated Motor Inns inappropriately used
$329,255 of Project funds between December 1998 and October 2003. The inappropriate
expenses included: $160,227 to repay advances made by SOMSOL, Inc.; $93,591 in excessive
management fees paid to Associated Motor Inns; and $75,437 in legal fees unrelated to the
Project’s operations. We provided Associated Motor Inns, the Somerset Point Limited
Partnership, and HUD’s staff a schedule of the inappropriate expenses. The Project was in a
non-surplus cash position and/or had defaulted on its FHA-insured mortgage when the funds
were used. As a result, Project funds were not used efficiently and effectively, and fewer funds
were available for the Project’s normal operation and debt service.

                                    Federal Requirements

The Regulatory Agreement, between HUD and the Somerset Point Limited Partnership,
paragraph 6(e), states that the Owners may not, without prior written approval of HUD: assign,
transfer, dispose of, or encumber any personal property of the Project, including rents, or pay out
any funds, other than from surplus cash, except for reasonable operating expenses and necessary
repairs; make or receive and retain any distribution of assets or any income of the Project except
surplus cash; and incur any liability other than for current operating expenses.

Paragraph 13(g) of the Project’s Regulatory Agreement defines distribution as any withdrawal or
taking of cash or any assets of the Project, excluding payments for reasonable expenses incident
to the operation and maintenance of the Project.

HUD Handbook 4370.2 REV-1, Chapter 2-6(E), requires that all disbursement be used to make
mortgage payments and required deposits, pay reasonable expenses necessary for the operations
and maintenance of the project, and pay distributions of surplus cash.



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24 CFR Part 24.110 permits HUD to take administrative sanctions against employees or
recipients under HUD assistance agreements that violate HUD’s requirements. 24 CFR Parts
24.300, 24.400, and 24.700 authorize the sanctions, which include debarment, suspension, or
limited denial of participation, respectively. HUD may impose administrative sanctions under the
following conditions:

    •   Failure to honor contractual obligations or to proceed in accordance with contract
        specifications or HUD regulations (limited denial of participation);

    •   Deficiencies in ongoing construction projects (limited denial of participation);

    •   Violation of any law, regulation, or procedure relating to the application for financial
        assistance, insurance, or guarantee or to the performance of obligations incurred following
        a grant of financial assistance or a conditional or final commitment to insure or guarantee
        (limited denial of participation);

    •   Violation of the terms of a public agreement or transaction so serious that it affects the
        integrity of an agency program, such as a history of failure to perform or unsatisfactory
        performance of one or more public agreements or transactions (debarment);

    •   Any other cause so serious or compelling in nature that it affects the present responsibility
        of a person (debarment); or

    •   Material violation of a statutory or regulatory provision or program requirements
        applicable to a public agreement or transaction, including applications for grants, financial
        assistance, insurance, or guarantees, or to the performance of requirements under a grant,
        assistance award, or conditional or final commitment to insure or guarantee (debarment).

Title 12, United States Code, Section 1715z-4a, Double Damages Remedy for Unauthorized
Use of Multifamily Housing Project Assets and Income, allows the Attorney General to recover
double the value of any housing project assets or income that was used in violation of the
Regulatory Agreement or any applicable regulations, plus all costs relating to the actions, including
but not limited to reasonable attorney and auditing fees.

Title 12, United States Code, Section 1735f-15, Civil Money Penalties Against Multifamily
Mortgagors allows the Secretary to impose a civil money penalty of up to $25,000 per violation
against a mortgagor, with five or more living units and a HUD-insured mortgage. A penalty may
be imposed for any knowing and material violation of the Regulatory Agreement by the
mortgagor, such as paying out any funds for expenses that were not reasonable and necessary
operating expenses or making distributions to owners while the project is in a non-surplus cash
position.


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                                       Recommendations

We recommend that HUD’s Director of Multifamily Housing Hub, Columbus Field Office, ensure
that the Somerset Point Limited Partnership and/or Associated Motor Inns:

A.     Reimburses HUD $329,255 for the inappropriate payments cited in this audit
       memorandum.

We recommend that HUD’s Director of Multifamily Housing Hub, Columbus Field Office, in
conjunction with HUD’s Office of Inspector General:

B.     Pursues double damages remedies if the Somerset Point Limited Partnership and/or
       Associated Motor Inns do not reimburse HUD for the inappropriate payments cited in
       this audit memorandum.

We also recommend that HUD’s Director of Departmental Enforcement Center:

C.     Pursues administrative sanctions against the Somerset Point Limited Partnership and/or
       Associated Motor Inns for the inappropriate payments cited in this memorandum.

D.     Imposes civil money penalties against the Somerset Point Limited Partnership and/or
       Associated Motor Inns for the inappropriate payments cited in this audit memorandum
       while the Project was in a non-surplus cash position and/or in default on its FHA-insured
       mortgage.

                           SCHEDULE OF INELIGIBLE COSTS

                                Recommendation
                                    Number               Ineligible 1/
                                      A                  $329,255
                                     Total               $329,255

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

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



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the report is issued for any recommendation without a management decision. Also, please furnish
us copies of any correspondence or directives issued because of the audit.

If you or your staff has any questions, please contact Ronald Farrell, Assistant Regional Inspector
General for Audit, at (614) 469-5737 extension 8279 or me at (312) 353-7832.




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