AUDIT REPORT
LAMBETH APARTMENTS – SECTION 236/SECTION 8
MULTIFAMILY HOUSING REVIEW
PITTSBURGH, PA
2004-PH-1010
AUGUST 4, 2004
OFFICE OF AUDIT, MID-ATLANTIC
PHILADELPHIA, PA
Issue Date
August 4, 2004
Audit Case Number
2004-PH-1010
TO: Diana L. Gray, Director, Office of Multifamily Housing, Pittsburgh Area Office,
3EHMLAV
FROM: Daniel G. Temme, Regional Inspector General for Audit, Mid-Atlantic, 3AGA
SUBJECT: Lambeth Apartments – Section 236/Section 8 Multifamily Housing Review
Pittsburgh, PA
We performed an audit of the multifamily operations at Lambeth Apartments. The primary
objective of our review was to assess HUD’s concerns about management and operational problems
at the property. Our audit covered the period from January 1, 2000 through November 30, 2002.
This report contains two findings and applicable recommendations requiring action by your office.
In accordance with HUD Handbook 2000.06 REV-3, within 60 days please provide us, for each
recommendation without 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 110 days after report issuance for
any recommendation without a management decision. Also, please furnish us copies of any
correspondence or regulations issued because of the audit.
We appreciate the cooperation extended to us during the audit by Lambeth Apartments staff and
Board of Directors; their outside legal counsel and management agent, along with Canterbury Place
and the local HUD Pittsburgh Field Office staff. Should you or your staff have any questions, please
contact Christine Begola, Assistant Regional Inspector General for Audit, at (410) 962-2520.
Management Memorandum
THIS PAGE LEFT
BLANK
INTENTIONALLY
2004-PH-1010 Page ii
Executive Summary
In response to a request from the U.S. Department of Housing and Urban Development (HUD),
Multifamily Pittsburgh Field Office, we performed an audit of the multifamily operations at
Lambeth Apartments. The property is owned and managed by Episcopal Residences, Incorporated
(ERI). The primary objective of our review was to assess HUD’s concerns over management and
operational problems identified during a management review at the property. Specifically, we
wanted to determine if the (1) general management practices were in compliance with its Regulatory
Agreement, Housing Assistance Payments Contract and applicable HUD rules and regulations, (2)
project assets were used appropriately, and (3) tenant eligibility requirements were being met.
We found that ERI did not manage Lambeth Apartments in accordance with the terms of the
Regulatory Agreement, Housing Assistance Payments Contract and other applicable HUD rules and
regulations; used project assets to pay for ineligible and unsupported costs; and did not properly
certify tenants’ eligibility to ensure it received correct housing assistance payments. The results of
our review are summarized below, and detailed in the Finding sections of this report.
ERI Did Not Manage Episcopal Residences, Incorporated (ERI) did not manage
Lambeth Apartments In Lambeth Apartments in accordance with its Regulatory
Accordance With Its Agreement with HUD and other applicable requirements.
Regulatory Agreement Specifically we found ERI distributed property funds
without HUD’s approval; used project funds to make
unauthorized structural changes to the property; did not
properly manage the property to maximize rental income;
and made payments to its maintenance supervisor for
questionable maintenance services. These violations
occurred because ERI and its Board of Directors did not
have policies and procedures in place to ensure the
property was managed in accordance with its Regulatory
Agreement with HUD. As a result, ERI spent $209,081 on
ineligible and $258,819 on unsupported expenditures. We
also estimate that the property lost $280,115 in potential
income due to the unauthorized changes in how the property
was used and managed. These project funds could have
been used to pay for reasonable and necessary operating
expenses and needed repairs. Further, these actions have
placed Lambeth Apartments in a non-surplus cash position
since Fiscal Year 2000, and limited its ability to provide
available affordable units to eligible low-income
households.
ERI Could Not Adequately Contrary to HUD regulations and its Section 8 Housing
Support $284,870 In Section Assistance Payments contracts with HUD, Lambeth
8 Housing Assistance Apartments did not maintain proper documentation in the
Payments tenant files to support the Housing Assistance Payments it
Page iii 2004-PH-1010
Executive Summary
received from HUD from January 1, 2000 through
November 30, 2002. Specifically, ERI could not
document it completed the required tenant certifications
that support tenants’ eligibility in the Program and the
Housing Assistance Payments received from HUD. This
occurred because ERI did not maintain effective policies
and procedures to ensure the property was managed in
compliance with its HAP contract and applicable HUD
regulations. As a result, Lambeth Apartments received
$284,870 in Housing Assistance Payments from HUD that
it could not adequately support.
Recommendations We recommend the Director of the Pittsburgh Area Office of
Multifamily Housing take appropriate administrative action
against ERI, as allowed in Section 11 of the Regulatory
Agreement, for violating its Regulatory Agreement. We also
recommend that HUD recover $209,081 of ineligible and
$543,689 of unsupported payments from Lambeth
Apartments. Further, we made a number of
recommendations to improve the owner’s management of this
multifamily property.
Auditee Comments We provided a draft of this report to the HUD staff and to
Episcopal Residences, Incorporated’s legal counsel on
April 30, 2004 and discussed the findings and
recommendations with all parties at an exit conference on
May 14, 2004. At the exit conference legal counsel for ERI
provided additional information. We reviewed this
information and made appropriate changes to the report as
necessary. A second draft was provided to ERI on May 19,
2004 for comment. We received a written response to the
draft report on June 1, 2004. In total ERI’s response
contained 436 pages that consisted of an 11-page summary
memorandum and 17 attachments totaling 425 pages.
Generally, ERI agreed with our recommendations on
improving its management processes including the Section
8 Program, however, ERI strongly disagreed with our
findings and recommendations concerning the ineligible
and unsupported expenditures. At the end of each finding
we summarized ERI’s comments and provide our
evaluation of those comments. Further, we included
statements relating to its comments throughout the report.
However, due to the overall volume of ERI’s response, we
only included the 11-page summary of the response as an
2004-PH-1010 Page iv
Introduction
attachment. The full response will be available upon
request.
Page v 2004-PH-1010
Executive Summary
THIS PAGE LEFT
BLANK
INTENTIONALLY
2004-PH-1010 Page vi
Table of Contents
Management Memorandum i
Executive Summary iii
Introduction 1
Findings
1. Episcopal Residences, Incorporated Did Not Manage 5
Lambeth Apartments in Accordance With Its Regulatory
Agreement With HUD
2. Lambeth Apartments Could Not Adequately Support 19
$284,870 in Section 8 Housing Assistance Payments
Management Controls 23
Follow Up On Prior Audits 25
Appendices
A. Schedule of Questioned Costs 27
B. Auditee Comments 29
Page vii 2004-PH-1010
Table of Contents
THIS PAGE LEFT
BLANK
INTENTIONALLY
2004-PH-1010 Page viii
Introduction
The original Episcopal Church Home was a three-story building constructed in 1893. In 1968,
the owners of the Episcopal Church Home formed the subsidiary Episcopal Residences,
Incorporated (ERI), a non-profit corporation. ERI was formed to provide for elderly families
and persons, on a non-profit basis, rental housing and related facilities and services to meet the
needs of the aged. To accomplish this objective, ERI built Lambeth Apartments, a 202-unit,
eight-story multifamily property in 1972 under Section 236 of the National Housing Act. Both
the original Episcopal Church Home and Lambeth Apartments are located on the same property.1
In 1985, the owners of the Episcopal Church Home wanted to expand their elderly care facilities,
so they entered into a relationship with the University of Pittsburgh Medical Center (UPMC).
Under this relationship a third building was added to the property. This building is a six-story
privately owned assisted living facility, which is managed by UPMC.2 During this renovation
phase, the three buildings were merged at various locations so that free access could be obtained
for the residents of all three facilities. Also during that time the Episcopal Church Home
changed its name and officially became Canterbury Place. Canterbury Place consists of the
original three-story Episcopal Church Home and the six-story addition built in the 1980’s.
All three entities, UPMC, Canterbury Place and Lambeth Apartments have separate Boards with
various governing powers. However, several of the Board members are located on more than
one Board. For example, the President of Lambeth Apartments’ Board at the time of our review
was Mr. Edmund Ruffin, who was also the Chairman of the Board for Canterbury Place until
March 2002. Thus, with the shared property, connection of the buildings and shared Board
members, an Identity of Interest relationship was established between Canterbury Place and
Lambeth Apartments.
In May 2002, ERI obtained the services of SeniorCare to manage Lambeth Apartments. Prior to
that the property was self-managed by salaried employees. However, as of January 31, 2004,
SeniorCare resigned from its position. The property’s books and records are currently located at
4003 Penn Avenue, Pittsburgh, Pennsylvania. We conducted our work through the assistance of
SeniorCare, ERI’s outside legal counsel, and Canterbury Place management.
The Section 236 Program, established by the Housing and Urban Development Act of 1968,
combined federal mortgage insurance with interest reduction payments to the mortgagee for the
production of low-cost rental housing. Under this program, HUD provided interest subsidies to
lower a project's mortgage interest rate to as low as 1 percent. This program no longer provides
insurance or subsidies for new mortgage loans, but existing Section 236 properties continue to
operate under the program. The interest reduction payment results in lower operating costs and
subsequently a reduced rent structure.
1
According to records located at the Allegheny County Courts, in order to meet City of Pittsburgh building
ordinances, the Episcopal Church Home and Lambeth Apartments had to be viewed as being one building, having
one Board and one owner. However, in order for ERI/Lambeth Apartments to participate in HUD’s Section 236 &
Section 8 Programs separate identities are required for the Board and properties to comply with HUD’s rules and
regulations.
2
UPMC controls 60 percent of the Board and Canterbury Place controls 40 percent of the Board.
Page 1 2004-PH-1010
Introduction
The Section 236 basic rent is the rent that the owner must collect to cover the property's
operating costs given the mortgage interest reduction payments made to the property. The
Section 236 market rent represents the rents needed to cover operating costs if the mortgage
interest were not subsidized. All tenants pay at least the Section 236 basic rent for their property
and, depending on their income level, may pay a rent up to the Section 236 market rent. Tenants
paying less than the Section 236 market rent are considered assisted tenants. The Regulatory
Agreement is the primary instrument controlling the mortgagor's use of project funds for Section
236 properties with HUD. In addition to Section 236, ERI has two separate Section 8 project-
based contracts for 102 of the 202 units with HUD.
Audit Objectives The primary objective of our review was to assess HUD’s
concerns over management and operational problems
identified during a management review at the property.
Specifically, we wanted to determine if the (1) general
management practices of Lambeth Apartments were in
compliance with its Regulatory Agreement, Housing
Assistance Payments Contract and applicable HUD rules and
regulations, (2) project assets were used appropriately, and
(3) tenant eligibility requirements were being met.
To achieve our objectives we:
Audit Scope And
Methodology • Reviewed laws, regulations and other applicable HUD
program requirements, Board Minutes and Lambeth
Apartments’ various policies and procedures.
• Reviewed HUD program files and Lambeth
Apartments’ tenant files.
• Reviewed Lambeth Apartments’ and Canterbury
Place’s accounting books and records including source
documentation used to support the expenditures in
relation to Lambeth Apartments.
• Interviewed HUD staff and various Lambeth
Apartments associates, including SeniorCare managers,
Canterbury Place management, various Board members
and Lambeth Apartments residents.
We also reviewed 100 percent of the transactions from nine
general ledger accounts that were selected using a non-
statistical format, for our audit period. The transactions
subject to our review totaled $981,766. In testing the
2004-PH-1010 Page 2
Introduction
Housing Assistance Payments we randomly selected 8
months of HAP payments over a 3-year period, which
totaled $293,510. In addition, we used a portion of this
sample to randomly select a 1-month period to review 18
out of 102 tenant files to determine the accuracy of the
documentation in the files.
The audit generally covered the period January 1, 2000
through November 30, 2002, but was expanded when
necessary to include other periods. We conducted the audit
in accordance with Generally Accepted Government
Auditing Standards.
Page 3 2004-PH-1010
Introduction
THIS PAGE LEFT
BLANK
INTENTIONALLY
2004-PH-1010 Page 4
Finding 1
Episcopal Residences, Incorporated Did Not
Manage Lambeth Apartments in Accordance
With Its Regulatory Agreement With HUD
Episcopal Residences, Incorporated did not manage Lambeth Apartments in accordance with its
Regulatory Agreement and other applicable HUD requirements. Specifically we found ERI
distributed property funds without HUD’s approval; used project funds to make unauthorized
structural changes to the property, used project funds to pay for ineligible and unsupported
miscellaneous expenses, and made payments to its maintenance supervisor for questionable
maintenance services. Further, we found ERI did not properly manage the property to maximize
rental income. These violations occurred because ERI and its Board of Directors did not have
policies and procedures in place to ensure the property was managed in accordance with its
Regulatory Agreement with HUD. As a result, ERI spent $209,081 on ineligible and $258,819 on
unsupported expenditures. We also estimate that the property lost $280,115 in potential income due
to the unauthorized changes in how the property was used and managed. As such, Lambeth
Apartments may have lost $748,0153 in project funds that could have been used to pay for
reasonable and necessary operating expenses and needed repairs. Further, these actions have
placed Lambeth Apartments in a non-surplus cash position since Fiscal Year 2000, and limited
the availability of units in the market place as well as available units to low-income tenants.
The questioned costs broken down by category are summarized below:
Description Ineligible Unsupported Lost Revenue
Unauthorized
Distribution of Funds $188,436 $ 99,103 0
Unauthorized Use of
Property 0 0 $280,115
Miscellaneous
Payments $ 20,645 $ 135,930 0
Maintenance
Subcontractor
Payments 0 $23,786 0
Total $209,081 $258,819 $280,115
3
Of this amount, $315,005 was paid to Canterbury Place.
Page 5 2004-PH-1010
Finding 1
Episcopal Residences, Incorporated Distributed Project
Funds Without Proper Authorization From HUD
During the review of the Lambeth Apartments’ accounts,
we found ERI distributed property funds without receiving
the approval from HUD as required by the Regulatory
Agreement. Specifically, Sections 2(a) and 2(c) of the
Regulatory Agreement state that the owners shall establish
and maintain a reserve fund for replacements and a residual
receipts fund. Disbursements from these funds, for
whatever purpose, may be made only after receiving
written consent from the Secretary of HUD.
ERI Used Project Funds On May 23, 1972, Episcopal Church Home provided a
To Prepay A Sponsor start-up loan to Episcopal Residences, Incorporated, to
Loan complete the construction of Lambeth Apartments. The
original loan balance was for $307,048 and is not to be paid
off until year 2014, the year in which the insured mortgage
matures. As of Fiscal Year 2001, the value of the loan was
$118,612. Per the original loan agreement and the
Regulatory Agreement, prepayments could be made on this
loan, but only if they were paid using the residual receipts,
and only after obtaining prior written approval from HUD.
During our review, we were unable to locate any
documentation to support that ERI received permission
from HUD to make prepayments on this loan. In fact, the
property was in a non-surplus cash position, so there were
also no residual receipts to use to pay this loan off. When
we asked for support documentation to determine how the
loan was being paid off, ERI could not provide the support
or an explanation as to why there was a downward trend on
the loan balance recorded in the financial statements.
During the exit conference ERI’s lawyer provided copies of
Board minutes that they believed provided an explanation.
It is ERI’s contention that the original amount of the loan,
$307,048, was never needed and thus a portion of that loan
was paid back during the property close out process. We
reviewed the information ERI provided us during the exit
conference, and noted that there were several dollar values
mentioned within the minutes and other documentation.
However, we could not determine if HUD ever approved a
certain dollar amount to be written off and if so, what that
dollar value should be. We consider the $188,436 decrease
in loan value without proper authorization or support a
violation of the Regulatory Agreement.
2004-PH-1010 Page 6
Finding 1
ERI Used Project Funds In 1999, Canterbury Place assisted living facility was going
To Renovate Its Boiler through an extensive renovation project. As part of that
System Before Obtaining project Lambeth Apartments’ Board decided to replace its
HUD Approval old boiler system with a new system that was to be located
in the basement of Lambeth Apartments. This new system
would serve the older wing of Canterbury Place (the three-
story Episcopal Church Home) along with Lambeth
Apartments. The Board had stated in its decision that this
renovation would allow Lambeth Apartments the
opportunity to accomplish a costly and much needed
renovation at a lesser expense since it would be sharing the
costs with Canterbury Place. In the decision it noted the
project would cost approximately $81,000 and the funds
would be paid out of the Reserve for Replacement Fund.
Section 2(a) of the Regulatory Agreement states that
disbursements from the Reserve for Replacement fund may
be made only after receiving written consent from HUD.
The Agreement further states in Section 6(d) that the
owners shall not, without the prior written approval from
HUD, remodel, add to, reconstruct, or demolish any part of
the property. Although we noted ERI notified HUD in
March 1998 of its intention to upgrade its boiler system and
share related costs with Canterbury Place, Lambeth
Apartments could not provide any documentation to show
it received HUD’s permission for this renovation prior to
completing it in 1999. It was not until May 2000, after the
Board contacted HUD and requested $46,897 from the
Reserve for Replacement account to cover the cost of the
renovation, did HUD send a letter approving the use of the
Reserve for Replacement funds. The letter also expressed
that no further shared expenditures between Canterbury
Place and Lambeth Apartments were to take place without
seeking HUD’s approval first.
Page 7 2004-PH-1010
Finding 1
Renovations Lead To After the renovation in late 1999, the gas company sent gas
Allocation Of bills to Canterbury Place management, who would then
Unsupported Gas Bills allocate the cost based on a 60/40 split.4 According to
Lambeth Apartments’ prior CPA, Lambeth Apartments
owed $99,103 for gas bills for the period of October 1999 –
December 2001 that Canterbury Place had not yet billed
them for. However, when we asked for the supporting
documentation for this expense, neither Lambeth
Apartments nor Canterbury Place could provide invoices to
show how the $99,103 was being calculated. We consider
this liability to be unsupported.
Episcopal Residences, Incorporated Used the Property
for Purposes Not Approved by HUD
We found ERI took 14 rental units offline without first
obtaining HUD approval. ERI used these units for storage
for Canterbury Place, to operate a commercial health clinic,
guest rooms, employee apartments, and lost several units
due to property renovations. We estimate that the lost rent
revenue from these units totaled at least $280,115. The
table that follows shows the breakdown of the units that
were taken offline and the associated lost rent revenue.
Description Number of Units Amount Time Frame
Guest Rooms 2 $ 74,696 1987 – 2002
Employee Apartments 25 $ 67,459 1997 – 2002
UPMC Health Clinic 4 $ 65,252 1996 – 2002
Storage Units Used by
Canterbury Place 4 $ 48,472 1999 – 2002
Units Lost to Renovation 2 $ 24,236 1999 – 2002
Total 14 $280,115
4
The 60/40 split was based upon an engineering study completed by a professional mechanical consulting
engineering firm. The drawings provided with the study showed that there were two meters feeding the three
buildings, one meter appeared to cover Lambeth Apartments and the older portion of Canterbury Place and the
second meter appeared to cover Canterbury Place only.
5
One unit was included in our calculation because the management agent included this unit on their rent roll
reported to HUD.
2004-PH-1010 Page 8
Finding 1
Section 6(h) of the Regulatory Agreement states that the
owners shall not permit the use of the dwelling
accommodations of the project for any purpose except for
the use it was originally intended, or permit commercial
use greater than was approved by HUD. Because the
owners of the property allowed these unauthorized uses of
the property, and did not collect a commercial rent for the
units used by Canterbury Place, we estimate that the
property lost $280,115 in revenue.
Episcopal Residences, Incorporated Paid Miscellaneous
Expenditures That Were Ineligible or Not Properly
Supported
The Regulatory Agreement requires that all books and
records of the property be maintained in a reasonable
condition for proper review. However, we found Lambeth
Apartments’ general ledger and cash disbursement files for
Fiscal Year 2000 did not reconcile. In addition, from our
review of $981,766 in expenditures in our audit period, we
identified $20,645 of ineligible expenses and $135,930 of
expenses that were not properly supported. The ineligible
expenses represented miscellaneous costs ERI paid without
first obtaining the proper authorization from HUD.
Examples of such expenses include payments for the
installation of a fence, management fees paid to its CPA,
and payments made on behalf of the tenants when it was
the tenants’ responsibility to cover the expense. The
unsupported expenses represent payments made to
Canterbury Place for the health and pension insurance,
maintenance contract and a service coordinator.
Maintenance Director Received Payments for
Questionable Maintenance Services
Under an agreement between Lambeth Apartments and
Canterbury Place, the Maintenance Director of Canterbury
Place was hired by ERI to supervise and manage the
maintenance activities of Lambeth Apartments. We found
ERI violated its Regulatory Agreement and other applicable
HUD requirements when the maintenance supervisor
provided himself additional payments of $23,786 for
questionable maintenance services he provided Lambeth
Page 9 2004-PH-1010
Finding 1
Apartments as a subcontractor. These services included
installing linoleum flooring and carpet cleaning services.
HUD Handbook 4381.5, Management Documents, Agents
and Fees, states an agent/owner is expected to solicit
written cost estimates from at least three contractors or
suppliers for any contract, ongoing supply or service which
is expected to exceed $10,000 per year. In addition, for any
contract less than $5,000 per year the agent/owner should
solicit verbal or written cost estimates to ensure that the
project is obtaining the services for the lowest possible
cost. Further, the Regulatory Agreement in Section 9(b)
states, “Payment for services, supplies or materials shall
not exceed the amount ordinarily paid.”
According to Lambeth Apartments’ maintenance staff,
carpet cleaning was a routine duty they were to perform.
However, the Maintenance Director procured the carpet
cleaning and floor installation services without obtaining
the required cost estimates or issuing a contract for his
subcontractor’s services. Therefore, we question whether
the costs paid by Lambeth Apartments for these services
were reasonable or necessary. For example, the flooring
invoices submitted by the Maintenance Director to
Lambeth Apartments were 35-41 percent higher than labor
prices charged by a national hardware store.6 Thus, we
consider the entire $23,786 to be unsupported.
Episcopal Residences, Incorporated Did Not Properly
Manage the Property to Maximize Rental Income
Under the Regulatory Agreement with HUD, ERI agreed to
operate the property efficiently and effectively to provide
decent, safe, and sanitary housing to low- to moderate-
income people. We found ERI violated this requirement by
not maintaining an accurate rent roll, allowing the vacancy
rate to continue to increase, not charging the proper rent
amount and renting more market rent units than allowed
under the regulations.
6
The national hardware store price included a more difficult installation with a sub-flooring and one-roll linoleum
rather than the peel n’ stick sheets installed by the Maintenance Director.
2004-PH-1010 Page 10
Finding 1
Management Agent Could When SeniorCare took over as the management agent for
Not Determine The Lambeth Apartments, it noted that ERI had not maintained
Actual Rent Roll an accurate rent roll. The owners had been reporting to
HUD they had 202 units available for rent. SeniorCare
attempted to create the rent roll, but found it very difficult
due to the condition of the records in the property files.
Since we could not rely on the documentation in the files
we completed an independent verification of the units at the
property.
We found Lambeth Apartments actually had 208 units,
instead of the 202 units it reported to HUD, with only 191
being used as rental units. Of the total available units, only
152 units (73 percent) were actually occupied by market
and assisted tenants. In part, the difference between the
reported and actual units can be attributed to ERI taking
units offline without HUD approval.
Management Allowed We found that Lambeth Apartments was not properly
The Vacancy Rate To managed to maximize occupancy and generate revenue for
Increase the property. The HUD Occupancy Handbook 4350.3
discusses how the owners of the property are to maintain a
marketing plan to assist the owners in marketing the
property. However, we were unable to locate any such
plan during our review. In fact, our review showed that
there was very little marketing of the property even going
on. For example, the site manager that was hired by the
Management Agent left their employment on August 23,
2002. A new site manager was not hired for 10 weeks. For
those 10 weeks, there was essentially no one present in the
office to take phone calls, answer tenants’ questions, accept
rent, or accept leasing applications. The main office of
Lambeth Apartments was essentially closed. During this
time period, there were approximately 39 vacant units (or
19 percent vacancy).7
When we questioned Lambeth Apartments’ management
and their legal counsel on the vacancy and marketing issues
they told us the vacant units were efficiency units and were
difficult to rent. However, we dispute this fact. Our review
showed that there were actually 12 one-bedroom units and
27 efficiency units vacant. In addition, we found in the
7
Based upon our observation of the 208 units when we conducted our independent unit verification.
Page 11 2004-PH-1010
Finding 1
February 2000 Board Minutes, the Board discussed how
the vacancy rate had improved over the prior year and that
a waiting list was going to have to be reinstated to
accommodate any prospective clients. According to the
February 2002 Board Minutes the reported occupancy rate
at the beginning of Fiscal Year 2002 was as high as 96
percent.
Not All Tenants Were In addition to not properly insuring the occupancy rate of
Paying The Proper Rent the property remained steady, ERI was not charging the
proper rent to the tenants. This is a direct violation of
Section 4 of the Regulatory Agreement, which states the
owners will insure that the proper rent is be charged to each
tenant. During July 2002, after SeniorCare had started
managing the property, it found the problem concerning the
rental rate and forwarded letters to 12 tenants who were
being charged the incorrect rent. Three of the 12 tenants’
rent had not been increased since 1997. In addition, these
three tenants were either current or recently retired
Lambeth Apartments employees. These residents
explained that they had a verbal agreement with the owners
to pay a reduced rental rate.
Number Of Allowable Section 236 of the Code of Federal Regulations, Subparts C
Market Rate Units and D, discusses how the owners are to determine the
Exceeded Requirements eligibility of a tenant for occupancy at the property. These
sections allow for tenants who can pay below and above
market rent. However, before admittance of an applicant
who can pay the market rent, the owner must obtain written
approval from HUD if the number of tenants already
paying market rent exceeds 10 percent of the number of
units authorized under the Section 236 Program.
Although Lambeth Apartments had reported 202 units to
HUD under the Section 236 Program, we determined it had
only 191 available units. As such this allowed them to use
19 units for market renters without HUD approval.
However, when we conducted our independent unit
verification we identified 35 market renters. Thus, Lambeth
Apartments exceeded the allowable market rate units by 16
units and was not in compliance with the requirements.
2004-PH-1010 Page 12
Finding 1
Lambeth Apartments Units*
Market Rent - 35
Units
17%
Market Rent - 35 Units
Vacant - 39 Units
Vacant - 39 Units
19%
Other Use - 17 Units
Rented Units - Sect 236/Sect
Other Use - 17 Units 8 - 117 units
Rented Units - Sect 8%
236/Sect 8 - 117 units
56%
* Based upon our observation of the 208 units when we conducted our independent unit verification.
Auditee Comments ERI’s Board of Directors stated it has started to take steps
to address the issues raised in this finding concerning the
overall management of the property. Specifically, the
Board hired SeniorCare Network, which has been
succeeded by Pennrose Management Company, to manage
the property. The Board also intends to attend training and
implement policies and procedures to ensure that the
Section 236 Program is being managed and maintained in
accordance with the Regulatory Agreement and HUD
regulations.
However, ERI’s Board of Directors strongly disagreed with
all of the items that the OIG identified as ineligible
expenditures. For example, ERI disagreed with our
opinion that the $188,436 in prepayments for the start up
loan were ineligible. In its response, ERI stated that not all
of the funds were needed when the original mortgage was
issued and thus HUD approved these funds to be returned
to the sponsor. ERI also disagreed with the OIG’s
assessment of $14,211 of the $20,645 in miscellaneous
ineligible expenditures identified.
Page 13 2004-PH-1010
Finding 1
The Board also disagreed with the auditor’s interpretation
of how the property lost revenue through the use of 14
units. For example, the Board questioned why the auditors
would continually question the use of four units for the
Benedum Clinic when it had received HUD approval for
these units to be taken off line to be used for the clinic.
They also questioned the use of four storage units that had
never been on the rent roll and were otherwise never
intended for residential use.
In addition, the Board disagreed with the unsupported gas
and miscellaneous expenditures questioned by the OIG.
The Board stated that they provided all of the gas bills
relating to the unsupported costs and cannot understand
why the OIG would continue to question them. In addition,
since Lambeth Apartments has not paid for all of the
expenditures then the recommendation has no basis.
Lastly, ERI disagreed with the OIG’s assessment of the
maintenance supervisor’s role at the property. Specifically,
the Board stated that the Canterbury Place staff member
was only assisting the Lambeth Apartments’ maintenance
team and not supervising them. In addition, the additional
work completed outside of the scope of the staff members’
service agreement was of nominal value and did not violate
HUD bidding requirements.
OIG Evaluation of We are pleased that the Board started to take the
Auditee Comments appropriate action to improve the overall management of
the apartments. However, we disagree with the Board’s
position that HUD approved the $188,436 prepayment to
the sponsor loan. As explained in the finding, we
reviewed the additional support provided to us by ERI’s
legal counsel and found several inconsistencies among the
statements in the minutes. In addition, we never noted a
formal approval from HUD stating that these funds could
be returned to the sponsor.
We also disagree with the Board’s assessment that the
property did not lose revenue through the unauthorized use
of the units, by the fact that the units were either approved
by HUD to be removed or the units were not rentable. For
2004-PH-1010 Page 14
Finding 1
example, we concur that HUD approved two of the units
for the Benedum clinic to be removed from the rent roll and
our calculation of lost revenue takes that approval into
account. However, the Director of the Pittsburgh
Multifamily Division only recently retroactively approved
the other two units, and based upon discussions we had
with members of the HUD’s Office of General Counsel, we
question whether the Director had the authority to
retroactively make this approval. As for the four storage
units, we were unable to determine if they were ever used
for residential purposes, however, that is beside the point.
The unit space is being utilized by Canterbury Place for
storage at no cost, thus the potential for additional revenue
remains.
We continue to question the unsupported gas bills provided
by ERI. Although ERI’s legal counsel provided us copies
of over $237,365 in gas bills, no one has been able to
provide evidence of how the funds are related specifically
to Lambeth Apartments. For example, in the engineering
study completed by the professional mechanical consulting
engineering firm, P.L. Frank, Incorporated, provided to us
by Canterbury Place managers, it showed that there were
two separate gas meters connected to the three buildings.
One gas meter fed directly to Canterbury Place while the
other gas meter was for Lambeth Apartments and the old
portion of Canterbury Place. Thus, to include all gas bills
in total and than allocate Lambeth Apartments 40 percent
of the cost does not provide adequate support for the
questioned costs. In addition, in the support provided there
was $81,235 in forgiven bills by the gas supplier to
Canterbury Place. We question if Canterbury Place was no
longer responsible for these two bills why it would
continue to request Lambeth Apartments to pay its portion
totaling $32,494.
Finally, during our review of the maintenance services
provided by the Canterbury Place staff member, it became
apparent that he had more than an assist role while working
at Lambeth Apartments. On several occasions when we
discussed maintenance issues with the Lambeth
Apartments’ maintenance staff, they would defer to the
Canterbury Place employee to answer our questions. In
addition, the Canterbury Place staff member would decide
Page 15 2004-PH-1010
Finding 1
when a particular bill should be paid and signed off on
several invoices. As for the additional services provided by
the Canterbury Place employee outside of the original
agreement between Canterbury Place and Lambeth
Apartments, these services should have been bid out. In
fact, the auditee in its response even concurs with this
evaluation. In its response ERI quotes the same criteria we
do in our report, however, it added “…it appears that the
word “less” was actually meant to be “more than $5,000,”
as the Handbook fails to provide for bidding on services
between $5,000 and $10,000…” Since the costs ranged
from $5,600 to $11,436 during the 3 years questioned, the
costs should have been properly bid out.
Recommendations We recommend the Director of Pittsburgh’s Office of
Multifamily Housing:
1A. Require the owners of Lambeth Apartments to
repay the property $209,081 for the ineligible
expenditures.
1B. Require the owners of Lambeth Apartments to
provide proper support documentation for $258,819
in unsupported expenditures. If these funds cannot
be supported they should also be paid back to the
property.
1C. Follow Section 11 of the Regulatory Agreement,
which states:
i. Written notification should be provided to the
owners of Lambeth Apartments notifying them
of the numerous violations under the Regulatory
Agreement.
ii. If the violation is not corrected within 30 days,
the owners should be declared in default of their
mortgage.
1D. Require the owners of Lambeth Apartments to:
2004-PH-1010 Page 16
Finding 1
i. Formally submit a request to HUD to approve
the rental units it has taken off-line that are
currently being used for unauthorized
commercial purposes.
ii. Establish a lease agreement with Canterbury
Place for the Benedum Clinic, storage space and
any other space occupied by Canterbury Place
employees or equipment within Lambeth
Apartments’ building. The rental rates to be
charged are to be equal to the Commercial rate
and approved by HUD.
IE. Require Lambeth Apartments’ two guest room units
and two staff housing allowance units (that do not
have prior HUD written approval) be returned to the
rent rolls as marketable units, unless they obtain
approval from HUD.
IF. Require the Lambeth Apartments’ owners and
Board of Directors to attend mandatory training to
obtain an understanding of the management process
of federally subsidized properties, specifically
concentrating on the use of the Regulatory
Agreement and HAP contract.
1G. Require the owners to establish agreements, with
HUD’s approval, between Lambeth Apartments and
Canterbury Place concerning any shared expenses,
including maintenance and/or managerial type
contracts. These agreements should be documented
and approved by HUD before any further payments
are made to Canterbury Place.
IH. Establish and implement policies and procedures to
ensure the Section 236 Program is being managed
and maintained in accordance with the Regulatory
Agreement and HUD regulations.
II. Require the owners of Lambeth Apartments to close
any open recommendations relating to the latest
management and occupancy review conducted by
HUD.
Page 17 2004-PH-1010
Finding 1
THIS PAGE LEFT
BLANK
INTENTIONALLY
2004-PH-1010 Page 18
Finding 2
Lambeth Apartments Could Not Adequately
Support $284,870 in Section 8 Housing
Assistance Payments
Contrary to HUD regulations and its Section 8 Housing Assistance Payments contract with
HUD, Lambeth Apartments did not maintain proper documentation in the tenant files to support
the Housing Assistance Payments it received from HUD from January 1, 2000 through
November 30, 2002. Specifically, Lambeth Apartments could not document it completed the
required tenant certifications that support tenants’ eligibility in the Program and the Housing
Assistance Payments it received from HUD. This occurred because the owners of Lambeth
Apartments did not maintain effective policies and procedures to ensure the property was
managed in compliance with its HAP contract and applicable HUD regulations. As a result,
Lambeth Apartments received $284,870 in Housing Assistance Payments from HUD that it
could not adequately support.
ERI Did Not Complete The owners currently have two Section 8 HAP contracts
Required Yearly Tenant with HUD, encompassing 102 units. In accordance with
Certifications these HAP contracts and its Regulatory Agreement, the
owners agreed to determine the eligibility of each tenant
that participates in the Section 8 Program on a yearly basis
by completing the tenant certifications and re-certifications.
Further, the owners are required to verify this information
and maintain it for 3 years. The owners are also required to
follow-up with any family who does not provide the
required certification data within the established timeframe
and initiate HUD-prescribed enforcement actions, if
necessary. However, we found Lambeth Apartments did
not follow these requirements and tenant certifications did
not reconcile to rent payments they submitted and received
from HUD. From January 1, 2000 through November 30,
2002, Lambeth Apartments received $284,870 of
payments.
Not All Housing In order to determine the accuracy of the Section 8 Housing
Assistance Payments Assistance Payments the owners submitted to HUD, we
Were Adequately selected 8 months of vouchers over a 3-year period. This
Supported was equivalent to reviewing 807 Section 8 tenant-assisted
rent payments. We then compared the amounts billed to
the supporting tenant rent eligibility certifications in
Lambeth Apartments’ files. From this review we found 94
of the HAP rent payments (or 12 percent) did not match the
Page 19 2004-PH-1010
Finding 2
information in the tenant files. Further, we found
management did not complete the tenant re-certifications in
Fiscal Year 2000 until five months past their annual
certification due date. Under the HAP contract, owners
must re-certify family income annually to determine
circumstances that may affect the amount of rental
assistance the family receives. Thus, the owners could not
verify the accuracy of their tenant’s eligibility with the
HAP rent payments they were requesting.
Move-Out Dates Were We also found that the recorded move-out dates for tenants
Inaccurate Or Not were often inaccurate or not documented in the files. For
Documented example, we found examples of move-out dates being
documented for deceased tenants up to 74 days after the
published obituary dates.8 Since many of the tenant files
contained inaccurate or missing move-out dates, we
question the validity of the Housing Assistance Payments
Lambeth Apartments received during January 1, 2000
through November 2002.
Section 8 Tenant Files During our review of the 807 individual HAP payments
Contained Numerous noted above, we selected a non-statistical sample of 18
Deficiencies tenant files from the September 2002 HAP registers. Our
objective in reviewing these 18 tenant files was to
determine the accuracy and completeness of the
documentation noted in the Section 8 files. From this
review we identified numerous deficiencies which are
summarized below.
• Six of the eighteen tenant files (33 percent) did not
include the proper move-out forms or dates.
• Six of the eighteen tenant files (33 percent) did not
have third-party verifications completed to verify the
supporting documents submitted by the tenants in order
to determine Section 8 eligibility as required by HUD
Handbook 4350.3.
• Five of the eighteen tenant files (28 percent) did not
have signed HUD forms located in the file to verify the
owners certified to the tenants’ eligibility.
8
HUD’s Regulations permit Section 8 payments not to exceed 14 days after a tenant has passed.
2004-PH-1010 Page 20
Finding 2
• Twelve of the eighteen tenant files (67 percent)
documented a different Housing Assistance Payment
amount than what was being billed on the September
2002 billing. In some cases, the amounts differed
because the tenant had moved out but was still being
claimed on the HAP billing.
• Three of the eighteen tenant files (17 percent) were not
re-certified annually.
Auditee Comments The ERI Board relied on a professional manager to
maintain its tenant records. It was not until the manager
was absent for an unforeseen amount of time that problems
with file maintenance surfaced. Once the problems were
brought to the Board’s attention, professional management
was contracted to resolve the issue. With the new
management team in place, first SeniorCare and now
Pennrose Management Company, 100 percent of the
tenants have been recertified with adjustments being
carried back to January 2002. Furthermore, ERI is now
revisiting its existing 2000 and 2001 rent rolls and records
to determine what tenants resided at Lambeth Apartments
in 2000 and 2001 to demonstrate a good faith attempt that
the tenants that received Section 8 did so legitimately.
OIG Evaluation of We are pleased that the ERI Board and Lambeth
Auditee Comments Apartments’ management has taken on such an
overwhelming task. Once the review is completed, it will
provide the Board, HUD and the OIG the assurance they all
need to know that the Section 8 funds distributed to
Lambeth Apartments were done so properly.
Recommendations We recommend the Director of Pittsburgh’s Office of
Multifamily Housing require the owners of Lambeth
Apartments to:
2A. Repay HUD all HAP payments received from
January 2000 through November 2002 ($284,870)
that they cannot adequately support.
Page 21 2004-PH-1010
Finding 2
2B. Provide adequate documentation to support all HAP
payments they received after November 2002. Any
unsupported or ineligible payments should be
returned to HUD from the project funds.
2C. Establish written policies and procedures to ensure
that all required documentation is maintained in the
tenant files to support the HAP payments.
2004-PH-1010 Page 22
Management Controls
In planning and performing our audit, we obtained an understanding of the management controls
that were relevant to our audit. Management is responsible for establishing effective management
controls. Management controls, in the broadest sense, 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.
Relevant Management We determined the following management controls were
Controls relevant to our audit objectives:
• Policies and procedures developed to manage the
property in accordance with the Regulatory Agreement,
• Cash management of the property,
• Documentation maintained to support expenditures and
cost eligibility,
• Procedures developed on how to maintain the HAP
tenant files, and
• Policies developed on the reporting of HAP payments.
We assessed all of the relevant control categories identified
above, to the extent they impacted our audit objectives.
Significant Weaknesses A significant weakness exists if management controls do not
give reasonable assurance that resource use is consistent
with laws, regulations, and policies; that resources are
safeguarded against waste, loss, and misuse; and that
reliable data are obtained, maintained, and fairly disclosed
in reports. Based on our review, we believe the following
items are significant weaknesses:
• Lambeth Apartments did not have a system in place to
ensure that the Regulatory Agreement was being
followed (see Finding 1).
• Lambeth Apartments did not have policies and
procedures in place to ensure costs incurred were for
eligible activities, properly supported by appropriate
Page 23 2004-PH-1010
Management Controls
source documentation, and were allowable under the
Regulatory Agreement (see Finding 1).
• Lambeth Apartments did not have the effective policies
and procedures in place to ensure that the HAP
payments were properly supported (see Finding 2).
2004-PH-1010 Page 24
Follow Up On Prior Audits
This is the first audit of the Lambeth Apartments’ Section 236 and Section 8 Programs by
HUD’s Office of Inspector General.
Page 25 2004-PH-1010
Follow Up On Prior Audits
THIS PAGE LEFT
BLANK
INTENTIONALLY
2004-PH-1010 Page 26
Appendix A
Schedule of Questioned Costs
Recommendation Type of Questioned Cost
Number Ineligible 1/ Unsupported 2/
1A $209,081
1B $258,819
2A $284,870
$209,081 $543,689
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/ Unsupported costs are costs charged to a HUD-financed or HUD-insured program or
activity and eligibility cannot be determined at the time of audit. The costs are not
supported by adequate documentation or there is a need for a legal or administrative
determination on the eligibility of the costs. Unsupported costs require a future decision
by HUD program officials. This decision, in addition to obtaining supporting
documentation, might involve a legal interpretation or clarification of Departmental
policies and procedures.
Page 27 2004-PH-1010
Appendix A
THIS PAGE LEFT
BLANK
INTENTIONALLY
2004-PH-1010 Page 28
Appendix B
Auditee Comments
Page 29 2004-PH-1010
Appendix B
2004-PH-1010 Page 30
Appendix B
Page 31 2004-PH-1010
Appendix B
2004-PH-1010 Page 32
Appendix B
Page 33 2004-PH-1010
Appendix B
2004-PH-1010 Page 34
Appendix B
Page 35 2004-PH-1010
Appendix B
2004-PH-1010 Page 36
Appendix B
Page 37 2004-PH-1010
Appendix B
2004-PH-1010 Page 38
Appendix B
Page 39 2004-PH-1010
Appendix B
THIS PAGE LEFT
BLANK
INTENTIONALLY
2004-PH-1010 Page 40
Lambeth Apartments - Section 236/Section 8 Multifamily Housing Review, Pittsburgh, Pennsylvania
Published by the Department of Housing and Urban Development, Office of Inspector General on 2004-08-04.
Below is a raw (and likely hideous) rendition of the original report. (PDF)