oversight

NorthStar Community Development Corporation Inappropriately Used More Than $120,000 in Economic Development Initiative - Special Purpose Grant Funds and HUD 's Interest in More Than $180,000 in Grant Funds Was Not Secured; Detroit, Michigan

Published by the Department of Housing and Urban Development, Office of Inspector General on 2005-12-30.

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

               AUDIT REPORT




    NORTHSTAR COMMUNITY DEVELOPMENT
               CORPORATION
 ECONOMIC DEVELOPMENT INITIATIVE – SPECIAL
       PURPOSE GRANT (B-02-SP-MI-0310)

                 DETROIT, MICHIGAN

NorthStar Inappropriately Used More Than $120,000 in Grant
 Funds and HUD’s Interest in More Than $180,000 in Grant
                  Funds Was Not Secured

                     2006-CH-1006

                  DECEMBER 30, 2005

                OFFICE OF AUDIT, REGION V
                    CHICAGO, ILLINOIS
                                                                Issue Date
                                                                         December 30, 2005
                                                                Audit Report Number
                                                                         2006-CH-1006




TO:         Francis P. McNally, Director of Congressional Grants, DECC
            Jeanette Harris, Director of Community Planning and Development, 5FD


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

SUBJECT: NorthStar Community Development Corporation Inappropriately Used More
           Than $120,000 in Economic Development Initiative - Special Purpose Grant
           Funds and HUD’s Interest in More Than $180,000 in Grant Funds Was Not
           Secured; Detroit, Michigan

                                   HIGHLIGHTS

 What We Audited and Why

             We audited NorthStar Community Development Corporation’s (NorthStar)
             Economic Development Initiative - Special Purpose Grant (Grant). We initiated
             the audit in conjunction with our internal review of the U.S. Department of
             Housing and Urban Development’s (HUD) oversight of Economic Development
             Initiative – Special Purpose Grants. The review is part of our fiscal year 2005
             annual audit plan. We chose NorthStar’s Grant based upon a statistical sample of
             fiscal years 2002 and 2003 Economic Development Initiative – Special Purpose
             Grants, in which 90 percent or more in funds were disbursed. Our objectives
             were to determine whether NorthStar used its Grant funds in accordance with
             HUD’s requirements and recorded HUD’s interest on the assisted properties.

 What We Found


             NorthStar improperly used $123,372 in Grant funds from March 2002 through
             July 2005. The inappropriate expenses included $49,200 to purchase 39
             properties for Harmony Park; $46,700 to pay engineering, environmental
           assessment, and closing cost expenses for properties within Pilgrim Park Homes;
           $13,106 in property taxes, including fines and penalties, for Community House;
           $8,399 to pay for deeds and title work for properties of Revitalife; $4,098 in
           rehabilitation for NorthStar’s Center; and $1,869 in property taxes for the
           property located at 15411 Rosa Parks Boulevard.

           NorthStar lacked documentation to support that an additional $1,970 in Grant
           funds was used according to NorthStar’s amended budget approved by HUD. In
           addition, NorthStar used $184,871 in Grant funds to acquire, or aid in the
           acquisition of, and/or rehabilitate real property; however, NorthStar did not place
           covenants on the properties’ titles assuring nondiscrimination based on race,
           color, national origin, or handicap. Further, HUD did not request that NorthStar
           record HUD’s interest on the properties’ titles.


What We Recommend

           We recommend that HUD’s director of congressional grants require NorthStar to
           (1) reimburse HUD from nonfederal funds for the inappropriate expenses; (2)
           provide documentation to support the unsupported expenses or reimburse HUD
           from nonfederal funds for the applicable portion; (3) implement procedures and
           controls to address the deficiencies cited in this report; and (4) record covenants
           on the titles assuring nondiscrimination based on race, color, national origin, or
           handicap and record liens on the titles for the University Grove properties,
           NorthStar’s Center, the Pilgrim Park properties, the Harmony Park properties, and
           the Revitalife properties showing HUD’s interest in the assisted properties. If the
           covenants and liens are not recorded, NorthStar should reimburse HUD $184,871
           from nonfederal funds for the Grant funds used on these properties.

           We also recommend that HUD’s director of congressional grants, in conjunction
           with the director of HUD’s Detroit Office of Community Planning and
           Development, determine whether NorthStar’s expense documentation for other
           HUD-funded grants was used to support expenses of the Grant since they were
           awarded for some of the same activities.

           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 NorthStar’s vice president and chief
           financial officer and HUD’s staff during the audit. We held an exit conference with
           NorthStar’s vice president and chief financial officer on December 19, 2005.



                                             2
We asked NorthStar’s vice president and chief financial officer to provide comments
on our discussion draft audit report by December 24, 2005. NorthStar’s vice
president and chief financial officer provided written comments dated December 26,
2005. NorthStar’s vice president and chief financial officer agreed to implement
corrective actions to address our findings and provided documentation for
unsupported disbursements relating to University Grove. The complete text of the
written response, along with our evaluation of that response, can be found in
appendix B of this report.




                                 3
                            TABLE OF CONTENTS

Background and Objectives                                                           5

Results of Audit

      Finding 1: NorthStar Inappropriately Used More Than $120,000 in Grant Funds   6

      Finding 2: HUD’s Interest in More Than $180,000 in Grant Funds Awarded to
                 NorthStar Was Not Secured                                          9

Scope and Methodology                                                               12

Internal Controls                                                                   13

Appendixes
   A. Schedule of Questioned Costs and Funds to Be Put to Better Use                15
   B. Auditee Comments                                                              16
   C. Federal Requirements                                                          21




                                            4
                     BACKGROUND AND OBJECTIVES

The Economic Development Initiative program. The U.S. Department of Housing and Urban
Development’s (HUD) Economic Development Initiative program includes noncompetitive
Economic Development Initiative – Special Purpose Grants. HUD awards Economic
Development Initiative – Special Purpose Grants to entities included in the U.S. House of
Representatives’ conference reports.

NorthStar Community Development Corporation. Incorporated in 1986 as a nonprofit
corporation under the laws of the State of Michigan, NorthStar Community Development
Corporation (NorthStar) is governed by a nine-member board of directors. The U.S. House of
Representatives’ Conference Report 107-272 set aside $350,000 in Economic Development
Initiative – Special Purpose Grant (Grant) funds to NorthStar for a targeted housing production
program. In August 2002, HUD awarded NorthStar the $350,000 Grant for its Varsity Park
Development Plan, consisting of two housing developments called University Grove and Pilgrim
Village Homes; Community House, a mini substation for the Detroit Police Department; Titan
Pointe, a housing development; Revitalife, a scattered-site housing program; and administrative
expenses. HUD approved an amended budget for the $350,000 Grant in October 2003. The
table below contains the amended budget’s expense items.

                                                                 Budget
                                      Expense item               amount
                            Administrative                      $150,000
                            Community House rehabilitation        95,000
                            NorthStar’s Center rehabilitation     60,000
                            University Grove predevelopment       45,000
                                           Total                $350,000

NorthStar increased its administrative expenses due to a reduction in Community Development
Block Grant and HOME funds from the City of Detroit that funded the expenses; increased the
rehabilitation costs for Community House due to continuing vandalism of the building; included
NorthStar’s Center rehabilitation costs to create a community development center; increased
University Grove’s predevelopment expenses because the actual costs were greater than the
estimated costs; eliminated Pilgrim Village Homes due to finding an alternative funding source;
eliminated Titan Pointe as a result of a delay in the project’s start; and eliminated Revitalife
because matching funds were unavailable. NorthStar’s records for the Grant are located at 3800
Puritan Street, Detroit, Michigan.

We initiated this audit in conjunction with our internal review of HUD’s oversight of Economic
Development Initiative – Special Purpose Grants. The review is part of our fiscal year 2005
annual audit plan. We chose NorthStar’s Grant based upon a statistical sample of fiscal years
2002 and 2003 Economic Development Initiative – Special Purpose Grants, in which 90 percent
or more in funds were disbursed.

Our objectives were to determine whether the NorthStar used its Grant funds in accordance with
HUD’s requirements and recorded HUD’s interest on the assisted properties.


                                                  5
                                 RESULTS OF AUDIT

Finding 1: NorthStar Inappropriately Used More Than $120,000 in
                            Grant Funds
NorthStar improperly used $123,372 in Grant funds from March 2002 through July 2005. The
inappropriate expenses included $49,200 to purchase 39 properties for Harmony Park; $46,700
to pay engineering, environmental assessment, and closing cost expenses for properties within
Pilgrim Park Homes; $13,106 in property taxes, including fines and penalties, for Community
House; $8,399 to pay for deeds and title work for Revitalife’s properties; $4,098 in rehabilitation
for NorthStar’s Center; and $1,869 in property taxes for the property located at 15411 Rosa
Parks Boulevard. NorthStar lacked documentation to support that an additional $1,970 in Grant
funds was used according to NorthStar’s amended budget. We provided NorthStar schedules of
the inappropriate and unsupported payments. The problems occurred because NorthStar lacked
effective procedures and controls over the use of Grant funds. As a result, Grant funds were not
used efficiently and effectively.



 NorthStar Inappropriately
 Used More Than $120,000 in
 Grant Funds

               Contrary to article I, section A, of its grant agreement, NorthStar used $123,372
               in Grant funds for expenses not included in its amended budget approved by
               HUD. The disbursements occurred from March 2002 through July 2005.
               NorthStar’s amended budget included the following expenses: $150,000 for
               administration; $95,000 for Community House rehabilitation; $60,000 for
               NorthStar’s Center rehabilitation; and $45,000 for University Grove
               predevelopment. However, NorthStar improperly: used $49,200 to purchase 39
               properties for Harmony Park; paid engineering, environmental assessment, and
               closing cost expenses totaling $46,700 for properties within Pilgrim Park Homes;
               paid property taxes, including fines and penalties, totaling $13,106 for
               Community House; used $8,399 to pay for deeds and title work for properties of
               Revitalife; paid $4,098 in rehabilitation for NorthStar’s Center; and used $1,869
               to pay property taxes for the property located at 15411 Rosa Parks Boulevard.

               Further, NorthStar lacked documentation to support that an additional $1,970 in
               Grant funds was used according to NorthStar’s amended budget. The
               unsupported disbursements, which related to University Grove, included $470 in
               acquisition costs for the property located at 15710 Dexter Avenue, and $1,500 for
               a tax credit application to the Michigan State Housing Development Authority.




                                                 6
           NorthStar used $148,184 in Grant funds to pay administrative expenses, had not
           started the rehabilitation of Community House, and exceeded its amended budget
           amount for NorthStar’s Center by $4,098. We were unable to determine whether
           NorthStar completed the $45,000 in predevelopment for University Grove using
           both Grant and other funds since NorthStar lacked supporting documentation and
           University Grove was a scattered-site housing development.


NorthStar Lacked Effective
Controls Over the Grant Funds

           NorthStar’s vice president and chief financial officer said NorthStar’s work
           revolves around its Varsity Park Development Plan. All of the funds were used
           for projects included in the Varsity Park Development Plan. Therefore, it does
           not matter for which project the funds were used. The misuse of Grant funds
           occurred because NorthStar lacked effective procedures and controls over the
           Grant. As a result, HUD’s Grant funds were not used effectively and efficiently.

           NorthStar submitted a revised budget for the Grant dated December 13, 2005, to
           HUD. The director of HUD’s Office of Congressional Grants denied NorthStar’s
           request since all Grant funds were disbursed prior to the submission of the revised
           budget.

NorthStar Also Received Block
Grant and HOME Funds

           NorthStar provided supporting documentation for the Grant funds totaling
           $148,184 in administrative expenses, which included $16,631 and $131,553 for
           expenses incurred in 2002 and 2003, respectively. However, NorthStar’s
           independent public accountant’s workpapers showed Grant funds were used to
           pay for NorthStar’s administrative expenses totaling $50,000 and $100,000 for
           2002 and 2003, respectively. NorthStar received an additional $1,035,640 in
           Community Development Block Grant (Block Grant) and HOME Investment
           Partnerships Program (HOME) funds to pay for salaries from July 1, 2002,
           through September 30, 2005. The following table details the grant type, number,
           period, and amount for salaries.

                       Type            Number             Period            Amount
                 Block Grant           2606578       7/1/02 – 6/30/03         $492,265
                 Block Grant           2638883       7/1/03 – 6/30/04          263,700
                 HOME                  2640145       10/1/02 – 9/30/05         225,000
                 Block Grant           2651997       7/1/03 – 6/30/04           54,675
                                         Totals                             $1,035,640




                                            7
          Further, NorthStar was awarded $85,000 in Block Grant (number 2620880) funds
          for the period January 28, 2004, through January 27, 2006, for Media Center’s
          rehabilitation. Since NorthStar received multiple HUD funds to pay similar
          expenses during the same periods, HUD lacks assurance that its funds were not
          inappropriately used to pay the similar expenses for another grant.


Recommendations


          We recommend that HUD’s director of congressional grants require NorthStar to

          1A. Reimburse HUD from nonfederal funds for the $123,372 in Grant funds
              cited in this finding that were not used in accordance with its amended
              budget approved by HUD.

          1B. Provide documentation to support $1,970 in unsupported expenses cited in
              this finding. If the necessary documenation cannot be provided, NorthStar
              should reimburse HUD from nonfederal funds for the applicable portion.

          1C. Implement procedures and controls to ensure Grant funds are used
              according to its amended budget approved by HUD.

          We recommend that HUD’s director of congressional grants, in conjunction with
          the director of HUD’s Detroit Office of Community Planning and Development

          1D. Determine whether NorthStar’s expense documentation for other HUD-
              funded grants was used to support expenses of the Grant since they were
              awarded for some of the same activities. If NorthStar used multiple grants
              to pay the same expenses, HUD should take appropriate action, including
              but not limited to reimbursement by NorthStar for the applicable amount
              and/or administrative action.




                                          8
Finding 2: HUD’s Interest in More Than $180,000 in Grant Funds
              Awarded to NorthStar Was Not Secured
NorthStar used $184,871 in Grant funds to acquire, or aid in the acquisition of, and/or
rehabilitate real property; however, NorthStar did not place covenants on the properties’ titles
assuring nondiscrimination based on race, color, national origin, or handicap. NorthStar used:
$64,098 for rehabilitation of NorthStar’s Center; $49,200 to purchase 39 properties for Harmony
Park; $46,700 for engineering, environmental assessment, and closing costs for properties within
Pilgrim Park Homes; $16,474 for title work, architectural fees, environmental assessment,
market study, and closing costs for University Grove properties; and $8,399 for deeds and title
work for properties of Revitalife. Further, HUD did not request that NorthStar record HUD’s
interest on the properties’ titles. NorthStar did not record the covenants on the titles because it
lacked effective oversight of the Grant. As a result, HUD’s interest in the properties is not
protected.


 NorthStar Used More Than
 $180,000 in Grant Funds
 without Placing Covenants on
 the Properties’ Titles to Ensure
 Nondiscrimination


               Contary to federal requirements, NorthStar did not secure HUD’s interest in
               $184,871 in Grant funds used to acquire, or aid in the acquisition of, and/or
               rehabilitate real property. NorthStar paid $64,098 for rehabilitation of
               NorthStar’s Center; $49,200 to purchase 39 properties for Harmony Park; $46,700
               for engineering, environmental assessment, and closing costs for properties within
               Pilgrim Park Homes; $16,474 for title work, architectural fees, environmental
               assessment, market study, and closing costs for University Grove properties; and
               $8,399 to pay for deeds and title work for properties of Revitalife. The Grant
               funds were disbursed from September 19, 2002, through June 15, 2005.

               NorthStar failed to place covenants on the properties’ titles to assure
               nondiscrimination based on race, color, national origin, or handicap. The purpose
               of the covenants is to ensure nondiscrimination for the period that the properties
               are used as outlined in NorthStar’s application for the Grant or for another
               purpose involving similar services or benefits. The recording of the covenants
               will provide HUD recourse if discrimination based on race, color, national origin,
               or handicap occurs in relation to the properties.




                                                 9
HUD’s Interest in the
Properties Is at Risk


            NorthStar’s vice president and chief financial officer said HUD did not provide
            NorthStar any directives or guidance regarding the securing of HUD’s interest in
            the properties. However, NorthStar assured HUD that it would place a covenant
            on the properties’ titles to assure nondiscrimination during the useful life of the
            projects. The recording of the covenants will provide HUD recourse if
            discrimination based on race, color, national origin, or handicap occurs in relation
            to the properties.

HUD Did Not Request
NorthStar to Record HUD’s
Interest on the Properties’
Titles


            HUD did not request NorthStar to record HUD’s interest on the properties’ titles.
            The recording of HUD’s interest on the properties will help protect HUD in case
            the properties are sold or no longer used for their intended purpose. NorthStar's
            president certified in Standard Form 424D, Assurances – Construction Programs,
            section 3, that NorthStar would record the federal interest in the title of real
            property in accordance with awarding agency directives.

            HUD’s Office of Congressional Grants’ position is that the standard form only
            requires NorthStar to record HUD’s interest in the properties if HUD issued a
            directive that requires applicants to record HUD’s interest in real property or
            HUD specifically directs NorthStar to record HUD’s interest in the properties.
            HUD did not issue any directives requiring grant recipients to record HUD’s
            interest in real property or specifically direct NorthStar to record HUD’s interest.
            However, HUD clearly has the authority to require a grantee to record HUD’s
            interest in an assisted property. Therefore, HUD’s interest in the properties is not
            protected in case they are sold or are no longer used for their intended purpose.

Recommendations


            We recommend that HUD’s director of congressional grants require NorthStar to

            2A. Record covenants on the properties’ titles assuring nondiscrimination based
                on race, color, national origin, or handicap and record liens for NorthStar’s
                Center, Harmony Park, Pilgrim Park Homes, Revitalife, and University
                Grove showing HUD’s interest in the assisted properties. The covenants and
                liens should help ensure that NorthStar protects HUD’s interest in the
                $184,871 in Grant funds used for the properties.



                                             10
2B. Reimburse HUD from nonfederal funds for the Grant funds used to pay for
    NorthStar’s Center, Harmony Park, Pilgrim Park Homes, Revitalife, and
    University Grove properties if the covenants and liens are not recorded.




                              11
                        SCOPE AND METHODOLOGY

We performed the audit at the NorthStar’s Center, Community House, and the University Grove
properties during September and October 2005. To accomplish our objectives, we interviewed
HUD’s staff and NorthStar’s employees.

To determine whether NorthStar used Grant funds in accordance with HUD’s requirements and
recorded HUD’s interest on the assisted property, we reviewed:

   •   U.S. House of Representatives’ Conference Report 107-272,
   •   HUD’s file related to the Grant,
   •   NorthStar’s financial records,
   •   Block Grants and HOME grants involving NorthStar,
   •   NorthStar’s fiscal year 2003 audited financial statements, and
   •   The Michigan secretary of state’s Website for organizational information on NorthStar.

We also reviewed 24 CFR [Code of Federal Regulations] Parts 1, 8, and 84; 56 Federal Register
16337; 70 Federal Register 35967; HUD Directives 1.5, 8.50, and 84.32; Office of Management
and Budget Circulars A-21, A-87, A-110, and A-122; and HUD Handbook 2000.06, REV-3.

The audit covered the period from August 9, 2002, through August 31, 2005. This period was
adjusted as necessary. We performed our audit in accordance with generally accepted
government auditing standards.




                                              12
                              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.




                                                13
Significant Weaknesses


            Based on our audit, we believe the following items are significant weaknesses:

               •   NorthStar inappropriately used Grant funds because it lacked effective
                   procedures and controls over the Grant (see finding 1).

               •   NorthStar did not record the covenants on the titles because it lacked
                   effective oversight of the Grant (see finding 2).




                                            14
                                    APPENDIXES

Appendix A

               SCHEDULE OF QUESTIONED COSTS
              AND FUNDS TO BE PUT TO BETTER USE


            Recommendation                                         Funds to be put
                number     Ineligible 1/        Unsupported 2/     to better use 2/
                   1A             $123,372
                   1B                               $1,970
                   2A                                                 $184,871
                  Totals          $123,372          $1,970            $184,871


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.

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

3/   “Funds to be put to better use” are quantifiable savings that are anticipated to occur if an
     Office of Inspector General (OIG) recommendation is implemented, resulting in reduced
     expenditures at a later time for the activities in question. This includes costs not incurred,
     deobligation of funds, withdrawal of interest, reductions in outlays, avoidance of
     unnecessary expenditures, loans and guarantees not made, and other savings.




                                              15
Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation   Auditee Comments




                         16
Ref to OIG Evaluation   Auditee Comments




                         17
Ref to OIG Evaluation   Auditee Comments




Comment 1




                         18
Ref to OIG Evaluation   Auditee Comments




                         19
                        OIG Evaluation of Auditee Comments

Comment 1   NorthStar provided supporting documentation for $10,150 in unsupported
            disbursements relating to University Grove. Therefore, we adjusted our report by
            reducing the amount of Grant funds NorthStar lacked supporting documentation
            to $1,970. We reduced the unsupported disbursements in acquisition costs for the
            property located at 15710 Dexter Avenue to $470. We did not remove the $470
            in acquisition costs for the property located at 15710 Dexter Avenue since
            NorthStar only provided a hand written note as supporting documentation.
            Further, NorthStar did not provide documentation for the $1,500 for a tax credit
            application to the Michigan State Housing Development Authority. We also
            adjusted the recommendation that HUD’s director of congressional grants require
            NorthStar to provide documentation to support unsupported expenses cited in
            finding 1 by reducing the amount to $1,970.

            The supporting documentation NorthStar provided was for environmental
            assessment, market study, and closing costs for University Grove properties.
            Therefore, we adjusted our report by increasing the amount in which NorthStar
            did not secure HUD’s interest in Grant funds used to acquire, or aid in the
            acquisition of, and/or rehabilitate real property to $184,871. We increased the
            amount relating to the University Grove properties to $16,474 and added
            environmental assessment, market study, and closing costs. We also adjusted the
            recommendation that NorthStar’s recording of covenants and liens should help
            ensure that NorthStar protects HUD’s interest by increasing the amount to
            $184,871.




                                           20
Appendix C

                            FEDERAL REQUIREMENTS

NorthStar’s grant agreement with HUD, article I, section A, states grant funds will be used for
activities described in the application. Section B of the grant agreement, states the grants funds
must be made available in accordance with 24 CFR [Code of Federal Regulations] Parts 1 and 8.
Section E of article I states NorthStar will comply with 24 CFR [Code of Federal Regulations]
Part 84.

Section 7 of NorthStar’s application, dated May 7, 2002, includes a project description stating
NorthStar would use the $350,000 Grant for its Varsity Park Development Plan, consisting of
two housing developments called University Grove and Pilgrim Village Homes; Community
House, a mini substation for the Detroit Police Department; Titan Pointe, a housing
development; Revitalife, a scattered-site housing program; and administrative expenses.
However, HUD approved an amended budget for the $350,000 Grant in October 2003.
NorthStar’s amended budget included the following expenses: $150,000 for administration;
$95,000 for Community House rehabilitation, $60,000 for the Center rehabilitation, and $45,000
for University Grove predevelopment.

According to 24 CFR [Code of Federal Regulations] 1.5(a)(2), in the case of real property,
structures, improvements thereon, or interests therein, acquired through a program of federal
financial assistance, the instrument effecting any disposition by the recipient of such real
property, structures or improvements thereon, or interests therein shall contain a covenant
running with the land assuring nondiscrimination based on race, color, or national origin for the
period during which the real property is used for a purpose for which the federal financial
assistance is extended or for another purpose involving the provision of similar services or
benefits.

According to 24 CFR [Code of Federal Regulations] 8.50(c)(2), when no transfer of property is
involved but property is purchased or improved with federal financial assistance, the recipient
shall agree to include a covenant in the instrument effecting or recording any later transfer of the
property for the period during which it retains ownership or possession of the property to assure
nondiscrimination based on a handicap.

HUD Directive 84.32 and 24 CFR [Code of Federal Regulations] 84.32(a) state title to the real
property shall vest in the recipient as long as the recipient uses the real property for its authorized
purpose and does not encumber the real property without HUD’s approval. Section 84.32(c)
states when the real property is no longer needed for the authorized purpose or cannot be used in
other HUD-approved federally sponsored projects or programs with purposes consistent with the
authorized purpose of the original project, the recipient shall request disposition instructions
from HUD. HUD shall require the recipient to do the following: (1) retain title to the real
property without further obligation to the federal government after it compensates the federal
government the percentage of the current fair market value of the real property attributable to the
federal participation in the project, (2) sell the real property and compensate the federal
government for the percentage of the current fair market value of the real property attributable to
the federal participation in the project, or (3) transfer title to the real property to the federal


                                                  21
government or to an eligible third party and be entitled to compensation for its percentage of the
current fair market value of the real property.

According to 56 Federal Register 16337, directive means a handbook (including a change or
supplement), notice, interim notice, special directive, and any other issuance that the department
may classify as a directive.

Office of Management and Budget Circular A-122 states fines and penalties resulting from
violations of, or failure of an organization to comply with federal, state, and local laws and
regulations are unallowable.

North Star’s president certified in Standard Form 424D, Assurances – Construction Programs,
section 3, that NorthStar would record the federal interest in the title of real property in
accordance with awarding agency directives and would include a covenant in the title of real
property acquired in whole or in part with federal assistance to assure nondiscrimination during
the useful life of the project.




                                                 22