Issue Date
July 18, 2006
Audit Report Number
2006-DE-1004
TO: Marcia D. LaPorte, Director, Denver Multifamily Hub, 8AHML
FROM: //signed//
Ronald J. Hosking, Regional Inspector General for Audit, 8AGA
SUBJECT: Juniper Communities, Bloomfield, New Jersey, Did Not Comply with Its
Regulatory Agreement or HUD Regulations in Managing Its Federal Housing
Administration-Insured Projects
HIGHLIGHTS
What We Audited and Why
In January 2006, we received a referral from the U.S. Department of Housing and
Urban Development’s (HUD) Departmental Enforcement Center for Wellspring at
Louisville and Wellspring at Aurora, two Section 232 projects owned and managed
by Juniper Communities (Juniper). The Departmental Enforcement Center claimed
that the projects took cash distributions when in a non-surplus-cash position, made
loans to affiliates, and commingled funds between projects.
Our audit objectives were to determine whether the projects made inappropriate
disbursements to the owners and/or loaned project funds to other projects.
What We Found
For Wellspring at Louisville, Juniper did not make inappropriate distributions to
the owners or loan project funds to other projects. The Departmental
Enforcement Center based its claim on data that contained reporting errors made
by Juniper’s independent public accountant.
For Wellspring at Aurora, Juniper made unauthorized cash distributions totaling
more than $165,000, prematurely withdrew more than $912,000, and had loans
outstanding from other Federal Housing Administration-insured projects totaling
almost $127,500 as of December 31, 2005.
Juniper also accrued unallowable asset management fees totaling almost $130,000
and improperly allocated corporate expenses to Wellspring at Aurora.
What We Recommend
We recommend that the Denver multifamily Hub director require Juniper to repay
Wellspring at Aurora for the unauthorized cash distributions, develop and
implement management controls to ensure that unauthorized cash distributions do
not recur, repay Wellspring at Aurora for the unauthorized loans to other Federal
Housing Administration-insured projects, develop and implement management
controls to ensure that unauthorized loans do not recur, eliminate all asset
management fee accrual accounts, develop and implement management controls
to ensure that expenses accrued and/or charged to Federal Housing
Administration-insured projects are legitimate project-related expenses, and
properly allocate its corporate expenses.
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 the discussion draft of the audit report to Juniper on July 10, 2006,
and requested its comments by July 25, 2006. Juniper provided its written
response on July 13, and agreed with the findings. The complete text of the
auditee’s response is in appendix B of this report.
2
TABLE OF CONTENTS
Background and Objectives 4
Results of Audit
Finding 1: Juniper Made Unauthorized Distributions and Premature 5
Withdrawals and Loaned Project Funds from Wellspring at Aurora
Finding 2: Juniper Accrued Unallowable Asset Management Fees and 7
Improperly Allocated Corporate Expenses to Wellspring at Aurora
Scope and Methodology 9
Internal Controls 10
Appendixes
A. Schedule of Questioned Costs and Funds to Be Put to Better Use 11
B. Auditee Comments 12
3
BACKGROUND AND OBJECTIVES
The U.S. Congress established the U.S. Department of Housing and Urban Development’s
(HUD) Section 232 Nursing Home Program in 1969 to accomplish three purposes:
1) Conserve and increase the supply of nursing homes, intermediate care facilities,
and board and care homes;
2) Provide credit enhancement through insurance of mortgages for new or
substantially rehabilitated projects; and
3) Purchase or refinance existing Section 232 insured projects with or without repair.
Owners of projects insured by HUD under Section 232 of the National Housing Act enter into a
regulatory agreement. The regulatory agreement, among other things, restricts the owner’s
ability to withdraw or disburse project assets.
Juniper Communities (Juniper), located in Bloomfield, New Jersey, owns and manages
Wellspring at Aurora and Wellspring at Louisville. Juniper does the majority of accounting for
its projects. It owns and manages seven Federal Housing Administration-insured Section 232
projects and eight non-Federal Housing Administration-insured projects.
Wellspring at Aurora is a Delaware general partnership formed on January 16, 1998, to develop
and operate a 48-unit, 52-bed assisted living facility housing project for Alzheimer’s patients.
The facility is located at 11901 East Mississippi Avenue, Aurora, Colorado.
Wellspring at Louisville is a Delaware limited partnership formed on March 24, 1999, to develop
and operate a 52-unit, 52-bed assisted living facility housing project for Alzheimer’s patients.
The facility is located at 1078 South 88th Street, Louisville, Colorado.
In January 2006, we received a referral from HUD’s Departmental Enforcement Center claiming
that Wellspring at Aurora took cash distributions when in a non-surplus-cash position, made
loans to affiliates, and commingled funds between projects. In addition, the Departmental
Enforcement Center claimed that Wellspring at Louisville took unauthorized distributions from
the project when the project was in a non-surplus-cash position.
The objectives of the audit were to determine whether the projects made inappropriate
disbursements to the owners and/or loaned project funds to other projects.
4
RESULTS OF AUDIT
Finding 1: Juniper Made Unauthorized Distributions and Premature
Withdrawals and Loaned Project Funds from Wellspring at
Aurora
Juniper did not comply with HUD’s regulatory agreement or regulations in managing its Federal
Housing Administration-insured project. It took unauthorized cash distributions, made
premature withdrawals, and loaned monies from Wellspring at Aurora to other Federal Housing
Administration-insured projects. Juniper’s management lacked knowledge of HUD requirements
for Section 232 Federal Housing Administration-insured mortgages. Juniper placed Wellspring
at Aurora at risk financially, thus placing HUD at risk for the Federal Housing Administration-
insured mortgage.
HUD’s Regulatory Agreement
and Regulations Not Followed
Juniper made more than $165,000 in unauthorized cash distributions from
Wellspring at Aurora in fiscal year 2001. Unauthorized cash distributions are cash
distributions greater than the surplus cash calculation allowed each year, plus any
surplus cash distributions not taken in previous years. Juniper made more than
$912,000 in premature withdrawals from Wellspring at Aurora over the period 2000
through 2005. Premature withdrawals are taking cash distributions before the
computation of surplus cash at the end of the reporting period, less any remaining
surplus cash not distributed in prior years. Juniper had also loaned almost $127,500
from Wellspring at Aurora directly to other Federal Housing Administration-insured
projects as of December 31, 2005. According to Juniper officials, the loans kept
another Federal Housing Administration-insured project financially stable.
Lack of Knowledge of HUD
Regulatory Agreement and
Regulations
Juniper’s management lacked knowledge of its HUD regulatory agreement and
regulations. For example, it did not understand that it could take funds from a
property only if the surplus cash computation resulted in excess cash. It also did
not understand that it could take surplus cash only as of and after a semiannual or
annual fiscal period.
In addition, Juniper’s management was not aware that all borrowers under Section
232 must be single asset borrowers. One of the main purposes of this requirement
5
is to keep Federal Housing Administration-insured properties from making loans
to other Federal Housing Administration-insured properties. HUD only allows
Juniper, as owner, to take surplus cash distributions. Then it can lend those
monies to other projects if it chooses.
Wellspring at Aurora and HUD
Placed at Risk
By taking unauthorized cash distributions, making premature withdrawals, and
loaning project funds to other projects, Juniper placed Wellspring at Aurora at
risk of being in a deficit position had unexpected expenses occurred. This in turn
put HUD at potential risk if Wellspring at Aurora defaulted on its mortgage or
went into foreclosure.
Recommendations
We recommend that the Denver multifamily Hub director require Juniper to
1A. Repay Wellspring at Aurora for the unauthorized cash distributions
of more than $165,000, and any other unauthorized cash
distributions made from other Federal Housing Administration-
insured projects.
1B. Develop and implement management controls to ensure that
unauthorized cash distributions do not recur. This would have
prevented the premature withdrawals of more than $912,000.
1C. Repay Wellspring at Aurora for the unauthorized loans to other
Federal Housing Administration-insured projects of just under
$127,500, and repay any other unauthorized loans made to or
received by other Federal Housing Administration-insured projects.
1D. Develop and implement management controls to ensure that
unauthorized loans do not recur.
6
Finding 2: Juniper Accrued Unallowable Asset Management Fees and
Improperly Allocated Corporate Expenses to Wellspring at
Aurora
Juniper did not comply with HUD regulations in managing its Federal Housing Administration-
insured project. It accrued unallowable asset management fees to Wellspring at Aurora for a
three-year period. In addition, it improperly allocated corporate expenses to Wellspring at
Aurora. Juniper’s management lacked knowledge of HUD requirements for Section 232 Federal
Housing Administration-insured mortgages. As a result, Wellspring at Aurora had less money
for its operations.
Accrued Unallowable Fees and
Improperly Allocated
Corporate Expenses
Juniper accrued unallowable asset management fees of almost $130,000 to
Wellspring at Aurora in violation of HUD requirements. This occurred from
2003 through 2005. According to Juniper’s management, the asset management
fees are for costs associated with reporting to the board of directors, developing
Juniper as a company, acquisition opportunities, and tax returns and audits of
Juniper. These are owner-related expenses, not project-related expenses.
Juniper improperly allocated corporate expenses to Wellspring at Aurora in
violation of HUD requirements. For example, Juniper employed a Colorado
regional director of operations and allocated some of her travel and telephone
expenses to Wellspring at Aurora. According to HUD regulations, HUD-insured
properties must pay a management fee to the management agent for its services
and only the person or entity approved by HUD to manage a HUD project can
receive management fees. Management agents must cover the costs of
supervising and overseeing project operations out of the fee they receive.
Therefore, the monthly management fee paid to Juniper by Wellspring at Aurora
already covered the Colorado regional director of operations’ expenses.
Lack of Knowledge of HUD
Requirements
Juniper’s management lacked knowledge of HUD requirements for accruing and
allocating corporate expenses to Wellspring at Aurora. As described by Juniper,
the accrued asset management fees are unallowable owner expenses. In addition,
Juniper lacked knowledge of management-related, project-related, and owner-
7
related fees. The management agent fee already covered the corporate expenses
allocated to Wellspring at Aurora.
Less Money for Wellspring at
Aurora’s Operations
Juniper accrued almost $130,000 in unallowable asset management fees and
improperly allocated corporate expenses to Wellspring at Aurora. As a result,
Wellspring at Aurora had less money for its operations.
Recommendations
We recommend that the Denver multifamily Hub director require Juniper to
2A. Eliminate almost $130,000 in asset management fee accruals for
Wellspring at Aurora and any other asset management fee accrual
accounts for other Federal Housing Administration-insured
properties.
2B. Develop and implement management controls to ensure that
expenses accrued and/or charged to Federal Housing Administration-
insured projects are legitimate project-related expenses.
2C. Develop and implement management controls to ensure the proper
allocation of corporate expenses as project-related, owner-related, or
management-related expenses.
8
SCOPE AND METHODOLOGY
To accomplish the audit objectives, we
• Became familiar with the applicable program requirements and project regulatory
agreement;
• Interviewed HUD multifamily officials;
• Reviewed HUD multifamily project files;
• Performed site work at Wellspring at Aurora in Aurora, Colorado, reviewed financial
records, and performed testing of account payables;
• Performed site work at Wellspring at Louisville in Louisville, Colorado, reviewed
financial records, and performed testing of account payables;
• Performed site work at Juniper in Bloomfield, New Jersey, and obtained and reviewed
audited financial statements, general ledgers, bank statements, and various other
documentation for the Federal Housing Administration-insured projects; and
• Interviewed officials and staff of Wellspring at Aurora, Wellspring at Louisville, and
Juniper.
Our audit period covered January 1, 2000 through December 31, 2005.
We relied on computer-processed data maintained by Juniper in its Quick Book accounting
system. We assessed the reliability of these data by corroborating the data with other sources.
Based on our assessment, we concluded that in meeting our objectives, the data are sufficiently
reliable.
In an effort to make appendix A more understandable, we explained those amounts categorized
as “funds to be put to better use.” Based on the audited financial statements (specifically, the
surplus cash calculation in the notes to the audited financial statements and cash distributions
reflected in the statement of cash flows), Juniper made $912,519 in premature withdrawals from
Wellspring at Aurora. Based on Wellspring at Aurora’s general ledger, account number 590-08,
Juniper accrued $129,996 in asset management fees.
We performed the audit work from February to June 2006. We conducted the audit in
accordance with generally accepted government auditing standards.
9
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, and
• Compliance with applicable laws and regulations.
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:
• Juniper’s policies and procedures for making cash disbursements to the
project owners and
• Juniper’s policies and procedures for ensuring project funds are used
exclusively for project-related expenses.
We assessed the relevant controls identified above.
A significant weakness exists if management controls do not provide reasonable
assurance that the process for planning, organizing, directing, and controlling
program operations will meet the organization’s objectives.
Significant Weaknesses
Based on our review, we believe the following items are significant weaknesses:
• Management lacked controls to ensure that unauthorized cash distributions
do not recur. [Finding 1]
• Management lacked controls to ensure that Federal Housing
Administration-insured projects do not loan monies to other Federal
Housing Administration-insured projects. [Finding 1]
• Management lacked controls to ensure that expenses accrued to Federal
Housing Administration-insured projects are legitimate project-related
expenses, and to ensure the proper allocation of corporate expenses.
[Finding 2]
10
APPENDIXES
Appendix A
SCHEDULE OF QUESTIONED COSTS
AND FUNDS TO BE PUT TO BETTER USE
Recommendation Ineligible 1/ Funds to be put
number to better use 2/
1A $165,900
1B $912,519
1C $127,487
2B $129,996
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/ 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.
For recommendation 1B, we determined that HUD requires that the management agent
maintain the funds identified in the project’s operating account until they are available for
distribution. If Juniper had controls over cash disbursements, it would have followed its
regulatory requirement. For recommendation 2B, we determined that Juniper accrued the
asset management fees and therefore encumbered assets of Wellspring at Aurora. If
Juniper had controls to ensure that expenses accrued were legitimate project-related
expenses, this would not have occurred.
11
Appendix B
AUDITEE COMMENTS
12
Juniper Communities, Bloomfield, New Jersey, Did Not Comply with Its Regulatory Agreement or HUD Regulations in Managing Its Federal Housing Administration-Insured Projects
Published by the Department of Housing and Urban Development, Office of Inspector General on 2006-07-18.
Below is a raw (and likely hideous) rendition of the original report. (PDF)