oversight

Rudolphy/Mercy-Douglass Home for the Blind, Philadelphia, PA, Did Not Charge a Cosponsor $19,582 in Commercial Rent

Published by the Department of Housing and Urban Development, Office of Inspector General on 2005-04-13.

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

                                                                 Issue Date
                                                                          April 13, 2005
                                                                 Audit Report Number
                                                                              2005-PH-1010




TO:        Encarnacion Loukatos, Director, Pennsylvania Multifamily HUB, 3AHMLA



FROM:      Daniel G. Temme, Regional Inspector General for Audit, Mid-Atlantic Region,
             3AGA

SUBJECT: Rudolphy/Mercy-Douglass Home for the Blind, Philadelphia, PA, Did Not
           Charge a Cosponsor $19,582 in Commercial Rent


                                   HIGHLIGHTS

 What We Audited and Why

             We audited the Rudolphy/Mercy-Douglass Home for the Blind (Owner/Project),
             an independent living facility for low-income persons with blindness and other
             disabilities, in response to a citizen complaint. The complainant alleged Project
             development funds and Project facilities were improperly used, payments to two
             payees were improper, and Project management deficiencies existed. We did not
             address the issue of Project management deficiencies since your office issued a
             Management Review report to the Project, dated less than 3 months before the
             complainant’s first letter to us. Our objectives were to determine whether the
             Owner used Project development funds and Project facilities properly and
             whether the payments to the two payees were proper.

 What We Found


             We found no problem with the expenditures related to the Project development
             funds. However, contrary to U.S. Department of Housing and Urban
             Development (HUD) regulations, one cosponsor of the Project, Mercy-Douglass
           Human Services Affiliate, the Management Agent, is using Project facilities to
           perform work not exclusively related to the administration of the Project. The
           Project lost commercial rent of $19,582 and future rental income will equal
           $18,076 per year. The additional revenue would enable the Project to make the
           required deposits to the Reserve for Replacement account, which are not being
           made, and have funds available for other Project needs.

           Also, we found no problem with the expenditures to the two payees.

What We Recommend


           We recommend that the Pennsylvania Multifamily HUB require the Owner to
           ensure the cosponsor, Mercy-Douglass Human Services Affiliate, pay past rent of
           $19,582 and future rent of $18,076 per year for the extra space it occupies in the
           Project.

           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 report with the Owner during the audit and at an exit conference
           on April 8, 2005. The Owner generally agreed with our finding and elected not to
           provide a response to our report.




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                           TABLE OF CONTENTS


Background and Objectives                                              4

Results of Audit

      Finding 1: The Owner Did Not Charge $19,582 in Commercial Rent   5

Scope and Methodology                                                  7

Internal Controls                                                      8

Appendixes
   A. Schedule of Funds To Be Put to Better Use                        9
   B. Schedule of Potential Rental Revenue                             10




                                           3
                     BACKGROUND AND OBJECTIVES


In August 1999, the Rudolphy/Mercy-Douglass Home for the Blind (Owner/Project), a joint
venture, applied for a U.S. Department of Housing and Urban Development (HUD) Section 811
capital advance to revitalize the 120-year-old building located in the University City section of
Philadelphia known as The Edith R. Rudolphy Residence for the Blind. The Edith R. Rudolphy
Residence for the Blind is dedicated to providing housing and assisted living services to low-
income individuals coping with blindness and other disabilities.

Section 811, Supportive Housing for Persons with Disabilities, provides Federal capital advances
and project rental assistance under Section 811 of the National Affordable Housing Act (42
U.S.C. [U.S. Code] 8013) for housing projects serving persons with disabilities. The total
amount of the capital advance awarded to the Owner was $1,566,600. The Owner received
additional grants and funding from other sources making the total amount available for
rehabilitation $2,265,042.

Our objectives were to determine whether the Owner used Project development funds and
Project facilities properly and whether the payments to the two payees were proper.




                                                4
                                      RESULTS OF AUDIT

Finding 1: The Owner Did Not Charge $19,582 in Commercial Rent
                   Contrary to HUD regulations, one cosponsor of the Project, Mercy-Douglass
                   Human Services Affiliate (Management Agent), is using Project facilities to
                   perform work not exclusively related to the administration of the Project. The
                   Owner/Project did not collect rent from the cosponsor for the additional space.
                   As a result, the Project lost commercial rent of $19,582 and future rental income
                   will equal $18,076 per year. The additional income would provide funds to pay
                   the Reserve for Replacement account, which is currently not being paid, and
                   funds for other Project needs.

                   HUD regulations1 state that except for office space used by the owner/borrower
                   exclusively for the administration of a project, project facilities may not include
                   office space.

                   Management Agent personnel acknowledged they manage other properties as
                   well as the Rudolphy building from the Project site. We allowed for reasonable
                   space in our calculation of commercial rent due. Only space other than
                   reasonable space for operation of the Project (Project manager’s office,
                   maintenance area, etc.) was included as commercial rent due.

                   The other cosponsor, Edith R. Rudolphy Residence for the Blind, is using Project
                   facilities to perform work related to the administration of the Project. It uses
                   office space in the building to perform its supportive services duties, such as
                   helping the residents with their medications, providing transportation for the
                   residents, and preparing schedules for the residents’ meal services.

                   The Edith R. Rudolphy Residence for the Blind is a residential building consisting
                   of 16 residential units located on the second through fourth floors. The first floor
                   mainly consists of the kitchen area and space used by the residents and by the
                   property manager. Both cosponsors also use space located on the first floor. The
                   Management Agent uses a conference room and storage, while Edith R. Rudolphy
                   personnel use two rooms as office space. Most of the basement area is used by
                   the Management Agent as office space and storage. The basement also contains
                   the laundry room and mechanical room.

                   The Management Agent obtained an appraisal of the space located in the
                   basement and on the first floor to determine the per square foot rate. The
                   appraisal was performed on August 11, 2002, and reported that the basement
                   space is estimated at $8 per square foot and the first floor space is estimated at
                   $11 per square foot. Minutes of the Board of Directors meeting on June 8, 2004,

1
    24 CFR [Code of Federal Regulations] 891.315

                                                     5
          indicate the issue of charging rent based on the appraisal figures was discussed.
          However, the Management Agent has not paid the Project for the space it uses.
          The Management Agent states that any rent it owes is offset by management fees
          owed by the Project but not paid and by advances it has made to the Project.
          However, this is a determination HUD should make. These are not items to be
          offset. If the Management Agent had paid rent, the advances may not have been
          necessary.

          According to the floor plans provided and a tour of the Project with Management
          Agent personnel, we determined the Management Agent uses approximately
          2,260 square feet of office/storage space at the Project site beyond what is
          necessary for the normal operation of the Project (see appendix C). The
          Management Agent owes the Project $19,582 for the space used to the present.
          Also, revenue of $18,076 could be generated annually by the Project if the
          Management Agent is required to pay rent for the space used.


Recommendations
Conclusion


          We recommend the Director, Pennsylvania Multifamily HUB require the Owner to:

          1A.     Collect $19,582 from the Management Agent for the commercial rent not
                  collected.

          1B.     Charge the Management Agent $18,076 for yearly rent in the future for a
                  savings of $18,076.




                                           6
                        SCOPE AND METHODOLOGY


To accomplish our objectives we

   •   Reviewed 100 percent of the disbursements from the construction requisitions.

   •   Examined records and related documents of Rudolphy/Mercy-Douglass Home for the
       Blind.

   •   Reviewed applicable HUD regulations and Project files.

   •   Conducted interviews with employees of Mercy Douglass Human Services Affiliate,
       Edith R. Rudolphy Residence for the Blind, and the HUD Multifamily Division.

The audit generally covered the period from August 1999 to November 2004. We conducted our
fieldwork from November through December 2004. The majority of our work was conducted at
the Project located at 3827 Powelton Avenue, Philadelphia, PA.

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




                                              7
                              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, 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:

                  •   Maintaining invoices, cancelled checks, and bank statements for all
                      disbursements, and

                  •   Using Project facilities.

              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 Owner improperly uses Project facilities.

              The deficiency is discussed in detail in the Results of Audit section of this report.




                                                  8
                                    APPENDIXES

Appendix A

                  FUNDS TO BE PUT TO BETTER USE

                           Recommendation          Funds To Be Put
                                 Number             to Better Use 1/
                                  1A                   $19,582
                                  1B                   $18,076
                                 Total                 $37,658


1/   “Funds to be put to better use” are quantifiable savings that are anticipated to occur if an
     Office of Inspector General (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.




                                               9
APPENDIX B


      SCHEDULE OF POTENTIAL RENTAL REVENUE



        MERCY-DOUGLASS HUMAN SERVICES AFFILIATE
                                      Square Feet $ Per Square Potential Annual
               Location
                                         (SF)         Foot      Rental Income
   Basement   storage G-09                219        $ 8.00       $ 1,752.00
   Basement   office G-13                 286        $ 8.00       $ 2,288.00
   Basement   laundry G-14                396        $ 8.00       $ 3,168.00
   Basement   general storage G-17        172        $ 8.00       $ 1,376.00
   Basement   living/dining H-02         365.5       $ 8.00       $ 2,924.00
   Basement   bedroom H-08               136.5       $ 8.00       $ 1,092.00
   Basement   bedroom H-10               136.5       $ 8.00       $ 1,092.00
   Basement   multipurpose room G-03      548        $ 8.00       $ 4,384.00
                                Total  2,259.50                   $18,076.00




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