AUDIT REPORT IVAN WOODS SENIOR APARTMENTS MULTIFAMILY EQUITY SKIMMING LANSING, MICHIGAN 2005-CH-1013 AUGUST 5, 2005 OFFICE OF AUDIT, REGION V CHICAGO, ILLINOIS Exit Table of Contents Issue Date August 5, 2005 Audit Report Number 2005-CH-1013 TO: Barbara Chiapella, Director of Detroit Multifamily Housing Hub, 5FHMLA Margarita Maisonet, Director of Departmental Enforcement Center, CV FROM: Heath Wolfe, Regional Inspector General for Audit, 5AGA SUBJECT: Management Agents and/or Owner of Ivan Woods Senior Apartments in Lansing, Michigan, Improperly Used Project Funds HIGHLIGHTS What We Audited and Why We reviewed the books and records of Ivan Woods Senior Apartments (project), a 90-unit multifamily housing project in Lansing, Michigan. We initiated the review based on a request from the Detroit Field Office of Multifamily Housing Hub for the U.S. Department of Housing and Urban Development (HUD). The review was also part of our efforts to combat multifamily equity skimming on HUD’s Federal Housing Administration insurance fund. Our objective was to determine whether the owner/management agents used project funds in compliance with the regulatory agreement and HUD’s requirements. What We Found Maplegrove Property Management, LLC (Maplegrove), the project’s former identity of interest management agent; Keystone Property Management, Inc. (Keystone), the project’s current management agent; and/or Ivan Woods Limited Dividend Housing Association Limited Partnership (Partnership), the project’s owner, inappropriately used $9,928 in project funds from June 2002 through April 2005 when the project was in a non-surplus cash position. Further, Maplegrove charged the project an additional $262 in excessive management fees that were not paid as of April 30, 2005. Maplegrove and/or the Partnership also lacked documentation to support that an additional $3,089 in project funds were properly Exit Table of Contents used. We provided Maplegrove, Keystone, and/or the Partnership schedules of the inappropriate disbursements and/or unsupported payments. What We Recommend We recommend that HUD’s director of Detroit Multifamily Housing Hub ensure that the Partnership, Keystone, and/or Maplegrove (1) reimburse the project's reserve for replacement account and/or HUD's Federal Housing Administration insurance fund for the inappropriate expenses, (2) provide documentation to support the unsupported payments or reimburse the appropriate amount to the project’s reserve account and/or the Federal Housing Administration insurance fund that cannot be adequately supported, and (3) implement procedures and controls. We also recommend that HUD’s director, in conjunction with HUD’s Office of Inspector General, pursue double damages remedies if the Partnership, Maplegrove, and/or Keystone do not make the reimbursement. We also recommend that HUD’s director of Departmental Enforcement Center impose civil money penalties against the Partnership, Maplegrove, Keystone, and/or their principals/officers for the inappropriate use of project funds. For each recommendation without a management decision, please respond and provide status reports in accordance with HUD Handbook 2000.06, REV-3. Please furnish us copies of any correspondence or directives issued because of the audit. Auditee’s Response We provided our discussion draft audit report to the Partnership’s agent, Maplegrove’s managing member, Keystone’s president, and HUD’s staff during the review. We held an exit conference on July 11, 2005. We asked the Partnership’s agent, Maplegrove’s managing member, and Keystone’s president to provide comments on our discussion draft audit report by July 15, 2005. Maplegrove’s managing member and Keystone’s president provided written comments dated July 14, 2005, and July 1, 2005, respectively. The Partnership’s agent did not provide any written comments as of July 28, 2005. Maplegrove’s managing member and Keystone’s president generally agreed with our finding. However, Keystone’s president disagreed that expenses related to the Partnership’s low-income housing tax credits were inappropriate. Further, Maplegrove’s managing member and Keystone’s president did not agree with our recommendations regarding the pursuit of double damages remedies and the imposition of civil money penalties. The complete text of the written responses, along with our evaluation of those responses, can be found in appendix B of this report. 2 Exit Table of Contents TABLE OF CONTENTS Background and Objectives 4 Results of Audit Finding: Management Agents and/or Owner Inappropriately Used or Lacked 5 Supporting Documentation for the Use of More Than $13,000 in Project Funds Scope and Methodology 9 Internal Controls 10 Appendixes A. Schedule of Questioned Costs 12 B. Auditee Comments and OIG’s Evaluation 13 C. Federal Requirements 22 3 Exit BACKGROUND AND OBJECTIVE Ivan Woods Senior Apartments (project) is a 90-unit multifamily housing project in Lansing, Michigan. The project is insured under section 223(f) of the National Housing Act, and its regulatory agreement was executed on June 12, 2002. The project’s owner is Ivan Woods Limited Dividend Housing Association Limited Partnership (Partnership). Maplegrove Property Management (Maplegrove) is the project’s former identity of interest management agent. Keystone Property Management (Keystone) is the project’s current management agent. We initiated the review based on a request from the Detroit Field Office of Multifamily Housing Hub for the U.S. Department of Housing and Urban Development (HUD). The review was also part of our efforts to combat multifamily equity skimming on HUD’s Federal Housing Administration insurance fund. Our objective was to determine whether the owner/management agents used project funds in compliance with the regulatory agreement and HUD’s requirements. 4 Exit Table of Contents RESULTS OF AUDIT Finding: Management Agents and/or Owner Inappropriately Used or Lacked Supporting Documentation for the Use of More Than $13,000 in Project Funds Maplegrove, Keystone, and/or the Partnership improperly used $9,928 of project funds from June 2002 through April 2005 when the project was in a non-surplus-cash position. The inappropriate disbursements included $2,279 in excessive management fees, $5,700 for expenses related to the Partnership’s low-income housing tax credits, and $1,949 for late fees/finance charges. Further, Maplegrove charged the project an additional $262 in excessive management fees that were not paid as of April 30, 2005. Maplegrove and/or the Partnership also lacked documentation to support that an additional $3,089 in project funds were properly used. The problems occurred because the Partnership, Maplegrove, and Keystone lacked effective procedures and controls over the use of project funds. As a result, fewer funds were available for debt service, and project funds were not used efficiently and effectively. The partnership paid management agents $2,279 in excessive management fees The Partnerhip paid Maplegrove and Keystone excess management fees of $2,279 from June 2002 through April 2005 when the project was in a non-surplus-cash position. The Partnerhip paid Maplegrove management fees totaling $26,965 from June 2002 through September 2003. However, Maplegrove only earned $25,389 during this period. The following schedule summarizes the payments to Maplegrove. Management fees Over(under) Year Paid Earned payment 2002 $16,779 $13,170 $3,609 2003 10,186 12,219 (2,033) Totals $26,965 $25,389 $1,576 The underpayment of $2,033 during 2003 occurred because Maplegrove reduced its management fees for February and March 2003 by $3,218 to offset excessive management fees paid during 2002 and 2003. Maplegrove also charged the project $5,193 in management fees for August, October, and November 2003. Maplegrove only earned $4,921 of the fees. The 5 Exit Table of Contents Partnership has not paid Maplegrove for these fees. However, the $262 in excess fees are carried on the project’s books as an accounts payable to Maplegrove. The accounts payable to Maplegrove as of April 30, 2005, was $52,477. The overpayments during 2002 occurred because Maplegrove included 1 percent of total monthly income for consulting fees along with 4 percent of total monthly income for management fees. Beginning April 2003, the Partnership paid Maplegrove a flat monthly rate of $1,731. Maplegrove’s accounts payable clerk said she followed the instructions provided by Maplegrove’s former chief accountant to pay the flat monthly fee. The Partnership paid Keystone management fees totaling $31,977 from December 2003 through April 2005. However, Keystone only earned $31,274 during this period. The following schedule summarizes the payments to Keystone. Management fees Over Year Paid Earned payment 2003 $1,941 $1,900 $41 2004 22,163 21,667 496 2005 7,873 7,707 166 Totals $31,977 $31,274 $703 The overpayments occurred because Keystone determined its management fee based on 4 percent of the project’s total monthly income. Keystone’s vice president said Keystone followed its management agreement with the Partnership. She did not know Keystone included income HUD does not consider residential income. Keystone repaid the $703 in excessive management fees on July 1, 2005, by depositing $703 into the project’s operating account. Management agents inappropriately used more than $7,500 in project funds Maplegrove and Keystone inappropriately disbursed $7,649 in project funds for expenses related to the Partnerhip’s low-income housing tax credits and late fees/finance charges. Maplegrove’s disbursements of $5,664 of the $7,649 occurred from July 2002 through November 2003. Keystone disbursed the remaining $1,985 from December 2003 through June 2004. The low-income housing tax credits and late fees/finance charges were not reasonable and necessary expenses of the project. The following table identifies the inappropriate disbursements. Inappropriate Maplegrove Keystone disbursements 2002 2003 2003 2004 Totals Tax credits $3,000 $1,350 $1,350 $5,700 Fees/charges 531 783 $179 456 1,949 Totals $3,531 $2,133 $179 $1,806 $7,649 6 Exit Table of Contents The disbursements for the Partnership’s low-income housing tax credits included annual compliance monitoring fees to the Michigan State Housing Development Authority and tenant compliance fees to a certified public accounting firm. The late fees/finance charges were for utilities, pest control, glass repair, heating and cooling, specialty retail stores, and advertising. Maplegrove’s accounts payable clerk said she did not know the expenses related to the Partnerhip’s low-income housing tax credits and late fees/finance charges were not eligible project expenses. She said she has not received training or been provided HUD handbooks regarding eligible project expenses. Keystone’s regional property manager said she was not aware that expenses related to project owners’ low-income housing tax credits and late fees/finance charges were not eligible project expenses. Keystone repaid the $635 in late fees/finance charges on July 1, 2005, by depositing $635 into the project’s operating account. Maplegrove and/or owner lacked documentation for the use of more than $3,000 in project funds Maplegrove and/or the Partnerhip also lacked documentation to support that an additional $3,089 in project funds was properly used. The unsupported disbursements included $1,062 and $2,027 to Maplegrove in 2002 and 2003, respectively. Maplegrove’s director of accounting could not explain why Maplegrove lacked supporting documentation for the unsupported payments. The Partnership has fewer project funds to make vendor and reserve payments The Partnership has fewer project funds to make vendor and reserve fund for replacement payments due to the inappropriate disbursements. HUD’s staff for the Detroit Field Office of Multifamily Housing Hub were not aware of the inappropriate and unsupported payments. HUD approved the use of $38,897 from the project’s reserve fund for replacement account to pay for vendor payments. HUD’s director of asset management for the Detroit Field Office of Multifamily Housing Hub said HUD would not have approved the use of the project’s reserve if it had known about the inappropriate and unsupported disbursements. As a result, the project’s reserve as of May 25, 2005, was $94,702, $294,939 below HUD’s minimum requirement of $389,641 for the project. 7 Exit Table of Contents Recommendations We recommend that HUD’s director of Multifamily Housing Hub, Detroit Field Office, ensure that the Partnership, Maplegrove, and/or Keystone 1A. Reduce the project’s accounts payable to Maplegrove by $1838 ($262 for the excessive management fees charged but not paid and $1,576 for the excessive management fees paid). 1B. Transfer $1,338 ($703 for excessive management fees paid to Keystone and $635 for late fees/finance charges) from the project’s operating account to its reserve for replacement and/or reimburse HUD’s Federal Housing Administration for the inappropriate expenses cited in this report that Keystone repaid to the project’s operating account. 1C. Reimburse the project's reserve for replacement and/or HUD’s Federal Housing Administration insurance fund $7,014 ($5,700 for the Partnership’s low-income housing tax credits and $1,314 for late fees/finance charges) for the inappropriate expenses. 1D. Provide documentation to support the $3,089 in unsupported payments or reimburse the project's reserve for replacement and/or the Federal Housing Administration insurance fund for the applicable portion. 1E. Implement procedures and controls to ensure project funds are used according to the regulatory agreement, the project owner's/management agent's certifications, and HUD’s handbooks. We also recommend that HUD’s director of Multifamily Housing Hub, Detroit Field Office, in conjunction with HUD’s Office of Inspector General (OIG), 1F. Pursues double damages remedies if the Partnership and/or Keystone do not reduce the project’s accounts payable to Maplegrove and/or the Partnership, Maplegrove, and/or Keystone do not reimburse the project’s reserve for replacement and/or the Federal Housing Administration insurance fund for the inappropriate expenses. We also recommend that HUD’s director of Departmental Enforcement Center 1G. Impose civil money penalties against the Partnership, Maplegrove, and/or Keystone for the payment of inappropriate expenses that violated the project’s regulatory agreement. 8 Exit Table of Contents SCOPE AND METHODOLOGY We performed the review at HUD’s Detroit and Grand Rapids Field Offices, Maplegrove’s and Keystone’s offices, and the project from February through April 2005. To accomplish our objective, we interviewed HUD’s staff; employees from the project, Maplegrove, and Keystone; and Maplegrove’s managing member. To determine whether the owner/management agent used project funds in compliance with the regulatory agreement and HUD’s requirements, we reviewed • The Partnership’s regulatory agreement with HUD, • HUD’s files and correspondence related to the project, • HUD’s Real Estate Management System and Financial Assessment Subsystem information related to the project, • The project’s financial records, • The Partnership’s audited financial statements for the years ending December 31, 2002, and 2003, • The Partnership’s management agreements with Maplegrove and Keystone, and • The State of Michigan’s Department of Labor and Economic Growth concerning ownership information for Maplegrove and Keystone. We also reviewed Title 12, United States Code, sections 1715 and 1735; Title 31, United States Code, section 3801; 24 CFR [Code of Federal Regulations], parts 24 and 207; and HUD Handbooks 2000.06, REV-3; 4350.1, REV-1; 4370.2, REV-1; and 4381.5, REV-2. The review covered the period January 1, 2003, to December 31, 2004. This period was adjusted as necessary. We performed our review in accordance with generally accepted government auditing standards. 9 Exit Table of Contents INTERNAL CONTROLS Internal control is an integral component of an organization’s management that provides reasonable assurance that the following objectives are being achieved: • Effectiveness and efficiency of operations, • Reliability of financial reporting, • Compliance with applicable laws and regulations, and • Safeguarding resources. Internal controls relate to management’s plans, methods, and procedures used to meet its mission, goals, and objectives. Internal controls include the processes and procedures for planning, organizing, directing, and controlling program operations. They include the systems for measuring, reporting, and monitoring program performance. Relevant Internal Controls We determined the following internal controls were relevant to our audit objectives: • Program operations - Policies and procedures that management has implemented to reasonably ensure that a program meets its objectives. • Validity and reliability of data - Policies and procedures that management has implemented to reasonably ensure that valid and reliable data are obtained, maintained, and fairly disclosed in reports. • Compliance with laws and regulations - Policies and procedures that management has implemented to reasonably ensure that resource use is consistent with laws and regulations. • Safeguarding resources - Policies and procedures that management implemented to reasonably ensure that resources are safeguarded against waste, loss, and misuse. We assessed the relevant controls identified above. A significant weakness exists if management controls do not provide reasonable assurance that the process for planning, organizing, directing, and controlling program operations will meet the organization’s objectives. 10 Exit Table of Contents Significant Weaknesses Based on our review, we believe the following items are significant weaknesses: • The Partnership, Maplegrove, and Keystone lacked effective procedures and controls over the use of project funds (see finding). 11 Exit Table of Contents Appendixes Appendix A SCHEDULE OF QUESTIONED COSTS Recommendation Ineligible 1/ Unsupported 2/ Number 1A $1,838 1B 1,338 1C 7,014 1D $3,089 Totals $10,190 $3,089 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 those costs charged to a HUD-financed or HUD-insured program or activity when we cannot determine eligibility at the time of audit. Unsupported costs require a 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. 12 Exit Table of Contents Appendix B AUDITEE COMMENTS AND OIG’S EVALUATION Ref to OIG Evaluation Auditee Comments 13 Exit Table of Contents Ref to OIG Evaluation Auditee Comments 14 Exit Table of Contents Ref to OIG Evaluation Auditee Comments Comment 1 Comment 2 15 Exit Table of Contents Ref to OIG Evaluation Auditee Comments 16 Exit Table of Contents Ref to OIG Evaluation Auditee Comments 17 Exit Table of Contents Ref to OIG Evaluation Auditee Comments Comment 3 Comment 5 Comment 4 Comment 5 Comment 7 18 Exit Table of Contents Ref to OIG Evaluation Auditee Comments Comment 4 Comment 5 Comment 7 Comment 6 Comment 7 19 Exit Table of Contents Ref to OIG Evaluation Auditee Comments Comment 2 20 Exit Table of Contents OIG Evaluation of Auditee Comments Comment 1 Reimbursement to the project’s reserve fund for replacement will return funds used from the reserve fund for replacement to pay for vendor payments. In addition, disbursements from the reserve fund for replacement require HUD approval; therefore, HUD can ensure that the use of the funds is for eligible project expenses. Comment 2 We adjusted our report by removing Keystone lacked supporting documentation to support project funds were properly used. We also reduced the amount Maplegrove, Keystone, and/or the Partnership lacked documentation to support that project funds were properly used by $29,826. We also removed that Keystone’s regional property manager could not explain why Keystone lacked supporting documentation for the unsupported payments. We adjusted our report to recommend the Partnership, Maplegrove, and/or Keystone provide documentation to support the $3,089 in unsupported payments or reimburse the project's reserve for replacement and/or the Federal Housing Administration insurance fund the applicable portion. Comment 3 We adjusted our report by adding Keystone repaid the $703 in excessive management fees on July 1, 2005, by depositing $703 in the project’s operating account. Comment 4 We adjusted our report by adding Keystone repaid the $635 in late fees/finance charges on July 1, 2005, by depositing $635 in the project’s operating account. Comment 5 We added a recommendation for the Partnership, Maplegrove, and/or Keystone to transfer $1,338 ($703 for excessive management fees paid to Keystone and $635 for late fees/finance charges) from the project’s operating account to its reserve for replacement and/or reimburse HUD’s Federal Housing Administration for the inappropriate expenses cited in this report that Keystone repaid to the project’s operating account. Comment 6 We adjusted our report by reducing the amount of project funds Maplegrove, Keystone, and/or the Partnership improperly used by $2,415. We also deleted the disbursements for the Partnership’s low-income housing tax credits that included salary expenses for Keystone’s tax credit specialist. Comment 7 We adjusted our report to recommend the Partnership, Maplegrove, and/or Keystone reimburse the project's reserve for replacement and/or HUD’s Federal Housing Administration insurance fund $7,014 ($5,700 for the Partnership’s low- income housing tax credits and $1,314 for late fees/finance charges) for the inappropriate expenses. 21 Exit Table of Contents Appendix C FEDERAL REQUIREMENTS The Partnership’s regulatory agreement, paragraph 6, mandates that the owner may not, without prior written approval of the secretary of HUD, assign, transfer, dispose of, or encumber any personal property of the project, including rents, or pay out any funds except for surplus cash, except for reasonable operating expenses and necessary repairs, and make or receive and retain any distribution of assets or any income of any kind of the project except surplus. Paragraph 9(d) of the regulatory agreement states the books and accounts of the operations of the mortgaged property and of the project shall be kept in accordance with the requirements of the secretary. Paragraph 13(g) of the regulatory agreement defines a distribution as any withdrawal or taking of cash or any assets of the project, excluding payment for reasonable expenses incident to the operation and maintenance of the project. The Partnership and Maplegrove certified in their project owner’s/management agent’s certification, dated November 16, 2001, that they have executed or will execute, within 30 days after receiving approval(s), a management agreement for the project. The management agreement provides or will provide that the management agent will manage the project for 4 percent of residential and commercial income collected. The Partnership and Maplegrove agreed to comply with the project’s regulatory agreement; HUD handbooks, notices, or other policy directives relating to the management of the project; and HUD requirements regarding payment and reasonableness of management fees. Maplegrove agreed to assure all expenses of the project are reasonable and necessary. The Partnership and Keystone certified in their project owner’s/management agent’s certification, dated December 24, 2003, that they have executed or will execute, within 30 days after receiving approval(s), a management agreement for the project. The management agreement provides or will provide that the management agent will manage the project for 4 percent of residential income collected. The Partnership and Keystone agreed to comply with the project’s regulatory agreement; HUD handbooks, notices, or other policy directives relating to the management of the project; and HUD requirements regarding payment and reasonableness of management fees. Keystone agreed to assure all expenses of the project are reasonable and necessary. HUD Handbook 4370.2, REV-1, CHG-1, page 2-6, requires that all disbursements must be supported by approved invoices/bills or other supporting documentation. Page 2-6 also requires that all disbursements be used to make mortgage payments and required deposits, and pay reasonable expenses necessary for the operations and maintenance of the project and pay distributions of surplus cash. HUD Handbook 4381.5, REV-2, paragraph 1.6(a), states the property owners are ultimately responsible for a project’s compliance with HUD’s regulations and requirements. HUD expects owners to oversee the performance of their management agents and take steps to correct deficiencies that occur. 22 Exit Table of Contents Title 12, United States Code, section 1715z-4a, “Double Damages Remedy for Unauthorized Use of Multifamily Housing Project Assets and Income,” allows the attorney general to recover double the value of any project assets or income that were used in violation of the regulatory agreement or any applicable regulation, plus all costs relating to the action, including but not limited to reasonable attorney and auditing fees. Title 12, United States Code, section 1735f-15, “Civil Money Penalties Against Multifamily Mortgagors,” allows the secretary of housing and urban development to impose a civil money penalty of up to $25,000 per violation against a mortgagor with five or more living units and a HUD-insured mortgage. A penalty may be imposed for any knowing and material violation of the regulatory agreement by the mortgagor, such as paying out any funds for expenses that were not reasonable and necessary project operating expenses or for making distributions to owners while a project is in a non-surplus-cash position. 23 Exit Table of Contents
Management Agents and/or Owner of Ivan Woods Senior Apartments in Lansing, Michigan, Improperly Used Project Funds
Published by the Department of Housing and Urban Development, Office of Inspector General on 2005-08-05.
Below is a raw (and likely hideous) rendition of the original report. (PDF)