United Properties Management, Inc., Multifamily Management Agent, Little Rock, Arkansas

Published by the Department of Housing and Urban Development, Office of Inspector General on 2004-09-14.

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

                                                         Issue Date
                                                                 September 14, 2004
                                                        Audit Case Number

TO:           E. Ross Burton
                  Director, Fort Worth Multifamily Housing HUB, 6AHMLAS
              Linda K. Hardway
                  Director, Little Rock Multifamily Program Center, 6FHM
              Margarita Maisonet
                  Director, Departmental Enforcement Center, CV

FROM:         D. Michael Beard
              Regional Inspector General, 6AGA

SUBJECT:      United Properties Management, Inc.
              Multifamily Management Agent
              Little Rock, Arkansas


As part of our initiative to combat equity skimming, we have completed an audit of 12
multifamily projects managed by United Properties Management, Inc. (United). HUD
either insured or held the mortgages on the properties. The owners sign regulatory
agreements with HUD. The objective of the audit was to determine whether United
complied with the regulatory agreements and HUD requirements when disbursing project

To accomplish the objective, we reviewed HUD’s regulations regarding Section 202,
Section 811, Section 221(d)(3), and Section 221(d)(4) Programs, project regulatory
agreements, HUD handbook requirements, and the owner’s and management agent’s
certifications. We interviewed United’s owners and staff, and HUD Multifamily Housing
officials in Little Rock, Arkansas. We reviewed accounting records and supporting
documents such as bank statements and invoices. The audit covered a 41-month period:
April 1, 1998, the date HUD approved United as a management agent, through
August 31, 2001, the latest completed period at the time. We conducted the audit in
accordance with generally accepted government auditing standards.
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 Jerry Thompson, Assistant
Regional Inspector General, at (817) 978-9309.


United officials disbursed project funds for items that violated project regulatory agreements
with HUD. Officials used project funds to pay United’s supervisory expenses, unsupported
accounting costs, and a property owner’s debt. In addition, officials made erroneous payments,
loaned money to a site manager, and made unsupported payments. As a result, United officials
misspent $445,612, which negatively affected the financial condition of the properties.

We recommend that HUD require United’s owners to: (1) repay the projects for ineligible
payments and (2) either furnish supporting documents or repay the projects for
unsupported payments. If the owners do not payback amounts they misspent, we
recommend that HUD impose administrative sanctions against them.

We provided United officials a copy of the draft on June 21, 2004, and received a written
response from them on July 15, 2004. They do not agree with the findings and say we have
been unwilling to listen to their explanations. They say they provided support for questioned
costs contained in our report. They declined to have an exit conference. Their response did not
change our position. They did not provide documentation required to adequately support the
questioned costs. We have included the complete response in Appendix B.


HUD’s Office of Multifamily Housing administers programs to provide an adequate supply
of quality affordable housing. Programs include the Supportive Housing for the Elderly
Program1 (Section 202), Supportive Housing for Persons with Disabilities Program2
(Section 811), and the Mortgage Insurance for Rental and Cooperative Housing Program3
(Section 221(d)(3) and (4)).

        Section 202 provides capital advances to finance the construction and rehabilitation
        of structures that will serve as supportive housing for very low-income elderly

    Section 202 of the Housing Act of 1959 is governed by 24 CFR Part 891.
    Section 811 of the National Affordable Housing Act of 1990 is governed by 24 CFR Part 891.
    Section 221(d)(3) and (4) of the National Housing Act is governed by 24 CFR 221, subparts C and D.

        persons. It also provides rent subsidies for the projects to help make them

        Section 811 provides interest-free capital advances to nonprofit sponsors to finance
        the construction, rehabilitation, or acquisition with or without rehabilitation of
        supportive housing to be used for very low-income adults with disabilities. It also
        provides rental assistance. The program is similar to Section 202.

        Sections 221(d)(3) and (4) provide mortgage insurance to finance rental or
        cooperative multifamily housing for moderate-income and displaced families.
        Through the programs, the Federal Housing Administration insures mortgage loans
        for the new construction or substantial rehabilitation of multifamily rental projects.
        The difference between (3) and (4) is that HUD may insure up to 100 percent of
        replacement cost under (3) for nonprofit or cooperative mortgagors, but only up to
        90 percent under (4) irrespective of the type of mortgagor.

The property owner participating in HUD programs has the ultimate responsibility for
compliance with HUD regulations and requirements. The property owner pledges
compliance by signing a regulatory agreement with HUD. The agreement governs
project operations.

The property owner may seek out and hire a management agent, which is subject to HUD
approval. HUD expects an owner to oversee the performance of its management agent
and take steps to correct deficiencies that occur. If the owner does not, HUD will step in
to assure compliance with applicable HUD regulations and program requirements.

Management agents play a key role in helping HUD provide quality affordable housing.
The owner and management agent together certify in writing that they will comply with
HUD requirements and contract obligations. HUD Handbook 4381.5 REV-2, The
Management Agent Handbook, provides basic guidance regarding owner and
management agent responsibilities and HUD procedures.

During the period of audit, April 1, 1998, through August 31, 2001, United managed 12
projects that HUD either assisted or insured. HUD held the mortgages of five properties
under Section 202,4 which exceeded $9.6 million. HUD assisted one property under Section
8115, with a capital advance and project rental assistance that together exceeded $1.8
million. HUD insured the mortgages of five properties under Section 221(d)(3)6 and the
mortgage of one property under Section 221(d)(4),7 which exceeded $7.9 million.

    Park Street Apartments, St. John Alexander Towers, Sarah Daisy Garden Courts, Shorter College
    Plaza, and Theressa James Manor are owned by nonprofit corporations.
    Chaucer Street Apartments, which is owned by a nonprofit corporation, does not have mortgage
    payments so long as the housing remains available to the very low-income elderly and disabled
    Chicot Apartments, Pilgrim Rest Apartments, St. John Apartments (26th Street), and Shorter College
    Gardens are owned by limited partnerships. West Apartments is owned by a nonprofit corporation.
    Scott County Apartments is owned by a limited partnership.

Before United, Mays Property Management, Inc. (Mays) managed eight of the above
projects. In addition to managing the projects, Mays had ownership interest in four of the
properties. It was the managing general partner of the limited partnerships that owned three
properties: Chicot Apartments, St. John Apartments, and Shorter College Gardens. It was a
general partner of the limited partnership that owned Pilgrim Rest Apartments.

In July 1997, United began managing the eight projects for Mays. United is an outgrowth
of Mays and is owned and operated by former Mays officials. United’s majority
stockholder was Mays’ executive vice-president, and United’s minority stockholder was
Mays’ comptroller. Initially, United’s principal staff was all former Mays employees.
By September 1998, United had officially replaced Mays as management agent for all
eight projects.

Management of the four projects, which Mays had not managed, started in 1997. United
began managing Shorter College Plaza in June 1997, Scott County Apartments in February
1999, Park Street Apartments in September 1999, and Chaucer Street Apartments in July

The projects paid United monthly fees for its management services. The fees
approximated $30,000 a month.

The HUD Office of Inspector General’s initiative to combat equity skimming consists of
audits such as this one where auditors consult with the appropriate United States
Attorney’s Office and HUD Assistant General Counsel to recover project funds used in
violation of the regulatory agreement. Under Title 12, United States Code, Section
1715z-4a, HUD may recover double the amount of project assets used for purposes other
than those permitted by the regulatory agreement, plus the cost of any audit, litigation,
and attorney’s fees. We provided a prosecution/litigation package to the HUD Assistant
General Counsel on March 31, 2003, and to the United States Attorney’s Office, Eastern
District of Arkansas on May 13, 2003.

The United States Attorney has declined prosecution since the Director of the Little Rock
Multifamily Program Center did not support a lawsuit against United and the principals
that manage United. On May 17, 2004, we received a copy of a letter dated May 10,
2004, from the United States Attorney to the Director, Little Rock Multifamily Program
Center. In the letter, the United States Attorney advises that he has decided not to
institute a civil action against United and the involved individuals. He declined because
of the Director’s assertions about United, which she expressed in her letter dated April 5,
2004, to the Assistant United States Attorney. In the letter, the Director states she
allowed the management agent to continue business with HUD because:

           •   Punishment must be consistently applied to HUD partners, and there are
               examples of more egregious violations in HUD programs where the
               participant was not suspended or debarred;
           •   Mays Property Management no longer exists;
           •   United Properties Management has no, and never had, business affiliation
               with Mays Property Management; and

           •   United Properties Management has addressed the financial irregularities
               with the OIG, and has corrected its previous erroneous accounting
               practices to HUD’s satisfaction.

In addition, she does not see United as a threat to HUD's interest in multifamily
properties. To the contrary, she states that United is one of her best management agents
to intervene in troubled properties and return them to HUD standards.

The audit results below do not support the Director’s assertions about United and its
principals. Since the United States Attorney has declined civil prosecution, we have
addressed this report to HUD management for resolution.


United officials misspent over $445,000 of project funds.

In violation of regulatory agreements, and without HUD authorization or knowledge, United
officials used project funds to pay:

   •   $218,428 in management agent supervisory expenses;
   •   $126,893 of a management agent owner’s salary;
   •   $28,938 in an owner’s secondary loan payments;
   •   $14,200 in erroneous payments related to the former management agent;
   •   $2,940 in duplicate payments to a contractor and for a loan to a project manager; and
   •   $54,213 in payments that were not supported by adequate documentation such as
       approved invoices.

This happened because officials disregarded requirements and, to a lesser extent, United
staff made errors, which United had not corrected and paid back the properties. As a result,
officials misspent over $445,000, which negatively impacted the financial condition of the

The regulatory agreements direct the following.

       “Neither Mortgagor nor its agents shall make any payment for services, supplies,
       or materials unless such services are actually rendered for the project or such
       supplies or materials are delivered to the project and are reasonably necessary for
       its operation. Payments for such services, or materials shall not exceed the
       amount ordinarily paid for such services, supplies, or materials in the area where
       the services are rendered or the supplies or materials furnished.”

       The regulatory agreements prohibit the use of project funds, other than surplus
       cash where applicable, for unreasonable and unnecessary operating costs.

        Distributions to owners8 of limited distribution projects are limited and
        distributions to owners of nonprofit projects are prohibited.

        Distributions to owners are prohibited when a project mortgage is in default, the
        project is in a non-surplus cash position, or HUD has notified the owner that the
        project is in need of maintenance.

        Books and accounts of the operations of the mortgaged property and of the project
        shall be kept in accordance with the requirements of HUD and in a reasonable
        condition for proper audit.

United owners entered into Project Owner’s & Management Agent’s Certifications for
Multifamily Housing Projects for Identity-of-Interest or Independent Management Agents
(Certifications). Those Certifications required United to comply with the regulatory
agreements, HUD handbooks, and other policy directives that related to the management
of the projects.

HUD Handbook 4381.5 REV-2, The Management Agent Handbook, provides basic
guidance regarding owner and management agent responsibilities and HUD procedures.
The Management Agent Handbook requires salaries of management agents’ supervisory
staff not assigned to any project, to be paid from the agent’s management fee and not from
project-operating funds.

According to The Management Agent Handbook, Paragraph 6.39(c), agent supervisory
personnel must be paid from the management fee unless one of the two exceptions is met.
The exceptions are when supervisory personnel:

    •   Provide oversight of centralized accounting and computer services for projects at
        a cost that does not exceed the cost of obtaining comparable services from an
        independent contractor or

    •   Replace a project employee on temporary leave after the first 40 consecutive
        hours of the assignment.

The Handbook requires travel expenses for management agents’ supervisory staff to be paid
from management agent fees. In addition, HUD does not allow reimbursement of
commuting mileage from project funds.

For centralized accounting services, the Handbook requires management agents to charge
the properties for bookkeeping costs based on actual costs. According to the HUD
handbook, the agent is responsible for treating the cost of bookkeeping services
performed as part of a centralized bookkeeping system as a project cost. Such expenses
are paid out of project funds based on actual costs attributable to the project.

    A distribution is any withdrawal or taking of cash or any assets of the project other than for the
    payment of reasonable expenses necessary to the operation and maintenance of the project.

For the period of the audit, HUD had established an acceptable accounting fee range of
$3.50 to $6.00 per unit per month. The range was set for Region VI, which includes
Arkansas. Thus, HUD limited costs of accounting fees charged to projects to the lesser
of actual cost or $6 per unit per month. HUD’s intent was to reimburse the actual costs
incurred but not provide additional income to management agents.

HUD Handbook 4370.2, REV-1, Financial Operations and Accounting Procedures for
Insured Multifamily Projects, Chapter 2, Section 2-6, paragraph E, states all disbursements
from the Regular Operating Account must be supported by approved invoices, bills, or other
supporting documentation. The use of operating funds should only be to make mortgage
payments, make required deposits to the Reserve for Replacements, pay reasonable
expenses necessary for the operation and maintenance of the project, and repay owner
advances authorized by HUD.

United charged $218,428 of supervisory staff expenses to the projects.

United officials used $218,428 of project funds to pay United $217,446 in management
agent salaries and $982 in management agent mileage expense. This occurred because
United officials disregarded requirements.

United paid the salaries of its district manager and administrator from project-operating
funds even though they did not meet the requirements for payment. Both are related to
the owners of United. United paid $122,539 and $94,907 for the salaries of the district
manager and administrator, respectively. Officials made the payments between May 1,
1998, and September 30, 2001.9 However, time records did not show that either one had
provided oversight of centralized accounting or computer services for projects or had
worked as a temporary project employee for more than 40 consecutive hours.

Furthermore, the ineligible salary of the administrator exceeded the actual salary paid to the
administrator by $21,491. Of the excess, $18,148 resulted from billing salary for drug
elimination grant work to project-operating funds. This duplicated what United had
collected from the HUD drug elimination grants for the same period. The remaining $3,343
resulted from errant charges to projects.

HUD staff had conducted management reviews and reported that the management agent was
using project-operating funds to pay supervisory salaries. Staff disclosed the finding
following HUD’s August 1997 management reviews of properties managed by Mays
Property Management and United Properties Management. Staff concluded that officials
should have paid those salaries from management fees. Staff advised officials to become
familiar with HUD Handbook 4381.5 REV-2. It sets out specific situations when
management agents can charge supervisory salaries to projects.

United officials did not comply with HUD requirements. Officials did the opposite of what
they said they would do. In a letter to HUD dated November 14, 1997, United’s majority
stockholder wrote that officials had ceased paying for supervisors’ salaries from project

    The costs were incurred before the end of August 2001.

funds. Contrary to that statement, officials continued to charge supervisor salaries to the

United officials misled HUD staff by reporting that the district manager and administrator
did not perform any supervisory functions. In a letter dated November 5, 1997, HUD
staff asked for generalist job descriptions of all central office staff that perform HUD-
approved activities and do not perform supervisory functions. HUD requested job
descriptions of persons whose salaries are reimbursable from project funds.

In a letter to HUD dated November 13, 1997, United’s minority owner described the jobs
of the district manager and administrator. His descriptions were not complete because he
omitted their supervisory functions. For example, the district manager had oversight
responsibility for project managers and the administrator had oversight responsibility for
employees doing grant work. He only listed functions that one could charge to projects,
leaving the impression that the two did not perform supervisory functions for United,
which was not true.

In addition, during March and May 1999, United used Scott County Apartment funds to pay
$982 to its administrator for mileage to and from the property. United officials disregarded
HUD direction that commuting mileage is not reimbursable from property funds. An
official said they paid the mileage from project funds because at the time the administrator
was the acting on-site manager.

United charged $126,893 of an owner’s salary as accounting cost to the projects.

For the pay periods between April 1, 1998, and August 31, 2001, officials reimbursed
United $126,893 for the salary of its minority owner. Officials used project-operating funds
to reimburse the owner’s salary as accounting fees. However, they had nothing to support
the salary as accounting costs, which The Management Agent Handbook requires. The
owner had not prepared reports to record his actual accounting time.

Furthermore, if the salary was in fact an accounting cost, United officials had overcharged
the projects $61,712. For the period, HUD had set the maximum accounting costs at $6 per
unit per month for Arkansas properties. However, total accounting fees, which included
part of the owner’s salary, exceeded the limit. United Officials said HUD had never
provided documentation showing that HUD had a $6.00 per unit per month maximum for
accounting costs.

United officials paid $28,938 from project-operating funds on a second mortgage.

Between December 1, 1998, and September 30, 2000, United officials used $28,938 of non-
surplus project-operating funds to pay down the property owner’s second mortgage. This
occurred because officials disregarded HUD requirements and the promissory note terms
that specified payment from surplus cash.

In order to rehabilitate the property, the owner, 26th Street Limited Partnership obtained a
$415,000 secondary loan from the Arkansas Development Finance Authority (Authority),

using St. John Apartments as collateral. On September 4, 1997, the president of the 26th
Street Limited Partnership signed the promissory note dated June 3, 1997, and the second
mortgage on St. John Apartments.

HUD Handbook 4350.1, REV-1, Multifamily Asset Management and Project Servicing,
governs the approval of second mortgages. Appendix G, Section II (F), Secondary
Financing, authorizes only the use of surplus cash to make payments on secondary
mortgage notes.

HUD worked with the Authority on the terms of the note between 26th Street Limited
Partnership and the Authority. The note in part reads:

       “...Any payments due from project income under this Note shall be payable
       only from permissible distributions from surplus cash of the said project, as
       that term is defined in the regulatory agreement dated November 7, 1968,
       between the Secretary of Housing and Urban Development and 26th Street
       Limited Partnership.”

Thereby the promissory note limits payments from the project to permissible distributions
from surplus cash. St. John’s regulatory agreement, Section 6(e), further limits use of
surplus cash by specifying a time for distribution and requiring written approval from HUD.

Officials paid down the second mortgage from the operating account despite not having
surplus cash. The project reported cash deficiencies of $89,808 at September 30, 1998,
$51,483 at September 30, 1999, and $56,050 at September 30, 2000. Officials made second
mortgage payments, generally on a monthly basis.

United’s minority owner stated that HUD’s asset manager had authorized him to pay the
second mortgage from project funds. However, he had nothing in writing to support this
approval. The asset manager asserted he had not given HUD’s authorization to make
second mortgage payments with project-operating funds.

United erroneously paid $14,200 to and for Mays Property Management, Inc.

United officials made two erroneous payments totaling $14,200 to and for the former
management agent, Mays Property Management, Inc. (Mays). They overpaid Mays
$4,626 because of an accounting error. They also inadvertently paid Mays’ own $9,574
payroll for the period ending December 25, 1998. Auditors advised officials of the
misspent funds on January 29, 2001. However, officials had not paid back the funds to
the projects.

An accounting error resulted in Pilgrim Rest reimbursing Mays three times for its March 15,
1996 payroll. While under Mays’ management, Mays correctly reimbursed itself $2,333 on
March 18, 1996, for the project’s March 15, 1996 payroll. Sometime after the payment,
United’s accounting clerk incorrectly entered the March 15, 1996 payroll as a payable to
Mays, revising the amount to $2,313. When the payroll clerk saw her mistake, she
attempted to remove the payable from the books. But instead she entered the $2,313

amount again, increasing the payable amount to $4,626. On June 30, 1998, United officials
issued a $4,626 check from Pilgrim Rest to Mays for the payable.

On January 4, 1999, officials used West Apartment’s funds to pay $9,574 to a payroll
processing company for Mays’ payroll for its period ended December 25, 1998. The payroll
had nothing to do with the operation of the project. It included $5,900 for the salary of the
owner of Mays.

United owes two projects $2,940 resulting from duplicate payments to a
contractor and a loan to a project manager.

United owes Theressa James Manor and Chicot Apartments $2,740 and $200, respectively.
From project-operating funds of Theressa James Manor, United overpaid a contractor twice.
From project-operating funds of Chicot Apartments, United loaned a site manager $800,
which was not a proper use of funds, and the site manager still owes $200 on the loan.

United officials made two duplicate payments to a contractor. United made the payments
from the operating account of Theressa James Manor for cabinets and countertops.

   •   On May 20, 1998, and again on June 2, 1998, they paid the contractor the total
       amount of the April 30, 1998, invoice for $1,370. As a result, they paid the
       contractor $2,740 (checks #6024 and #6046), which includes an overpayment of

   •   On July 20, 1998, and again on August 17, 1998, they paid the contractor $1,370 for
       cabinet units and countertops installed in Units A211 and A215. As a result, the
       project paid the contractor $2,740 (checks #6120 and #6179) for the work, which
       includes another overpayment of $1,370.

On April 29, 1998, United loaned the manager of Chicot Apartments $800. Instead of using
United’s funds they used project funds. Officials acknowledged that they should not have
used project funds.

The manager quit before she repaid the loan, leaving a balance of $200 owed. To write-off
the $200 outstanding is not an eligible project-operating expenditure since the loan was not
an eligible use of project funds. Therefore, United should pay back the project.

United used project funds to pay unsupported purchases totaling $54,213.

From April 1, 1998, through August 31, 2001, officials paid $54,213 from project-
operating funds without having approved invoices, bills, or other supporting
documentation. As a result, officials had nothing to show that the costs were necessary
and reasonable, as required by the regulatory agreements.

United officials wrote 25 checks totaling $24,000 from three project accounts. From the
Shorter College Gardens account, officials wrote nine checks payable to a local bank. The
checks totaled $11,450 and were written monthly starting on April 1, 1998, through
December 31, 1998. Amounts ranged from $750 to $1,800. From the St. John Apartments
account, they wrote nine checks payable to a local bank. The checks totaled $7,550 and
were written monthly starting on April 1, 1998, through January 31, 1999, except December
1998. Amounts ranged from $450 to $1,350. From the Pilgrim Rest Apartments account,
they wrote seven checks payable to an individual. The checks totaled $5,000 and were
written monthly starting on April 2, 1998, through October 1, 1998. Amounts ranged from
$600 to $900.

Officials stated the checks paid for grounds work at the three projects. However, they had
nothing from the payees, or any other party, to support the payments.

United officials wrote checks totaling $30,213 to two contractors and a site manager.
Invoices or other similar documents from the three payees supported none of the checks.
Although the contractors generally provided invoices, invoices or other similar documents
did not support payments totaling $30,013 to the contractors. Without supporting
documents officials could not show that the payments were for reasonable operating costs or
necessary repairs. Officials wrote one check for $200 to a site manager. However, they did
not have anything to support the payment.

Auditee Comments
United’s president disagrees with the findings except for the duplicate payments and the
loan to a project manager.

The president says the audit started with the audit of Mays Property Management, Inc.
(Mays). The OIG carried the audit over to United. The OIG did this because the owner
of Mays is the father of the majority owner and president of United.

He says United is not an outgrowth of Mays. United is a new company and not Mays
with a new name. It is a company that has had success in bringing properties up to HUD
standards. The change caused vastly improved financial and physical conditions.

Additionally, he says he was not ever the president and has never had an ownership
interest in Mays. It is not unusual for persons to leave one company to form another one.
This is what they did and United has had great success. United’s actions have not
harmed the properties. He asserts United saved the properties more than $300,000 over
the 41 months, the audit period.

Further he believes the report is not balanced. It states that United Properties earned
$30,000 a month in management fees. However, the OIG did not report that United had
many times deferred its fees to pay operating expenses. Some properties still owe United
Properties deferred fees. In addition, the OIG refuses to acknowledge the positive results
reported by HUD.

The OIG has unduly audited United compared to others that have violated HUD
requirements. He believes the audit is unfair and that someone in an influential position
is behind it.

In addition to the above general comments, he provided the following specific comments:

   •   United followed the handbook when it charged $218,428 of supervisory staff
       expense to the projects. The staff had done front-line and day-to-day activities.
       The handbook shows such costs are eligible property expenses. In addition, the
       administrator did two jobs: grant work and property work. Therefore, United paid
       the administrator from grant funds and property funds, which HUD had approved.

   •   The salary of the Minority Owner is accounting costs. The report implies that
       United just classified his salary as accounting work to skim money from the
       properties. This is not true. A simple analysis shows United charged a very
       reasonable fee for accounting.

   •   He acknowledges that United paid $28,938 from project-operating funds on a
       second mortgage note. However, he says that the HUD asset manager, after
       talking to the second mortgagee, instructed United to make the payments until the
       payment issue is resolved. The payments did not benefit United in anyway.

   •   United had support for the purchases totaling $54,213 that the OIG questioned as
       unsupported costs. The auditor said the documents were not good enough.

OIG Evaluation
This audit did result from our audit of Mays Property Management, Inc. As stated in our
report, two officials left Mays and formed a new company, United. All the operating
personnel of Mays Property Management became the personnel of United. Mays ceased
operations and turned over the management of all its HUD properties to United. In
addition, United initially used the Mays’ bank account. Since we had found problems
with Mays expenditures in a previous audit, we surveyed payments to find out whether
the same problems existed at United. The survey disclosed United misspent funds and
this led to the in-depth audit work. The family relationships had nothing to do with the
decision to do the audit.

Although based on a corporate resolution dated October 22, 1996, we concluded that
Gregory T. Mays was the president of Mays Property Management, Inc.; we accept Mr.
Mays’ statement that he was not the president of Mays and have revised our report.

With regard to the comments regarding the objectives and scope of the audit, our
objective was to determine whether United complied with the regulatory agreements and
HUD requirements when disbursing project funds. We believe our scope was sufficient
to accomplish this. Our scope did not include an objective to determine whether United
Properties deferred its fees.

The comments regarding our finding that United misspent project funds did not change
our position. United officials could not provide us any evidence required to show the
questioned disbursements, i.e., the supervisory staff expense, the charges for the minority
owner’s salary, or the unsupported costs, were appropriately charged to the projects,
necessary and reasonable project operating costs, or consistent with HUD requirements.
As our finding states, United could not provide invoices, bills, or other adequate
documentation for the unsupported costs. Further, HUD officials deny approving the
payments on the second mortgage and any of the questioned charges to the projects.


We recommend the HUD Directors of Multifamily Housing:

1A.    Require United owners or the property owners to repay the projects $264,506 for
       the ineligible expenditures from project funds.

1B.    Require United owners or the property owners to repay the projects $181,106 for
       the unsupported expenses, if the owners cannot furnish adequate documentation
       supporting those costs as reasonable and necessary operating expenses.

We recommend the Director, Departmental Enforcement Center:

1C.    Take administrative sanctions against the owners of United.


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 that the following management controls were relevant to our audit
objective to determine whether United complied with the regulatory agreements and
HUD requirements when disbursing project funds:

•      Controls to ensure compliance with regulatory requirements

It is a significant weakness if management controls do not provide reasonable assurance
that the process for planning, organizing, directing, and controlling program operations
will meet an organization’s objectives.

Based on our objective we gained an understanding of the applicable controls. However, we
did not test or rely on them in conducting the audit. We generally reviewed all allocation
and disbursement transactions.

                                                                                               Appendix A

                            SCHEDULE OF QUESTIONED COSTS

                                                         Type of Questioned Cost
                 Recommendation No.                    Ineligible 1    Unsupported 2
                        1A                                 $264,506
                        1B                                                   $181,106

                           Totals                           $264,506                 $181,106

1   Ineligible costs are those that are questioned because of an alleged violation of a provision of a law,
    regulation, contract, grant, cooperative agreement, or other agreement or document governing the
    expenditure of funds.
2   Unsupported costs are those whose eligibility cannot be clearly determined during the audit since such
    costs were not supported by adequate documentation. A legal opinion or administrative determination
    may be needed on these costs.

     Appendix B