oversight

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)

                                                                  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