oversight

Uptown Towers Apartments, Portland, Oregon HAP Contract No. OR160039003 Master ACC Contract No. S-0029

Published by the Department of Housing and Urban Development, Office of Inspector General on 2004-03-26.

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

                                                            Issue Date
                                                                    March 26, 2004

                                                            Audit Case Number
                                                                    2004-SE-1003




TO:             Philip Head, Acting Director, Region X Multifamily Hub, 0AHM



FROM:           Frank E. Baca, Regional Inspector General for Audit, 0AGA

SUBJECT:        Uptown Towers Apartments, Portland, Oregon
                HAP Contract No. OR160039003
                Master ACC Contract No. S-0029


                                   INTRODUCTION

At the request of your office, we have completed an audit of Uptown Towers Apartments
(Project), a HUD-subsidized project in Portland, Oregon. The purpose of our audit was
to determine if:

      •   The Project owner received repayment of ineligible construction loans and
          capital contributions from Project funds;
      •   Commercial space income has been treated as Project income or owner's
          contribution;
      •   Commercial income has been paid out to the Project owner;
      •   The management agent has been receiving excessive management fees; and
      •   Certain Project expenses were eligible and benefited the Project.

To achieve our objectives, we performed audit procedures that included:

Obtaining and reviewing:

   •      Federal Regulations, the Annual Contributions Contract between HUD and
          Oregon Housing and Community Services Department (OHCSD) and the
          Housing Assistance Payments (HAP) Contract between Uptown Towers
          Apartments and OHCSD to determine the terms and conditions under which
          OHCSD monitors the Project and under which the Project should operate.
   •   OHCSD and Guardian Management files and records related to Uptown Towers
       Apartments to obtain information relevant to the Project’s operations.

Interviewing:

   •   HUD program staff to confirm our understanding of the request received;

   •   OHCSD staff to determine how they monitor the operations of the Project; and

   •   Guardian Management and Project employees to understand the operations of the
       Project.

Our audit covered the period from January 1998 through July 2003. We performed our
audit work from June 2003 through January 2004 at the offices of: Oregon Housing and
Community Services Department in Salem, Oregon; Guardian Management and Uptown
Towers Apartments in Portland, Oregon; Dwyer Pemberton and Coulson P.C., in
Tacoma, Washington; and HUD Seattle Multifamily Hub and OIG Office of Audit in
Seattle, Washington.

We conducted the audit in accordance with generally accepted government auditing
standards.

In accordance with HUD Handbook 2000.06 REV-3, within 60 days please provide
us, for each recommendation without a management decision, a status report on: (1)
the corrective action taken; (2) the proposed corrective action and the date to be
completed; or (3) why action is considered unnecessary. Additional status reports
are required at 90 days and 120 days after report issuance for any recommendations
without a management decision. Also, please furnish us copies of any
correspondence or directives issued because of the audit.

We appreciate the courtesies and assistance extended by the management and staff of
Oregon Housing and Community Services Department, Guardian Management, and
Uptown Towers Apartments.

Should you or your staff have any questions, please contact me at (206) 220-5360.

                                     SUMMARY

Our audit found no repayments of construction loans. We determined that repayments of
capital contributions from Project surplus cash to the owners were eligible. We also
found that the Project’s commercial income was properly treated as owner contributions
or income, and that payments to the owner from the commercial income are allowable.
However, the management agent received excessive management fees paid from
residential income for the management of the Project’s commercial income. Further,
ineligible partnership expenses were paid from Project funds and some of those expenses

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were paid without supporting documents in sufficient detail to show whether they were
partnership or Project expenses.

                                    BACKGROUND

Uptown Towers Apartments (Project) is a 72 unit elderly housing project located in
Portland, Oregon. Each unit contains one bedroom, a living room, a kitchen, and a
bathroom. Uptown Associates, Ltd., owns the property. It was built in 1983 using bond
financing from OHCSD. The property was refinanced in 1992 through OHCSD under a
Financing Adjustment Factor (FAF) Agreement between HUD and OHCSD. The
property is not insured or financed by HUD. However, the Project owner entered into a
Housing Assistance Payments (HAP) contract with OHCSD, dated July 19, 1983 under
which HUD provides a monthly project-based rental subsidy (Section 8) for 71 of the
Project’s 72 units. One unit is a rent-free management unit. Project operations are
monitored by OHCSD under terms of its Annual Contributions Contract with HUD.

Guardian Management manages Uptown Towers Apartments. In this capacity, Guardian
Management is responsible for overseeing the day-to-day operations and maintenance of
the property as well as all financial aspects of the property. To compensate for these
services, Guardian Management receives a management fee expressed as a percentage of
collections.

A convenience store and parking area associated with the store occupies the lower
portion of one side of the Project’s building. The store generates lease income of $3,000
per month, which flows through the books and records of the Project and is paid to the
Project owner. Additionally, in September 1998 the owner entered into a contract to
lease the side of the building as advertising space. This contract was terminated due to a
city ordinance in 2001. However, while the contract was in effect, the income generated
by this lease of about $2,500 per month also flowed through the Project’s books and
records and was paid to the owner. The Project’s residential operations do not benefit in
any way from either of these commercial leases.

                                       FINDING 1

                         PROJECT FUNDS WERE USED
                     TO PAY FOR NON-PROJECT EXPENSES

We found that $55,907 in Project funds were inappropriately used to pay $14,720 in
management fees on commercial income as well as $41,187 in partnership expenses.
Consequently, these funds were not available to reduce subsidy payments or to fund the
residual receipts account, which reverts to HUD at the termination of the HAP contract.
These ineligible expenditures of Project funds allowed the owners to receive distributions
in excess of the limited distribution provided for in the Federal regulations. This occurred
because controls were not in place to prevent or detect unauthorized use or disposition of
Project resources.



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Federal and OHCSD Requirements

Federal regulations at 24 CFR 883.702(e) and Section 2.6(c)(1) of the Project’s HAP
contract state that project funds must be used for the benefit of the project to: (1) make
mortgage payments, (2) pay operating expenses, (3) make required deposits to the
replacement reserve, and (4) provide limited distributions to the owner. Funds in excess
of those needed for these purposes must be deposited into a separate account (residual
receipts), from which withdrawal may only be made with OHCSD approval for project
purposes including the reduction of HAP payments. Upon termination of the HAP
contract, any funds in the residual receipts account must be remitted to HUD.
Distributions to the Project owner are limited to six percent of equity.

Project Residential Income Was Used to Pay Ineligible Fees for Management of the
Project’s Commercial Income

During our audit period, Guardian Management received a fee of eight percent of the
monthly rent paid for the space leased by the convenience store located within the
Project. Guardian Management also received a fee of eight percent of the payments for
the lease of the advertising space on the side of the Project’s building. The following
table illustrates the amount of commercial income generated by these leases and the fees
paid to Guardian to manage this commercial income:

                                 FY1999*       FY2000       FY2001      FY2002*       Total

Advertising Income                             $30,000      $10,000
Convenience Store Income           $36,000      36,000       36,000      $36,000
Total Commercial Income            $36,000     $66,000      $46,000      $36,000
Management Fee Percentage             0.08        0.08         0.08         0.08
Management Fee Paid on
Commercial Income                  $ 2,880     $ 5,280      $ 3,680      $ 2,880      $14,720

*A management fee was not paid on advertising income in 1999 and there was no advertising income in
2002

We found that this commercial income did not in any way benefit the Project’s residential
operations as it flowed through the Project’s books and records and was paid out in its
entirety to the Project’s owner. Because all of the commercial income was paid out, the
$14,720 paid out for the commercial income management fee came from the Project’s
residential income. The entire $14,720 is an ineligible Project expense since it only
covers expenses related to the generation of commercial income paid to the owner.

Project Funds Were Used to Pay Ineligible Partnership Expenses

We reviewed all Project checks written for accounting, auditing, bookkeeping, legal fees,
and tax services from January 1, 1999 through July 31, 2003. We also reviewed all
checks in excess of $50 written to the general partner of the ownership entity or to his
wife for miscellaneous expenses, software, or supplies. Our review disclosed $41,187 of
ineligible expenses relating to the operation of the Uptown Associates, Ltd. partnership.

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We also found $2,042 in unsupported expenses. The ineligible payments were not for
legitimate Project expenses since they were not: (1) part of the mortgage payments; (2)
for Project operating expenditures; (3) for payments to the reserves for replacement; or
(4) authorized distributions to the owners.

Supplies and Miscellaneous Expenses

We reviewed $4,406 in supplies and miscellaneous expenses reimbursed to the general
partner, of which $1,702 (38.6 percent) was ineligible and $1,804 (40.9 percent) was
unsupported. These expenses included reimbursements to the general partner for his
purchases of computer software and office supplies such as toner, binders, and paper.
The general partner of the ownership entity resides in a different state from that in which
the Project is run and he purchased these items for use in his home office. The
management agent reimbursed these expenses using Project funds even though the items
were not used for the benefit of the Project.

Further, the management agent did not require the general partner to submit itemized
invoices that would show if the expenses were for the partnership or the Project.
Consequently, many of the supporting documents we received from the general partner
through the management agent did not support the costs in question.

Bookkeeping Expenses

We reviewed $59,781 of expenses classified as auditing, bookkeeping, and tax services
and found that $13,790 (23.1 percent) was for ineligible partnership expenses. The
general partner’s wife typically invoiced the Project $450 for bookkeeping services once
every three months. These expenditures were categorized as either auditing or
bookkeeping fees. The management agent has been paying these invoices from Project
funds for at least as far back as 1990. However, the management agent did not know
when or what auditing or bookkeeping services the general partner’s wife performed.
Since all of the Project’s bookkeeping and auditing functions are performed and managed
by the management agent, any auditing or bookkeeping performed by the General
Partner’s wife is not reflected in the Project’s accounting system and did not benefit the
Project.

We also found costs relating to the purchase of filing cabinets and furniture on some of
these bookkeeping invoices. As discussed above, the furniture and file cabinets are used
in the general partner’s home office and are not for the benefit of the Project. Further, we
identified expenses categorized as accounting and tax fees that related to the sale of the
property. These are asset management services that benefit the partnership, not the
Project as discussed below.

Legal Fees

We reviewed $38,144 in legal expenses and found $25,695 (67.4 percent) was ineligible.
Expenses categorized as legal fees included legal services related to the advertising lease,

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the convenience store lease, and the sale of Uptown Towers Apartments. Since the
Project does not benefit from either of the commercial leases, any expenses related to
these leases are ineligible non-Project expenses. Additionally, services related to the sale
of the property are asset management services that benefit the owners, not the Project
itself. Therefore, these expenses are partnership, not Project expenses. Further, the
management agent was unable to provide support for $238 of the expenses listed as legal
fees.

The Owner Did Not Have Controls In Place to Prevent or Detect Unauthorized Use
or Disposition of Resources.

Guardian Management reimbursed the owners of Uptown Towers Apartments for
partnership expenses and paid itself a management fee on commercial income from
Project funds because controls were not in place to prevent or detect unauthorized use or
disposition of resources. When asked why Guardian Management allowed the ineligible
payments, the Portfolio Manager told us that the question had never come up before since
neither HUD nor OHCSD had ever looked at expenditures in this detail before.

Since Project funds were used for non-Project expenses, these funds were not available to
reduce subsidy payments to the Project. Further, these funds were not available to fund
the residual receipts account, which could then be used for the benefit of the Project as
needed and which revert to HUD at the termination of the HAP contract. Use of Project
funds in this manner also allowed the owner to receive a greater return on equity than
provided for in the regulations and HAP contract.


                                AUDITEE COMMENTS

The general partner of the ownership entity responded to our draft report, in writing, on
March 24, 2004. In his response, the general partner stated that:

1. He participated in major decisions involving the management of the Project, assisted
   in management related decision-making, worked closely with OHCSD staff on a
   variety of issues related to both residential and commercial operations, played a role
   in coordinating the annual audit from beginning to end each year to meet HUD
   requirements, and maintained records dating back 20 years while the management
   agent only kept records 7 years.

2. He agreed that management and professional fees paid in relation to the commercial
   portion of the Project were improperly paid with residential income, and that the
   partnership should reimburse the project’s residential operations for these expenses.
   However, he also stated that the commercial space provides a net benefit to the
   property as the commercial tenant pays a portion of the property taxes related to the
   project, and asked us to consider whether this benefit would offset the deficiency. He
   also explained that payment of the management fees occurred in error as the result of



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   an accounting software error following Guardian Management’s conversion to new
   software.

3. He has maintained files for the project’s residential and commercial activities (e.g.
   original submission documents, “as builts,” repair documentation, annual audits, etc.).
   No one else has these documents, it benefits the project for him to provide safe and
   secure maintenance of these records, and he has not asked for reimbursement for
   these costs. Because of the time, effort, and cost to store the documents, he believes
   the ineligible and unsupported partnership expenses should be allowed. He has also
   offered to provide invoices for future expenses to OHCSD for approval prior to
   seeking reimbursement from Guardian Management for these expenses.
   Additionally, his wife has stopped charging the residential operations for
   bookkeeping fees.

4. He believes the professional fees related to the proposed sale of the property should
   be allowed. OHCSD would not have allowed a sale of the property if the parties had
   not first agreed to extend the current use as low-income housing. This is a direct
   benefit to the residential segment of the project and would also mean there would be
   no eviction or relocation costs. In addition, OHCSD offered to forego its portion of
   the savings that resulted from the bond refinancing to add to the income of the project
   after the sale. He then stated he would be open to allocating the professional fees
   related to the proposed sale on the percentage basis of residential vs. commercial
   space in the Project.

The general partner’s response is included in its entirety in Appendix B of this report.

                  OIG EVALUATION OF AUDITEE COMMENTS

1. While it is commendable that the general partner expended much time and energy
   participating in the management of the Project and maintaining files and records
   related to the Project over the past 20 years, the services he has provided are
   considered a function of asset management. Asset management functions are those
   activities associated with managing and protecting the assets of the ownership entity
   and overseeing the management agent's performance. These functions include how
   the owner will plan for long-term operating, capital investment, rehabilitation,
   modernization, disposition, and other needs of the Project. In other words, asset
   management functions operate to protect the owner’s investment. The costs for these
   services are the costs of ownership and should not be borne by the Project’s
   operations.

2. Although the commercial tenant pays a portion of the property taxes related to the
   project, we do not agree that any benefit should offset the deficiency. The portion of
   the property taxes paid by the commercial tenant is directly related to the commercial
   portion of the building.




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3. The general partner’s maintenance of files and records for the Project such as
   building documents and annual audits are asset management functions. These are
   costs related to protecting the ownership entity’s investment in the project and as such
   are costs of ownership.

4. As previously mentioned, the sale of the property is a function of asset management.
   It is the owner’s responsibility to bear the costs of disposition of the property.

                               RECOMMENDATIONS

We recommend that the Director instruct OHCSD to require the owners of Uptown
Towers to:

1.A. Submit monthly accounting reports, and review the reports to ensure that only
     Project expenses are paid with Project funds.

1.B. Reimburse the residual receipts account $55,907 for ineligible partnership expenses
     and ineligible management fees paid on commercial income through July 31, 2003.
     Also require the owners to reimburse the residual receipts account for any ineligible
     partnership expenses and management fees paid on commercial income since
     August 1, 2003.

1.C. Provide support for the $2,042 in unsupported supplies, miscellaneous, and legal
     expenses or reimburse the residual receipts account if no support is provided.

1.D. Implement controls to ensure that only Project expenses are paid with Project funds.

1.E. Stop paying a management fee on the commercial space from residential income.


                            MANAGEMENT CONTROLS

In performing our review, we considered the management controls relevant to Uptown
Towers Apartments' operations to determine our audit procedures, not to provide
assurance on those controls. Management controls in the broadest sense include the plan
of organization, methods, and procedures adopted by management to meet its missions,
goals, and objectives. Management controls include the processes for planning,
organizing, directing, and controlling program operations. It includes the systems for
measuring, reporting, and monitoring program performance. It also serves as the first line
of defense in safeguarding assets and preventing and detecting errors, fraud, and
violations of laws and regulations. Officials of the audited entity are responsible for
establishing effective management controls.




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We determined the following management controls were relevant to our review
objectives:

   •   Program Operations - Policies and procedures that officials of the audited entity
       have implemented to reasonably ensure that a program meets its objectives and
       that unintended actions do not result.

   •   Compliance with Laws and Regulations - Policies and procedures that officials of
       the audited entity have implemented to reasonably ensure that resources used are
       consistent with laws and regulations.

   •   Safeguarding Resources - Policies and procedures that officials of the audited
       entity have implemented to reasonably prevent or promptly detect unauthorized
       acquisition, use, or disposition of resources.

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

Based on our review, we believe the following items are significant weaknesses:

We identified a significant weakness in Uptown Towers Apartments' management
controls when it did not require documents in sufficient detail to support reimbursements
to the general partner and others. As a result, we found during our audit that controls did
not reasonably ensure that all resources were used consistent with laws and regulations.
In addition, management controls did not reasonably prevent or promptly detect
unauthorized use or disposition of resources.




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                                                                               Appendix A

     SCHEDULE OF QUESTIONED COSTS AND FUNDS PUT TO BETTER USE


 Recommendation                  Type of Questioned Cost                  Funds Put to
     Number            Ineligible 1/              Unsupported 2/          Better Use 3/
       1B              $ 55,907
       1C                                          $ 2,042
       1E                                                                    $ 2,880
      Totals           $ 55,907                      $ 2,042                 $ 2,880


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.

3/      Funds Put to Better Use are costs that will not be expended in the future if our
        recommendations are implemented. Specifically, we estimate that if the owner of
        Uptown Towers Apartments is required to stop paying a management fee on the
        commercial space from residential income $2,880 will be available in the next
        year to reduce HUD subsidy payments or to deposit into the residual receipts
        account.




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                   Appendix B

AUDITEE COMMENTS




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                                                                    Appendix C

                     DISTRIBUTION OUTSIDE OF HUD

The Honorable Joseph Lieberman, Ranking Member, Committee on Government Affairs
The Honorable Susan M. Collins, Chairman, Committee on Government Affairs
The Honorable Thomas M Davis, III, Chairman, Committee on Government Reform
The Honorable Henry A. Waxman, Ranking Member, Committee on Government
Reform
Elizabeth Meyer, Senior Advisor, Subcommittee on Criminal Justice
Clinton C. Jones, Senior Counsel, Committee on Financial Services
Kay Gibbs, Committee on Financial Services
Mark Calabria, Committee on Banking, Housing, and Urban Affairs
W. Brent Hall, U.S. General Accounting Office (HallW@GAO.GOV)
Steve Redburn, Chief Housing Branch, Office of Management and Budget
Linda Halliday, Department of Veterans Affairs, Office of Inspector General




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