oversight

Southwest Alliance of Asset Managers, LLC, Addison, Texas; Did Not Effectively Enforce The Lease Terms Over Payment of Property Utilities

Published by the Department of Housing and Urban Development, Office of Inspector General on 2006-06-23.

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

                                                                    Issue Date
                                                                             June 23, 2006
                                                                    Audit Report Number:
                                                                             2006-AO-1001




TO:         Ben L. Johnson, Director, Single Family Homeownership Center, 8AHH


FROM:       Rose Capalungan, Director, Hurricane Recovery Audit Oversight Division, GAH

SUBJECT: Southwest Alliance of Asset Managers, LLC, Addison, Texas; Did Not
           Effectively Enforce The Lease Terms Over Payment of Property Utilities

                                     HIGHLIGHTS

 What We Audited and Why

             We audited Southwest Alliance of Asset Managers, LLC (Southwest Alliance), a
             management and marketing contractor for the United States Department of
             Housing and Urban Development’s (HUD) real estate-owned properties held off
             market for disaster victims.

             The audit was initiated in conjunction with the President’s Council on Integrity
             and Efficiency, as part of its examination of relief efforts provided by the Federal
             government in the aftermath of hurricanes Katrina and Rita. Our objective was to
             determine whether Southwest Alliance complied with HUD’s regulations,
             procedures, and instructions in the management of HUD’s real estate-owned
             properties held off market for disaster victims.

 What We Found

             Southwest Alliance generally complied with the terms of its Management and
             Marketing contract, with one exception. It did not effectively ensure that the
             disaster victims transferred the billing of property utility services into their names
             within seven days of occupancy, as required by the lease agreements. As a result,
             after occupancy by tenants, HUD paid $79,306 in utility costs for 636 leased
             properties during the period, from September 2, 2005 through April 25, 2006.
What We Recommend

           We recommend that the Director of HUD’s Denver Office of Single Family
           Homeownership Center instruct Southwest Alliance of Asset Managers, LLC to
           take appropriate action against the tenants who do not comply with the lease
           requirements over utility payments, and require Southwest Alliance to initiate
           collection actions against tenants to recover the $79,306 HUD paid for utility costs.

           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

           During the audit, we provided the results of our review to Southwest Alliance
           management. We also provided our discussion draft audit report to HUD’s staff
           during the audit. We conducted an exit conference with Southwest Alliance
           management on June 1, 2006.

           We asked the president of Southwest Alliance to provide comments on our
           discussion draft audit report by June 2, 2006. The president provided three-paged
           written comments dated June 1, 2006. The complete text of the written response,
           along with our evaluation of that response, can be found in appendix B of this
           report.




                                             2
                           TABLE OF CONTENTS

Background and Objectives                                                         4

Results of Audit

      Finding 1: Southwest Alliance Did Not Effectively Enforce The Lease Terms
                 Over Payment of Property Utilities                               5

Scope and Methodology                                                             7

Internal Controls                                                                 8

Appendixes
   A. Schedule of Questioned Costs                                                10
   B. Auditee Comments and OIG’s Evaluation                                       11




                                           3
                      BACKGROUND AND OBJECTIVE

In July 2004, Southwest Alliance of Asset Managers, LLC (Southwest Alliance) was formed as a
limited liability company in which Realty Marketing Associates of Las Vegas, Inc. and First
Preston Management, Inc. of Addison are members. Southwest Alliance represents the
combined resources of the two members in managing and marketing affordable housing and
promoting homeownership. Felix DeHerrera is the President of Southwest Alliance.

In August 2004, the U.S. Department of Housing and Urban Development (HUD) contracted
with Southwest Alliance to provide management and marketing services for HUD’s single-
family program in the States of Texas and New Mexico. In September 2005, HUD made homes
available for disaster victims under the Temporary Housing Assistance Program of the Robert T.
Stafford Disaster Relief and Emergency Assistance Act as a result of Hurricanes Katrina and
Rita. Such program was designed to assist people whose homes were damaged by disaster to
have a temporary place to live until repairs can be completed or permanent housing solution is
identified. This program was available only to homeowners and renters who are legal residents
of the United States and who were displaced by the disaster. Subsequently, HUD modified its
initial contract with Southwest Alliance to provide services in managing, marketing, preparing
and repairing properties held off market to house disaster victims.

As of April 25, 2006, Southwest Alliance manages 714 properties that are occupied by disaster
victims and located in North and South Texas. During our audit period, from September 2005
through December 2005, HUD had reimbursed Southwest Alliance $3,821,577 in fees and other
costs for managing, preparing, and repairing the properties held off market for disaster victims.

We audited Southwest Alliance’s management of HUD’s real estate-owned properties for
disaster victims. The audit was initiated in conjunction with the President’s Council on Integrity
and Efficiency, as part of its examination of relief efforts provided by the Federal government in
the aftermath of hurricanes Katrina and Rita.

Our objective was to determine whether Southwest Alliance complied with HUD’s regulations,
procedures, and instructions in the management of HUD’s real estate-owned properties held off
market for disaster victims.




                                                4
                             RESULTS OF AUDIT

 Southwest Alliance Did Not Effectively Enforce the Lease Terms Over
                    Payment of Property Utilities
Southwest Alliance generally complied with the terms of its Management and Marketing
contract, with one exception. It did not effectively ensure that the disaster victims transferred the
billing of property utility services into their names within seven days of occupancy, as required
by the lease agreements. As a result, after occupancy by tenants, HUD paid $79,306 in utility
costs for 636 leased properties during the period, from September 2, 2005 through April 25,
2006.



  Tenants Did Not Pay Utility
  Costs

               Under its contract with the U.S. Department of Housing and Urban Development
               (HUD) Southwest Alliance is responsible for ensuring that utility costs for
               properties are paid before properties are leased, and after lease up that tenants
               timely assume this responsibility.

               Southwest Alliance did not effectively enforce the lease terms over utility
               payments. As of April 25, 2006, Southwest Alliance had leased 700 properties
               requiring tenant payments of utility services. However, instead of the tenants,
               HUD continues to pay for the utility costs for 636 of the 700 properties.

               Southwest Alliance was aware of the nonpayment and in November 2005
               Southwest Alliance started monitoring tenants who were not paying property
               utility bills. Southwest Alliance’s Marketing Specialist used a system called
               Home Trackers system to acquire the tenants’ utility information and verify
               whether the utilities were transferred to the tenants’ names. She also took
               corrective actions such as follow-up phone calls and certified mailings and
               tracked responses on a spreadsheet. As of April 5, 2006, about 75 to 100 certified
               letters were returned to Southwest Alliance out of a batch of at least 300 certified
               letters that were sent out.


Southwest Alliance Did Not
Timely Inform HUD

               Months after the utility issue surfaced, Southwest Alliance asked HUD for
               guidance. In an April 6, 2006 electronic mail message to HUD, Southwest
               Alliance wanted to know if HUD would continue to reimburse Southwest



                                                 5
          Alliance for the utility costs it paid for tenant occupied properties. Southwest
          Alliance also needed guidance on tenant evictions and a confirmation from HUD
          regarding reimbursement for eviction costs.

          HUD told Southwest Alliance that tenants would not be evicted for failure to pay
          utilities. HUD advised the contractors including Southwest Alliance to be more
          proactive in encouraging the tenants to convert utilities such as notifying the
          tenants. As of April 25, 2006, HUD paid a total of $79,306 for utility bills after
          the tenants occupied the properties and continues to pay for utility services despite
          HUD’s guidance to pursue tenants of these funds. We found nine percent of
          tenants complied with the lease agreements regarding their responsibilities over
          utility costs, and in fairness to these compliant tenants, HUD should require
          Southwest Alliance to initiate collection actions against a total of 91 percent (or 636
          of 700) non-compliant tenants.

Recommendations

          We recommend that the Director of HUD’s Denver Office of Single Family
          Homeownership Center

          1A.     Instruct Southwest Alliance of Asset Managers, LLC to take appropriate
                  action against the tenants who do not comply with the lease requirements
                  over utility payments.

          1B.     Require Southwest Alliance of Asset Managers, LLC to initiate collection
                  actions against tenants to recover the $79,306 HUD paid for utility costs.




                                            6
                            SCOPE AND METHODOLOGY

We performed our audit work between January and May 2006. We conducted our audit at
Southwest Alliance’s Office in Addison, Texas and HUD’s Houston Field Office.

To achieve our objective, we relied on hard copy data from Southwest Alliance, and data contained
in HUD’s Single Family Assets Management System. We relied on the transmittal payment
histories provided by Southwest Alliance and HUD Santa Ana Home Ownership Center.

In addition, we interviewed six tenants; and the appropriate HUD’s management and staff, and
Southwest Alliance’s management and staff involved in managing and marketing HUD’s real
estate-owned properties, overseeing and/or processing the repairs of the properties, inspecting
the properties, and processing management fees and other cost reimbursements, lease agreement
and other related agreements.

Further, we reviewed HUD’s directives, Management and Marketing contract and any
modifications or change orders, monthly evaluation or assessment reports on Southwest
Alliance’s management of HUD’s real estate-owned properties, and the standard lease executed
between HUD and the tenants. We also reviewed the appropriate Southwest Alliance’s
accounting, inspection, repair and other records; and the Tenant Move-In Inspection and
Acceptance Agreement executed between the tenants and Southwest Alliance and its contractor
on behalf of HUD. We performed site visits of ten properties.

The audit covered the period of September 1, 2005, through December 31, 2005. This period
was adjusted as necessary. We conducted the audit 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,
   •   Compliance with applicable laws and regulations, and
   •   Safeguarding resources.

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 objective:

              •       Program operations - Policies and procedures that management has
                      implemented to reasonably ensure that a program meets its objectives.

              •       Validity and reliability of data - Policies and procedures that management
                      has implemented to reasonably ensure that valid and reliable data are
                      obtained, maintained, and fairly disclosed in reports.

              •       Compliance with 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 internal controls do not provide reasonable
              assurance that the process for planning, organizing, directing, and controlling
              program operations will meet the organization’s objectives.




                                                8
Significant Weakness


           Based on our audit, we determined there were no significant weaknesses existed in
           Southwest Alliance’s management of HUD’s Real Estate-Owned properties held off
           market to house disaster victims.




                                           9
                                   APPENDIXES
Appendix A

                SCHEDULE OF QUESTIONED COSTS


             Recommendation      Ineligible
                 number              1/

                    1B            $79,306

                  Totals          $79,306


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.




                                              10
Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation   Auditee Comments




Comment 1




Comment 2




                         11
Ref to OIG Evaluation   Auditee Comments




Comment 3




                         12
Ref to OIG Evaluation   Auditee Comments




Comment 4




                         13
                        OIG Evaluation of Auditee Comments


Comment 1   We commend Southwest Alliance for stepping up in response to the national
            crisis by retooling itself quickly from a property resale business into landlord
            to at least 756 families displaced as a result of Hurricanes Katrina and Rita.

Comment 2   Southwest Alliance stated that it informed HUD as early as October 2005
            about tenants not paying utility bills. However, Southwest Alliance was
            mainly concerned that HUD would authorize reimbursement of the tenant
            utility bills paid by the contractor. It was only months later in April 2006,
            when HUD’s Santa Ana Homeownership Center informed Southwest Alliance
            that HUD would no longer reimburse utility costs, that the contractor sought
            written guidance on how to resolve the problem to include the option of tenant
            evictions.

Comment 3   Southwest Alliance disagreed that the tenant lease agreement required it to start
            the process to disconnect utility services for tenants who did not transfer services
            into their names within seven days. Southwest Alliance contends that the
            reference disconnecting utilities after seven days appears only in the Tenant
            Move-In Inspection and Acceptance Form that it prepared on behalf of HUD. We
            determined that Southwest Alliance incorporated the Tenant Move-In Inspection
            and Acceptance Agreement into page one of the tenant lease agreement that was
            executed between the tenants and the landlord (Southwest Alliance on HUD’s
            behalf). The Tenant Move-In Inspection and Acceptance Agreement therefore
            was part of the lease agreement, and was also executed between the tenant and the
            landlord (Southwest Alliance on HUD’s behalf) on the same date as the date the
            lease agreement became a binding agreement. Although HUD must authorize
            punitive actions against non-compliant tenants, as its contractor, Southwest
            Alliance must enforce the terms and conditions of the lease agreements.
            Among those terms, Southwest Alliance is required to start the process to
            disconnect utility services for tenants who do not transfer services into their
            names within seven days of occupancy. Southwest Alliance must aggressively
            enforce the lease terms through punitive actions such as disconnecting utility
            services. In addition, Southwest Alliance needs to aggressively pursue
            collection of utility costs from tenants whose utilities were paid by HUD on
            their behalf.

            Southwest Alliance disagreed with the total utility costs HUD paid for non-
Comment 4   compliant tenants. Southwest Alliance stated that the total should be substantially
            lower after excluding the temporary costs for the temporary time lag the tenants
            took to switch the utility services into their names. We did not decrease the total
            utility costs cited in our report because based upon Southwest Alliance’s
            accounting and other related records, HUD paid a total of $79,306 for tenant
            utility bills as of April 25, 2006. It is important to also emphasize that there were
            other tenants who complied with the lease agreements regarding their
            responsibilities over utility costs, and therefore for fairness, HUD should require
            Southwest Alliance to initiate collection actions against non-compliant tenants to
            recover the $79,306 HUD paid for their utility costs.
                                             14