oversight

The Villas at Camelbck Crossing Phase II, Glendale, Arizona, Used Project Funds Totaling $1,008,215 for Ineligible or Undocumented Costs

Published by the Department of Housing and Urban Development, Office of Inspector General on 2005-12-13.

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

                                                                  Issue Date
                                                                      December 13, 2005
                                                                  Audit Report Number
                                                                       2006-LA-1006




TO:          Sally G. Thomas, Director, Phoenix Multifamily Housing Hub, 9EHML

             Margarita Maisonet, Director, Departmental Enforcement Center, CV


.
FROM:        Joan S. Hobbs, Regional Inspector General for Audit, Region IX, 9DGA

SUBJECT: The Villas at Camelback Crossing Phase II, Glendale, Arizona,
         Used Project Funds Totaling $1,008,215 for Ineligible or Undocumented Costs


                                     HIGHLIGHTS

    What We Audited and Why

              We reviewed the books and records of the Villas at Camelback Crossing Phase II
              (project), a 240-unit multifamily housing project located in Glendale, Arizona. We
              initiated the review in response to a request from the Phoenix Multifamily Housing
              Hub of the U.S. Department of Housing and Urban Development (HUD) due to its
              concerns about the owner’s use of project funds. Our objective was to determine
              whether the owner and its identity-of-interest management agent used project funds
              only for reasonable operating expenses and necessary repairs as required by the
              regulatory agreement.

    What We Found


              The owner, Camelback Crossings II Limited Partnership, and American West
              Communities, LLC (American West), the project’s general partner and identity-of-
              interest management agent, inappropriately used $1,008,215 in project funds for
              nonproject (ineligible) purposes during a period when the project did not have
              surplus cash available for distribution and/or was in default on its HUD-insured
              mortgage. The ineligible uses included $262,100 in international wire transfers to
           unknown entities, $101,984 for payments on unauthorized loans, $100,000 to an
           unknown certificate of deposit account, and $79,389 for payment of project
           construction costs. Additional improper uses consisted of $151,146 paid to
           corporate officers and management agent supervisory personnel and net payments of
           $119,000 to other identity-of-interest projects. Camelback Crossings II Limited
           Partnership and/or American West also lacked documentation to support additional
           disbursements of $182,595 for credit card expenses, real estate taxes, and other
           costs. Further, the owner did not obtain required HUD approval for American West
           to serve as the project’s management agent and allowed another identity-of-interest
           project to retain $12,001 in project revenue.

What We Recommend


           We recommend that the director of HUD’s Phoenix Multifamily Housing Hub
           ensure that the owner reimburses the project’s operating account for the ineligible
           disbursements and provides documentation for the unsupported payments or
           reimburses those amounts that cannot be supported to the project’s operating
           account. We also recommend that the director, in conjunction with HUD’s Office of
           Inspector General, pursue double damages remedies under the equity skimming
           statutes for the misuse of project funds. We further recommend that the director
           require the project’s owner to contract with a HUD-approved independent fee
           management agent.

           We recommend that the director of HUD’s Departmental Enforcement Center take
           administrative actions against the owner, American West, and/or its
           principals/officers for the inappropriate use of project funds.

           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 owner with a draft report on November 8, 2005, and held an exit
           conference on December 5, 2005. The owner stated he had concerns about some
           items in the report, but did not wish to provide formal verbal or written
           comments.




                                            2
                            TABLE OF CONTENTS

Background and Objectives                                                      4

Results of Audit
      Finding 1: The Project’s Owner/Management Agent Improperly Used or Lacked 5
      Supporting Documentation for the Use of $996,214 in Project Funds
      Finding 2: The Project’s Owner Contracted with Its Identity-of-Interest   10
      Management Agent without HUD Approval

Scope and Methodology                                                          14

Internal Controls                                                              15

Appendixes
   A. Schedule of Questioned Costs and Funds to Be Put to Better Use           17
   B. Criteria                                                                 18




                                            3
                      BACKGROUND AND OBJECTIVES

The Villas at Camelback Crossing Phase II (project) is a 240-unit multifamily housing project
located in Glendale, Arizona. The project’s $16.7 million mortgage is insured under section
221(d)(4) of the National Housing Act. Its regulatory agreement was executed on December 11,
2002, construction cost cut off date was March 29, 2004, and final endorsement occurred on
September 30, 2004. The project’s owner is Camelback Crossings II Limited Partnership. The
partnership is composed of its general partner (which is also the identity-of-interest management
agent), American West Communities, LLC (American West), holding 25 percent interest in the
project, and two limited partners. One of the limited partners holds a 50 percent interest in the
project, and the other, who is the sole member of the general partner, holds a 25 percent interest.
The general partner/management agent has control over all project operations.

The project has been in default on its Federal Housing Administration-insured mortgage since
February 2005. The project shares a leasing office, clubhouse, fitness center, swimming pools,
and other common areas with another U.S. Department of Housing and Urban Development
(HUD)-insured identity-of-interest project, the Villas at Camelback Crossing Phase I
(Camelback I). We will address issues identified during our review of Camelback I in a separate
audit report.

We initiated the review based on a request from HUD’s Phoenix Multifamily Housing Hub due to
its concerns about the owner’s apparent improper use of project funds.

Our objective was to determine whether project funds were used only for reasonable operating
expenses and necessary repairs as required by the regulatory agreement.




                                                  4
                                RESULTS OF AUDIT

Finding 1: The Project’s Owner/Management Agent Improperly Used or
Lacked Supporting Documentation for the Use of $996,214 in Project
Funds
The project owner, Camelback Crossings II Limited Partnership and American West, the
project’s general partner and identity-of-interest management agent, violated the terms of its
regulatory agreement by using $996,214 in project funds for nonproject (ineligible) purposes
during a period when the project did not have surplus cash available for distribution and/or was
in default on its HUD-insured mortgage. The ineligible uses included $262,100 in international
wire transfers to unknown entities, $101,984 for payments and fees on unauthorized loans,
$100,000 to an unknown certificate of deposit account, and $79,389 used for payment of project
construction costs. Additional improper uses consisted of $151,146 paid to corporate officers and
management agent supervisory personnel and net payments of $119,000 to other identity-of-
interest projects. Camelback Crossings II Limited Partnership (owner) and/or American West
also lacked documentation to support additional disbursements of $182,595 for credit card
expenses, real estate taxes, and other costs. The problems occurred because the
owner/management agent (principal) disregarded the project’s regulatory agreement with HUD.
As a result, the project’s funds available for debt service were reduced, contributing to the
current default on its $16.7 million HUD-insured mortgage.



 Project Funds Totaling $543,473
 Were Used for Miscellaneous
 Ineligible Expenses


              Project funds totaling more than $543,473 were used for miscellaneous ineligible
              expenses as follows:

              •   Operating funds totaling $262,100 were disbursed to foreign entities via
                  international wire transfer. The payments may have been made to finance
                  business interests that the principal has in Russia.

              •   Ineligible payments of $76,816 were made on a personal working capital loan
                  the principal obtained from Jackson State Bank to fund project off-site
                  construction improvements (construction costs). Construction costs cannot be
                  paid from project operating funds.




                                               5
         •   In May 2005, project funds were used to make a principal payment of $25,000
             on a $100,000 loan derived from a line of credit against the project. Finance
             fees related to this loan totaling $168 were also paid from project funds. The
             funds from this original loan/line of credit were transferred to an unidentified
             nonproject checking account in March 2005 and were not used for project
             operations.

         •   In March 2005, the owner transferred $100,000 to an unknown certificate of
             deposit account. We have been unable to obtain an explanation from the
             owner for this disbursement. However, it is clear that it does not represent a
             project operating cost.

         •   $79,389 in project operating funds was used to directly pay other
             construction-related costs. This included $65,574 paid to the construction
             contractor for the builder’s and sponsor’s profit and risk allowance, $13,050
             used to pay audit costs related to the project’s cost certification, and $765 for
             construction engineering costs. Use of operating funds to pay construction-
             related costs is a violation of the regulatory agreement.


The Owner Disbursed $151,146
(Net) to Principals and
Management Agent
Supervisory Personnel


         The owner (partnership) disbursed $151,146 in project funds to its partners and
         identity-of-interest management agent supervisory personnel in violation of the
         regulatory agreement. The principal (sole member of the general partner and also a
         limited partner) took distributions from the project totaling $117,946. In one
         instance, the payment was noted as a repayment for prior owner contributions.
         However, the project’s regulatory agreement forbids repayment of owner advances
         or any distributions to owners except from surplus cash. The owner has failed to
         repay the project for the $117,946 in unauthorized distributions. The owner
         disbursed to another limited partner $36,250, of which $14,500 remains
         unreimbursed. The project was in a non-surplus-cash position at the time of the
         distributions, and, accordingly, these owner distributions violated the regulatory
         agreement.

         Supervisory personnel of the identity-of-interest management agent, American
         West, received compensation from the project totaling $18,700–including $17,499
         in salary costs and $1,201 for employee health insurance. Salary and insurance
         payments for management agent supervisory personnel must be paid out of the
         management fee of an approved management agent, not out of project operating
         funds. The supervisory employee was hired by American West as its general




                                           6
                manager to supervise the operations of the project and two other identity-of-interest
                projects, Camelback I and the Villas at Augusta Ranch. American West did not
                receive approval from HUD to manage any of the HUD-insured identity-of-interest
                projects (see finding 2).



     The Owner Disbursed $119,000
     (Net) to Identity-of-Interest
     Projects



                The owner disbursed $490,400 in project funds to other projects controlled by the
                sole owner of the general partner (principal). Of this amount, $119,000 has not
                been reimbursed and remains outstanding and due to the project. The funds were
                disbursed to two HUD-insured projects as well as one non-HUD-insured project
                located in San Antonio, Texas. The noninsured San Antonio project, The Waters,
                received $217,000 and still owes the project $114,000. One HUD-insured
                project, the Villas at Augusta Ranch, received $82,200 from the project and still
                owes $5,000. The other HUD-insured project, Camelback I, received $191,200
                but has fully reimbursed the project for these ineligible disbursements.1 Payments
                made to these projects were not reasonable operating expenses and accordingly
                violated the terms of the regulatory agreement. The sole owner of the general
                partner previously informed HUD that these types of disbursements were
                intercompany loans between projects that were repaid within 30 days and that he
                would no longer loan funds between projects in this manner. However, such
                disbursements continue to occur, including two disbursements totaling $60,000
                made to The Waters project during the last month of our review period, May
                2005.


    More Than $182,595 in Other
    Costs Were Not Supported


                     Documentation was not available to support $182,595 in other costs paid by the
                     project. These unsupported costs included wire transfers in October 2004 of
                     $100,000 ($93,000 and $7,000) to an unknown entity (possibly for real estate
                     taxes) and $82,595 in other unsupported costs including credit card expenses,
                     nonproject legal expenses, and unsupported computer-related expenses. The
                     owner failed to provide adequate supporting documentation to demonstrate that



1
 The project owes Camelback I $34,167 as Camelback I advanced the project $225,637, of which only
$191,200 was reimbursed.



                                                      7
             these disbursements were reasonable operating expenses or necessary repairs,
             and, accordingly, they are considered ineligible costs unless appropriate
             supporting documentation can be provided.


Conclusion



             The owner used $996,214 in project funds for ineligible and unsupported
             expenses. Despite knowledge of HUD requirements, the owner continues to
             misuse project assets in violation of its regulatory agreement with HUD. The
             improper use of project funds has significantly contributed to the owner’s default
             on its $16.7 million HUD-insured mortgage. Further, the improper use of
             project funds makes the owner(s) subject to criminal and civil money penalties,
             including the equity skimming statutes set out in Title 12, United States Code,
             §1715z-19 and §1715-4a.


Recommendations



             We recommend that the director, Phoenix Multifamily Hub, require the
             owner/management agent to

             1A. Repay the project operating account $813,619 used for ineligible
             expenses.

             1B. Provide support for the $182,595 in undocumented expenses detailed
             above or repay the funds to the project’s operating account.

             1C. Implement procedures and controls to ensure project funds are used only
             for reasonable project expenses and necessary repairs as required by the
             regulatory agreement.

             1D. Pursue double damages remedies against the project’s principals/partners
             under the applicable equity skimming statutes, in conjunction with the Office
             of Inspector General.




                                           8
We also recommend that the director of HUD’s Departmental Enforcement
Center

1E. Take appropriate administrative sanctions against the principals/partners
and other entities involved in the project’s operations.

1F. Impose civil money penalties against Camelback Crossings II Limited
Partnership and its principals.




                             9
Finding 2: The Project’s Owner Contracted with Its Identity-of-Interest
Management Agent without HUD Approval
The owner contracted with its identity-of-interest management agent, American West, without
obtaining HUD-required approval. American West, owned in whole by one of the project’s limited
partners, is both the general partner and management agent of Camelback Crossing II Limited
Partnership and has in effect managed the project since its inception. During this period, the project
has not been operated in conformance with the owner’s regulatory agreement with HUD. In
addition to the numerous unauthorized disbursements detailed in finding 1, the project, through its
management agent, has failed to satisfy other requirements of the regulatory agreement, including
improperly accounting for $12,001 in project income. The owner’s disregard for the regulatory
agreement and failure to contract with a HUD-approved management agent has put the $16.7
million mortgage at risk.




 The Owner Failed to Contract
 with a HUD-Approved
 Management Agent


               Although American West is acting as the management agent for the project, it has
               not received HUD approval to do so, as required by paragraph 6(c) of its regulatory
               agreement. The owner attempted to obtain HUD approval for American West to
               manage the property on several occasions. However, HUD denied these requests
               and informed the owner that the project would have to contract with an independent
               fee management agent. HUD explained that American West did not have the
               successful management experience necessary to manage the project. HUD also
               advised the owner that since American West did not have an Arizona broker’s
               license, Arizona state law prohibited it from collecting a management fee. The
               owner was also informed of HUD requirements that prohibit payment of any
               management fee until HUD approval of a management agent is obtained.

               During the final loan closing process for the project, HUD advised the owner that
               final closing could not take place until the project contracted with a HUD-approved
               management agent. Since the owner wanted to proceed with final closing of the
               project, a HUD-approved management agent was selected. However, the owner
               limited the role of this HUD-approved management agent to processing payroll and
               insurance and creating a portion of the project’s monthly financial statements. The
               identity-of-interest management agent, American West, did not relinquish its
               property management duties, including access to and control of the project’s bank
               accounts. Within two months of final closing of the project, the HUD-approved




                                                 10
            management agent was terminated and American West resumed full control over the
            project and its operations.


Owner Did Not Operate the
Project in Compliance with the
Regulatory Agreement



            The owner did not ensure that the project was operated in accordance with HUD
            requirements, resulting in improper use of project funds, failure to provide required
            accounting reports to HUD, not funding tenant security deposits, and lack of control
            over project income as follows:

            •   The owner disbursed $813,619 in project funds for ineligible purposes and failed
                to properly document an additional $182,595 in project expenditures (see finding
                1).

            •   The owner did not provide monthly project accounting reports requested by
                HUD, which were necessary to enable HUD to monitor the project’s operations
                (the furnishing of such reports is provided for in paragraph 9(f) of the regulatory
                agreement). The owner complied with HUD’s initial request for these reports
                and provided the reports for the period January through August 2004. However,
                when HUD questioned various disbursements identified in the reports at the end
                of August, the owner stopped submitting the reports to HUD. As a result of the
                owner’s failure to provide these reports, HUD has been unable to properly
                monitor the project’s operations for more than a year. The services of an
                approved and qualified management agent would help to ensure that monthly
                accounting reports are prepared correctly and submitted to HUD in a timely
                manner.

            •   The owner failed to submit the 2004 annual financial statement audit in a timely
                manner. Audited financial statements are usually due on March 31 of each year
                for projects with a fiscal year based on the calendar year, such as the project.
                However, all HUD-insured multifamily projects were given an extension in
                filing this year to April 30 due to technical issues with HUD’s reporting system.
                The project did not select a firm to conduct the financial statement audit until
                March 30, 2005. The project submitted the audited financial statements
                electronically to HUD on September 14, 2005 (more than four months after the
                extended deadline). We attribute the untimely filing of the financial statement




                                              11
             •   audits to the owner/management agent’s disregard for HUD requirements and
                 lack of experience in operating and managing HUD-insured projects.

             •   The owner failed to establish and to maintain a separate tenant security deposit
                 account until May 2005. Before the May 2005 opening of this security deposit
                 account, the owner/management agent disregarded HUD requirements and
                 commingled tenant security deposits with project operating funds. In many
                 instances, the project operating bank account did not have a large enough
                 balance to cover the corresponding security deposit liability. The
                 owner’s/management agent’s disregard of the requirement for maintaining a
                 separate, fully funded tenant security deposit account placed the project at
                 unnecessary risk.

             •   The owner did not ensure that $12,001 (net) in project income was properly
                 accounted for and deposited into the project’s operating bank account—$14,521
                 in project income was mistakenly deposited into the Camelback I bank account,
                 and $2,520 in Camelback I income was mistakenly deposited into the project’s
                 bank account. In August 2004, the independent fee management agent
                 determined that $12,107 in project revenue was incorrectly deposited into the
                 Camelback I bank account but was unable to correct the errors since American
                 West had sole control of the operating bank accounts of both projects. The
                 independent fee management agent informed the owner of the $12,107 deposit
                 error (other offsetting deposit errors with a net effect of $6 were identified
                 during OIG’s review). However, the owner, through American West, has not
                 directed Camelback I to reimburse the project for the $12,001 (net) in
                 misdirected project revenue. The services of an approved and qualified
                 management agent would have ensured that project revenue was deposited into
                 the appropriate bank account and that any errors were corrected in a timely
                 manner.


Conclusion



             In summary, the owner failed to contract with a HUD-approved management agent
             as required by the regulatory agreement or ensure that other regulatory agreement
             requirements were followed. Despite knowledge of these requirements, the
             owner/management agent continues to operate the project in violation of its
             regulatory agreement with HUD. Due to the owner/management agent’s disregard
             of the regulatory agreement, operating control of the project should be transferred to
             a HUD-approved management agent




                                               12
Recommendations



          We recommend that the director, Phoenix Multifamily Hub,

          2A. Require the owner to transfer operating control of the project to a HUD-
          approved independent fee management agent.

          2B. Require the owner/American West to ensure that Camelback I reimburses the
          project for the $12,001 mistakenly deposited into its bank account.




                                          13
                        SCOPE AND METHODOLOGY

We performed the review at HUD’s Phoenix field office, American West’s office in Scottsdale,
Arizona, and the project from February through August 2005. To accomplish our objective, we
interviewed appropriate personnel and management from HUD, employees from the project, and
management representatives of Camelback Crossings II Limited Partnership and American West.

To determine whether the owner and the management agent used project funds only for
reasonable operating expenses and reasonable repairs as required by the regulatory agreement,
we reviewed

       •   The owner’s regulatory agreement with HUD,

       •   HUD’s files and correspondence related to the project,

       •   HUD’s Real Estate Management System and Financial Assessment Subsystem
           information related to the project,

       •   The project’s financial records, and

       •   The project’s monthly accounting reports submitted to HUD.

We also reviewed Title 12, United States Code, §1715 and §1735; Title 31, United States Code,
§3801; 24 CFR [Code of Federal Regulations] parts 24 and 207; and HUD Handbooks 2000.06,
REV-3; 4350.1, REV-1; 4370.2, REV-1; and 4381.5, REV-2.

The review covered the period March 1, 2004, through May 31, 2005. This period was adjusted
as necessary. We performed our review in accordance with generally accepted government
auditing standards.




                                                  14
                             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:

              •   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 implemented
                  to reasonably ensure that resources are safeguarded against waste, loss, and
                  misuse.

              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.




                                               15
Significant Weaknesses


           Based on our review, we believe the following item is a significant weakness:

           •   The owner and its identity-of-interest management agent lacked effective
               procedures and controls over the use of project funds and to ensure compliance
               with laws and regulations (see findings 1 and 2).




                                            16
                                      APPENDIXES

Appendix A

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

     Recommendation number                     Ineligible 1/            Unsupported 2/


              1A                                 $813,619
              1B                                                              $182,595
              2B                                    $12,001


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 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.




                                               17
Appendix B

                                         CRITERIA
Regulatory Agreement

Important provisions of Camelback Crossings II Limited Partnership’s regulatory agreement
include the following:

   •   Paragraph 6 mandates that the owner may not, without the prior written approval of the
       secretary of housing and urban development, assign, transfer, dispose of, or encumber
       any personal property of the project, including rents, or pay out any funds except from
       surplus cash, except for reasonable operating expenses and necessary repairs, and make
       or receive and retain any distribution of assets or any income of any kind of the project
       except surplus cash.

   •   Paragraph 6(c) states that the owner may not, without the prior written approval of the
       secretary of housing and urban development, convey, assign, or transfer any right to
       manage the mortgaged property.

   •   Paragraph 6(g) states that 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 obligations under said account.

   •   Paragraph 9(e) requires that the owners, within 60 days following the end of each fiscal
       year, furnish the secretary of housing and urban development with a complete annual
       financial report based upon an examination of the books and records of the borrower,
       prepared in accordance with the requirements of the secretary, prepared and certified to
       by an officer or responsible owner, and when required by the secretary, prepared and
       certified by a certified public accountant or other person acceptable to the secretary.

   •   Paragraph 9(f) requires that at the request of the secretary of housing and urban
       development, his agents, employees, or attorneys, 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 income, assets, liabilities, contracts, operations, and
       condition of the property and the status of the insured mortgage.

   •   Paragraph 13(g) defines “distribution” as any withdrawal or taking of cash or any assets
       of the project, excluding payment for reasonable expenses incident to the operation and
       maintenance of the project.

   •   Paragraph 17 stipulates that Camelback Crossings II Limited Partnership and all present
       or future general partners and limited partners to be liable for a) funds or property of the
       project coming into their hands that they are not entitled to retain and b) their own acts


                                                18
   •   and deeds or acts and deeds of others, which they have authorized, in violation of the
       provisions.

Applicable Handbook Requirements

HUD Handbook 4370.2, REV-1, CHG-1, “Financial Operations and Accounting
Procedures for Insured Multifamily Projects,” paragraph 2-10, section A, states that if the
owner takes distributions when the project is in default or when the project is in a non-surplus-
cash position, the owner is subject to criminal and/or civil penalties.

HUD Handbook 4381.5, REV-2, “The Management Agent Handbook,” chapter 3, “Allowable
Management Fees from Project Funds,” paragraph 3.1, states: “Management fees may be paid only
to the person or entity approved by HUD to manage the project. Management agents must cover
the costs of supervising and overseeing project operations out of the fee they receive.”

Equity Skimming and Civil Remedies Statutes

Title 12, United States Code, §1715z-4a, “Double Damages Remedy for Unauthorized Use of
Multifamily Project Assets and Income,” allows the U.S. attorney general to recover double
the value of any project assets or income that was used in violation of the regulatory agreement
or any applicable regulation, plus all cost relating to the action, including but not limited to
reasonable attorney and auditing fees.

Title 12, United States Code, §1715z-19, “Equity Skimming Penalty," authorizes a fine of not
more than $500,000 and/or imprisonment of not more than five years for owners, agents, or
managers that willfully use or authorize the use of any part of the rents, assets, proceeds, income,
or other funds derived from the property for any purpose other than to meet reasonable and
necessary expenses in a period during which the mortgage note is in default or the project is in a
non-surplus-cash position as defined by the regulatory agreement.

Title 12, United States Code, §1735f-15, “Civil Money Penalties Against Multifamily
Borrowers,” allows the secretary of housing and urban development to impose a civil money
penalty of up to $25,000 per violation against a borrower with five or more living units and a HUD-
insured mortgage. A penalty may be imposed for any knowing and material violation of the
regulatory agreement by the borrower, such as paying out any funds for expenses that were not
reasonable and necessary project operating expenses or making distributions to owners while the
project is in a non-surplus-cash position.

Title 31, United States Code, §3801, “Program Fraud Civil Remedies Act of 1986,” provides
federal agencies which are the victims of false, fictitious, and fraudulent claims and statements
with an administrative remedy to recompense such agencies for losses resulting from such claims
and statements; to permit administrative proceedings to be brought against persons who make,
present, or submit such claims and statements; and to deter the making, presenting, and
submitting of such claims and statements in the future.




                                                19