oversight

Housing Authority of Maricopa County - Mixed Finance Development Activities, Phoenix, AZ

Published by the Department of Housing and Urban Development, Office of Inspector General on 2005-03-14.

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

                                                               Issue Date
                                                                    March 14, 2005
                                                               Audit Report Number
                                                                    2005-LA-1002




TO:        Milan Ozdinec, Deputy Assistant Secretary, Office of the Deputy Secretary for
             Public Housing Investments, PI



FROM:      Joan S. Hobbs, Regional Inspector General for Audit, Los Angeles, 9DGA

SUBJECT:   Housing Authority of Maricopa County - Mixed-Finance Development Activities,
             Phoenix, AZ



                                 HIGHLIGHTS

 What We Audited and Why

           We reviewed the Housing Authority of Maricopa County’s (Authority)
           development and management of two mixed-finance housing projects–Rose
           Terrace and Maricopa Revitalization.

           The objectives of our review were to ensure that the Authority (1) followed the
           U.S. Department of Housing and Urban Development’s (HUD) approval
           requirements/conditions related to the disposal of 135 low-income public housing
           units as part of the overall development of its two mixed-finance housing projects;
           (2) obtained required approval from HUD for development of the projects; (3)
           made appropriate amendments to its Annual Contributions Contract (contributions
           contract) and Declaration of Trust to reflect both the disposition of involved
           housing units and development of the new mixed-finance units; and (4) made
           adjustments to its contributions contract unit count for budgetary purposes,
           including computation of operating subsidy, replacement housing, and capital
           grant funding eligibility.



                                            1
What We Found


           The Authority did not carry out its replacement housing projects as described in
           its approved disposition plans or obtain required HUD approval of its mixed-
           finance proposals for Rose Terrace and Maricopa Revitalization. Although HUD
           never approved the projects, the Authority went forward with them and invested
           more than $7.2 million of its Federal assets in the projects. Additionally, since
           the Authority did not obtain HUD approval for the mixed-finance projects, it also
           did not or could not make amendments to its Declaration of Trust, which is
           required by HUD to protect the low-income character of the developments and
           HUD’s interest. The failure to follow HUD’s development requirements has put
           the Authority’s $7.2 million investment at risk. The Authority also did not amend
           its contributions contract to reflect the changes resulting from the two projects.
           As a result, it has received more than $500,000 of operating subsidy and capital
           grant funds for the units in these projects to which it is not legally entitled. These
           deficiencies resulted from a failure of the Authority’s former Executive Director
           to ensure that HUD requirements were met during and after the development of
           the projects. This was compounded by HUD’s failure to provide appropriate
           oversight to ensure that the Authority carried out its approved low-income public
           housing unit disposition activities and related replacement housing projects in
           accordance with applicable requirements.

What We Recommend


           We recommend that the Deputy Assistant Secretary for Public Housing
           Investments require the Authority to work with HUD to ensure the project/units
           meet the legal and compliance requirements of the mixed-finance development
           program, including contributions contract and Declaration of Trust amendments.
           If the projects cannot be brought into compliance, the Authority should be
           required to refund the questioned costs to its low-income public housing program
           using nonfederal 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 discussed the review results with Authority officials during the audit and at an
           exit conference held on February 25, 2005. We also provided the Authority with
           a copy of the draft audit report for comments on February 11, 2005. We received



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their written response on March 7, 2005. The Authority expressed general
agreement with the report conclusions and agreed to work with HUD to
implement the report recommendations. The complete text of the Authority’s
response can be found in appendix B of this report.




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                            TABLE OF CONTENTS

Background and Objectives                                                         5

Results of Audit
      Finding 1: The Authority Failed To Obtain Required HUD Approvals of Its     7
      Mixed-Finance Projects – Questioned $7,720,000

Scope and Methodology                                                             12

Internal Controls                                                                 13

Followup on Prior Audits                                                          14

Appendixes
   A. Schedule of Questioned Costs and Funds To Be Put to Better Use              15
   B. Auditee Comments                                                            16
   C. Schedule of Authority Assets Used for Development of the Rose Terrace and   19
      Maricopa Revitalization Projects




                                            4
                     BACKGROUND AND OBJECTIVES


The Housing Authority of Maricopa County (Authority) was created in 1943, as authorized by the
U.S. Housing Act of 1937 and Arizona Revised Statute 36-1404. The Authority operated as an
independent entity until February 1992, when Maricopa County took over its administration through
the County’s Housing Department. Under the County government, the Maricopa County Board of
Supervisors functioned as the Board of Commissioners for the Authority. In July 2003, the County
again made the Authority an independent entity, and an intergovernmental agreement delegated the
authorities under Arizona Revised Statute 36-1404 to the Authority. Currently, each member of the
Maricopa County Board of Supervisors appoints one Authority commissioner, and these
commissioners serve as the governing board of the Authority. As one of its early actions, the Board
of Commissioners replaced the Acting Executive Director with a new Executive Director, who
assumed his position in January 2004.

Beginning in 2001, the Authority undertook the development of two mixed-finance housing
projects. Both projects were originally considered replacement housing and were to be developed
in conjunction with a U.S. Department of Housing and Urban Development (HUD)-approved
housing disposition plan. Both involved the use of Low Income Housing Tax Credits (tax credits)
in the development of the replacement housing units.

Rose Terrace I and II – This is a 120-unit project (separated into a 100-unit phase and a 20-unit
phase) located in Avondale, AZ. It was completed around December of 2002 using tax credit
financing and approximately $3.8 million provided by the Authority. The funding provided by
the Authority was in the form of a $3 million loan, repayable only if there is sufficient project
cashflow (final maturity date is 2051), and an additional capital infusion of approximately
$767,000. Rose Terrace Development Partnership, LLC, of which the Authority has a very small
ownership interest through the managing entity CSA-Rose Terrace, owns the Rose Terrace I and
II projects. (Note: CSA stands for Community Services of Arizona, the nonprofit parent entity
of CSA-Rose Terrace that has overall control of the project).

Maricopa Revitalization – This project, as approved by HUD in May 2002 (disposition
approval), was to consist of 56 single-family scattered-site public housing units that would be
sold (transferred) to a new ownership entity, which would then obtain tax credit financing to
rehabilitate the units. The units were to be taken off the Authority’s Annual Contributions
Contract (contributions contract) and then brought back in under a new contributions contract
(for operating subsidy only) after completion of rehabilitation. In the end, although all 56 units
were sold (ownership transferred) by the Authority, only 35 units were ultimately included in the
new ownership entity that received the tax credit financing (Maricopa Revitalization Partnership,
LLC). Rehabilitation of the 35 units was completed around October of 2003. Nothing was done
with the other 21 units, and they are now owned by CSA-Maricopa Revitalization, LLC, a
separate entity formed by Community Services of Arizona and the Authority.

The objectives of our review were to ensure the Authority (1) followed HUD’s approval
requirements/conditions related to the disposal of 135 low-income public housing units as part of


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the overall development of its two mixed-finance projects; (2) obtained required approval from
HUD for development of the projects; (3) made appropriate amendments to its contributions
contract and Declaration of Trust to reflect both the disposition of involved housing units and
development of the new mixed-finance units; and (4) made adjustments to its contributions
contract unit count for budgetary purposes, including computation of operating subsidy,
replacement housing, and capital grant funding eligibility.




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RESULTS OF AUDIT

Finding 1: The Authority Failed To Obtain Required HUD Approvals of
Its Mixed-Finance Projects – Questioned $7,720,000
The Authority did not develop and manage its two mixed-finance housing projects (Rose Terrace
and Maricopa Revitalization) in compliance with pertinent regulations and requirements. It did
not obtain HUD approval of the projects before or after development and inappropriately
obtained operating subsidy and capital grants for units in the projects without the requisite
contributions contract amendments. This resulted in the questionable use of more than $7.2
million of low-income public housing program assets and receipt of more than $500,000 of
operating subsidy and capital grants to which the Authority was not legally entitled. Regulations
governing the development of mixed-finance housing, 24 Code of Federal Regulations 941,
require HUD approval of mixed-finance developments before obligation and expenditure of low-
income public housing funds. Such approval is also required for mixed-finance units to be
eligible for inclusion under the Authority’s contributions contract. Additionally, for units to be
eligible for operating subsidy and capital grant funding, they must be under a contributions
contract (reference 24 Code of Federal Regulations 990 and 905). In our opinion, the
deficiencies noted were a result of negligence by the Authority’s former Executive Director,
compounded by HUD’s failure to provide appropriate oversight. Details relating to each of the
two projects are discussed below.



Rose Terrace

 The Authority Spent $3.8 Million
 To Develop Rose Terrace
 Without HUD Approval


               The Authority expended approximately $3.8 million on this project without
               obtaining HUD approval, as required by pertinent regulations contained in 24
               Code of Federal Regulations 941.608 and 970.9 and its contributions contract.
               Authority funds invested in the project consisted of a $3 million loan, payable
               only if cash flow is available and with a final maturity date of 2051, and an
               additional capital investment of approximately $767,000 - $647,000 from its
               HUD-funded capital and replacement housing grants and $120,000 from other
               low-income public housing sources.




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          The funds for the Authority’s $3 million loan and approximately $120,000 of
          additional project capital investment came from the sale of 79 Authority-owned
          public housing units and associated land. HUD’s June 1998 disposition approval
          for this property called for the construction of at least 75 new units (replacement
          units) of low-income housing, 40 of which would be public housing units (under a
          new contributions contract) with 35 additional low-income units subsidized by the
          tax credit funding (80 additional units were actually built using tax credit
          financing). Before the start of the project, the Authority was to submit a mixed-
          finance application to HUD for approval. However, this was not done. Instead,
          in February 2003, approximately 3 months after the project was completed
          (December 2002), the Authority submitted a Mixed-Finance Operating Subsidy-
          Only application to HUD. This delayed application could not be processed
          because appropriate environmental clearances had not been obtained.

          The required (after the fact) environmental review was recently completed.
          However, environmental approval is just the first stage in the approval process.
          At this time, it is unknown whether all requirements, procedural and legal, were
          followed during the development phase, which would allow HUD to retroactively
          approve the project and the expenditure of approximately $3.8 million in Federal
          funds. In this regard, the application submitted by the Authority in February 2003
          was an “operating subsidy only” application that is applicable only if no funds
          derived from HUD were/are to be used in the development of the project. Since
          this is not the case, a new mixed-finance application must be submitted to HUD to
          determine whether retroactive approval of the project is possible. If approval can
          be obtained, appropriate amendments to the contributions contract and
          Declaration of Trust (deed restriction) will need to be obtained to protect HUD’s
          and the Authority’s interest in the project.


HUD Obligated $104,760 in
Operating Subsidy for 40 Units
Without a Contributions Contract


          The Authority included 40 Rose Terrace units in its operating subsidy application for
          its fiscal year ending June 30, 2005. HUD approved the Authority’s application
          obligating $104,760 for the 40 units, although these units are not included in the
          Authority’s contributions contract and, therefore, are not eligible to receive an
          operating subsidy.

          When asked why these units were included in the operating subsidy calculations, the
          Authority’s Executive Director stated they were added in anticipation of receiving
          approval of the contributions contract for the units. He further stated it had been
          disclosed that the 40 units were in development. However, the Authority has not




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                 obtained appropriate approval from HUD for the units. Therefore, the $104,760 of
                 operating subsidy funds for the 40 units represents ineligible funding and must be
                 returned to HUD.

                 Additionally, the Authority continues to provide maintenance services for the 40
                 units that have been designated as public housing. Since these units are not under
                 a contributions contract, they are not eligible to receive assistance using the
                 Authority’s low-income public housing funds. Accordingly, the Authority should
                 transfer maintenance responsibilities for the units to the Rose Terrace ownership
                 entity until such time as (unless) HUD approves the units for inclusion under its
                 contributions contract.

Maricopa Revitalization

    $3.4 Million of Public Housing
    Assets Were Used for a Mixed-
    Finance Project Without
    Obtaining HUD Approval

                 The Authority used more than $3.4 million of public housing assets for a mixed-
                 finance housing development without obtaining required HUD approval. These
                 assets included the value of 56 public housing units disposed of as part of the
                 transaction and an additional investment of $120,000 of low-income public housing
                 funds.1

                 In May 2002, the Authority received HUD approval to dispose of (sell) 56 public
                 housing units and then rehabilitate them as part of a mixed-finance housing
                 development project using tax credit funds. The units were to be removed from the
                 Authority’s contributions contract when sold and then brought back in under a new
                 contributions contract after project completion (after rehabilitation). This disposition
                 approval was subject to obtaining HUD’s approval of the mixed-finance application.
                 An application/proposal was submitted in July 2002. However, before HUD
                 initiated its review, the Authority informed HUD that the proposal would be
                 changing and that a new application would be submitted.

                 No new proposal was submitted by the Authority. However, it went forward with
                 the project, transferring ownership of the 56 units–ultimately 35 units to Maricopa
                 Revitalization, LLC, and 21 units to CSA-Maricopa Revitalization. The 35 units
                 were later included in a tax credit project and rehabilitated. However, the other 21
                 units were not made part of the tax credit project and were not rehabilitated. The
                 sales price of the 35 units was $2,065,000, which was less than the properties’
                 appraised value of $2,170,050. However, there were no actual sales proceeds.


1
 The $120,000 came from the land sales proceeds related to the Rose Terrace disposition and replacement housing
project.


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                 Instead, the Authority took back a $2,065,000 promissory note payable only as the
                 project’s cash flow permits and with a final maturity date of May 2019. In addition
                 to the sales price of the properties, the Authority spent $120,000 of public housing
                 funds on the development of Maricopa Revitalization.2 There was no compensation
                 for the transfer of ownership of the 21 units (valued at $1,147,500) to CSA-
                 Maricopa Revitalization, which still owns the properties. No amendments to the
                 Authority’s contributions contract or its Declaration of Trust have been made to
                 account for these ownership changes.


    The Authority Received $413,516
    of Operating Subsidy and Capital
    Grant Funds for Units That Did
    Not Have a Valid Contributions
    Contract


                 Although the Authority no longer owns these 56 units, it continues to manage
                 them and receive operating subsidy and capital grant funding in violation of its
                 contributions contract and pertinent regulations (the sale of the units invalidated
                 the existing contributions contract for the units). From the June 2002 sale through
                 September 30, 2004, the Authority received more than $413,000 of questionable
                 operating subsidy and capital grant funding for these 56 units. Although the
                 Authority made adjustments in the Public and Indian Information Center system
                 in September 2004, removing the 56 units from its inventory, these adjustments
                 only affect the computation of capital grant funding eligibility and do not affect
                 the unit count used in the computation of the operating subsidy. Therefore, the
                 Authority continues to receive $12,222 per month of questionable operating
                 subsidy funds.


    Conclusion



                 The Authority has used $7.2 million of Federal low-income public housing assets for
                 these two projects without obtaining HUD approval, without ensuring the legality of
                 the transactions, and without assurance that appropriate legal safeguards are in place
                 to protect its and HUD’s interests in the projects (see appendix C). Additionally, it
                 has received more than $500,000 of operating subsidy and capital grant funds for
                 units that are not under a valid contributions contract, necessary for operating
                 subsidy and capital grant funding eligibility. The Authority must work with HUD to
                 attempt to obtain retroactive approval of the projects and regain ownership of the 21

2
  An additional $570,000 of HOME funds were also used on this project. The use of HOME funds for a project
receiving an operating subsidy is not allowable under pertinent regulations. This issue will be discussed in a
separate report.


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           units that were not included in the Maricopa Revitalization project. If this cannot be
           done, the Authority must repay its low-income housing program the $7.2 million of
           unapproved expenditures. Additionally, the Authority must refund to HUD the
           $104,760 of ineligible operating subsidy funds it received for Rose Terrace and,
           absent retroactive HUD approval, refund the $413,516 of questionable operating
           subsidy and capital grant funds it has received for Maricopa Revitalization.


Recommendations



           We recommend that the Deputy Assistant Secretary for Public Housing
    Investment

           1A.     Work with the Authority to bring the two projects into compliance with
           applicable mixed-finance development requirements. If this cannot be done and
           retroactive approval cannot be obtained, require the Authority to repay the low-
           income housing program from nonfederal funds the $6,057,259 of low-income
           housing assets used for the projects (see appendix C);

           1B.    Require the Authority to refund to HUD the $104,760 of ineligible
           operating subsidy funds it received for Rose Terrace;

           1C.    Require the Authority to refund to HUD the $413,516 of questionable
           operating subsidy and capital grant funding it received for Maricopa
           Revitalization, unless retroactive approval can be obtained;

           1D.    Require the Authority to recover the 21 units transferred to CSA-Maricopa
           Revitalization or refund the value of the properties, $1,147,500, to its low-income
           housing program using nonfederal funds;

           1E.    Require the Authority to submit for HUD approval appropriate
           contributions contract amendments for both projects.

           1F.     As part of the ongoing approval process, require the Authority to prepare
           and submit to HUD for approval the appropriate amendments to its Declaration of
           Trust for the units included in these projects.




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          SCOPE AND METHODOLOGY

To achieve our audit objectives we reviewed

•   Applicable laws, regulations, and other HUD program requirements,

•   Project closing documents, available project proposal and evidentiary
    materials, project accounting records, independent public accountants’ reports,
    project development documents maintained by Community Services of
    Arizona, Inc., and accounting records maintained by Rose Terrace’s current
    management agent.

We also interviewed appropriate Authority personnel, the project developer,
project management agent staff, and HUD program officials.

We performed our review between July and December 2004. The audit period
covered the period January 2002 through September 2004.

We performed our review in accordance with generally accepted government
auditing standards.




                                12
                             INTERNAL CONTROLS

Internal controls 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, and
   •   Compliance with applicable laws and regulations.

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:

              •   Compliance with applicable 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 has
                  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


 Significant Weaknesses


              Based on our review, we believe the following item is a significant weakness:

              •       The Authority did not have adequate oversight and controls to ensure that
                      its mixed-financed projects were developed and managed in accordance
                      with HUD’s requirements (see finding 1).



                                               13
                   FOLLOWUP ON PRIOR AUDITS


Prior Report Title and Number


           An Office of Inspector General (OIG) audit report related to the Authority was
           issued in September 2004 (Report # 2004-LA-1007). However, this report dealt
           with the Authority’s management of its Housing Choice Voucher Program and
           contained no findings related to its mixed-finance development activities.




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                                    APPENDIXES

Appendix A

               SCHEDULE OF QUESTIONED COSTS
              AND FUNDS TO BE PUT TO BETTER USE

       Recommendation          Ineligible 1/        Unsupported 2/    Funds To Be Put to
           Number                                                       Better Use 3/
               1A                                        $6,057,259
               1B                   $104,760
               1C                                         $413,516
               1D                  $1,147,500


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.

3/   “Funds to be put to better use” are quantifiable savings that are anticipated to occur if an
     OIG recommendation is implemented, resulting in reduced expenditures at a later time
     for the activities in question. This includes costs not incurred, deobligation of funds,
     withdrawal of interest, reductions in outlays, avoidance of unnecessary expenditures,
     loans and guarantees not made, and other savings.




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Appendix B

             AUDITEE COMMENTS




                    16
17
18
Appendix C

          SCHEDULE OF AUTHORITY ASSETS USED
        FOR DEVELOPMENT OF THE ROSE TERRACE
        AND MARICOPA REVITALIZATION PROJECTS


            Project                          Description                  Amount
Rose Terrace              Loan from land sale proceeds                    $3,000,000
Rose Terrace              Other costs paid from land sale proceeds           120,311
Rose Terrace              Capital and replacement housing funds              646,898
Maricopa Revitalization   Value of property sold/transferred to project    2,170,050
Maricopa Revitalization   Advance to project from land sale proceeds         120,000
 Subtotal                                                                 $6,057,259
Maricopa Revitalization   Value of property transferred to CSA-
                          Maricopa Revitalization but not included in      1,147,500
                          the project
Total                                                                     $7,205,759




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