oversight

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)

           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




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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.




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Executive Summary




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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




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Table of Contents




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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.




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Introduction




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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




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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




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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.




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                             Appendix B

Auditee Comments




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