oversight

The General Partner of The Sanctuary of Geneva, Ohio Improperly Used More Than $43,000 in Project Funds

Published by the Department of Housing and Urban Development, Office of Inspector General on 2005-11-17.

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

               AUDIT REPORT




               THE SANCTUARY
         MULTIFAMILY EQUITY SKIMMING

                   GENEVA, OHIO

The General Partner Improperly Used More Than $43,000 in
                      Project Funds

                     2006-CH-1002

                 NOVEMBER 17, 2005

               OFFICE OF AUDIT, REGION V
                   CHICAGO, ILLINOIS
                                                                 Issue Date
                                                                          November 17, 2005
                                                                 Audit Report Number
                                                                          2006-CH-1002




TO:        G. Alan Coupland, Director of Columbus Multifamily Housing Hub, 5EHM


FROM:      Heath Wolfe, Regional Inspector General for Audit, 5AGA

SUBJECT: The General Partner of The Sanctuary of Geneva, Ohio Improperly Used More
           Than $43,000 in Project Funds

                                   HIGHLIGHTS

 What We Audited and Why

             We reviewed the books and records of The Sanctuary (project), a 39-bed assisted
             living facility located in Geneva, Ohio. The review was part of our efforts to
             combat multifamily equity skimming on the U.S. Department of Housing and
             Urban Development’s (HUD) Federal Housing Administration insurance fund.
             We chose the project based upon its negative surplus-cash position since 2002 and
             indicators of diverted project funds or assets. Our objective was to determine
             whether the owner/management agent used project funds in compliance with the
             regulatory agreement and HUD’s requirements.


 What We Found

             Eld-Terra, Incorporated (general partner), the managing general partner of The
             Sanctuary of Geneva Limited Partnership (owner), improperly used $38,009 in
             project funds from February 2003 through January 2005 when the project was in a
             non-surplus-cash position. The inappropriate disbursements included $37,000 to
             the general partner to repay owner advances to the project and $1,009 in legal
             services for the general partner. The general partner also lacked documentation to
             support that an additional $5,475 in project funds was properly used. We
             provided the general partner a schedule of the improper disbursements.
What We Recommend

           We recommend that the director of HUD’s Columbus Multifamily Housing Hub
           require the general partner to (1) reduce the project’s management fee liability for
           the inappropriate payments, (2) provide documentation to support the unsupported
           payments or reduce the project’s management fee liability for the appropriate
           amount, and (3) implement procedures and controls to ensure that future
           repayments of owner advances are made only from project surplus cash or with
           prior HUD approval and project funds are used according to HUD’s requirements.

           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 provided our discussion draft audit report to the general partner and HUD’s staff
           during the audit. We held an exit conference with the general partner on October 26,
           2005.

           We asked the general partner to provide comments on our discussion draft audit
           report by October 28, 2005. The general partner provided written comments dated
           October 20, 2005. The general partner disagreed with our finding and
           recommendations. The complete text of the written comments, along with our
           evaluation of those comments, can be found in appendix B of this report.




                                            2
                           TABLE OF CONTENTS

Background and Objectives                                                        4

Results of Audit

      Finding: The General Partner Inappropriately Used or Lacked Supporting
               Documentation for the Use of More Than $43,000 in Project Funds   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 OBJECTIVES

The Sanctuary (project) is a 39-bed assisted living facility located in Geneva, Ohio. The project
is insured under section 232 of the National Housing Act and its regulatory agreement was
executed on February 14, 2001. The project’s owner is The Sanctuary of Geneva Limited
Partnership (owner). Eld-Terra, Incorporated (general partner) is the managing general partner
while the Sanctuary Management Company (management agent) manages the project. Vincent
J. Micucci is the owner of the general partner and management agent. The project has been in a
non-surplus-cash position since December 2002.

The review was part of our efforts to combat multifamily equity skimming on the U.S.
Department of Housing and Urban Development’s (HUD) Federal Housing Administration
insurance fund. We chose the project based upon its negative surplus-cash position since 2002
and indicators of diverted project funds or assets.

Our objective was to determine whether the owner/management agent used project funds in
compliance with the regulatory agreement and HUD’s requirements.




                                                4
                                 RESULTS OF AUDIT

Finding: The General Partner Inappropriately Used or Lacked
Supporting Documentation for the Use of More Than $43,000 in Project
                                Funds
The general partner improperly used $38,009 in project funds from February 2003 through
January 2005 when the project was in a non-surplus-cash position. The inappropriate
disbursements included $37,000 to the general partner to repay owner advances to the project
and $1,009 in legal services for the general partner. The general partner also lacked
documentation to support that an additional $5,475 in project funds was properly used. The
inappropriate disbursements occurred because the general partner lacked effective procedures
and controls over the use of project funds. As a result, project funds were not used efficiently
and effectively.



 The General Partner Repaid
 $37,000 in Advances to the
 Project

               The general partner repaid itself $37,000 in project funds from March through
               December 2003 when the project was in a non-surplus-cash position. The general
               partner said the disbursements were made for the repayment of cash advances
               made to meet the project’s payroll needs. The general partner provided a related
               inter-company temporary advance to divert a crisis. The general partner did not
               request approval from HUD before the repayment as required by the project’s
               regulatory agreement.

               Paragraph 6(b) of the regulatory agreement requires that the owners will not,
               without prior written approval of the secretary of HUD, assign, transfer, dispose
               of, or encumber any personal property of the project, including rents, or pay out
               any funds except for surplus cash, except for reasonable operating expenses and
               necessary repairs, and make or receive and retain any distribution of assets or any
               income of any kind of the project except surplus cash. Page 2-16 of HUD
               Handbook 4370.2, REV-1, states that the repayment of owner advances when the
               project is in a non-surplus-cash position will subject the owner to criminal and/or
               civil penalties.




                                                 5
The General Partner
Improperly Paid $1,009 in
Nonproject Legal Expenses

            The general partner inappropriately disbursed $1,009 in project funds for legal
            services related to the allocation of interest in the project’s ownership entity. The
            services were not reasonable and necessary expenses of the project as required by
            paragraph 6(b) of the regulatory agreement. The disbursement was made in
            March 2004 while the project was in a non-surplus-cash position.


The General Partner Lacked
Documentation to Support the
Use of $5,475 in Project Funds

            The general partner lacked documentation to support that an additional $5,475 in
            project funds was properly used. The unsupported disbursements included such
            items as petty cash, cable television service, and food service. The disbursements
            occurred between June 2003 and January 2005 while the project was in in a non-
            surplus-cash position. We provided the general partner a schedule of the
            unsupported disbursements. As of October 13, 2005, the project owed the general
            partner $118,090 in management fees.

Recommendations

            We recommend that the director of HUD’s Columbus Multifamily Housing Hub
            require the general partner to

            1A.    Reduce the project’s management fee liability by $38,009 ($37,000 for the
                   repayment of owner advances and $1,009 in nonproject legal expenses)
                   for the inappropriate disbursements from project funds cited in this
                   finding.

            1B.    Provide documentation to support the $5,475 in unsupported payments
                   cited in this finding or reduce the project’s management fee liability for
                   the appropriate amount.

            1C.    Implement procedures and controls to ensure that future repayments of
                   owner advances are made only from project surplus cash or with prior
                   HUD approval and project funds are used according to HUD’s
                   requirements.




                                              6
                        SCOPE AND METHODOLOGY

We performed the review at HUD's Cleveland Multifamily Housing Program Center and its
Columbus Multifamily Housing Hub, the general partner’s office, and the project from March to
June 2005. To accomplish our objective, we interviewed HUD’s staff, the general partner’s
employees, and a partner from the project’s independent public accountant.

To determine whether the owner/management agent used project funds in compliance with the
regulatory agreement and HUD’s requirements, we reviewed

   •   HUD’s files for the project;
   •   The project’s audited financial statements for the years ending December 31, 2003, and
       2004; and
   •   The project’s financial records such as bank statements, canceled checks, and general
       ledgers.

We also reviewed Title 12, United States Code, sections 1715 and 1735; Title 31, United States
Code, section 3801; 24 CFR [Code of Federal Regulations] Parts 24 and 232; and HUD
Handbooks 2000.06, REV-3; 4350.1, REV-1; 4370.2, REV-1; and 4381.5, REV-2.

The review covered the period February 1, 2003, through January 31, 2005. This period was
adjusted as necessary. 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,
   •   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 objectives:

                  •   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 all of 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 review, we believe the following item is a significant weakness:

               •   The general partner lacked effective procedures and controls over the use
                   of project funds (see finding).




                                            9
                                   APPENDIXES

Appendix A

                SCHEDULE OF QUESTIONED COSTS

                  Recommendation
                      number            Ineligible 1/    Unsupported 2/
                         1A               $38,009
                         1B                                  $5,475
                        Totals            $38,009            $5,475


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
     polices or regulations.

2/   Unsupported costs are those costs charged to a HUD-financed or HUD-insured program
     or activity when we cannot determine at the time of audit. Unsupported costs require a
     decision by HUD program officials. This decision, in addition to obtaining supporting
     documentation, might involve a legal interpretation of departmental policies and
     procedures.




                                            10
Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation   Auditee Comments




Comment 1




                         11
Ref to OIG Evaluation   Auditee Comments




                         12
                        OIG Evaluation of Auditee Comments

Comment 1   When HUD’s asset manager for the project provided this information to the
            general partner, the asset manager was unaware that the general partner provided
            the cash advance to the project. The asset manager was under the impression that
            the management agent provided the cash advance to the project. Further, HUD
            Handbook 4370.2, chapter 2, clearly outlines an owner's responsibilities with
            regard to repayment of owner advances as required by the regulatory agreement.
            Advances to help a project are encouraged, but repayment must be in accordance
            with the regulatory agreement and written guidance.




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