Issue Date
June 1, 2005
Audit Report Number
2005-PH-1011
TO: Charlie Famuliner, Director, Richmond Multifamily Program Center, 3FHM
FROM: Daniel G. Temme, Regional Inspector General for Audit, Philadelphia Region,
3AGA
SUBJECT: America House, Incorporated, Marshall, Virginia, and Its Subsidiaries Did Not
Comply with HUD Requirements Covering Their HUD-insured Mortgages
HIGHLIGHTS
What We Audited and Why
We completed an audit of America House, Incorporated1 (America House) and its
wholly owned subsidiaries at the request of the director of HUD’s Richmond
Multifamily Program Center. The objective of our audit was to determine whether
America House, Incorporated and its subsidiaries complied with HUD
requirements covering their HUD-insured mortgages.
What We Found
America House, Incorporated and its subsidiaries did not comply with HUD
requirements covering their HUD-insured mortgages. Contrary to its regulatory
agreements with HUD, America House, Incorporated and its subsidiaries failed to
make the mortgage payments for their three HUD-insured properties even when
the mortgaged properties produced sufficient income to cover the payments. In
addition, America House improperly commingled funds in violation of its
1
America House, Incorporated changed its name to Amerisist Management Company, Limited Liability Company
in March 2002.
Regulatory Agreements and did not properly maintain project records. These later
actions prevented us from performing a thorough audit of the three HUD-insured
properties. America House defaulted on the notes and HUD was compelled to sell
the properties at a loss of $4.1 million in September 2004.
What We Recommend
We recommend that HUD pursue appropriate administrative sanctions against the
owner and president of America House, Incorporated and its three wholly owned
subsidiaries.
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 America House during the audit and at an exit
conference on May 20, 2005. America House provided its written comments to
our draft report on May 25, 2005. The complete text of its response, along with
our evaluation of that response, can be found in Appendix A of this report.
2
TABLE OF CONTENTS
Background and Objectives 4
Results of Audit
Finding 1: America House, Incorporated and Its Subsidiaries Did Not Comply 5
with HUD Requirements Covering Their HUD-insured Mortgages
Scope and Methodology 8
Internal Controls 9
Appendixes
A. Auditee Comments and OIG’s Evaluation 10
3
BACKGROUND AND OBJECTIVES
Under Section 232 of the National Housing Act, Congress authorized a mortgage insurance
program beginning in 1959 to facilitate the construction and rehabilitation of nursing homes,
intermediate care facilities, board and care homes, and assisted living facilities. Through its wholly
owned subsidiaries, America House, Incorporated owned and operated three such HUD-insured
assisted living facilities. Mr. Charles Rice is the owner and president of America House,
Incorporated and its three wholly owned subsidiaries. America House, Incorporated’s main
corporate office is located at 4252 Manor Drive, Marshall, VA. The three corporations defaulted on
their HUD-insured mortgages in 2003, and HUD sold the notes in September 2004 at a loss of $4.1
million. Information on the three properties related to the HUD-insured mortgages is as follows:
America House, Regulatory
Property Incorporated Agreements Units
Subsidiary Signed
America House One,
Manassas, VA Incorporated March 31, 1999 27
America House
Orange, VA Two, Incorporated February 25, 1999 27
America House
Stephens City, VA Three, Incorporated July 18, 2000 41
Total 95
The owner and president of America House, Incorporated and its three wholly owned
subsidiaries signed each of the following agreements related to the HUD-insured mortgages:
• Regulatory Agreement for Multifamily Housing Projects (HUD-92466);
• Regulatory Agreement for Nursing Homes (HUD-92466-NHL); and
• Agreements of Lease by and Between America House One, Two, and Three (Landlord),
and America House, Incorporated (Tenant).
In addition to its three properties with HUD-insured mortgages, America House, Incorporated
owned and operated 188 other assisted living units at five other uninsured properties. The
objective of our audit was to determine whether America House, Incorporated and its
subsidiaries complied with HUD requirements related to their HUD-insured mortgages.
4
RESULTS OF AUDIT
Finding 1: America House, Incorporated and Its Subsidiaries Did Not
Comply with HUD Requirements Covering Their HUD-insured
Mortgages
Contrary to their regulatory agreements with HUD, America House, Incorporated, and its
subsidiaries failed to make the payments on their HUD-insured mortgages even when the
mortgaged properties produced sufficient income to make the payments. America House also
improperly commingled funds in violation of its Regulatory Agreements and did not properly
maintain project records. This occurred because the owner and operator did not ensure the
projects were managed in accordance with HUD requirements. America House defaulted on the
notes and HUD was compelled to sell the properties at a loss of $4.1 million.
America House Had Income But
Did Not Pay Its Mortgage
During the period December 2003 until August 2004 America House,
Incorporated was in default on its HUD-insured mortgages. Our audit showed
however, that during this same period, the mortgaged properties produced a total
net income of $484,377. America House could have used this income to make
mortgage payments and possibly avoid default. As stated previously, HUD was
compelled to sell the notes at a loss of $4.1 million. The audit further noted that
America House, Incorporated made substantial payments for such personal items
as automobile lease payments, country club fees, credit cards, and private schools
during the period when the HUD-insured projects were in default. For example,
during the period America House, Incorporated was in default of the mortgage it
made payments of $6,000 for country club fees, and more than $30,000 for
private schools.
Under the Regulatory Agreements for Multifamily Housing Projects (HUD-
92466), America House and its three subsidiaries agreed to promptly make all
payments due under the note and the mortgage. Under the Regulatory Agreements
for Nursing Homes (HUD-92466-NHL), America House, Incorporated agreed to
make lease payments to its three subsidiaries when due. Under the lease agreements,
the three subsidiaries were designated as the landlord and America House,
Incorporated was designated the tenant. Notwithstanding the various legal
arrangements established by the owner and president of these various corporate
5
entities, the fact remains that America House, Incorporated often had income to
make the mortgage payments but did not do so.
America House, Incorporated
Improperly Commingled Funds
Contrary to HUD requirements, America House, Incorporated also commingled
project funds with its other non-HUD project funds. America House, Incorporated
used a centralized accounting system for its projects and it made disbursements
from a centralized account that could not be clearly traced to each project. HUD
allows commingling of funds, but only when disbursements from the centralized
account can be clearly traceable to each project. An America House official
informed us that the company did not maintain separate accounts for each project
because he did not believe this was efficient. Since America House, Incorporated
did not maintain separate accounts for its projects, project funds were improperly
commingled with the other uninsured project funds, and we could not accurately
determine the actual cash position of each project.
Personal Expenses Were Paid
with Commingled Funds
Under the Regulatory Agreements for Multifamily Housing Projects (HUD-
92466), America House and its three subsidiaries also agreed under paragraph
9(g) of the agreement that they would withdraw rents and other project receipts
only in accordance with the provisions of their agreement. America House is only
permitted to take withdrawals for expenses of the project or for distributions of
surplus cash. But, as we noted previously, the audit showed America House,
Incorporated made substantial payments for such personal items as automobile
lease payments, country club fees, credit cards, and private schools when its
HUD-insured projects were in default. And as previously discussed, during the
period the mortgage was in default America House, Incorporated made payments
from its commingled project fund of $6,000 for items such as country club fees
and more than $30,000 for private schools.
America House, Incorporated
Did Not Properly Maintain
Project Records
America House, Incorporated also did not maintain books and records as required
by its Regulatory Agreements with HUD. Under paragraph 9(c) of the Regulatory
Agreements for Multifamily Housing Projects (HUD-92466), America House and
its three subsidiaries agreed to maintain books, contracts, records, documents, and
6
other papers related to the projects in reasonable condition. This was required in
order to permit an examination and inspection at any reasonable time by the HUD
Secretary or his duly authorized agents. Our audit showed however, that America
House, Incorporated could not provide a check register, cash receipts or
disbursement journals.
In summary, the owner and president of America House violated a number of key
provisions of his regulatory agreements with HUD which put him in default on
his three HUD-insured mortgages. This compelled HUD to sell the notes in
September 2004 at a loss of $4.1 million. As the evidence from the audit
demonstrates, these actions could have been avoided.
Recommendations
We recommend that the Director, Richmond Multifamily Program Center
1A. Pursue appropriate administrative sanctions against the owner and
president of America House, Incorporated and its three wholly owned
subsidiaries.
7
SCOPE AND METHODOLOGY
We performed an audit of America House, Incorporated and its wholly owned subsidiaries in
Marshall, Virginia from September 2004 through April 2005 in accordance with generally
accepted government auditing standards and included tests of internal controls that we
considered necessary under the circumstances.
The audit covered transactions representative of operations from June 2002 through August
2004. We expanded the scope of the audit as necessary. We reviewed applicable guidance and
discussed operations with management and staff personnel at America House, Incorporated and
key officials from HUD’s Richmond Field Office.
To determine whether America House, Incorporated complied with HUD requirements, we
• Reviewed federal requirements, including the Code of Federal Regulations, HUD
Handbooks, and the U.S. Code;
• Reviewed the projects’ files maintained by HUD’s Richmond Field Office to include
Regulatory Agreements, Lease Agreements, and Monthly Accounting Reports;
• Performed limited testing of management controls relevant to the audit through
inspection, review, and analysis of documents and records, and evaluated the effects
of any exceptions;
• Reviewed the projects’ books and records to determine the reliability of information;
and
• Used computer assisted audit tools to analyze accounting information, review a non-
statistical sample of disbursements, and calculate income and expenses of the three
projects.
8
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 that internal controls over the following requirements were relevant
to our audit objective:
• Making payments when due under the note and mortgage,
• Ensuring disbursements from a centralized account can be traced to each
project, and
• Maintaining books and records as required by its HUD Regulatory
Agreements.
.
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, the following are material weaknesses. America House,
Incorporated did not
• Make all payments due under the note and the mortgage.
• Ensure disbursements from a centralized account can be traced to each
project.
• Maintain books and records as required by its Regulatory Agreements with
HUD.
9
Appendix A
AUDITEE COMMENTS AND OIG’S EVALUATION
Ref to OIG Evaluation Auditee Comments
Comment 1
Comment 2
Comment 3
10
Comment 4
11
OIG Evaluation of Auditee Comments
Comment 1 America House, Incorporated violated a number of key provisions of its
regulatory agreements with HUD which put it in default on its three HUD-insured
mortgages. This compelled HUD to sell the notes in September 2004 at a loss of
$4.1 million. As the evidence from the audit demonstrated, this loss of $4.1
million could have been avoided if America House had in fact complied with the
provisions of its regulatory agreements.
Comment 2 As the audit demonstrated, America House, Incorporated did not maintain its
books and records in compliance with its regulatory agreements with HUD. As
such, it is understandable why it is having a difficult time accounting for project
funds. The OIG calculated the $484,377 total net income for the period in
question on the three defaulted HUD-insured mortgages by using the accounting
records America House provided the auditor. The $4.1 million loss was calculated
from actual data from HUD related to the sale of the notes in September 2004.
Comment 3 Under paragraph 9(g) of its Regulatory Agreements for Multifamily Housing
Projects (HUD-92466), America House, Incorporated and its three subsidiaries
agreed to withdraw rents and other project receipts only in accordance with the
provisions of their agreements. Under the agreements, America House is only
permitted to take withdrawals for expenses of the project or for distributions of
surplus cash. However, our audit showed America House, Incorporated made
substantial payments from its commingled project fund for personal items such as
automobile lease payments, country club fees, credit cards, and private schools
when its HUD-insured projects were in default.
Comment 4 America House, Incorporated’s centralized accounting system did not comply
with HUD requirements because it could not clearly trace disbursements to each
project. Further, contrary to HUD requirements, America House, Incorporated
did not have an independent audit completed on its activities each year. America
House, Incorporated’s Vice President for Administration could only provide us
with audited financial statements for America House One and Two for the year
ending May 2002. The Vice President told us America House, Incorporated did
not have sufficient funds to have the audits completed as required.
12
America House, Incorporated, Marshall, Virginia, and Its Subsidiaries Did Not Comply with HUD Requirements Covering Their HUD-insured Mortgages
Published by the Department of Housing and Urban Development, Office of Inspector General on 2005-06-01.
Below is a raw (and likely hideous) rendition of the original report. (PDF)