Department of Housing and Urban Development, Office of Inspector General | Housing and Urban Development | The General Partner of The Sanctuary of Geneva, Ohio Improperly Used More Than $43,000 in Project Funds

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.