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)