oversight

RVA Properties, Inc., Farmington Hills, MI; Multifamily Equity Skimming of More Than $270,000 From Four Projects

Published by the Department of Housing and Urban Development, Office of Inspector General on 2004-12-22.

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

                                              U.S. Department of Housing and Urban Development
                                              Office of Inspector General for Audit, Region V
                                              Ralph H. Metcalfe Federal Building
                                              77 West Jackson Boulevard, Suite 2646
                                              Chicago, Illinois 60604-3507

                                              Phone (312) 353-7832 Fax (312) 353-8866
                                              Internet http://www.hud.gov/offices/oig/



                                                                         MEMORANDUM NO.
                                                                              2005-CH-1801

December 22, 2004

MEMORANDUM FOR: Robert M. Brown, 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: RVA Properties Inc.
         Multifamily Equity Skimming
         Farmington Hills, MI

                                    INTRODUCTION

We reviewed the records of RVA Properties, Inc., to determine whether it used project
funds in compliance with the Regulatory Agreements and the U.S. Department of Housing
and Urban Development’s (HUD) requirements. RVA Properties, Inc., management agent,
inappropriately used $271,940 from four projects while the projects were in a non-surplus
cash position.

                                     BACKGROUND

RVA Properties, Inc., was incorporated in the State of Michigan in February 1990. It operates
as a property management, real estate, and marketing consultant; land developer; and real
estate agent sales agent. RVA Properties, Inc., was contracted by project owners to manage
Taylor Lake Manor, Phillip C. Sims Senior Apartments, Pontiac Townhouse Apartments
Cooperative, Slidell Senior Apartments, and Ellis Manor Apartments. Cooper’s Lake Manor,
Inc., Jefferson-Chalmers Non-Profit Senior Housing Corporation, Pontiac Townhouse
Apartments Cooperative, Slidell Senior Citizens Residence, Inc., and Greater Grace Temple
Non-Profit Housing Corporation are the owners of the five projects, respectively.



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                             METHODOLOGY AND SCOPE

Our review covered the period between January 1, 2000, and December 31, 2001. We
interviewed HUD’s staff, and employees of RVA Properties, Inc., Jefferson-Chalmers Non-
Profit Senior Housing Corporation, Pontiac Townhouse Apartments Cooperative, Greater
Grace Temple Non-Profit Housing Corporation, and The Fourmidable Group. The
Fourmidable Group, a property management company, took over the management of Slidell
Senior Apartments and Taylor Lake Manor after RVA Properties, Inc., was removed as
management agent. We reviewed the projects’ files including bank statements, invoices,
Regulatory Agreements, and audited financial statements for fiscal years 2000 and 2001. We
also reviewed HUD Handbooks 4370.2, REV-1, CHG-1, and 4381.5, REV-2; 24 Code of
Federal Regulations, part 24; Title 12 of the United States Code, sections 1715z-4a and 1735f-
15; and Title 31 of the United States Code, section 3801.

                                  RESULTS OF REVIEW

Cooper’s Lake Manor, Inc., Jefferson-Chalmers Non-Profit Senior Housing Corporation,
Pontiac Townhouse Apartments Cooperative, Slidell Senior Citizens Residence, Inc., and/or
RVA Properties, Inc., inappropriately used $271,940 of Taylor Lake Manor’s, Phillip C.
Sims Senior Apartments’, Pontiac Townhouse Apartments Cooperative’s, and Slidell
Senior Apartments’ (Projects) funds between January 1, 2000, and December 31, 2001.
The inappropriate expenses included $23,239 for ineligible expenses and $248,701 for
unsupported expenses. We provided RVA Properties, Inc., the Projects’ owners, and
HUD’s staff schedules of the inappropriate expenses. The Projects were in a non-surplus
cash position when the funds were improperly used. As a result, funds were not used
efficiently and effectively, and fewer funds were available for the Projects’ normal
operations.

                                   Federal Requirements

The Projects’ Regulatory Agreements require that the Projects or their agents not—without
prior written approval of HUD—assign, transfer, dispose of, or encumber any personal
property, including rents or charges, and shall not disburse or pay out any funds except as
provided in the Building Loan Agreement.

The Projects’ Regulatory Agreements, paragraph 11(c), states that neither the Project nor its
agents shall make any payments for services, supplies, or materials unless such services are
actually rendered for the Project or such supplies or materials are delivered to the Project and
are reasonably necessary for its operation.

Paragraph 6 of the Projects’ Regulatory Agreements states that the owners may not, without
prior written approval of the Federal Housing Administration’s Commissioner, assign,
transfer, dispose of, or encumber any personal property of the Projects, including rents, or pay
out any funds, other than from surplus cash, except for reasonable operating expenses and
necessary repairs, or make or receive and retain any distributions of assets or any income of

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any kind of the Projects, except from surplus cash and except under certain conditions,
including the requirements to comply with all outstanding notices for proper maintenance of
the Projects.

Paragraph 17 of the Projects’ Regulatory Agreement defines a distribution as any withdrawal
or taking of cash or other assets of the Project other than for mortgage payments or for
payment of reasonable expenses incident to its construction, operation, and maintenance.

RVA Properties, Inc.’s Management Agreement with the Projects, paragraph 3, requires
compliance with the Projects’ Regulatory Agreement and HUD Handbooks, notices, or
other policy directives that relate to the management of the Project. Paragraph 4 requires
RVA Properties, Inc., to assure that all expenses of the Project are reasonable and
necessary and to take advantage of discounts, rebates, and similar money-saving
techniques. Paragraph 6(b) requires RVA Properties, Inc., to establish and maintain the
Project’s accounts, books, and records in accordance with HUD’s administrative
requirements and generally accepted accounting principles and in a condition that will
facilitate an audit.

HUD Handbook 4370.2, REV-1, CHG-1, “Financial Operation and Accounting Procedures
for Insured Multifamily Projects,” page 2-6, requires that all disbursements be supported
by approved invoices/bills or other supporting documentation.

HUD Handbook 4381.5, REV-2, “Management Agent Handbook,” provides guidance
regarding most aspects of HUD’s relationship and interaction with owners and management
agents of HUD-insured and HUD-assisted properties. Paragraph 1.6 of the Handbook states
that the property owners are ultimately responsible for a project’s compliance with HUD’s
regulations and requirements. HUD expects that owners will oversee the performance of their
management agents and take steps to correct deficiencies that occur.

24 Code of Federal Regulations, part 24.110, permits HUD to take administrative
sanctions against employees or recipients under HUD assistance agreements that violate
HUD’s requirements. The sanctions include debarment, suspension, or limited denial of
participation and are authorized by parts 24.300, 24.400, or 24.700, respectively.

HUD may impose administrative sanctions based upon the following conditions:

   •   Failure to honor contractual obligations or to proceed in accordance with contract
       specifications or HUD regulations (limited denial of participation);

   •   Deficiencies in ongoing construction projects (limited denial of participation);

   •   Violation of any law, regulation, or procedure relating to the application for financial
       assistance, insurance, or guarantee or to the performance of obligations incurred



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       pursuant to a grant of financial assistance or pursuant to a conditional or final
       commitment to insure or guarantee (limited denial of participation);

   •   Violation of the terms of a public agreement or transaction so serious as to affect the
       integrity of an agency program such as a history of failure to perform or unsatisfactory
       performance of one or more public agreements or transactions (debarment);

   •   Any other cause so serious or compelling in nature that it affects the present
       responsibility of a person (debarment); or

   •   Material violation of a statutory or regulatory provision or program requirements
       applicable to a public agreement or transaction, including applications for grants,
       financial assistance, insurance, or guarantees, or to the performance of
       requirements under a grant, assistance award, or conditional or final commitment to
       insure or guarantee (debarment).

Title 12, United States Code, section 1715z-4a, “Double Damages Remedy for Unauthorized
Use of Multifamily Housing Project Assets and Income,” allows the U.S. Attorney General to
recover double the value of any housing project assets or income that was used in violation of
the Regulatory Agreement or any applicable regulations, plus all costs relating to the actions,
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 making distributions to owners while the project is in a non-surplus
cash position.

                                     Recommendations

We recommend that HUD’s Director of Multifamily Housing Hub, Detroit Field Office,
ensure Cooper’s Lake Manor, Inc., Jefferson-Chalmers Non-Profit Senior Housing
Corporation, Pontiac Townhouse Apartments Cooperative, Slidell Senior Citizens Residence,
Inc., and/or RVA Properties, Inc.,

A. Reimburse the appropriate Projects’ Reserve Capital Account $23,239 for the
   ineligible payments from non-Project funds (see appendix A).

B. Provide documentation for the $248,701 of unsupported payments. If adequate
   documentation cannot be provided, Cooper’s Lake Manor, Inc., Jefferson-Chalmers
   Non-Profit Senior Housing Corporation, Pontiac Townhouse Apartments Cooperative,

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      Slidell Senior Citizens Residence, Inc., and/or RVA Properties, Inc., should reimburse
      the appropriate Reserve Capital Account for the amount that cannot be supported from
      non-Project funds (see appendix A).

We also recommend that HUD’s Director of Multifamily Housing Hub, Detroit Field Office,
in conjunction with HUD’s Office of Inspector General,

C. Pursue double damages remedy for unauthorized use of multifamily housing project
   assets and income if Cooper’s Lake Manor, Inc., Jefferson-Chalmers Non-Profit Senior
   Housing Corporation, Pontiac Townhouse Apartments Cooperative, Slidell Senior
   Citizens Residence, Inc., and/or RVA Properties, Inc., does not appropriately reimburse
   the Reserve Capital Account for the ineligible and unsupported payments cited in this
   report.

We also recommend that the Director of HUD’s Departmental Enforcement Center

D. Pursue administrative sanctions against Cooper’s Lake Manor, Inc., Jefferson-Chalmers
   Non-Profit Senior Housing Corporation, Pontiac Townhouse Apartments Cooperative,
   Slidell Senior Citizens Residence, Inc., and/or RVA Properties, Inc.

                         SCHEDULE OF QUESTIONED COSTS

                       Recommendation                   Type of Questioned Costs
                          Number                      Ineligible 1/ Unsupported 2/

                              A                      $23,239
                              B                                       $248,701
                             Total                   $23,239          $248,701


1/          Ineligible costs are costs charged to a HUD-financed or 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 insured program or
            activity when eligibility cannot be determined at the time of the 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 cost. 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.

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

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action is considered unnecessary. Additional status reports are required at 90 days and 120
days after the report is issued for any recommendation without a management decision. Also,
please furnish us copies of any correspondence or directives issued because of the audit.
If you or your staff has any questions, please contact Thomas Towers, Assistant Regional
Inspector General for Audit, at (313) 226-6280, extension 8062, or me at (312) 353-7832.




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Appendix A

             SCHEDULE OF QUESTIONED COSTS BY PROJECT

Recommendation                                       Type of Questioned Costs
   Number        Project                             Ineligible    Unsupported

      A          Pontiac Townhouse Apartments        $9,101
                 Taylor Lake Manor                    6,960
                 Slidell Senior Apartments            5,701
                 Phillip C. Sims Senior Apartments    1,477

      B          Pontiac Townhouse Apartments Cooperative         $ 20,262
                 Taylor Lake Manor                                  17,223
                 Slidell Senior Apartments                         103,482
                 Phillip C. Sims Senior Apartments                 107,734
    Totals                                         $23,239        $248,701




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