Issue Date
August 31, 2006
Audit Report Number:
2006-AO-1002
TO: Ben L. Johnson, Director, Single Family Homeownership Center, 8AHH
FROM: Rose Capalungan, Director, Hurricane Recovery Audit Oversight Division, GAH
SUBJECT: Cityside Management Corporation, Hammond, Louisiana, Did Not Enforce The
Lease Terms Over Payment of Property Utilities
HIGHLIGHTS
What We Audited and Why
We audited Cityside Management Corporation (Cityside), a management and
marketing contractor for the U.S. Department of Housing and Urban
Development’s (HUD) real estate-owned properties held off market to house
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 Cityside complied with HUD’s regulations, procedures, and
instructions in the management of HUD’s real estate-owned properties held off
market to house disaster victims.
What We Found
Cityside complied with HUD’s regulations, procedures, and instructions in the
management of HUD’s real estate-owned properties held off market to house
disaster victims, with one exception. It did not ensure that all disaster victims
transferred the billing of property utility services into their names and paid
charges for utility services in full, as required by the lease agreements. This
occurred because Cityside did not take timely and proactive measures to enforce
full tenant compliance with the lease terms over payment of property utilities,
when staff became aware of the issue. Instead, Cityside used $17,744 in HUD
funds to pay the monthly billings on 133 leased properties during the period
October 13, 2005 through March 31, 2006.
What We Recommend
We recommend that the Director of the Denver Office of Single Family
Homeownership Center instruct Cityside Management Corporation to take
appropriate action against the tenants who do not comply with the instruction and
requirements regarding utility payments, and require Cityside Management
Corporation to initiate collection actions against tenants to recover the $17,744
that HUD paid for utility costs and any additional costs HUD had incurred after
March 31, 2006.
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 Cityside management.
We also provided our discussion draft audit report to HUD’s staff during the
audit. We conducted an exit conference with Cityside’s management on July 21,
2006.
We asked the president of Cityside to provide comments on our discussion draft
audit report by July 25, 2006. The president provided written comments dated
July 25, 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 Objective 4
Results of Audit
Finding: Cityside Management Corporation Did Not Enforce The Lease Terms 5
Over Payment Of Property Utilities
Scope and Methodology 7
Internal Controls 8
Followup on Prior Audits 10
Appendixes
A. Schedule of Questioned Costs 11
B. Auditee Comments and OIG’s Evaluation 12
3
BACKGROUND AND OBJECTIVES
Founded in 1996, Cityside Management Corporation (Cityside) is a real estate company.
Cityside specializes in the management and marketing of U.S. Department of Housing and
Urban Development (HUD)-owned real estate portfolios as well as the management of many
other commercial and residential properties located in the New England area. Christopher
Dolloff is the president and founder of Cityside.
In August 2004, HUD contracted with Cityside to provide management and marketing services
for its single-family program in the states of Arkansas and Louisiana. 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 following Hurricanes
Katrina and Rita. The program was designed to provide people whose homes have been
damaged by disaster a temporary place to live until repairs can be completed or a permanent
housing solution is identified. The program is available only to homeowners and renters who are
legal residents of the United States and who have been displaced by the disaster. HUD modified
its initial contract with Cityside to provide services in managing, marketing, preparing and
repairing properties held off market to house disaster victims.
In October 2005, HUD advanced $3.12 million to Cityside to repair and prepare 312 properties,
held off market to house disaster victims, for occupancy. As of February 2006, Cityside had
expended $956,800. As of April 25, 2006, Cityside managed 165 properties that were occupied
by disaster victims and located in Arkansas and Louisiana.
We audited Cityside’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 Cityside complied with HUD’s regulations, procedures,
and instructions in the management of HUD’s real estate-owned properties held off market to
house disaster victims.
4
RESULTS OF AUDIT
Cityside Management Corporation Did Not Enforce The Lease Terms
Over Payment Of Property Utilities
Cityside complied with HUD’s regulations, procedures, and instructions in the management of
HUD’s real estate-owned properties held off market to house disaster victims, with one
exception. It did not enforce the lease terms over payment of property utilities for 133 tenant
families during the period October 13, 2005 through March 31, 2006. Cityside was required to
ensure that the disaster victims timely transferred the billing of property utility services into their
names and paid all charges for utility services. This occurred because Cityside did not take
timely and adequate corrective actions, as provided for in the lease agreements. Instead, Cityside
used $17,744 in HUD funds to pay the tenants’ obligations.
Under its Marketing and Management contract with HUD, Cityside is responsible
for ensuring that the utility costs for properties leased to hurricane victims were
paid before lease up, and after occupancy, that tenants timely assumed this
responsibility.
Cityside did not enforce the lease requirements over utility payments for all
tenants. As of April 25, 2006, Cityside had leased 165 properties requiring tenant
payments of utility services. However, for 133 leased properties, Cityside used
HUD funds to pay for the utility costs owed by the tenants month after month.
Cityside knew that tenants were not paying for their utility bills, because the
utility billings for the 133 noncompliant tenants continued to be addressed to its
offices. The president of Cityside told us that Cityside did not see a need to
monitor tenants if and when tenants converted utilities into their names.
However, as HUD’s contractor, Cityside was responsible for taking timely and
proactive steps to enforce the lease terms. In this case, enforcement involved
converting the utility services and the billing addresses at lease up from Cityside’s
to the tenants’ names and periodic monitoring to ensure that tenants converted
utilities into their names.
Cityside took a more proactive approach in February 2006 by sending notification
letters to all tenants reminding them of their utility obligations. In addition, Cityside
implemented a proactive measure for new tenants such as requiring them to sign the
Utility Activation Acknowledgement form that stated their responsibility to transfer
utility services into their names and that their continued occupancy in the leased
properties was dependent upon such transfer. Tenant noncompliance, however, has
not been resolved, and HUD has since (April, 2006) directed Cityside and other
Marketing and Management contractors not to disconnect utility services for
noncompliant tenants.
5
By early and proactive enforcement actions, Cityside could have minimized the
ineligible utility costs paid from HUD funds. As of March 31, 2006, HUD had paid
a total of $17,744 for utility costs and continues to pay utility costs for tenants who
have not transferred the utility services into their names as required.
Recommendations
We recommend that the Director of the Denver Office of Single Family
Homeownership Center
1A. Instruct Cityside Management Corporation to take appropriate action
against the tenants who do not comply with the instructions and
requirements regarding utility payments.
1B. Require Cityside Management Corporation to initiate collection actions
against tenants to recover the $17,744 that HUD paid for utility costs and
any additional costs HUD had incurred after March 31, 2006.
6
SCOPE AND METHODOLOGY
We performed our audit work between January and May 2006. We conducted our audit at
Cityside’s Office in Hammond, Louisiana and the HUD Office of Inspector General’s (OIG)
New Orleans, Louisiana field office.
To achieve our audit objective, we relied on electronic and hard-copy data from Cityside and
HUD.
In addition, we interviewed eight tenants; the appropriate HUD management and staff; and
Cityside’s management, staff, and contractors involved in managing and marketing HUD’s real
estate-owned properties, overseeing and/or processing the repairs of the properties, lease
agreements and other related agreements, and inspecting the properties.
Further, we reviewed HUD’s directives, management and marketing contract and any
modifications or change orders, monthly evaluation or assessment reports on Cityside’s
management of HUD’s real estate-owned properties, and the standard lease executed between
HUD and the tenants. We also reviewed Cityside’s property management plan, accounting,
inspection, repair, and other relevant records; and the utility activation acknowledgment form
signed by the tenants. We performed site visits to six properties.
The audit covered the period September 1 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 Weaknesses
Based on our audit, we determined there were no significant weaknesses existed
in Cityside’s management of HUD’s Real Estate-Owned properties held off
market to house disaster victims.
9
FOLLOW-UP ON PRIOR AUDITS
This is the first audit of Cityside Management Corporation by HUD OIG.
HUD did not require Cityside to submit independent auditors’ reports. It modified Cityside’s HUD
management and marketing contract on September 1, 2005, deleting the annual audit requirement
and replacing it with an annual compiled financial statement requirement.
10
APPENDIXES
Appendix A
SCHEDULE OF QUESTIONED COSTS
Recommendation Ineligible
number 1/
1B $ 17,744
Totals $17,744
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.
11
Appendix B
AUDITEE COMMENTS AND OIG’S EVALUATION
Ref to OIG Evaluation Auditee Comments
Comment 1
12
OIG Evaluation of Auditee Comments
Cityside contends it followed HUD’s directions/instructions to pay all utilities
Comment 1
that were not transferred by tenants and not to evict tenants for failure to pay
utilities. Although Cityside was following HUD’s directions/instructions,
Cityside, as a management and marketing contractor, has the responsibility for
taking timely and proactive steps to enforce the lease terms. Cityside did not
take timely and proactive measures to enforce full tenant compliance with the
lease terms over payment of property utilities, when staff became aware of the
issue. In addition, Cityside did not seek guidance from HUD regarding
payment of utilities for months. Cityside continued to pay utilities for
noncompliant tenants six months before HUD actually provided the direction
to not evict noncompliant tenants in April 2006.
13
Cityside Management Corporation, Hammond, Louisiana, Did Not Enforce The Lease Terms Over Payment of Property Utilities
Published by the Department of Housing and Urban Development, Office of Inspector General on 2006-08-31.
Below is a raw (and likely hideous) rendition of the original report. (PDF)