oversight

The Villas at Augusta Ranch, Mesa, Arizona, Used Project Funds Totaling $965,316 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-1007




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 Augusta Ranch, Mesa, Arizona, Used Project Funds Totaling
         $965,316 for Ineligible or Undocumented Costs


                                    HIGHLIGHTS

 What We Audited and Why

             We reviewed the books and records of the Villas at Augusta Ranch (project), a 238-
             unit multifamily housing project located in Mesa, 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, Tegan Communities, Inc., and American West Communities, LLC, the
             project’s identity-of-interest management agent, inappropriately used $965,316 in
             project funds for nonproject (ineligible) purposes in violation of its regulatory
             agreement. The ineligible uses included $366,980 in wire transfers to unknown
           entities, $136,531 for payments on an unauthorized line of credit, and $8,593 for
           payment of project construction costs. Additional improper uses consisted of
           $78,460 paid to management agent supervisory personnel and corporate officers and
           net payments of $72,040 to other identity-of-interest projects. Tegan Communities,
           Inc., and/or American West Communities, LLC, lacked documentation to support
           additional disbursements of $246,277 for credit card expenses, legal expenses, and
           other costs. Further, the project did not obtain required HUD approval of its
           management agents and inappropriately paid $56,435 in management fees.

What We Recommend


           Subsequent to completion of our audit, the project was sold and the HUD-insured
           mortgage was paid in full, canceling HUD’s insurance liability on the project.
           Accordingly, we have not recommended repayment of the ineligible costs detailed in
           our report. However, we recommend that the director of HUD’s Phoenix
           Multifamily Housing Hub, 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 recommend that the director of HUD’s Departmental Enforcement Center take
           administrative actions against the nonprofit owner, American West Communities,
           LLC, and its principals/officers for the inappropriate use of project funds. We also
           recommend that the director impose civil money penalties against the nonprofit
           owner and its principals.

           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 draft schedules of the questioned and disallowed
           costs on November 8, 2005, and held an exit conference on December 5, 2005.
           The owner stated he had concerns about some items in the schedules, but did not
           wish to provide formal verbal or written comments at this time.




                                             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 $908,881 in Project Funds
      Finding 2: The Project’s Owner Contracted with Management Agents without  9
      HUD Approval and Paid $56,435 in Ineligible Management Fees

Scope and Methodology                                                          13

Internal Controls                                                              14

Appendixes
   A. Schedule of Questioned Costs and Funds to Be Put to Better Use           16
   B. Criteria                                                                 17




                                            3
                     BACKGROUND AND OBJECTIVES

The Villas at Augusta Ranch (project) is a 238-unit multifamily housing project located in Mesa,
Arizona. The project’s $17.9 million mortgage is insured under section 221(d)(3) of the National
Housing Act. Its regulatory agreement was executed on October 30, 2000, construction cost cutoff
was February 28, 2002, and final endorsement occurred on August 13, 2002. The project’s owner is
Tegan Communities, Inc., a nonprofit corporation incorporated in the state of Arizona. The
controlling officer (principal) of the nonprofit corporation is also the owner of the identity-of-
interest management agent, American West Communities, LLC (American West). The project has
been in default on its Federal Housing Administration-insured mortgage since September 2004.
The principal also controls the activities of two other U.S. Department of Housing and Urban
Development (HUD)-insured projects, the Villas at Camelback Crossing Phase I (Camelback I) and
the Villas at Camelback Crossing Phase II (Camelback II). We will address issues identified during
our review of these projects in separate audit reports.

Subsequent to the completion of our review, the project was sold and its HUD-insured mortgage
paid in full. Accordingly, HUD no longer has an insurance risk related to the project

We initiated the review based on a request from HUD’s Phoenix Multifamily Housing Hub for
HUD 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
            $908,881 in Project Funds
The project owner, Tegan Communities, Inc., and American West, the nonprofit corporation’s
controlling officer’s (principal) identity-of-interest management agent, violated the terms of its
regulatory agreement by using $908,881 in project funds for nonproject purposes.

The ineligible uses included $366,980 in wire transfers to unknown entities, $136,531 for
payments on an unauthorized line of credit, and $8,593 for payment of project construction costs.
Additional improper uses consisted of $78,460 paid to management agent supervisory personnel
and corporate officers and net payments of $72,040 to other identity-of-interest projects. Tegan
Communities, Inc., and American West also lacked documentation to support additional
disbursements of $246,277 for credit card expenses, legal expenses, insurance expenses for
another identity-of-interest project, and other expenses. The problems occurred because the
owner/management agent disregarded the project’s regulatory agreement with HUD. As a result,
project funds available for debt service were reduced, contributing to the current default on its
$17.9 million HUD-insured mortgage.




 Project Funds Totaling
 $512,104 Were Used for
 Miscellaneous Ineligible
 Expenses


               Project funds totaling $512,104 were used for miscellaneous ineligible expenses
               as follows:

               •   Operating funds totaling $510,000 were disbursed to unidentified entities for
                   investment purposes. The project received reimbursements of $143,020 via
                   wire transfer, resulting in a net amount due to the project of $366,980.

               •   Operating funds totaling $136,531 were used to make payments on a Bank of
                   America line of credit in the project’s name. Funds withdrawn from this line




                                                 5
              of credit were transferred to an unidentified nonproject Bank of America
              account, while the line of credit was repaid using project funds.

          •   $8,593 in project operating funds was used to directly pay for construction-
              related costs. This included $5,243 for project construction engineering costs
              and $3,350 for audit costs related to the project’s cost certification.
              Construction costs cannot be paid from project operating funds.

The Owner/Management Agent
Inappropriately Disbursed
$78,460 to Management Agent
Supervisory Personnel and
Corporate Officers

          Supervisory personnel of the identity-of-interest management agent, American
          West received compensation from the project totaling $71,692–$51,149 in salary
          costs and $20,543 for other costs including insurance expenses, vehicle expenses,
          and housing expenses. In accordance with paragraph 3.1 of HUD Handbook
          4381.5, REV-2, “The Management Agent Handbook,” salary and benefits, such
          as insurance, vehicle expenses, and housing expenses 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 manager to supervise the operations of
          the project and two other identity-of-interest projects, Camelback I, and
          Camelback II. The original general manager has since terminated her
          employment with American West, and a new manager has taken her place. The
          costs identified above are attributable to both the current and former general
          managers. American West did not receive approval from HUD to manage any of
          the HUD-insured identity-of-interest projects (see finding 2).

          The project also made payments of $6,768 to nonprofit corporate officers.
          Insufficient documentation was available to identify the purpose of these
          payments, and they are, therefore, considered to be ineligible compensation to the
          corporate officers.




                                           6
    The Project’s Owner/
    Management Agent Disbursed
    $72,040 (Net) to Identity-of-
    Interest Projects


                 The owner/management agent disbursed $420,092 in project funds to other
                 identity-of-interest projects. Of this amount, $72,040 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
                 $62,500 and still owes the project $56,000. One HUD-insured project,
                 Camelback I, received $280,392 from the project and still owes $16,040. The
                 other HUD-insured project, Camelback II, received $77,200 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 owner 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 a
                 $28,000 disbursement made to The Waters during July 2005.


    More Than $246,277 in Other
    Costs Were Not Supported


                 Documentation was not available to support $246,277 in other costs paid by the
                 project. These unsupported costs included credit card expenses, apparent
                 nonproject legal expenses, and insurance expenses of another identity-of-interest
                 project.

                 The owner/management agent failed to provide adequate supporting
                 documentation to demonstrate that these disbursements were reasonable operating
                 expenses or necessary repairs, and, accordingly, they are considered ineligible
                 costs unless appropriate supporting documentation can be provided.




1
  The project owes Camelback II $5,000 as Camelback II advanced the project $82,200, of which only $77,200 was
reimbursed.


                                                      7
Conclusion


             The owner/management agent used $908,881 in project funds for ineligible and
             unsupported expenses. Despite knowledge of HUD requirements, the
             owner/management agent continues to misuse project assets in violation of its
             regulatory agreement with HUD. The improper use of project funds significantly
             contributed to the owner’s default on its $17.9 million HUD-insured mortgage.
             Further, the improper use of project funds makes the principal(s) subject to criminal
             and civil money penalties, including the equity skimming statutes set out in Title 12,
             United States Code, sections 1715z-19 and 1715-4a.

Recommendations



             Subsequent to completion of our audit, the project was sold and the $17,710,686
             balance on the HUD-insured mortgage was paid in full, canceling HUD’s insurance
             liability on the project. Accordingly, we are not recommending repayment of the
             misused funds to the project, however, we are recommending:

             1A.     The director of HUD’s Phoenix Multifamily Hub, in conjunction with
             HUD’s Office of Inspector General, pursue double damages remedies against the
             project owner, the identity-of-interest management agent, and their principals
             under the equity skimming statutes for the $908,881 of ineligible and
             undocumented expenses detailed in this finding;

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

             1B.     Take appropriate administrative sanctions against the principal(s) of the
             project owner, the identity-of-interest management agent, and other entities
             involved in the project’s operations.

             1C.    Impose civil money penalties against Tegan Communities, Inc., and its
             principals.




                                               8
Finding 2: The Project’s Owner Contracted with Management Agents
           without HUD Approval and Paid $56,435 in Ineligible
            Management Fees
The project owner, through its principal officer, contracted with several independent fee
management agents and with its identity-of-interest management agent, American West, without
obtaining required HUD approval. During our audit period, these unapproved agents were paid
$56,435 in management fees in violation of the regulatory agreement. The owner also did not
ensure that these management agents complied with the project’s regulatory agreement with HUD.
In addition to the numerous unauthorized disbursements detailed in finding 1, the project, through
its management agents, failed to satisfy other requirements of the regulatory agreement including
accounting, reporting, and tenant security deposit requirements. The owner’s disregard for the
regulatory agreement and failure to contract with a HUD-approved management agent has put the
$17.9 million mortgage at risk.



 Owner Failed to Contract with
 a HUD-Approved Management
 Agent


               The project initially (January 2002) contracted with a HUD-approved fee
               management agent. However, due to a disagreement between the owner and the
               management agent, the management agent ended its relationship with the project
               in October 2002. The owner, without obtaining HUD approval, then contracted
               with another independent fee management agent, Archstone Management.
               Archstone managed the project from November 2002 through May 2003; at that
               time it sold its fee management division (including its management rights for the
               project) to Gables Residential. In January 2004, the owner ended its relationship
               with Gables and elected to provide management services through its identity-of-
               interest entity American West. HUD was not informed of these changes in
               management, and Archstone and Gables were paid $30,977 and $18,958 in
               ineligible management fees, respectively.

               Although American West is currently acting as the management agent for the
               project, it never received HUD approval to do so as required by paragraph 7(j) of
               the project’s regulatory agreement. The project owner, through its principal
               officer, attempted on several occasions to obtain HUD approval for American
               West to manage the property. 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




                                                 9
           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 identity-of-interest Camelback II
           project, HUD advised the owner’s principal that final closing could not take place
           until all projects controlled by the principal, including Camelback I and Augusta
           Ranch, contracted with a HUD-approved management agent. Since the principal
           wanted to proceed with final closing of the Camelback II project, a HUD-
           approved management agent, Tucson Realty and Trust, was selected in August
           2004. However, the principal 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, never relinquished its property management duties, including
           access to and control of the project’s bank accounts, and within one month of
           final closing of Camelback II, the management agreement with Tucson Realty and
           Trust was terminated. American West resumed its full control over the project
           and continues to manage the project. American West was paid $19,500 in
           ineligible management fees, of which $13,000 was reimbursed to the project,
           leaving a balance due to the project of $6,500.

The Owner Did Not Manage the
Project in Compliance with the
Regulatory Agreement


           The owner did not ensure that American West managed the project in accordance
           with HUD requirements, resulting in improper use of project funds, failure to
           provide required accounting reports to HUD, and not properly funding tenant
           security deposits as follows:

           •   The owner disbursed more than $662,604 in project funds for ineligible
               purposes and failed to properly document an additional $246,277 in project
               expenditures (see finding 1).

           •   The owner did not ensure that American West provided 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 10(f) of the regulatory agreement). The owner and American
               West complied with HUD’s initial request for these reports and provided the
               reports for the period January 2003 through August 2004. However, when
               HUD questioned various disbursements identified in the reports at the end of
               August, the owner and American West stopped submitting the reports to
               HUD. As a result of the owner’s and American West’s failure to provide




                                            10
                 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/management agent 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 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 audits to the owner/management
                 agent’s disregard for HUD requirements and lack of experience operating and
                 managing HUD-insured projects.

             •   The owner failed to ensure that American West established and maintained a
                 separate tenant security deposit account until March 2005. Before the March
                 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’s 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.

Conclusion


             The project failed to contract with a HUD-approved management agent as required
             by its regulatory agreement. This lack of an independent, experienced, HUD-
             approved management agent contributed to the project’s misuse of project assets and
             its failure to follow other terms of the regulatory agreement.

Recommendations



             Subsequent to completion of our audit, the project was sold and the HUD-insured
             mortgage was paid in full, canceling HUD’s insurance liability for the project.
             Accordingly, we are not recommending repayment of the misused funds to the
             project, however, we are recommending:




                                              11
2A.      The director of HUD’s Phoenix Multifamily Hub, in conjunction with
HUD’s Office of Inspector General, pursue double damages remedies against the
project owner, the identity-of-interest management agent, and their principals
under the equity skimming statutes for the $56,535 of ineligible expenses detailed
in this finding.




                                12
                         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 of the project, and
management representatives of Tegan Communities, Inc., and American West.

To determine whether the owner/manager used project funds only for reasonable operating
expenses and necessary 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, sections 1715 and 1735; Title 31, United States
Code, section 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 February 2002 through May 31, 2005. This period was adjusted
as necessary. We performed our review in accordance with generally accepted government
auditing standards.




                                               13
                             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
                      implement 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.




                                               14
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).




                                            15
                                    APPENDIXES

Appendix A

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

                  Recommendation number           Funds to be put to better use 1/


                           1A                                        $17,710,686


1/   Funds to be put to better use” are quantifiable savings that are anticipated to occur if an
     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. In reviews involving equity skimming
     violations where the mortgagor pays off the mortgage, OIG may claim the remaining
     balance of the mortgage as funds to be put to better use since the prepayment frees up
     available FHA commitment authority and HUD no longer has any financial interest or
     potential financial interest in the property.




                                             16
Appendix B

                                         CRITERIA
Regulatory Agreement

Important provisions of Tegan Communities, Inc.’s regulatory agreement include the following:

   •   Paragraph 7(b) mandates that the owner may not, without the prior written approval of
       the commissioner, assign, transfer, dispose of, or encumber any personal property of the
       project, including rents, or pay out any funds except for reasonable operating expenses
       and necessary repairs.

   •   Paragraph 7(f) requires that any fund collected as security deposits 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 7(i) prohibits the project owners from paying “any compensation, including
       wages or salaries, or incur any obligations to themselves, or any officers, directors,
       stockholders, trustees, partners, beneficiaries under a trust, or to any of their nominees,”
       without first obtaining HUD written approval.

   •   Paragraph 7(j) states that the owner may not, without the prior written approval of the
       commissioner, enter into any contract or contracts for supervisory or managerial services.

   •   Paragraph 10(e) requires that the owners, within 60 days following the end of each fiscal
       year, furnish the commissioner with a complete annual financial report based upon an
       examination of the books and records of the mortgagor, prepared in accordance with the
       requirements of the commissioner, certified to by an officer or responsible owner, and
       when required by the commissioner, prepared and certified by a certified public
       accountant or other person acceptable to the commissioner.

   •   Paragraph 10(f) requires that at the request of the commissioner, 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 the
       income, assets, liabilities, contracts, operation, and condition of the property and the
       status of the insured mortgage.

   •   Paragraph 10(g) stipulates that all rents and other receipts of the project shall be
       deposited in the name of the project in a bank and that such funds shall be withdrawn
       only in accordance with the provisions of this agreement for expenses of the project.




                                                17
   •
       Any owner receiving funds of the project shall immediately deposit such funds in the
       project bank account and failing to do so in violation of this agreement, shall hold such
       funds in trust.

   •   Paragraph 18 stipulates that the project owner, Tegan Communities, Inc, remains liable
       under this agreement “a) for funds or property of the project coming into their hands
       which, by the provisions hereof, they are not entitled to retain; and b) for their own acts
       and deeds or acts and deeds of others which they have authorized in violation of the
       provisions hereof.”

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 distributions to owners are
not permitted on nonprofit projects.

HUD Handbook 4381.5, REV-2, “The Management Agent Handbook,” chapter 3, “Allowable
Management Fees from Project Funds,” paragraph 3.1, states that “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, section 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, section 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 manager 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, section 1735f-15, “Civil Money Penalties Against Multifamily
Mortgagors,” allows the secretary of housing and urban development to impose a civil money
penalty of up to $25,000 per violation against a mortgagor 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 mortgagor 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 nonsurplus cash position.




                                                18
Title 31, United States Code, section 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