oversight

Massachusetts Housing Finance Agency - Multifamily Property Demonstration Disposition Program

Published by the Department of Housing and Urban Development, Office of Inspector General on 2005-01-19.

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

                                      U.S. Department of Housing and Urban Development
                                      Office of Regional Inspector General for Audit, Region 1
                                      Thomas P. O’Neill, Jr. Federal Building
                                      10 Causeway Street, Room 370
                                      Boston, MA.02222-1092

                                      Phone (617) 994-8380   Fax (617) 565-6878
                                      Internet http://www.hud.gov/offices/oig


                                     Memorandum Number: 2005-BO-1002

                                     Date: January 19, 2005

MEMORANDUM FOR:                  Ellen R. Connolly, Director of New England Multifamily
                                 Hub, 1AH



FROM:                            John A. Dvorak, Regional Inspector General for Audit, 1AGA

SUBJECT:                         Massachusetts Housing Finance Agency - Multifamily
                                 Property Demonstration Disposition Program

                                      INTRODUCTION

We audited the Demonstration Disposition (Demo-Dispo) program administered by
Massachusetts Housing Finance Agency (Agency). The objective of our audit was to determine
the propriety of the use of funds under the U.S. Department of Housing and Urban
Development’s (HUD) Demo-Dispo program by the Agency and the extent of the Agency’s
oversight of the program.

Under the Demo-Dispo program, HUD provided the Agency more than $535 million during the
10-year period ended May 2004. As a result of HUD investing over $535 million under the
program, HUD gained 11 revitalized properties with 1,850 units. Our review disclosed that the
costs charged by the Agency for the expenses reviewed were supported and reasonable and met
the requirements of the agreement between HUD and the Agency.

                              METHODOLOGY AND SCOPE

To determine the propriety of the use of funds, we:

       •   Reviewed the Demo-Dispo Agreement, as amended, to determine HUD’s and the
           Agency’s responsibilities.

       •   Reviewed the Agency’s written procedures on procurement, management agents,
           property and management reviews, internal audit, operating budgets, security,
           accounting procedures, preliminary disposition plans, and final disposition plans to
           determine if procedures were followed.
    Telephone: (617) 994-8380           http://www.hud.gov/oig/oigindex.html                  Fax: (617) 565-6878




           •    Interviewed Boston Office of Housing staff, Agency staff, and HUD property
                management system specialists to determine their roles and responsibilities regarding
                the Demo-Dispo program.

           •    Reviewed the Agency’s operational controls regarding separation of duties,
                procurement, disbursements, and authorization to ensure that the controls were
                operating effectively and efficiently.

           •    Reviewed the Agency’s accounting controls to assure the reliability and integrity of
                financial reporting regarding postcode accounts and disbursement subsystems and
                controls over use of the HUD property management system.

           •    Reviewed Agency’s controls over the procurement process and discussed the
                procurement process with staff. Using a non-representative selection of contracts, we
                examined $59,551,169 in a universe of $297,498,723.1 We reviewed the expenditure
                for the contracts for the architect and the construction contractor that had the largest
                number of construction change orders. Our review was limited to the selected
                contracts, and the results may not be representative of the entire universe of contract
                costs.

           •    Reconciled a difference between the cash disbursement subsystem and general ledger
                subsystem.

           •    Selected the following operating expenses to review: architect and engineer fees,
                asset management, environmental hazard abatement, management fees, payroll,
                security contracts, and tenant relocation. We used a non-representative sample and
                based our selection on the total dollar amount of the expense and the dollar value for
                that expense in any given year in the audit period. We examined $13,245,816 from a
                universe of $300,733,531. We limited our review to the selected expenses, and the
                results may not be representative of the entire universe.

           •    Reviewed four categories of operating expenditures in which HUD directly paid vendors for
                expenses of the Demo-Dispo program. These four categories were activity supplies, flooring
                contract, heating fuel, and resident pay and totaled $838,369.

We conducted our audit between June 2004 and November 2004, covering the period
August 15, 1994 through May 31, 2004. When appropriate, the audit was extended to include
other periods. We conducted our audit in accordance with generally accepted government
auditing standards.




1
    The $297,498,723 consists of contract expenditures from operating activities and rehabilitation activities.


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                                         BACKGROUND

On September 30, 1993, our office issued a report, Management of Multifamily Property
Disposition Inventory Property Disposition Branch, 93-BO-113-0003, which found that the
Boston Office’s Multifamily Property Disposition Branch lacked the staffing necessary to
properly monitor and manage the inventory of 14 projects containing 1,878 dwelling units. This
report advised that the 14-project inventory in Boston was the oldest, the most physically
deteriorated, and most poorly managed in the country. Crime, drugs, and vandalism plagued
these areas. On September 16, 1993, HUD implemented a demonstration program through
which HUD would enter into an agreement with a State housing finance agency for the
management and disposition of the 14 HUD-owned properties.

On April 8, 1994, HUD selected the Massachusetts Housing Finance Agency (Agency) as the
public sector asset manager to administer the multifamily inventory in Boston, MA. The Agency
was responsible for developing cost-effective methods for improving day-to-day management of
14 HUD-owned properties. These properties were the 14 properties identified in the 1993 Office
of Inspector General (OIG) audit report. HUD entered into a contract with the Agency on
August 15, 1994, to integrate these HUD-owned properties into the Agency’s existing operations
for the purpose of managing and disposing of them. HUD agreed to waive certain requirements
normally imposed on Federal agencies pursuant to the Federal Property and Administrative
Services Act. HUD did, however, require the Agency to comply with the competitive bid
requirements and procedures set forth in the Management Agreement and the Agency’s
procurement procedures in procuring the goods and services. On July 28, 1995, HUD and the
Agency agreed to add a 15th property to the Demo-Dispo program.

For the 15 multifamily properties subject to this agreement, HUD either owned the property or
had taken possession of the property after a borrower stopped paying the HUD-insured
mortgage. All 15 properties are located in Boston, MA. and are under the jurisdiction of HUD’s
Boston office. HUD and the Agency indicated that the 15 properties contained 2,193 units on
July 28, 1995. As part of the Demo-Dispo program, the Agency reconfigured the physical layout
of several buildings and consolidated certain properties. As a result, the number of units
changed to 1,850, and the number of multifamily properties changed from 15 to 11. From
August 15, 1994, to December 3, 2004, the Agency renovated these properties and provided
interim management services leading to their final disposition. Appendix B delineates the
disposition of Demo-Dispo properties.

On November 14, 1996, HUD and the Agency amended their agreement to establish an
Indemnification Contingency Fund. Using this fund, HUD and the Agency worked to minimize
third-party contractor claims by use of specific terms and conditions in the Demo-Dispo
contracts. The Agency required this provision to protect itself against lawsuits or construction
arbitrations that might be filed against HUD. Negotiating this contingency delayed bids for
construction for 2 years because the Agency would not risk a lawsuit from contractors or tenants.
Therefore, HUD established an Indemnification Contingency Fund of $18.7 million of which
HUD's obligation to indemnify the Agency is limited to 50 percent of the claim.



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In March 2004, the General Accounting Office issued a report, HUD Single-Family and
Multifamily Property Programs, GAO-04-390, which identified that HUD had inadequate
controls resulting in questionable payments and potential fraud. This report stated that HUD
entered into an agreement that made HUD responsible for providing all the money needed to
complete the program while the Agency was responsible for developing and monitoring the
program. The report identified that HUD granted the Agency the flexibility to make payments
off budget. It identified that HUD spent more than $241 million as of September 30, 2002, on
expenditures that included abatement of environmental hazards, tenant relocation, and other off
budget expenses. As a result, OIG decided to examine operations at the Agency.

                                          RESULTS OF REVIEW

Our review disclosed that the Agency spent $535,690,337 from August 15, 1994, through
May 31, 2004, for the renovation, interim management, and ultimate disposition of HUD-owned
properties. The Agency reconfigured the 15 properties into 11 properties totaling 1,850
apartment units. The review also found that the costs charged by the Agency were supported
and reasonable, and met the requirements of the agreement for the cost reviewed. The Agency
also handled the rehabilitation budget separately and concurrently with the operations budget for
the properties, as required. Under the Demo-Dispo program, the Agency managed the
reconfiguration and the renovation of the properties while continuing to operate the 11 properties
as housing for low-income families.


                       From August 15, 1994 through May 31, 2004, HUD invested
                       more than $535 million under the Demonstation Disposition
                                                Program




                                                                            $234,956,806

                             $300,733,531




                                         Rehabilitation        Operations




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Rehabilitation Budget

Our review disclosed that the Agency prepared and obtained HUD approval on 11 separate
rehabilitation budgets, one for each property. The Agency charged rehabilitation expenses in the
rehabilitation budgets. The rehabilitation expenses include costs for architects, engineers,
general contractors, overhead allowances, and environmental hazard abatement including
asbestos removal, lead paint abatement, and treatment of soil contamination.

Contracting

The Agency spent $270,767,752 under construction contracts, which included $67,881,543 in
change orders (modifications) to these contracts. The change orders covered increased costs for
$33,062,852 in general contractors’ expenditures and $34,818,691 in environmental hazard
abatement costs. Under the Management Agreement, the Agency was required to award the
contracts under competitive bid. We reviewed the Agency’s award process and determined
whether the construction contracts and modifications were necessary for the renovation of the
HUD properties. Using a non-representative selection of contracts, we selected to review the
property, Roxse Homes, which had contracts totaling $59,551,169 and had the largest number of
construction change orders. Our review was limited to the contracts for Roxse Home and may
not be representative of the universe. However, we found no major procurement weaknesses in
the award and administration of the architect, engineering, and construction contracts for the
Roxse Homes property.

Architect’s Modifications

The Agency spent $26,730,971 in architects’ contracts to complete the renovations for all 11
properties. This included $10,381,303 for the original contracts, $13,435,548 in modifications,
and $2,914,120 to modify the Clerks of the Works contract. Roxse Homes had architectural
contracts totaling $5,947,249, which included $1,845,731 for the original contract, $3,626,732 in
modifications to the contract, and $474,786 in modifications to the Clerk of the Works contract.
The review of the contract modifications for Roxse Homes confirmed that all modifications had
HUD approval. The Agency also prepared a written justification supporting that each
modification was necessary for the renovation of the property. These changes dealt with
contaminated soil issues that were outside the original scope of the contract. The changes were
prompted when Massachusetts’ Department of Environmental Protection required the removal of
more than 50,000 cubic yards of topsoil to address soil contamination at Roxse Homes. Our
review also found that the modification to the Clerk of the Works contract was for increased
construction administrative service costs, and that the Agency had obtained HUD approval for
the modification. The increases in administrative service costs were caused by delays due to the
abatement of the soil contamination.




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Change Orders for Contractors

Roxse Homes had 300 change orders totaling $16,253,806. These change orders included 67
change orders for environmental hazards abatement totaling $5,686,656, and 233 change orders
for increases in general contractor costs totaling $10,567,150. We examined 18 change orders
whose value was $100,000 or more. The review of the change orders showed that the work
listed in the change orders was outside the scope of the original contract, the Agency had written
justification to support the change orders, and HUD had approved the change orders. Our
review also showed that the Agency's legal department had taken court action against
construction contractors, architects, and management agents that did not follow their contracts.
In addition, the Agency's legal counsel provided us the names of the violators, the nature of the
violations, and the actions taken against the violators.

Operating Budgets

The Agency submitted 11 operating budgets and HUD approved them. The operating budgets
included day-to-day expenses such as administration expenses, rental payments for tenant
relocation, office salaries, management fees, maintenance salaries, and supplies. We selected
seven categories of expenditures totaling $169,622,786 within the operating budgets of
$300,733,531. These seven categories were selected because of their dollar value or the unusual
nature of the cost involved. These seven categories were:

             Architect & engineer fees                       $8,107,873
             Asset management                               $16,851,865
             Environmental hazards                          $68,246,739
             Management fees                                 $7,579,295
             Repairs payroll                                $15,451,903
             Security payroll/contract                      $33,362,035
             Tenant relocation                              $20,023,077

After testing 100 expenditures totaling $13,245,816, we discontinued our testing because the
expenses reviewed were reasonable and necessary for the renovation and management of the
properties. We also found that the items were documented; approved by the appropriate Agency
staff; and proper expenses of the Demo-Dispo program.

Four Operating Categories of Direct Payments

Under the Demo-Dispo program, HUD directly paid the vendors for certain goods and services
delivered to the properties. The direct vendor payments for goods and services involved four
categories: (1) activity supplies, (2) flooring contract, (3) heating fuel, and (4) resident payments.
Deliveries to the properties were limited to $25,000, and the limit was adjusted to the need of the
property. Our review found that the Agency had controls ensuring that deliveries were signed by
an authorized person for the management agent and that the $838,369 expended in these four
categories was for necessary costs.




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Conclusion

Overall, our review disclosed that the Agency established adequate accounting and operational
controls to ensure that it supported valid expenditures of $535,690,337 and met the requirements
of its agreement with HUD. Under the HUD Demo-Dispo program, the Agency, using HUD
funding, renovated neglected properties to provide decent, safe, and sanitary housing for low-
income families. Appendix A shows pictures of some of the properties from 1993 (before the
Demo Dispo program) and 2004, while appendix B shows the new resident partnerships and/or
non-profit owners.




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      Telephone: (617) 994-8380     http://www.hud.gov/oig/oigindex.html        Fax: (617) 565-6878




                                                  Appendix A

     CAMFIELD GARDENS/ESTATES

     In 1993, the Camfield Gardens project consisted of a contiguous grouping of three-story and
     four-story buildings located on Camden Street and Lenox Street. Built in the late 1960s or early
     1970s, the complex could house up to 136 families. In 1993, the OIG inspector found air
     infiltration problems with most of the windows.




                                                                                     Camfield Gardens
                                                                                     in August 1993




     As part of the reconstruction, the Agency razed the building and reconfigured the property to a
     series of buildings with town house apartments. In 2004, the renamed Camfield Estates can
     house up to 102 families.




Camfield Estates
November 2004




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  GENEVA APARTMENTS

  In 1993, the Geneva project consisted of low-rise, three-story apartment buildings and one
  building of row-house style units on Geneva Street. Built in the 1960s or 1970s, this property
  could house up to 60 families. Before 1993, HUD had boarded up the row-house units due to
  their very poor condition including sloping floors and mildew. In 1993, the OIG inspector
  advised that rehabilitation of these row-house units might not be economically feasible and
  recommended that HUD obtain an engineer’s report to make a final determination of the future
  viability of these units.




                                                                                      Uninhabited row
                                                                                      houses at Geneva
                                                                                      in August 1993




  To renovate Geneva Apartments, the Agency razed all buildings at the property. The Agency
  constructed new buildings, reconfigured the property to townhouse-style apartments able to
  house up to 47 families, and landscaped the property.




Courtyard view at
renovated Geneva
property in
November 2004




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  In 1993, the vacant unit’s bathroom (pictured below) is in poor conditions with the bathroom
  sink on the floor and the toilet missing.




                                                                                       Bathroom of a
                                                                                       recently vacated
                                                                                       unit at Geneva in
                                                                                       August 1993




  In 2004, a vacant unit’s bathroom is clean. The renovated electrical and plumbing fixtures are in
  working condition.




Bathroom of a
recently vacated
unit at Geneva in
November 2004




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 GRANT MANOR

 In 1993, Grant Manor housed 185 families and consisted of: (a) a seven-story apartment building
 (b) a low-rise, four-story, apartment building and (c) several buildings of row-house-style units.
 The complex appeared to have been built in the 1960s or 1970s.




                                                                                       Grant Manor on
                                                                                       August 1993




 As part of the reconstruction, the Agency abated environmental hazards, upgraded the
 mechanical systems, reconfigured the unit-mix, replaced roofs, and repaired masonry. In
 November 2004, the property houses up to 179 families.




Grant Manor on
November 2004




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ROXSE HOMES

Through intercession by the court after protracted litigation, HUD obtained possession of Roxse
Homes on December 23, 1992. HUD instructed the former owners to turn over all records to
HUD’s contractual management company. At HUD’s request, OIG performed a separate audit
of Roxse Homes to ensure that all assets of the property were accounted for and turned over to
HUD’s contractual property manager. Issued June 30, 1993, this audit, Roxse Homes
Multifamily Project, 93-BO-212-1007 found that more than $429,000 in potential assets that
were not returned to the property when HUD took possession. Because of this separate audit, we
did not include Roxse Homes in our 1993 audit of the Multifamily Property Disposition
program; thus, OIG does not have any 1993 pictures of Roxse Homes. In 1993, Roxse Homes
consisted of 13 buildings containing 364 apartments, retail space, and office space.

 Renovated Roxse Homes in November 2004




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As part of the reconstruction, the Agency razed Roxse Homes because of the deteriorating
structural conditions at the site. As discussed in the Results section of this report, Roxse Homes
also had environmental hazards that HUD needed to correct—in particular, soil contamination.
In November 2004, the property houses up to 346 families in an eight-story building.

 A recently vacated unit at Roxse Homes in
 November 2004




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                                                Appendix B
                                     Demonstration Disposition Program

        Property             Final                           Ownership Type                    Disposition
                             Units                                                             Completed
    Camfield                  102      A resident controlled non-profit corporation            8/13/2003
    Estates
    Fieldstone Apts.          84       A non-profit corporation without any resident             6/2/2003
                                       association interest
    Franklin                 286       A limited partnership between the resident              12/13/2002
    Highlands                          association and a for profit general partner
    Geneva                    47       A partnership between the resident association and        9/1/2002
                                       an economic property corporation *
    Grant Manor              179       A limited partnership between the resident               2/11/2002
                                       association (minority interest) and a community
                                       property corporation
    Grove Hall               104       A limited liability company with a non-profit as         6/30/2004
                                       sole partner.**
    Roxse Homes              346       A limited partnership between the resident                3/4/2004
                                       association (minority interest) and a for profit
                                       corporation.
    Theroch                  191       A limited liability corporate partnership between         9/3/2004
                                       the resident association (minority interest***) and
                                       a community property corporation
    Sonoma, Maple,           100       A limited liability corporate partnership between        9/15/2004
    Schuyler                           the resident association (minority interest****)
                                       and a non-profit partner
    Washington               175       A limited liability corporate partnership between        9/30/2004
    Heights                            the resident association (majority interest*****)
                                       and a non-profit partner
    Academy                  236       A resident-controlled, non-profit corporation            12/3/2004
    Homes II
    Total units              1850

* This resident association has a goal to transition to tenant ownership 5 years from disposition.
**This resident association may become a member of the Limited Liability Company and co-
owner with minority interest upon meeting HUD/Agency guidelines.
*** This resident association may attain sole ownership or co-ownership with majority interest
upon meeting HUD/Agency guidelines.
**** After 4 years, this resident association may attain majority ownership and, by year 7, may
become sole owner upon meeting HUD/Agency guidelines.
***** After 3 years, this resident association may become sole owner upon meeting
HUD/Agency guidelines.




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