oversight

The Owner of HDC Retirement Village in St. Louis, Missouri, Violated Its Regulatory Agreement

Published by the Department of Housing and Urban Development, Office of Inspector General on 2006-06-29.

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

                                                               Issue Date
                                                                        June 29, 2006
                                                               Audit Report Number
                                                                            2006-KC-1012




TO:        Herman Ransom, Director, Office of Multifamily Housing, Kansas City Hub,
             7AHM

           Margarita Maisonet, Director of the Departmental Enforcement Center, CV

           //signed//
FROM:      Ronald J. Hosking, Regional Inspector General for Audit, 7AGA

SUBJECT: The Owner of HDC Retirement Village in St. Louis, Missouri, Violated Its
         Regulatory Agreement


                                  HIGHLIGHTS

 What We Audited and Why

            We audited HDC Retirement Village, a 48-unit project located in St. Louis,
            Missouri. We selected this project for audit based on a request from the U. S.
            Department of Housing and Urban Development’s (HUD) Office of Housing.
            Our audit objective was to determine whether the managing owner (owner)
            complied with regulatory agreement provisions when expending project funds.


 What We Found


            HDC Retirement Village’s owner did not use project funds in compliance with the
            regulatory agreement. It also violated several other terms of the agreement. The
            owner violated the regulatory agreement because it viewed its projects as
            interdependent and not individually viable. These violations, totaling $209,716,
            adversely affected the project’s financial stability.




                                            1
What We Recommend


           We recommend that HUD take appropriate actions to correct deficiencies and
           ensure that these violations will not occur in the future.

           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


           The owner generally disagreed with our findings. We provided the draft report to
           the owner on May 24, 2006. The owner provided written comments on June 12,
           2006 . The complete text of the owner’s response, along with our evaluation of
           that response, can be found in appendix B of this report.




                                            2
                             TABLE OF CONTENTS

Background and Objectives                                                4

Results of Audit
        Finding: Owner’s Actions Violated the Regulatory Agreement       5

Scope and Methodology                                                    10

Internal Controls                                                        11

Appendixes
   A.   Schedule of Questioned Costs and Funds to Be Put to Better Use   12
   B.   Auditee Comments and OIG’s Evaluation                            13
   C.   Schedule of Regulatory Agreement Violations                      18
   D.   Regulatory Agreement Provisions                                  19
   E.   Schedule of Unauthorized Distributions                           20




                                              3
                      BACKGROUND AND OBJECTIVES

HDC Retirement Village is an elderly housing project consisting of 48 Section 8 units located in St.
Louis, Missouri. The U.S. Department of Housing and Urban Development (HUD) insures this
project under its Section 221(d)(3) mortgage insurance program.

Human Development Community Development Corporation (owner), a not-for-profit entity, owns
and manages the project. It has managed two other HUD-insured projects (Wellston Townhouses
and Grandview Heights), one of which was assigned in 2004.

HDC Retirement Village’s operations are governed by a regulatory agreement, which was signed by
the owner in 1981. Our audit objective was to determine whether the owner complied with
regulatory agreement provisions when expending project funds.




                                                 4
                                 RESULTS OF AUDIT

Finding: Owner’s Actions Violated the Regulatory Agreement
HDC Retirement Village’s owner did not use project funds in compliance with the regulatory
agreement. It also violated several other terms of the agreement. The owner violated the
regulatory agreement because it viewed its projects as interdependent and not individually
viable. These violations, totaling $209,716, adversely affected the project’s financial stability.



 Managing Owner Violated
 Regulatory Agreement


               The owner did not follow the regulatory agreement requirements (see appendixes
               C and D). The owner
                           •   Improperly allocated shared expenses,
                           •   Made unauthorized distributions,
                           •   Allowed liens,
                           •   Underfunded tenant security deposits,
                           •   Retained tenant rent credits, and
                           •   Withheld required financial reports.

               Expense Allocation

               The owner did not properly allocate expenses for payroll, office utilities, and
               office maintenance. Its three projects share employees and office space; however,
               the owner did not have an allocation plan and did not require employees to track
               time spent performing duties for each project. While our review of Wellston
               Townhouses did not identify any payments for office maintenance or utilities,
               HDC Retirement Village paid $13,306 toward these expenses during the audit
               period. Further, although HDC Retirement Village was an elderly project with
               fewer units and fewer maintenance needs than Wellston Townhouses, it paid
               approximately $59,000 more than Wellston Townhouses in payroll expenses
               during the audit period.




                                                 5
                       Payroll expenses for shared employees
                              of HUD-insured projects

        $100,000
                       $73,120                      $74,845
         $80,000
         $60,000                  $45,165                      $43,618
         $40,000
         $20,000
              $0
                              2004                         2005

          HDC Retirement Village (48 units)   Wellston Townhouses (63 units)

HDC Retirement Village’s books and records did not show that the $161,271 paid
for payroll, office utilities, and office maintenance was reasonable and necessary
for project operations.

Asset Distributions

The owner, without prior HUD approval, distributed $28,971 in project assets.
The owner
   •    Purchased $16,388 in supplies and services for other projects, $5,900 of
        which was later repaid to the project;
   •    Paid $3,486 for owner legal expenses not related to project operations;
   •    Loaned $3,000 to another project;
   •    Transferred $4,229 to another project to correct an unsupported deposit
        error; and
   •    Paid $1,868 for ineligible or unsupported miscellaneous expenses.
Appendix E provides details of each unauthorized distribution.

The owner also failed to keep sufficient records of credit card activity. During
our audit period, the project made several payments toward its Visa account and
toward another project’s Office Depot account. The project’s books and records
did not show the payments were charges of the project or that they were
reasonable and necessary.

Liens

The owner allowed the sewer district to place liens on the project. As of
December 31, 2005, the owner had not paid $10,844 in service fees, penalties, and
interest. The sewer bill consisted of $8,601 for service and $2,243 for penalties


                                 6
          and interest. The penalties and interest accumulated because the owner did not
          pay the project’s sewer expense in a timely fashion. Penalties of this type are not
          ordinary or necessary for the project’s operation.

          Security Deposits

          The owner improperly used tenant security deposits. In November 2005, the
          owner transferred tenant security deposit funds to the project’s operating account.
          As of December 31, 2005, the tenant security deposit account was underfunded by
          $6,836.

          Rent Credits

          The owner improperly retained tenant rent credits. When retroactive changes at
          recertification created rent credits, the project manager did not issue refunds to
          tenants. As of December 31, 2005, the project owed $1,794 to 20 tenants. Seven
          of the tenants were owed between $100 and $400.

          Financial Reports

          The owner did not submit all required monthly accounting reports. In March
          2005, HUD advised the owner that it was required to submit these reports each
          month, beginning with February 2005. HUD uses these reports to monitor the
          project’s revenues, disbursements, and obligations. As of December 31, 2005, the
          project had only submitted two monthly account reports.



Owner’s Reasoning

          The owner viewed its projects as interdependent and not individually viable. The
          owner did not establish effective written procedures and controls because it
          wanted fiscal flexibility to meet expenses. The owner
                     •   Believed it was too time consuming and costly to accurately track
                         employee time between projects,
                     •   Thought it was reasonable to financially support other entities by
                         paying their expenses and advancing funds,
                     •   Thought it was allowable to repay other entities without obtaining
                         HUD approval,
                     •   Did not pay the sewer bills because this service could not be shut
                         off like other utilities,
                     •   Had a standard practice of using security deposits for operating
                         expenses and then reimbursing the account upon receipt of reserve
                         for replacement funds, and


                                           7
                        •   Thought it was allowable to delay notifying tenants who were due
                            rent reimbursements.

Financial Stability Affected

             The owner allowed the project’s financial stability to deteriorate through these
             regulatory agreement violations totaling $209,716, including unsupported payroll
             and liens on the property. The owner also denied HUD access to financial reports
             needed to monitor the project’s condition. These reports would have indicated to
             HUD that the owner used project funds for unauthorized purposes and allowed the
             project’s financial stability to deteriorate. For example, from August 31, 2004, to
             August 31, 2005, the project’s negative surplus cash doubled to more than
             ($27,000).



Conclusion

             Due to the frequency and significance of these regulatory agreement violations,
             HUD should consider terminating the self-management arrangement and
             requiring independent management of the project. This action would put $1,500
             monthly project funds to better use, or $18,000 annually. The self-management
             certification provides for this type of action when owners fail to follow regulatory
             agreement requirements.


Recommendations

             We recommend that the director of HUD’s Kansas City Multifamily Housing Hub
             require the owner to

             1A.    Obtain independent management to put $18,000 to better use annually.

             1B.    Develop and implement procedures and controls to ensure that future
                    disbursements of project assets comply with the regulatory agreement and
                    HUD’s requirements, including a cost allocation plan to maintain adequate
                    books and records.

             1C.    Provide documentation to support the $166,812 in unsupported
                    distributions for payroll, office utilities, office maintenance, and
                    miscellaneous expenses or reimburse the project’s reserve for replacement
                    account the applicable portion that cannot be supported as necessary to the
                    project.




                                              8
1D.   Deposit $17,530 for improper distributions into the project’s reserve for
      replacement or a restricted capital account, which requires HUD approval
      for release of the funds.

1E.   Pay $2,243 in sewer fees and interest from nonproject funds and initiate
      action to pay $8,601 from project funds to resolve sewer liens.

1F.   Properly fund the tenant security deposit account with $6,836.

1G.   Reimburse tenants from project funds $1,794 for their rent credits.

We also recommend that HUD’s director of the Departmental Enforcement
Center

1H.   Pursue civil money penalties and administrative sanctions, up to and
      including debarment, as appropriate against the owner, management agent,
      and/or their principals/owners for their part in the regulatory violations
      cited in this report.




                               9
                         SCOPE AND METHODOLOGY

Our review generally covered the period from January 1, 2004, through December 31, 2005. To
achieve our objective, we conducted interviews with the project’s management staff, HUD
Departmental Enforcement Center staff, and HUD multifamily housing staff. We also reviewed
federal laws, regulations, and requirements. We also reviewed sewer district records.

To determine whether the owner complied with regulatory agreement provisions when expending
project funds, we reviewed the project’s
    • Monthly accounting reports,
    • Cash disbursements ledger,
    • Bank statements,
    • Check stubs,
    • Supporting documentation,
    • Audited financial statements, and
    • Regulatory agreement.

We reviewed all disbursements of more than $250. Because we identified problems with shared
expenses, we also reviewed all disbursements for office rent, utilities, and maintenance; payroll
expenses; and credit card accounts. During our review of the monthly accounting files, we also
noted four miscellaneous questionable disbursements under our threshold; therefore, we included
them in our sample.

As a result of this review, we identified the regulatory agreement violations addressed in the
finding. We discussed our results with the owner, as well as HUD staff, to obtain clarification
and agreement.

We performed audit work from February through March 2006 at Human Development
Community Development Corporation’s office, 6046 Delmar Boulevard, St. Louis, Missouri.
The audit was conducted in accordance with generally accepted government auditing standards.




                                               10
                             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:

              •       Compliance with laws and regulations – Policies and procedures that
                      management has implemented to reasonably ensure that resource use is
                      consistent with laws and regulations.

              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 item is a significant weakness:

              •       The owner did not have adequate procedures in place to ensure project assets
                      were distributed in compliance with the regulatory agreement (see finding).




                                               11
                                   APPENDIXES

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

         Recommendation            Ineligible 1/    Unsupported      Funds to be put
                number                                       2/       to better use 4/
                       1A                                                    $18,000
                       1C                              $166,812
                       1D              $17,530
                       1E               $2,243                                $8,601
                       1F               $6,836
                       1G                                                     $1,794



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 eligibility 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 or clarification of
     departmental policies and procedures.

3/   “Funds to be put to better use” are estimates of amounts that could be used more
     efficiently if an Office of Inspector General (OIG) recommendation is implemented.
     This includes reductions in outlays, deobligation of funds, withdrawal of interest subsidy
     costs, costs not incurred by implementing recommended improvements, avoidance of
     unnecessary expenditures noted in preaward reviews, and any other savings which are
     specifically identified. Our estimate reflects only the initial year of these recurring
     benefits.




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Appendix B

       AUDITEE COMMENTS AND OIG’S EVALUATION


Auditee Comments




Comment 1




                        13
Comment 2




Comment 3


Comment 4




Comment 5




Comment 6




            14
15
                 OIG’s Evaluation of Auditee Comments

Comment 1   The owner indicates that “... employees of the project provided equal time
            to each project.” This is representative of our concerns. When the owner
            does not properly allocate employee time between projects, HUD has no
            assurance that any of the projects’ expenses are reasonable and necessary
            or accurate. The owner has a contractual obligation under the regulatory
            agreement to only incur reasonable and necessary expenses. Expenses
            which benefit another project are not reasonable or necessary to HDC
            Retirement Village. The owner has previously indicated to OIG that they

                   •   Do not keep timesheets or record the amount of time spent on
                       each project,
                   •   Employ three maintenance men and each project pays the
                       salary of one maintenance man who works on all projects,
                   •   Have a work order system, but it does not track which man
                       performed the work, time spent, supplies used or the project
                       charged, and
                   •   Allocate employee time based on what the project can afford
                       rather than how much time or supplies it requires.

            The owner should be required to properly allocate employee time and
            shared expenses to the project receiving the benefit. If the owner had
            properly allocated these expenses, the owner would have met its
            contractual obligation to only incur reasonable and necessary project
            expenses and avoided violating the regulatory agreement.


Comment 2   The owner’s statement that the correction of a bank error and the
            repayment of obligation of the development do not require HUD approval
            is incorrect. The owner’s statement that assets were not distributed to any
            outside parties is also incorrect. Once funds have been deposited into the
            project’s bank account they become assets of the project and any
            distributions of assets made to outside entities, including disbursements
            that benefit other projects or the owner, require prior HUD approval.

            The owner should be required to obtain HUD approval before project
            assets are distributed to either the owner or to related entities. If the owner
            had requested HUD approval prior to making disbursements for the
            owner’s or related entity’s benefit, the owner would have met its
            contractual obligation and avoided violating the regulatory agreement.
            Requesting HUD’s approval and not getting it would have kept project
            funds for the project’s use and benefit.




                                      16
Comment 3   The owner should have prevented local sewer company liens by properly
            paying the project’s sewer bill. It is the owner’s responsibility to properly
            pay the sewer bill. If the owner had paid this expense, the owner would
            have met its contractual obligation to keep the property free of liens and
            avoided violating the regulatory agreement.

Comment 4   The owner should have kept security deposit funds separate and apart
            from all other funds of the project in a trust account. The amount in this
            account should have always been equal to or more than the aggregate of
            all outstanding obligations under said account. Tenant security deposits
            should not, for any reason, be used for demands of the project. If the
            owner had maintained the tenant security deposit in the proper manner, the
            owner would have met its contractual obligation and avoided violating the
            regulatory agreement. The owner has not provided us with information
            that would verify repayment of the underfunded amount.

Comment 5   The owner’s comments are not responsive to the issue at hand. Tenants
            are owed refunds of rent they have over paid. The regulatory agreement
            requires that only the proper amount of rent be collected. If the owner
            collects excess rent, the owner should notify the tenant and refund the rent.
            Maintaining rent credits for use at move out to cover damages violates the
            regulatory agreement.

Comment 6   HUD was very clear in its instructions to the owner. The owner did not
            comply with HUD’s request for monthly accounting reports. Forwarding
            the financial reports to the mortgage holder and the Board of Directors and
            Mr. Brown’s health has no bearing on these issues. The owner’s actions
            have violated the regulatory agreement.




                                     17
Appendix C

 SCHEDULE OF REGULATORY AGREEMENT VIOLATIONS


                                                  Funds
                                                               Applicable
         Regulatory agreement violations        improperly
                                                                Sections
                                                   used

      Improperly allocating shared expenses     $161,271     8(f),12(c),12(d)
      Making unauthorized asset distributions    $28,971         8(b),8(f)
                 Allowing liens                  $10,844           8(a)
      Underfunding tenant security deposits       $6,836           8(g)
          Retaining tenant rent credits           $1,794           5(b)
      Withholding required financial reports        $0             12(f)
           Total funds improperly used          $209,716




                                           18
Appendix D

               REGULATORY AGREEMENT PROVISIONS


Paragraph 5 -
       (b) The maximum rent for each Section 8 unit is stated in the Housing Assistance
           Payments Contract and adjustments in such rents shall be made in accordance with
           the terms of the Housing Assistance Payments Contract.

Paragraph 8 -
Owners shall not without the prior written approval of the Secretary:
       (a) Convey, transfer, or encumber any of the mortgaged property, or permit the
           conveyance, transfer, or encumbrance of such property.
       (b) Assign, transfer, dispose of, or encumber any personal property of the project,
           including rents, or pay out any funds except from surplus cash [residual receipts],
           except for reasonable operating expenses and necessary repairs.
       (f) Engage, except for natural persons, in any other business or activity, including the
           operation of any other rental project, or incur any liability or obligation not in
           connection with the project.
       (g) Require, as a condition of the occupancy or leasing of any unit in the project any
           consideration or deposit other than the prepayment of the first month’s rent, plus a
           security deposit in an amount not in excess of one month’s rent (the gross family
           contribution in Section 8 units) to guarantee the performance of the covenants of the
           lease. Any funds collected as security deposits shall be kept separate and apart from
           all other funds of the project in a trust account the amount of which shall at all times
           equal or exceed the aggregate of all outstanding obligations under said account.

Paragraph 12 -
       (c) The mortgaged property, equipment, buildings, plans, offices, apparatus, devices,
           books, contracts, records, documents, and other papers relating thereto shall at all
           times be maintained in reasonable condition for proper audit and subject to
           examination and inspection at any reasonable time by the Secretary or duly
           authorized agents of the Secretary. Owners shall keep copies of all written contracts
           or other instruments which affect the mortgaged property, all or any of which may be
           subject to inspection and examination by the Secretary or duly authorized agents of
           the Secretary.
       (d) The books and accounts of the operations of the mortgaged property and of the
           project shall be kept in accordance with the requirements of the Secretary.
       (f) At request of the Secretary, or duly authorized agents of the Secretary, the Owners
           shall furnish monthly occupancy reports and shall give specific answers to questions
           upon which information is desired from time to time relative to the income, assets,
           liabilities, contract, operation, and condition of the property and the status of the
           insured mortgage.



                                                 19
Appendix E

        SCHEDULE OF UNAUTHORIZED DISTRIBUTIONS
                                                      Ineligible costs
                      Cash
    Check                              Ineligible    later reimbursed       Unsupported
                  disbursements
    number                               costs       (as of December            costs
                  journal month
                                                         31, 2005)
The owner purchased $16,388 in supplies and services for other projects, $5,900 of which
was later repaid to the project.
      5583            July 2004           $600
      5586            July 2004           $389
      5611           August 2004         $2,000
      5616         September 2004         $716
      5642         November 2004         $2,223
      5669         November 2004          $150
      5672         November 2004          $386
      5682         December 2004         $1,852
      5690         December 2004         $5,592            $4,800
      5735          February 2005         $900
      5761            April 2005          $153
      5772            April 2005          $327
      5778            April 2005         $1,100            $1,100
                                        $16,388            $5,900                   $0

The owner paid $3,486 for owner legal expenses not related to project operations.
      5661         November 2004          $750
      5747          March 2005            $236
      5826          August 2005          $2,500
                                         $3,486             $0                      $0

The owner loaned $3,000 to another project.
      DM             April 2005          $3,000
                                         $3,000             $0                      $0

The owner transferred $4,229 to another project to correct an unsupported deposit error.
      5554           May 2004                                                  $4,229
                                          $0                $0                 $4,229

The owner paid $1,868 for ineligible or unsupported miscellaneous expenses.
      5469         February 2004         $350
      5525           April 2004                                                 $307
      5589           July 2004                                                  $180
      5646         November 2004                                                $825
      5667         November 2004         $206
                                         $556               $0                 $1,312




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