oversight

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)

                                                                          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.




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                             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



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           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.



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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.




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