Issue Date
March 3, 2006
Audit Report Number
2006-LA-1010
TO: William F. Bolton, Director, Los Angeles Multifamily Housing, 9DHMLA
FROM: Joan S. Hobbs, Regional Inspector General for Audit, Region IX, 9DGA
SUBJECT: The Owner and Agent of Holiday Apartments, LA Pro 30, and Two Worlds II,
Los Angeles, California, Mismanaged Project Finances and Operations
HIGHLIGHTS
What We Audited and Why
We audited the four Holiday Apartments (101-A, 101-B, 101-C, and 102), LA Pro
30, and Two Worlds II, housing projects which have U.S. Department of Housing
and Urban Development (HUD)-insured financing and receive project-based
Section 8 subsidy assistance. We initiated the audit in response to a request from
HUD’s Departmental Enforcement Center. Our objectives were to assess HUD’s
concerns over inappropriate disbursements and determine whether the projects
were administered in compliance with HUD requirements.
What We Found
The owner and identity-of-interest management agent for the six projects used
project funds to pay $2,670,118 in ineligible and unsupported costs, including
$1,562,193 for excessive and unreasonable charges by an identity-of-interest
maintenance contractor, $365,734 in excessive charges for accounting services
paid to identity-of-interest contractors, $380,670 in payroll charges for the
management agent’s president, $209,441 in unsupported rent charges and
$140,880 in capital improvement expenses for the management agent’s office,
and $11,200 in ineligible ownership expenses. We anticipate similar additional
questionable costs continued after the end of our audit period, through June 2006,
that could cost the projects another $457,444.
In addition, the owner did not maintain the projects in good repair and free of
health and safety violations. Our unit and building inspections identified more
than 240 housing violations, which resulted in $561,600 in housing assistance
payments for units and buildings that were not decent, safe, and sanitary.
Finally, the owner and identity-of-interest management agent did not effectively
manage the projects. They failed to ensure that project costs were reasonable and
necessary; did not ensure that the properties were adequately maintained; and did
not accurately calculate, report, and resolve $655,173 in project liabilities.
What We Recommend
We recommend that the director of HUD’s Los Angeles Multifamily HUB require
the owner to repay the respective projects $2,319,797 for the ineligible costs
identified during our audit and review costs incurred after our audit period. HUD
should require the owner to provide support over the reasonableness of the
$350,321 in unsupported costs or require the owner to repay the projects. We also
recommend that HUD require the owner to correct unit deficiencies and certify
they have been completed. In addition, HUD should require the owner to obtain
new management, accounting, and maintenance services from entities that have
no identity-of-interest with the owner; properly address project liabilities; and
develop written procedures and controls over the projects’ operations.
For each recommendation without a management decision, please respond and
provide status reports in accordance with HUD Handbook 2000.06, REV-3.
Please furnish copies of correspondence or directives issued because of the audit.
Auditee’s Response
We provided our discussion draft audit report to the owner’s general partner on
January 20, 2006, and held an exit conference on February 8, 2006. The owner’s
general partner provided written comments on February 21, 2006, with additional
comments on February 23, 2006. The ownership generally disagreed with our
report findings.
The complete text of the auditee’s response without the voluminous exhibits,
along with our evaluation of that response, can be found in appendix B of this
report. The exhibits will be made available upon request.
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TABLE OF CONTENTS
Background and Objectives 4
Results of Audit
Finding 1: The Projects Paid $2,670,118 for Ineligible and Unsupported 6
Expenses
Finding 2: The Projects Were Not Maintained in Good Repair and Free of 21
Health and Safety Violations
Finding 3: The Owner and Management Agent Mismanaged the Projects 27
Scope and Methodology 33
Internal Controls 34
Appendixes
A. Schedule of Questioned Costs and Funds to Be Put to Better Use 36
B. Auditee Comments and OIG’s Evaluation 37
C. Statistical Sampling Methodology 107
D. Schedule of Inspection Results 108
3
BACKGROUND AND OBJECTIVES
Holiday Apartments consists of four U.S. Department of Housing and Urban Development
(HUD)-insured housing projects (101-A, 101-B, 101-C, and 102), each under a separate
regulatory agreement. Each project is owned by a limited liability partnership, whose general
partner is also the general partner of two additional HUD-insured projects, LA Pro 30 and Two
Worlds II. HUD insured all six projects under the Section 236 program between 1971 and 1974.
The intent of the Section 236 program is to reduce rental costs for lower income families by
subsidizing the property owners’ mortgage interest payments.
In addition to interest subsidies, these scattered-site properties receive project-based Section 8
subsidies for their rental units. Under this program, HUD subsidizes tenant rent by paying the
portion of the rent that exceeds 30 percent of eligible tenants’ adjusted income. Collectively, the
projects have 609 of their 632 units under the Section 8 program.
No. Project name Project Federal Housing Mortgage Regulatory Housing Assistance Payment
Administration number amount Agreement date contract (Section 8)
1 Holiday 101-A 122-44538-LDP-EC $ 1,490,500 November 1, 1971 CA16M000223 & CA16L000024
2 Holiday 101-B 122-44539-LDP-EC $ 1,525,500 November 1, 1971 CA16L000025
3 Holiday 101-C 122-44540-LDP-EC $ 1,536,200 November 1, 1971 CA16M000225 & CA16L000078
4 Holiday 102 122-44553-LDP-EC $ 1,148,300 August 31, 1972 CA16M000087 & CA16M000231
5 LA Pro 30 122-44542-LDP-EC-SR-PR $ 1,841,100 June 28, 1974 CA16L000075
6 Two Worlds II 122-44730-LDP-EC $ 1,150,200 December 5, 1973 CA16L000044
Proland Management Company, LLC, has acted as the management agent of the projects since
October 1998. The projects’ general partner is a co-owner of the management agent, and his
principal place of business is located in the same building in which the management agent
operates. Proland Management Company receives management fees, as set out in its
management certifications, for managing the projects. These fees range from 12.18 to 15.01
percent of income collected, depending on the project. Between 2000 and 2004, the
management agent charged the six projects more than $2.2 million in management fees. The
management agent also managed at least three additional non-HUD-insured projects owned by
the general partner. In addition, the general partner and management agent engaged other
identity-of-interest companies (in which the general partner had an ownership interest) to provide
maintenance and accounting services, including Action Maintenance, Action Bookkeeping, and
Accounting Data Systems.
The regulatory agreements restrict the amount of distributions an owner can take from the
limited dividend projects to the prior year’s surplus cash calculation, as reported on the projects’
annual audited financial statements. Holiday 101-A and Two Worlds II had negative surplus
cash during the entire audit period. The other four projects had intermittent surplus and negative
surplus cash between 2000 and 2004, and only Holiday 102 had surplus cash for 2004. Further,
distributions of surplus cash cannot be made if a project’s physical condition does not meet
HUD-established housing standards. HUD’s Real Estate Assessment Center performs
4
inspections on the properties to assess their physical condition. The latest inspections showed
Holiday 101-A and Holiday 101-B did not meet an acceptable level of housing standards in
March 2005 and September 2005, respectively. Two Worlds II, Holiday 101-C, Holiday 102,
and LA Pro 30 did meet acceptable housing standard levels during their respective September
2002, May 2003, July 2003, and February 2005 inspections. Holiday 102 and 101-A also did not
meet an acceptable level on a prior 2000 and 2001 inspection, respectively.
The 2000 audited financial statements for the projects questioned project funds used to pay for
payroll costs of supervisory staff, capital improvements to the agent’s offices, and high
maintenance costs. The following year, the owner contracted with a different independent public
accounting firm to prepare the audited financial statements. The previous year’s audit issues
were cleared by the new accounting firm without explanation.
HUD’s Departmental Enforcement Center referred the four Holiday Apartment projects to the
Office of Inspector General (OIG) in October 2004, expressing concerns over the possible
misuse of project funds. Accordingly, our objectives were to determine whether HUD’s
concerns had merit, to assess whether the projects were being administered in compliance with
the regulatory agreement and other HUD requirements, and to ensure the projects met proper
health and safety requirements. Due to the common ownership and management, we expanded
our review to include both LA Pro 30 and Two Worlds II.
5
RESULTS OF AUDIT
Finding 1: The Projects Paid $2,670,118 for Ineligible and Unsupported
Expenses
The projects’ general partner (owner) and identity-of-interest management agent used
$2,670,118 in project funds for ineligible and unsupported expenses. The owner/management
agent used identity-of-interest contractors to charge the projects $1,562,193 for excessive and
unreasonable maintenance costs and $365,734 for excessive accounting costs. Additional
questionable costs paid included $380,670 in ineligible payroll charges for the management
agent’s president, unsupported rent charges $209,441 and capital improvement expenses
$140,880 for the management agent’s central office, and $11,200 in ineligible ownership
expenses. We also estimate the projects were or will be charged another $457,444 for
questionable maintenance, accounting, and central office rent from the end of our audit period
through June 2006. Payment of these ineligible and unsupported costs was a result of the
owner/management agent ignoring HUD requirements and a lack of effective procedures and
controls. The questionable disbursements reduced the amount of project funds available for
reasonable and necessary expenses, including maintenance and repair of the projects (see finding
2), and increased the risk of mortgage default.
Identity-of-Interest Contractors
Charged the Projects More
Than $1.9 Million in Excessive
and Unreasonable Maintenance
and Accounting Costs
The owner and management agent did not follow a competitive contracting
process when selecting and maintaining contracts with identity-of-interest
companies to provide maintenance and accounting services. Although the
projects’ regulatory agreements and HUD requirements contained in HUD
Handbook 4381.5, REV-2, allows for use of identify-of-interest contractors, the
cost of services provided by these contractors cannot exceed reasonable rates
ordinarily paid for such services on the open market. The handbook also requires
the owner to obtain bids for services exceeding $10,000 per year. However, the
owner/management agent did not have procurement procedures and controls in
place to adequately ensure the identity-of-interest contractors had to compete with
outside companies and, therefore, keep costs reasonable.
Inadequate procurement and bidding information was obtained by the
owner/management. The owner/management could not provide bids showing the
6
identity-of-interest maintenance company competed with other general
maintenance contractors when initially selected. In addition, most subsequent
bids were obtained for individual services of licensed trades that the identity-of-
interest contractor did not employ, and were therefore not comparable. When
selecting the identity-of-interest bookkeeping company, resumes were obtained in
response to a job add for employment, instead of obtaining bids from contractors.
No subsequent attempts were made to verify costs were reasonable. As a result,
the projects were charged $1,562,193 in excessive (ineligible) maintenance costs
and $365,734 in excessive (ineligible) accounting costs.
An Identity-of-Interest
Contractor Overcharged the
Projects $1,562,193 for Poor
Quality Maintenance Services
Between January 2000 and June 2005, the owner’s/management agent’s identity-
of-interest company, Action Maintenance, charged the projects more than $3.7
million for maintenance and repair services. We determined that at least
$1,562,193 of these costs were unreasonable, including more than $1,453,019 in
excessive service costs, $75,674 in direct payroll charges for Action
Maintenance’s supervisor, and $33,500 in charges for undocumented unit
inspections. Additionally, in violation of the regulatory agreement, the
owner/manager allowed an identity-of-interest contractor, Action Maintenance, to
improperly mark up the cost of materials purchased for the projects and the cost
of repair services provided to the projects by other contractors. Further, serious
problems were noted with the quality of the work Action Maintenance claimed to
have completed as the work often was not done in a professional manner, was
incomplete, and had to be redone, and in some cases, the work apparently was
never performed. Maintenance problems were compounded by the owner’s and
management agent’s failure to maintain a work order system to track tenant
requests for repairs and related work orders to ensure that tenant service requests
were addressed and the necessary work was completed in a professional manner.
Action Maintenance Charged Projects Excessive Rates for Maintenance Services
Between 2000 and 2005, the identity-of-interest contractor billed the projects
excessive amounts to address work orders. Action Maintenance charged labor
rates of $30 to $55 per hour, depending on the employee performing the work. In
addition, it charged $50 or $65 for an hour or less of service, which was higher
than the normal hourly rate. As a result, if an employee worked in one-hour or
shorter increments throughout the day, Action Maintenance effectively charged a
rate of $50 to $260 per hour (the latter representing $65 per quarter hour). For
example, the contractor charged $65 for 15 minutes of work to place mouse traps
(work order 26128 from January 7, 2005). The higher rate was applied even
when addressing separate work orders throughout the day for the same project.
7
Since the employees consistently charged for a full eight hours each day, these
high rates may not be considered compensation to Action Maintenance for
downtime. According to the management agent, the owner of the projects
established the rates charged by its identity-of-interest maintenance company.
Meanwhile, the contractor was only paying its employees salaries of $8 to $18 per
hour, averaging just over $11. Personnel files showed the staff were standard
maintenance workers with no skilled or licensed carpenters, electricians, or
plumbers. The difference between the amounts paid to the employees and the
amounts billed to the project was unreasonably high.
A comparison of the amounts charged by the identity-of-interest contractor to
rates established in a construction cost index shows Action Maintenance’s rates
were excessive. We compared the amounts Action Maintenance charged between
January 2000 and June 2005 to the standard rates for open shop (nonunion)
general laborers documented in Saylor1 construction cost indexes. The average of
the annual base labor rates listed for the Los Angeles area matched the average
hourly rate Action Maintenance actually paid its employees. The cost index
applied additional amounts for applicable taxes, workers compensation,
supervision, overhead, and profit to determine the hourly rate2 a contractor should
charge to earn a reasonable profit. Based on this information, Action
Maintenance should have charged only $2,248,942 for the more than 89,000 labor
hours in question. This is $1,453,019 lower than the $3,701,961 Action
Maintenance charged the projects, which was 65 percent higher than necessary.
Excessive Maintenance Charges
Housing Amount Reasonable Excessive
Project Charged * Amount Amount
Holiday 101-A $ 743,263 $ 465,860 $ 277,403
Holiday 101-B $ 726,036 $ 439,566 $ 286,470
Holiday 101-C $ 684,314 $ 412,629 $ 271,685
Holiday 102 $ 693,013 $ 422,757 $ 270,256
LA Pro 30 $ 451,067 $ 269,738 $ 181,329
Two Worlds II $ 404,268 $ 238,392 $ 165,876
Total $ 3,701,961 $ 2,248,942 $ 1,453,019
* Charges up to June 2005
In addition, Action Maintenance’s payroll and overhead records showed its actual
cost to perform these services was $1.93 million. Therefore, the contractor
received a profit of $1,763,885 with an excessive profit margin of 48 percent.
The excessive profit closely matched the excessive amounts determined through
comparison to the standard cost index.
1
Saylor Publications, Inc. is a California-based publisher of construction and remodeling cost indexes, providing
standard information on labor rates and construction costs for contractors and appraisers, updated annually.
2
In addition, we added a factor for fringe benefits in line with Action Maintenance’s own policies and costs.
8
The Projects Were Charged Directly for Action Maintenance Supervisor’s Payroll
Costs
The management agent and Action Maintenance charged the projects $75,674 in
payroll costs for the supervisor of Action Maintenance between January 2000 and
September 2001. These charges were not based on specific work performed by
the contractor but allocated to the projects as if he were one of the management
agent’s staff performing eligible front-line project activities. However, the
supervisor’s payroll was part of Action Maintenance’s overhead costs, already
compensated as part of the maintenance billings. Therefore, charging this cost to
the projects again represents an ineligible duplicative charge.
Maintenace supervisor cost
Project 2000 2001 Total
Holiday 101-A $ 7,110 $ 6,921 $ 14,031
Holiday 101-B $ 7,110 $ 6,921 $ 14,031
Holiday 101-C $ 7,414 $ 7,217 $ 14,631
Holiday 102 $ 5,470 $ 5,324 $ 10,794
LA Pro 30 $ 6,138 $ 5,975 $ 12,113
Two Worlds II $ 5,105 $ 4,969 $ 10,074
Total $ 38,347 $ 37,327 $ 75,674
The Projects Were Charged for Undocumented Unit Inspections
Action Maintenance charged the projects $33,500 for inspections between May
2003 and May 2005. The invoices were supposed to compensate the contractor
for unit inspections performed by the maintenance supervisor. However, these
costs were not based on actual work performed. It charged the same amount to
each project on consecutive invoices, an apparent allocation of the maintenance
supervisor’s payroll (see spreadsheet below). In addition, Action Maintenance
did not identify the locations inspected or generate inspection reports to document
results. Based on the lack of a work product, poor quality of maintenance by the
contractor (as discussed below), and the poor project conditions (see finding 2), it
does not appear effective inspections were performed. As a result, these costs
were not reasonable and necessary project expenses and, therefore, paid in
violation of the regulatory agreement.
Inspection charges
Project 2003 2004* 2005** Total
Holiday 101-A $ 100 $ 3,250 $ 2,250 $ 5,600
Holiday 101-B $ 100 $ 3,250 $ 2,250 $ 5,600
Holiday 101-C $ 100 $ 3,250 $ 2,250 $ 5,600
Holiday 102 $ 100 $ 3,250 $ 2,250 $ 5,600
LA Pro 30 $ 100 $ 3,250 $ 2,250 $ 5,600
Two Worlds II $ 3,250 $ 2,250 $ 5,500
Total: $ 500 $ 19,500 $ 13,500 $ 33,500
* Only charged for second half of 2004
** Costs up to May 2005
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Action Maintenance Marked Up Outside Vendor Costs in Violation of HUD
Requirements
Action Maintenance marked up costs by up to 35 percent when it purchased
materials or used another contractor to perform repairs. The regulatory
agreements and HUD Handbook 4381.5 prohibit the owner and management
agent from adding surcharges to actual costs. The fiscal year 2000 financial
audits for the projects3 identified a reportable condition on internal controls,
stating Action Maintenance charged a 33.3 percent markup on material purchases.
In addition, we identified examples of 35 percent markups added to work
performed by outside contractors in 2002. Due to the management agent’s and
maintenance contractor’s inadequate record keeping, we could not determine the
total excessive amount charged.
Maintenance Work Was Unsatisfactory Due to the Owner’s/Management’s
Failure to Monitor Maintenance
Review of maintenance work performed on a sample of units showed work was
not completed in a professional manner. Our inspections on 60 sample units (see
finding 2) showed 328 (36 percent) of the work order repairs performed since
2003 were questionable, including poor quality repairs, incomplete work, repeated
repairs, questionable lock repairs, unsupported work, and other similar issues.
These conditions were allowed to occur due to the owner’s and management
agent’s failure to monitor the contractor’s work and to establish procedures and
controls over maintenance and inspections. These matters resulted in the projects
being charged for unreasonable work and necessary repairs not being fully
resolved.
• Action Maintenance’s quality of work was inadequate.
The contractor charged the projects for 26 work orders despite unacceptable
workmanship.
Example 1. For Holiday 101-C unit D304 and LA Pro 30 unit B209, the
contractor performed shower repairs. This work was charged to the projects
respectively in December 2004 under invoice 33228 for $110 and in March
2004 under invoice 25604 for $55. However, our June 2005 inspection of
these units found, as part of the repair, the shower heads had been removed
without installing new ones, leaving the pipe bare (see photograph of shower).
3
Financial audits for Holiday 101-A, 101-B, 101-C, LA Pro 30, and Two Worlds II included the condition, but the
audit for Holiday 102, with a different fiscal year end date, did not.
10
Example 2. On December 2, 2003 Action Maintenance verified a window had
fallen out and broken in LA Pro 30, 1606 West 47th, unit F111, and two
windows needed to be replaced. However, work did not begin until December
17, 2003, performed under four work orders. On January 26, 2004, additional
work was performed under work orders 16127 and 16114. Overall, only two
of at least three windows needing replacement had been replaced. Our
physical inspection on June 7, 2005, a year and a half later, showed the frames
had not been installed, and the exterior wood was left exposed (see exterior
photograph). In addition, the windows would not open properly and were not
sealed, which allowed water to get in. This work was performed by three of
Action Maintenance’s most experienced long-term employees. The labor cost
alone for this poor quality repair was $1,132.
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• Action Maintenance left work incomplete.
Action Maintenance did not perform all the work necessary to fully resolve
and complete 17 work orders. For example, bathroom work was performed
by the contractor on Two Worlds II, 474 Hartford, unit B09, on June 8, 2005.
However, the work was still incomplete as of our June 21, 2005, inspection
(see photograph of bathroom ceiling), and appears to have remained so at least
until November 2005. In addition, Action Maintenance poorly patched a
section of the ceiling by placing drywall over the existing drywall ceiling.
• Action Maintenance had to repeat its repairs.
There were 69 work orders in which Action Maintenance had to revisit and
recharge the project to resolve the same issue. Information showed the
contractor had been unable to properly address the problem on its first
attempt, which resulted in the projects incurring additional costs. If qualified
tradesmen had performed the work, the problem could have been immediately
resolved and resulted in lower overall charges.
For example, LA Pro unit C108 had a kitchen sink faucet leak repair in
January 2004 under work order 16125. The leak was not fixed, and the repair
had to be repeated in March 2004 under work orders 17520 and 17428 and
then again in June 2004 under work order 19361. It was not fixed until
December 2004 under work order 26699. This work was performed by three
of Action Maintenance’s most experienced, long-term employees for a total
cost of $297 to the project for labor alone. This same unit also had the
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garbage disposal removed and fixed in January 2004, which had to be done
again in March 2004. In addition, the toilet wax ring was replaced in January
2004 but had to be replaced again in April 2004 because it was leaking.
• Action Maintenance charged for questionable lock repairs.
There were 101 work orders for lock repairs and similar work that did not
appear reasonable and necessary due to their unusual frequency on the same
units. For example, LA Pro 30 unit B203 had 11 work orders to repair
entrance door locks between January 2004 and May 2005, costing the project
$605. The tenant occupying the unit since 1996 had no knowledge of this
work. In addition, Holiday 101-C unit B305 had 12 work orders between
April 2003 and November 2004 to repair the entrance door locks and program
phone numbers into the intercom, costing the project $642. Since on-site
managers have copies of the keys for lockouts, it isn’t clear whether this work
was necessary or performed.
• The management agent could not produce all work orders.
We requested all invoices and work orders associated with maintenance work
performed since 2003 on the units inspected. Although most invoices and
work orders were available, documentation for 97 separate charges to the
projects was missing. The only information available was invoice data in the
management agent’s Quickbooks accounting system. As a result, we could
not determine exactly what was done or who performed the work.
• Action Maintenance also charged for other questionable work.
Nineteen work orders included various issues making the work performed
appear questionable. For example, repairs to LA Pro 30 unit F111 under work
order 9390 stated that a paper holder rack was replaced as of January 2003 for
$50. However, as of our June 2005 inspection, there was no applicable paper
holder rack in the unit.
The owner and management agent did not monitor maintenance performed by
Action Maintenance to ensure the work was properly completed. They did not
require the identity-of-interest contractor to implement a satisfactory maintenance
work order system to ensure all necessary repairs were adequately addressed.
There was no log to identify and track tenant requests or deficiencies identified
during inspections. In addition, there was no system to ensure work orders were
completed within a reasonable timeframe for a reasonable cost. There was also
no evidence the maintenance supervisor evaluated the performance of the staff or
verified the skills of new employees. Although the maintenance supervisor was a
licensed contractor, he was inexperienced at running a maintenance company.
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Action Maintenance’s lack of tracking, monitoring, and evaluating repairs
compounded problems with its questionable work product.
Identity-of-Interest Contractors
Charged the Projects
Unreasonable and Duplicative
Fees for Accounting Services
The owner and management agent contracted with two identity-of-interest
contractors, Action Bookkeeping and Accounting Data Systems, to provide
accounting services for the projects. Although HUD allows a management agent
to charge for accounting services it provides, it has established a maximum
allowable fee for these services of $7.50 per unit per month. The $366,474 in fees
the projects paid the identify-of-interest accounting firms from December 2000
through November 2004 exceeded this cap by $144,714.
In addition, during the period from August 2001 through November 2004, the
management agent charged the projects $221,019 for the direct time of two of its
staff for providing accounting services to the projects. By charging for services
through a vendor and then again directly, the management agent double charged
the projects for accounting services. Overall, as summarized below, the $365,734
paid by the projects in excess of the HUD-established fee cap represents ineligible
project expenses. There is no evidence the owner of the projects fulfilled his
responsibility to ensure the charges were reasonable by taking steps to limit the
accounting costs.
Excessive/duplicative bookkeeping charges
Projects 2001 2002 2003 2004 Total
Holiday 101-A 13,941 19,375 17,766 18,694 $ 69,776
Holiday 101-B 13,941 19,375 17,766 18,694 $ 69,776
Holiday 101-C 14,537 20,203 18,525 19,493 $ 72,758
Holiday 102 3,342 14,903 13,666 14,380 $ 46,291
LA Pro 30 10,290 16,725 15,336 16,138 $ 58,489
Two Worlds II 8,558 13,910 12,755 13,421 $ 48,644
Total $ 64,609 $104,491 $ 95,814 $100,820 $ 365,734
Payroll Costs of the
Management Agent’s President
Were Charged to the Projects
The management agent inappropriately charged the projects $380,670 in payroll
costs for its president. Such charges are considered management agent costs and
under the terms of the applicable regulatory agreements and HUD guidelines, are
not eligible for payment from project funds. The payroll costs charged to the
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projects ranged from 60 to 70 percent of the president’s total salary and related
costs, including salary, bonus, taxes, and workers compensation through
September 2004, when the charges abruptly stopped.
Although HUD Handbook 4381.5, REV-2, does allow an agent to charge projects
for front-line staff, it also states that management agents must cover the cost of
supervising and overseeing project operations out of their management agent fee.
Activities already compensated through the fee include supervising project
personnel, monitoring project operations through site visits, analyzing and solving
project problems, designing procedures and systems, etc. The president’s job
description included supervisory functions, such as overseeing staff, reviewing
correspondence, setting policies/procedures, overseeing occupancy, approving
payroll reports, acting as liaison with HUD, reporting to owners, visiting
properties, etc. Clearly, these functions are management agent duties, the cost of
which is to be covered by the management fee. Charging the projects again for
functions the projects were already paying for through the management fee
represents an ineligible duplicative charge.
President's ineligible payroll
Project 2000 2001 2002 2003 2004 Total
Holiday 101-A $ 14,680 $ 14,843 $ 14,868 $ 14,829 $ 11,364 $ 70,584
Holiday 101-B $ 14,680 $ 14,843 $ 14,868 $ 14,829 $ 11,364 $ 70,584
Holiday 101-C $ 15,308 $ 15,477 $ 15,503 $ 15,463 $ 11,849 $ 73,600
Holiday 102 $ 11,292 $ 11,417 $ 11,437 $ 11,407 $ 8,742 $ 54,295
LA Pro 30 $ 12,672 $ 12,813 $ 12,835 $ 12,801 $ 9,810 $ 60,931
Two Worlds II $ 10,540 $ 10,656 $ 10,674 $ 10,647 $ 8,159 $ 50,676
Total $ 79,172 $ 80,049 $ 80,185 $ 79,976 $ 61,288 $ 380,670
Questionable Office Rental and
Capital Improvement Costs
Totaling $350,321 Were
Charged to the Projects
The management agent charged the projects $209,441 for rent of and $140,880
for capital improvements to the management agent’s central office in violation of
the projects’ regulatory agreements and HUD requirements. HUD Handbook
4381.5, REV-2, does allow management agents to charge office costs for
employees performing front-line activities to the projects. However, the amount
charged by the management agent did not represent an appropriate allocation of
the actual costs and covered the cost of space not necessary for the eligible front-
line personnel, including the general partner’s offices. As a result, a portion of
the rent and capital improvements would not be reasonable and necessary in
accordance with the regulatory agreement.
15
The central office only occupied a limited portion of the first floor of a two-story
building and shared this space with the identity-of-interest maintenance contractor
and accounting companies. The second floor also included the general partner’s
principal place of business. In addition, the management agent managed the
operations of three to five additional non-HUD projects between 2000 and 2004,
which should also be allocated some of the costs. However, the amount charged
to the six HUD projects was more than 75 percent of the entire building’s $60,000
annual rental cost, an unreasonable amount. The questionable rental costs paid by
the projects are summarized below.
Agent's office rent
Project 2000 2001 2002 2003 2004 Total
Holiday 101-A $ 8,970 $ 8,622 $ 8,622 $ 7,905 $ 7,902 $ 42,021
Holiday 101-B $ 8,970 $ 8,622 $ 8,622 $ 7,905 $ 7,902 $ 42,021
Holiday 101-C $ 9,353 $ 8,990 $ 8,989 $ 8,239 $ 8,239 $ 43,810
Holiday 102 $ - $ 9,396 $ 6,633 $ 6,083 $ 6,083 $ 28,195
LA Pro 30 $ - $ 7,443 $ 7,442 $ 6,820 $ 7,440 $ 29,145
Two Worlds II $ - $ 6,190 $ 6,191 $ 5,676 $ 6,192 $ 24,249
Total $ 27,293 $ 49,263 $ 46,499 $ 42,628 $ 43,758 $ 209,441
In addition, capital improvement charges performed on the central office are
questionable. Over 70 percent of these costs were allocated to the projects, which
included all costs attributable to common areas, even though utilized by the
management agent and maintenance contractor. In addition, it included all space
utilized by management agent staff who did not work exclusively on the projects,
as well as, space for ineligible staff such as the management agent’s President
(see finding above). In fact, the only space designated for Proland management’s
office space was one-half of the President’s and Controller’s offices.
Capital improvements
Project 2000 2001 Total
Holiday 101-A $ 23,794 $ 2,280 $ 26,074
Holiday 101-B $ 24,202 $ 2,280 $ 26,482
Holiday 101-C $ 26,655 $ 2,378 $ 29,033
Holiday 102 $ 18,702 $ 1,697 $ 20,399
LA Pro 30 $ 20,901 $ 182 $ 21,083
Two Worlds II $ 17,656 $ 153 $ 17,809
Total $ 131,910 $ 8,970 $ 140,880
Currently, there is insufficient information to show what portion of theses charges
were for reasonable and necessary office space costs required for eligible front-
line staff to perform their project responsibilities.
16
Holiday Apartments Paid the
Owner’s Expenses
Between 2001 and 2004, Holiday Apartments paid $21,600 in ineligible
ownership franchise taxes. These taxes were the responsibility of the individual
partners of the ownership entities and should not have been paid from project
funds. The projects’ regulatory agreements require that project funds be used
only to pay for reasonable project expenses.
This matter was identified in the fiscal year 2001 financial audit reports, which
stated a bookkeeping error resulted in the projects mistakenly paying these
amounts from the project funds and stated the amounts had been repaid.
However, after 2001, the projects continued to pay these ineligible costs each
year. The matter was again identified as a condition on the fiscal year 2004
financial audit reports.
Review of the projects’ general ledgers and related support showed that in
December 2002 and February 2005, the management agent returned $10,400 of
these ineligible expense payments to the projects. However, $11,200 had not
been reimbursed to the projects, as follows:
Ineligible franchise taxes
Property Franchise tax paid for 2002 2003 2004 Total
Holiday 101-A Holiday A limited $ 800 $ 800 $ - $ 1,600
Holiday 101-A Wilshire Holiday A limited $ 800 $ 800 $ - $ 1,600
Holiday 101-B Holiday B limited $ 800 $ 800 $ - $ 1,600
Holiday 101-B Wilshire Holiday B limited $ 800 $ 800 $ - $ 1,600
Holiday 101-C Holiday C limited $ 800 $ 800 $ - $ 1,600
Holiday 101-C Wilshire Holiday C limited $ 800 $ 800 $ - $ 1,600
Holiday 102 West Holiday 102 $ - $ 800 $ 800 $ 1,600
Total $ 4,800 $ 5,600 $ 800 $ 11,200
Projects Continue to Pay for
Similar Inappropriate Expenses
The maintenance, accounting, management office rent, and inspection costs were
ongoing issues, extending beyond the period of our review. We anticipate these
issues resulted in additional ineligible and unsupported charges to the projects.
Overall, we estimate that after our audit period, through December 2005, the
projects would have been charged $457,444 in additional ineligible and
unsupported costs, including $264,185 for one year of maintenance, $100,374 for
one year of bookkeeping, $76,135 for one year of rent, and $16,750 for six
months of inspection costs.
17
The Owner/Management Knew
Costs Were Inappropriate
The owner and management agent knew about problems with the excessive and
ineligible costs since 2001. The 2000 financial audit reports for the projects,
issued in 2001, included findings that charges to the projects for the management
agent’s president, the maintenance supervisor, and capital improvements on the
management agent’s office were unreasonable. The reports also identified a
reportable condition on internal controls over maintenance, which stated there
were no organization policies or procedures, maintenance records were
inadequately maintained, errors and duplicate charges were noted, and no
receiving reports were obtained from managers or tenants to show the job was
done or appliances received. In addition, there was no schedule for preventive
maintenance, invoices were not checked by the supervisor, and the costs appeared
excessive. Despite knowledge of these conditions, no efforts were made by the
owner to curb excessive and ineligible costs by its identity-of-interest companies.
Due to a lack of independence, the management agent did whatever the owner of
the projects wanted, even to the detriment of the projects. The president and
controller of the management agent also held these same positions with the
identity-of-interest company providing the maintenance and bookkeeping
services. When issues over maintenance were brought to the attention of the
president of the management agent, he stated that he had no control and all
decision making was done by the ownership, including the general partner of the
projects, and although he was the president, he was still just an employee.
Conclusion
Overall, the owner ignored HUD requirements by charging more than $2.6
million in ineligible and unsupported costs to the projects through his identity-of-
interest companies. The inappropriate charges and poor maintenance work could
have been prevented through the establishment of strong procedures and controls
in compliance with HUD requirements. However, the ineligible and unsupported
charges benefited the owner by increasing the profits of these companies in which
he had ownership interest, leaving little incentive to ensure only reasonable
amounts were charged, and as a result, the owner did not establish effective
controls. Due to the lack of independence, the owner of the projects was able to
set the inappropriate practices and was, therefore, directly responsible for the
activity of these companies. As a result, the projects were left in poor financial
condition, increasing the risk of mortgage default, and the properties were not
maintained in appropriate condition (see finding 2).
18
Recommendations
We recommend that the director of HUD’s Los Angeles Multifamily HUB require
the project owner/management agent to
1A. Develop and implement written procurement, contracting, and
disbursement policies and procedures acceptable to HUD.
1B. Terminate the use of Action Maintenance, Action Bookkeeping, and
Accounting Data Systems and contract maintenance and accounting services with
independent third parties.
1C. Pay from non project funds the excessive identity-of-interest maintenance
costs of $1,453,019 to the projects’ respective reserve for replacement accounts.
1D. Pay from non project funds the payroll costs of $75,674 for the
contractor’s maintenance supervisor to the projects’ respective reserve for
replacement accounts.
1E. Pay from non project funds the inspection charges of $33,500 to the
projects’ respective reserve for replacement accounts.
1F. Identify all surcharges on materials and third-party contractors added on
by Action Maintenance and pay from nonproject funds the inappropriate amounts
to the projects’ respective reserve for replacement accounts.
1G. Pay from non project funds the excessive and duplicative identity-of-
interest accounting/ bookkeeping of $365,734 to the projects’ respective reserve
for replacement.
1H. Pay from non project funds the $380,670 in payroll costs of the
management agent’s president to the projects’ respective reserve for replacement
accounts.
1I. Provide support to show what portion of the $209,441 in office rent was
reasonable or pay the projects’ respective reserve for replacement accounts from
non project funds.
1J. Provide support to show what portion of the $140,880 in capital
improvement costs was reasonable or pay the projects’ respective reserve for
replacement account from nonproject funds.
1K. Pay from nonproject funds the ineligible ownership costs of $11,200 to the
projects’ respective reserve for replacement accounts.
19
1L. Submit documentation to identify maintenance costs billed to the projects
after June 2005 and bookkeeping/accounting and management agent office rent
billed to the projects after December 2004 for HUD to determine the ineligible
amounts and the owner to pay from non project funds the ineligible amounts to
the projects’ respective reserve for replacement accounts.
1M. Impose civil money penalties and pursue double damages remedies
against the projects’ general partner and management agent under the applicable
equity skimming statutes in conjunction with the OIG.
20
Finding 2: The Projects Were Not Maintained in Good Repair and Free
of Health and Safety Violations
The owner did not maintain Holiday Apartments (101-A, 101-B, 101-C, and 102), LA Pro 30,
and Two Worlds II free of health and safety violations. Inspections of statistically selected units
and their associated buildings showed 50 of 60 Section 8 units and all 25 buildings did not meet
HUD’s housing quality standards. Overall, we estimate $561,600 in housing assistance
payments were made for properties in material violation of HUD quality standards. These
conditions occurred due to the owner/management not ensuring the properties were adequately
maintained by the identity-of-interest maintenance contractor. Consequently, tenants had to live
in units and buildings that were not decent, safe, and sanitary.
Project Units Were Not Decent,
Safe, and Sanitary
Our inspection of a statistical sample of 60 units and their 25 associated scattered-
site buildings identified 166 24-hour health and safety violations, 14 10-day
violations, and 60 30-day violations (see appendix C for sampling methodology
and appendix D for results by building and unit). HUD requirements under 24
CFR [Code of Federal Regulation] 5.701 and 5.703 state that owners of HUD-
insured projects and facilities with project-based Section 8 funding must maintain
the dwelling units, site, building systems, and common areas free of health and
safety hazards and in good repair. In addition, according to HUD Handbook
4381.5, chapter 6, assisted units must comply with housing quality standards or
local housing codes, whichever are more stringent. The violations resulted in 100
percent of the buildings and 83 percent of the units reviewed failing housing
quality standards under 24 CFR [Code of Federal Regulations] Part 982.
Inspection results
Project Buildings Units Violations
Holiday 101-A 5 10 44
Holiday 101-B 5 12 44
Holiday 101-C 4 16 63
Holiday 102 2 5 26
LA Pro 30 5 9 37
Two Worlds II 4 8 26
Total 25 60 240
The results of our inspection were previously provided to HUD and to the
projects’ management agent. Some of the most significant and/or prevalent
violations included the following:
21
Frequency of violations
Issue 24-hour 10-day 30-day All
violations violations violations violations
Inoperable/disconnected smoke detector 13 0 0 13
Inoperable/damaged stove/range 13 0 1 14
Gas leak 1 0 0 1
Inoperable/damaged water heaters and furnaces 16 4 4 24
Blocked emergency egress 10 0 0 10
Electrical hazards 20 3 2 25
Damaged/moldy/rotted bathroom 4 0 10 14
Damaged refrigerator 9 0 4 13
Tripping/falling hazard 5 0 5 10
Potential landslide danger 0 0 1 1
Excessive buildup of debris, filth, or foreign materials 26 0 4 30
Elevators not working properly 4 0 0 4
Broken/missing/poorly fitting window glass 2 2 4 8
Insecure/missing handrails 3 0 1 4
Rotted/unsafe balconies and landings 2 0 3 5
Other 38 5 21 64
Total violations 166 14 60 240
The photographs below illustrate some of the conditions we found in the project
units and buildings.
Location: Two Worlds II, 1228 Kingsley, unit C06
Cracked stove
22
Location: LA Pro 30, 817 Parkview, unit D106
Tub wall separating and deteriorating
Location: Two Worlds II, 420 Union
Detached handrail in common area
23
Location: Holiday 101-B, 106 Commonwealth
Furnace exhaust not ventilating to exterior of building.
In addition, our earlier cursory review of Holiday Apartments building exteriors
in March 2005 identified several significant problems, such as a deteriorated
egress door, exposed electrical wiring, missing fire extinguisher, loose railing,
rotted window frames, etc.
Location: Holiday 101-A, 1107 West 42nd Street
Damaged roof access door
24
Violations Were Caused by the
Owner’s Neglect and Lack of
Controls over Maintenance
The violations were generally long term in nature, and many were caused by the
owner ignoring HUD requirements and neglecting the properties for long periods.
The owner did not establish effective procedures to monitor the maintenance
work, perform preventive maintenance, or perform and document inspections (see
finding 1), and these deficiencies contributed to the high number of violations.
The owner’s and management agent’s failure to correct deficiencies identified
during HUD’s Real Estate Assessment Center inspections demonstrated the
owner’s neglect and disregard for HUD requirements. As part of our unit
inspections and review of work orders, we checked violations identified as part of
prior HUD Real Estate Assessment Center inspections. There were two instances
in which deficiencies had not been addressed and four instances in which the
problems were not addressed in a reasonable amount of time. For example, the
HUD Real Estate Assessment Center’s May 2003 inspection of Holiday 101-C
unit C-216 identified problems with the garbage disposal and refrigerator. There
was no evidence the garbage disposal was repaired until July 2004, 14 months
later. In addition, there were no work orders generated to fix the refrigerator,
which was again identified as a violation during our June 2005 inspection. These
problems were not addressed due to the lack of maintenance procedures and
controls to ensure deficiencies were properly recorded, tracked, and completed
(see finding 1).
Section 8 Funds Were Paid for
Units in Material Violation
Based on the inspection results, all of the units sampled would have failed HUD’s
Section 8 housing quality standards through the unit interior and/or building
inspections, since common area violations impact all units within the building.
Adjusting for the severity of the violations, 32 units inspected and another 124
Section 8 units within five of the buildings with the most severe violations
materially violated housing requirements. As a result, $561,6004 in housing
assistance payments was paid between July 2004 and June 2005 to house tenants
in units and buildings not meeting HUD requirements.
4
Based on average annual housing assistance payments for 156 units.
25
Recommendations
We recommend that the director of HUD’s Los Angeles Multifamily HUB
2A. Require the owner to correct all violations identified, which resulted in
$561,600 in housing assistance payment to units and buildings not meeting
HUD’s requirements, and certify to HUD that the violations have been resolved.
2B. Perform followup inspections of the six properties to ensure they are
decent, safe, and sanitary.
2C. Develop and implement written maintenance, repair, and inspection
policies and procedures acceptable to HUD to ensure the properties are
maintained free of housing violations.
26
Finding 3: The Owner and Management Agent Mismanaged the
Projects
The owner and management agent did not manage the projects in a reasonable manner. They
failed to ensure identity-of-interest maintenance and accounting services were reasonable;
charged the projects for ineligible amounts; failed to maintain the projects free of health and
safety violations and in good repair; did not maintain an inventory; and did not accurately
calculate, report, and resolve $655,173 in project liabilities, including excess income, reserve for
replacement, payables to the City of Los Angeles, and a note payable. These problems occurred
due to the lack of procedures and controls, failure to maintain documentation, and the use of
identity-of-interest contractors. As a result, the projects were left in poor physical and financial
condition, critical information was not reported accurately, and the risk of default on the HUD-
insured mortgages increased.
Management Did Not Ensure
Maintenance and Accounting
Services were Reasonable
The management agent did not sufficiently supervise or control the activities of
the identity-of-interest maintenance and accounting contractors. As discussed in
finding 1, the management agent did not follow HUD requirements over
procurement to prevent excessive costs and failed to ensure quality work was
performed by the maintenance contractor.
Management Charged
Ineligible and Unsupported
Costs to Projects
The management agent charged the projects for costs already paid through their
management fees, including the president’s salary and unknown portions of the
central office costs (see finding 1). Unreasonable amounts paid to the
management agent would benefit the projects’ general partner, through his
ownership of the management agent.
Management Did Not Ensure
Projects Were in Good Repair
The owner and management agent did not operate the projects in a manner
ensuring they were maintained in good repair as required by the regulatory
agreements and other HUD criteria. Numerous health and safety violations were
27
identified during our sample inspections (see finding 2). In addition, both
Holiday 101-A and Holiday 101-B failed recent HUD Real Estate Assessment
Center physical inspections.
Management Failed to
Maintain an Accurate
Inventory
The management agent did not have an accurate inventory of project appliances
and equipment. It never developed formal procedures to track the placement of
project assets. The president of the management agent informed us the
management agent trusted the maintenance contractor’s employees to know
where the project assets were located. The regulatory agreements require that
records over project equipment be maintained in reasonable condition for proper
audit. An inventory is necessary to audit equipment, including appliances. In
addition, HUD Handbook 4350.1, chapter 4, requires the owner to provide HUD
with information on changes or replacement of appliances and items that are
normally identified by make, model, and serial number. When questioned about
these practices, the management agent informed us that at one point, it tried to get
the inventory under control but the ownership, including the general partner of the
projects, prevented it.
We reviewed all available sources of information showing the location of the
projects’ assets. The management agent could only produce an undated and
unsigned hand-written list of recently purchased appliances, identifying their unit
location, although it did not include information on older appliances. Invoices
and general ledger entries for appliance purchases sometimes mentioned where
items were delivered. Work orders mentioned when Action Maintenance
installed or removed the items. However, in no cases were the appliances
identified by serial number, and when they were moved out of a unit, there was no
indication of where they were taken.
As part of unit inspections, we attempted to confirm 16 recently purchased
appliances identified in the available documentation. However, not all items
could be confirmed, and comparison of the management agent’s handwritten list
to the general ledgers, invoices, and work orders showed various discrepancies.
The general ledger, invoices, and/or work orders listed the installation of four
appliances that the management agent’s list failed to identify, two of which could
be confirmed in the units. In two cases, the management agent listed a stove
going into the unit when it was actually a refrigerator. Also, due to a lack of
serial numbers, we could not confirm two items on the agent’s list and an
additional item in the general ledger to the applicable unit. Finally, due to
discrepancies between the agent’s list and the general ledger, it was unclear
whether one or two refrigerators were moved in and out of a unit, but in either
28
case, there was no information as to where they were taken afterward. Overall,
the management agent’s inventory tracking was inaccurate and insufficient. As a
result, it is not clear whether all items purchased by the projects are actually at the
properties.
Management Failed to
Correctly Report Excess
Income
The general partner and management agent failed to ensure the projects accounted
for excess income amounts due to HUD. This violated the Housing Act of 1937,
section 236, which requires the projects to provide monthly reports of excess
income collected from tenants for charges over the base rent. These funds are to
be remitted to HUD unless HUD authorizes the projects to retain them.
Between 2000 and 2004, the management agent only submitted 109 of the 240
monthly excess income reports required. This problem continued after the fiscal
year 2000 financial audit reports identified the nonsubmission of the reports as a
finding, which remained an outstanding issue through 2001. Although HUD
granted waivers on the payments for Holiday 101-A, 101-B, and 101-C during
certain periods, allowing the excess income to be placed in the reserve for
replacement accounts, the reports were still required. The actual payments to
HUD and the reserve totaled $7,038, and many of the available reports listed zero
excess income.
During our confirmation of excess income calculations, the management agent
admitted previous reports had been incorrectly prepared to reflect zero excess
income. In March 2005, the agent submitted corrected reports for the period 2002
to 2004. Based on these revised reports, the projects must remit an additional
$13,018 to HUD and $7,166 to the reserve for replacements, as follows:
Corrected monthly reports of excess income
Property Revised Funds due Funds due to Totals
reports to HUD reserve for
2002 - 2004 replacement
Holiday 101-A 24 $2,376 $1,207 $3,583
Holiday 101-B 24 4,135 4,945 9,080
Holiday 101-C 24 3,069 1,014 4,083
Holiday 102 41 3,438 3,438
Total 113 $13,018 $7,166 $20,184
The lack of reporting and incorrect information appear to be due to the lack of
effective procedures and controls to ensure accurate and timely reporting to HUD.
29
Delinquent Reserve Funds
Were Not Reported or Paid
The owner and management agent failed to ensure the projects repaid funds
borrowed from the reserve for replacement accounts. The regulatory agreements
require monthly payments to the reserve for replacement, to be used for major
project repairs and released with HUD’s approval. HUD allowed the four
Holiday projects to borrow $705,681 from their reserve accounts between August
1999 and December 2004 to cover operations when Section 8 subsidy payments
were delayed and to pay insurance costs.
The fiscal year 2000 financial audit reports for Holiday 101-A, 101-B, and 101-C
identified the borrowed funds as overdue, which remained outstanding through
November 30, 2001. The outstanding balances were again identified as
conditions on the fiscal year 2004 financial audit reports for Holiday 101-A and
101-B.
After management submitted documentation regarding various project repairs,
HUD waived the majority of the amount owed between November 2001 and
March 2002. In addition, Holiday 101-C and 102 returned $81,907 to their
reserves between December 2004 and May 2005. However, $129,142 was still
owed to the project reserves, as follows:
Delinquent amounts owed to reserve for replacement account
Property Borrowed Repaid HUD allowed offset Total owed
Holiday 101-A $ 237,633 $ - $ 158,234 $ 79,400
Holiday 101-B $ 147,252 $ - $ 124,880 $ 22,372
Holiday 101-C $ 169,599 $ 25,606 $ 144,008 $ (15) *
Holiday 102 $ 151,197 $ 56,301 $ 67,525 $ 27,370
Total $ 705,681 $ 81,907 $ 494,647 $ 129,142
* Amount repaid and offset exceeds balance borrowed, but doesn't impact balance other project's owe.
Although we did not review the detail for LA Pro 30 and Two Worlds II, the
fiscal year 2004 financial audit reports identified similar outstanding balances of
$12,264 and $8,164, respectively.
Management Did Not Address
Obligations to the City of Los
Angeles
The owner and management agent did not take appropriate action to resolve
outstanding obligations to the City of Los Angeles for systematic code
enforcement ordinance and rent stabilization inspections. Holiday Apartment
30
payables due to the City of Los Angeles5 totaling $115,841 have been outstanding
since 2000. The lack of payment resulted in the assessment of substantial late
charges, which are ineligible since they are not reasonable and necessary project
expenses. Holiday 101-B also received a final notification letter from the city,
threatening to take legal remedies, which may include liens or seizure of the
property. As of the October 22, 2004, invoices, the obligation balances were as
follows:
Amounts owed to City of Los Angeles
Property Outstanding Late fees Total amount
charges assessed due
Holiday 101-A $ 19,957 $ 11,358 $ 31,315
Holiday 101-B $ 27,540 $ 19,004 $ 46,544
Holiday 101-C $ 11,266 $ 7,214 $ 18,480
Holiday 102 $ 12,323 $ 7,179 $ 19,502
Total $ 71,086 $ 44,755 $ 115,841
These matters were not included in the account payable balances or notes in the
projects’ financial statements submitted to HUD. According to the management
agent, it did not inform the project’s financial auditing firm about the delinquent
amounts. The owner’s and agent’s inactivity and failure to report significant
matters resulted in unnecessary late charges and put the HUD-insured properties
at risk.
The Project Is Missing Support
for Note Payable
The financial statements for Holiday 101-B include a questionable note payable
for $369,578. According to the management agent, this amount is supposed to be
an earthquake loan from HUD. However, management could not provide support
or identification numbers showing the legitimacy of the note. As a result, it is not
clear whether this is an eligible project payable.
Conclusion
The owner and management agent demonstrated poor management through their
failure to control project disbursements, safeguard project assets, maintain the
properties in good repair, and report critical information to HUD. The
mismanagement stemmed from the owner’s and management agent’s failure to
establish effective policies and procedures, including those for excess income,
5
We did not review whether similar amounts were due from LA Pro 30 or Two Worlds II.
31
inventory, and document maintenance to ensure the projects were in compliance
with HUD requirements. The identity-of-interest relationship between the
management agent and major contractors resulted in a lack of independence. As a
result, the projects were left in poor financial and physical condition. These
issues can only be resolved through the repayment of project funds, establishment
of procedures and controls, and removal of identity-of-interest contractors,
including the management agent.
Recommendations
We recommend that the director of HUD’s Los Angeles Multifamily HUB
3A. Take appropriate administrative action against the management agent and
the projects’ ownership, including requiring the owner to remove Proland
Management Company as the projects’ management agent and obtain a new
independent management management agent acceptable to HUD.
3B. Require the projects to develop and implement written inventory, excess
income, and document maintenance policies and procedures.
3C. Require the projects to remit excess income owed to HUD of $13,018 and
submit $7,166 to the applicable replacement reserves.
3D. Require the projects to return the $149,570 in borrowed funds to their
respective reserve for replacement accounts.
3E. Require the owner to address the $115,841 obligation to the City of
Los Angeles and report amounts owed in the financial statements. If the city does
not waive the $44,755 in late fees, we recommend HUD require the owner to pay
these expenses.
3F. Provide support as to the legitimacy of the $369,578 note payable.
32
SCOPE AND METHODOLOGY
We performed our review at HUD’s Los Angeles regional office and the management agent’s
offices from January to October 2005. To accomplish our objectives, we interviewed HUD
officials, management agent staff and officials, and the general partner. The primary
methodologies included
• Reviews of the projects’ regulatory agreements and management agent certifications.
• Reviews of applicable HUD guidance, including HUD handbook and Code of Federal
Regulations requirements.
• Reviews of HUD’s referral documentation and monitoring files, including monitoring
reviews, correspondence, mortgage documentation, housing assistance payment
documents, and Real Estate Assessment Center inspection results.
• A walk-through on a nonstatistical sample of seven scattered-site building exteriors in
March 2005 to generally assess the properties’ physical conditions.
• Inspecting a statistical sample of 60 of 609 project-based Section 8 units in June 2005 to
determine whether they met health and safety standards (see appendix C for sampling
methodology). We also inspected the associated exterior and common areas of 25 out of
29 scattered-site buildings. In addition, we reviewed and confirmed work order
information for each unit inspected for the period January 2003 to May 2005. We
interviewed available tenants and confirmed recently installed appliances.
• Reviews of the projects’ annual audited financial statements from 2000 to 2004.
• Reviews of the projects’ financial records, such as invoices, payroll, bank reconciliations,
and general ledgers, including downloads from the management agent’s Quickbooks
accounting system.
• Reviews of standard cost index information from 2000 to 2005.
The review generally covered the period of January 1, 2000, to December 31, 2004. This period
was adjusted as necessary. We conducted our audit in accordance with generally accepted
government auditing standards.
33
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:
• Policies and procedures that management has in place to reasonably ensure
that HUD-insured projects are administered in accordance with regulatory
agreements and HUD requirements.
We assessed the relevant controls identified above.
A significant weakness exists if management controls do not provide reasonable
assurance that the process for planning, organizing, directing, and controlling
program operations will meet the organization’s objectives
Significant Weaknesses
Based on our review, we believe the following items are significant weaknesses:
• The projects lacked effective procurement, contracting, and disbursement
procedures and controls to reasonably ensure project funds were used in
compliance with the regulatory agreement and HUD requirements (see
findings 1 and 3).
• The projects lacked effective maintenance and inspection procedures and
controls to ensure the projects were maintained in a reasonable condition and
free of health and safety defects (see findings 1, 2, and 3).
34
• The projects lacked effective controls over the use, supervision, and
monitoring of identity-of-interest contractors (see findings 1, 2, and 3).
• The projects lacked effective controls to ensure proper reporting to HUD
(see finding 3).
35
APPENDIXES
Appendix A
SCHEDULE OF QUESTIONED COSTS
AND FUNDS TO BE PUT TO BETTER USE
Recommendation Ineligible 1/ Unsupported 2/ Funds to be put to
number better use 3/
1C $1,453,019 $264,185
1D $75,674
1E $33,500 $16,750
1G $365,734 $100,374
1H $380,670
1I $209,441 $76,135
1J $140,880
1K $11,200
2A $561,600
3C $13,018 $7,166
3D $149,570
3E 44,755 $71,086
3F $369,578
Total $2,377,570 $719,899 $1,246,866
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.
3/ “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.
36
Appendix B
AUDITEE COMMENTS AND OIG’S EVALUATION
Ref to OIG Evaluation Auditee Comments
Comment 1
37
Comment 1
38
Comment 2
Comment 3
39
Comment 4
Comment 5
40
Comment 6
41
Comment 7
Comment 8
Comment 9
Comment 8
42
Comment 10
43
Comment 9
44
Comment 3
Comment 11
Comment 12
45
Comment 13
Comment 10
Comment 9
46
Comment 14
47
Comment 14
Comment 15
48
Comment 15
Comment 16
49
Comment 12
50
Comment 17
51
Comment 18
52
Comment 19
53
Comment 19
Comment 12
54
55
Comment 11
Comment 11
56
Comment 20
57
Comment 21
Comment 22
58
Comment 23
Comment 24
59
Comment 25
60
61
Comment 26
62
Comment 27
63
Comment 27
Comment 27
64
Comment 27
65
Comment 12
66
Comment 28
67
Comment 29
68
Comment 30
Comment 31
69
Comment 31
Comment 32
70
Comment 2
Comment 20
71
Comment 30
72
Comment 10
Comment 9
73
Comment 12
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Comment 26
75
Comment 26
Comment 27
76
Comment 27
77
Comment 27
78
Comment 11
Comment 30
79
Comment 33
80
Comment 34
81
Comment 35
82
Comment 36
83
Comment 37
Names have been redacted for privacy
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Comment 38
85
Comment 38
86
Comment 39
87
Comment 40
88
Comment 41
Comment 42
89
Comment 42
90
Comment 43
Comment 32
91
92
93
Comment 44
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OIG Evaluation of Auditee Comments
Comment 1 We allowed reasonable time for the exit conference, and the auditee had a month
to prepare its written response. In addition, the auditee had been provided draft
finding outlines between August 22 and December 6, 2005, identifying finding
issues, which included notifying the auditee that maintenance costs were
excessive when compared to a construction cost index.
Comment 2 The background section of the report discussed recent Real Estate Assessment
Center inspection results.
Comment 3 Matters regarding the central office were referred to OIG by the HUD Los
Angeles offices indicating resolution had not occurred.
Comment 4 Where Reznick Group may have experience and expertise in auditing HUD
insured projects, we can only rely on our own testing of compliance with federal
regulations, which is generally more extensive than the testing for compliance in
financial audits.
Comment 5 We will address individual violations below. Each violation identified in this
report is contrary to a HUD handbook or regulatory agreement requirement. The
project ownership signed the regulatory agreement, which stated it would comply
with HUD’s requirements as well as those contained within it. Since the
ownership signed the document, it is assumed to know what is in it and, therefore,
willingly violated its requirements.
Comment 6 The supervisory staff the OIG spoke to were the President and the Controller of
Proland Management Company, which is also the parent company of the
bookkeeping companies. The same two individuals also hold the same
supervisory positions with Proland Real Estate, which does business as Action
Maintenance.
Our intent is to gain compliance with HUD’s requirements and return the project
to its original state, had violations not occurred. We do not wish to remove
affordable housing from the market. Additionally, we have not recommended
such sanctions and they are not even available under chapter 7.4 of HUD
Handbook 4381.5 REV-2. We appreciate that the owners wish to work with
HUD to correct violations.
Comment 7 The specific references within the handbook were left out to make the report
easier to read. It is clear from the direct references in the auditee’s comments, the
auditee has identified the specific criteria within the handbook so no further
adjustments were made to the report.
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Comment 8 In addition to the management agent’s certification and HUD Handbook 4381.5,
the regulatory agreements require project costs to be reasonable and necessary.
We have demonstrated in our report where we do not believe the owners and
management agents complied with this provision even when obtaining bids.
Comment 9 The exhibit provided, which is supposed to show that the Reznick Group
performed its own bid testing and determined the amounts were reasonable, is an
unsigned and undated “MEMO TO FILE.” It has no information showing it was
prepared by Reznick and included in its audit workpapers. There is also
insufficient information to show what detailed testing was performed, or how the
conclusion was reached. As a result, we cannot rely on the results. We can only
rely on our own testing performed during this audit, which is usually more
thorough than the compliance testing performed in financial audits.
Comment 10 Although the auditee claims it obtained over 100 competitive bids, 33 were
provided to our office relating to repair services (along with several duplicates of
some bids).
Discussion with the President of Proland Management had indicated bids were
obtained in relation to Action Maintenance procuring for services that it could not
perform and costing over $2,000, as stated in the auditee’s disbursement
procedures. The bids were not presented as the justification for using Action
Maintenance’s services. However, we have reviewed the bids provided by the
auditee. The majority of the bids were obtained by Action Maintenance, the
company the bidders would supposedly replace, which would demonstrate poor
management practices and makes them questionable. In addition, the majority of
the bids were for licensed professionals, such as plumbers, electricians, and
carpenters, specialists that Action Maintenance did not employ. In addition, most
of the rates were for single services, not what a vendor would necessarily charge
under a long term contract. Finally, the rates on the bids would be higher to
compensate the vendor for travel time to the site, as opposed to charging directly
for the travel time; whereas Action Maintenance charged the projects its full
hourly rate for all time and travel on any job.
The auditee only produced 5 bids from maintenance companies that were similar
to the services performed by Action Maintenance. One was an undated bid
submitted by the former supervisor for Action Maintenance, which was therefore
unreliable. The remaining bids listed rates of $25 to $42 per hour as their average
hourly rates (not including travel). The maintenance bids included one obtained
in 2000, none between 2001 and 2003, one in 2004, and two in 2005, which
would not meet the minimum threshold of obtaining 3 applicable bids per year.
In addition, one of the 2005 maintenance bids, which listed its individual service
call rate at $35 per hour, recommended “it would be more economical to work
under a maintenance service contract” in which the vendor offered a flat fee of
$3,500 per month for all repairs on up to 700 units, excluding materials. Action
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Maintenance’s average monthly cost to address the projects’ 632 units was
$56,090 (excluding materials), far higher than the proposed rate.
Comment 11 Based on discussions with the HUD Los Angeles offices, limitations or denials
for rent increases and/or withdrawal requests from the reserve for replacement
accounts were due to the owner’s and management agent’s noncompliance with
HUD requirements, issues leading to the referral to the OIG.
Comment 12 The letters were not identified in HUD’s files, so we do not have any information
to show that HUD received the letters in question or responded to them.
However, issues discussed in these letters were later referred by HUD to the OIG
for further review. The OIG is independent of HUD and HUD does not bring
about issues in our report. We are only reporting on violations of regulations we
identified during our audit.
Comment 13 The handbook requires written cost estimates from vendors for any ongoing
service that is expected to exceed $10,000 per year. The projects paid for
maintenance services in excess of this amount and, therefore, the overall
maintenance service for the year should have been bid, not the cost of individual
jobs as was done. The service would need to be sent out for bid every year after
that or brought in-house and performed by project employees. Had this been
done, the owner would only need to maintain three years of bidding
documentation. If a five-year contract had been signed, the bids would have
needed to be maintained for five years or the length of the contract. As it is
currently, there is no assurance the maintenance services provided were at the
most reasonable cost.
Comment 14 In addition to the procurement and bidding requirements detailed in the
management agent’s certification and HUD Handbook 4381.5, the regulatory
agreements require costs to be reasonable and necessary. In the absence of
adequate applicable bids for long-term maintenance services to show the identity-
of-interest contractor’s costs were reasonable, we determined what the reasonable
cost would be from other sources.
We reviewed personnel records, payroll, and Action Maintenance’s unaudited
financial records to determine what their actual costs and profit were in
performing the services for the project, and noted the profit margins were
excessively high. This was corroborated by the large transfers of cash from
Action Maintenance to the owners, ranging from $420,000 to $832,000 each year
between 2000 and 2005.
We also checked a standard cost index used by contractors and appraisers to
determine construction related costs. These amounts are not “guesses” as
contended by the auditee, but based on information obtained by the vendor on
actual wages rates. The higher rates provided by the Saylor Cost Index for
professions such as electricians, plumbers, and carpenters would not apply to
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Action Maintenance since the contractor was not employing such skilled workers
to address its work orders. The higher rates charged by independent contractors
for those professions directly relate to the higher salary such skilled and licensed
workers command. Whereas Action Maintenance’s average employee earned
around $11, and its highest paid worker earned $18 an hour as of 2005, the base
wage for an open shop electrician and plumber approached $37 and $31 per hour.
Although its employees are generalist performing a variety of maintenance
functions, the identity-of-interest relationship between the owner of the projects,
the management agent, and the maintenance contractor, allowed Action
Maintenance to charge the projects for rates approaching licensed craftsmen.
Although HUD doesn’t specifically limit the owner’s profit margin, costs must be
reasonable and necessary in accordance with the regulatory agreement.
Comment 15 Although the maintenance supervisor was a licensed contractor, as mentioned in
the report, he was not addressing the maintenance work orders in question. In
addition, the six employees listed by the auditee were the most skilled of the
contractor’s 65 employees working during various periods between 2000 and
2005. Our review of personnel files showed the staff were generally hired as
maintenance employees, not plumbers or electricians, with no mention of
electrical certifications or training. Although the auditee has provided new
resumes for these maintenance staff, and provided support that one was a
locksmith, there has been no support provided to show that the remainder were
licensed electricians or plumbers.
Comment 16 The example provided by the auditee uses the highest pay rate paid to any of its
employees between 2000 and May 2005, when the majority of the maintenance
staff earned less than $11 per hour. We confirmed the health cost and payroll tax
matched the rates listed by the auditee. However, review of Action Maintenances
actual costs show its average per hour cost would be $0.22 for car allowance,
$1.20 for leave and holidays, and $1.07 for workers compensation, lower than the
rates listed by the auditee. Also, since Action Maintenance charges a higher rate
for actual overtime worked, adding a factor of $1.16 to the base rate would not be
reasonable. In addition, even using the auditee’s own numbers for its highest paid
employee, the maximum rate of $38.30 (which includes overhead and profit) is
significantly below the $55 per hour charged to the projects.
However, upon further consideration, we noted the Saylor open shop rates did not
clearly identify the inclusion of fringe benefits into their calculations. Although
not all of Action Maintenance’s employees received these fringe benefits, we
have made an allowance for leave, holiday pay, and health benefits based on
Action Maintenances’ costs and policies. This has increased the projected
reasonable rate to $25 per hour, which is also in line with some of the
maintenance rates included in the documentation provided by the auditee. We
adjusted the report wherever necessary.
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Comment 17 If the maintenance contractor performed the alleged services, the maintenance
contractor should have properly invoiced the projects for actual work performed.
The management agent should not have allocated the maintenance supervisors
costs to the projects as if he were a management agent employee performing font-
line activity, with no record concerning the time spent performing those activities.
We also noted that exhibit 6 did not include inspection reports to support the
auditee’s assertions, and only included work orders signed off by the subsequent
maintenance supervisor (not the maintenance supervisor in question).
Comment 18 The maintenance contractor did not keep track or bill based on actual work
performed. The one example of an invoice provided by the auditee did not show
what work was performed. Our office had previously requested inspection
reports, which were not provided. In addition, there were no examples of
inspection reports under exhibit 7. However, the auditee did submit a 2006 work
order provided under exhibit 15 showing one of the maintenance staff “went to
check the jobs that are finished and the jobs that need to be done in the properties”
instead of the maintenance supervisor. Exhibit 15 also included one example of a
building inspection report from February 2005, but it was prepared by one of the
maintenance workers and not the maintenance supervisor. Finally, there was a
single example of a vacant unit inspection report provided, prepared in November
2005 (after our audit period), but it was signed by someone other than the
maintenance supervisor.
Comment 19 The report has been adjusted to discuss the bids obtained by the management
agent. However, we have not been provided bids over materials purchased in
volume. If third parties were selected to perform work, they should have been
contracted by the management agent and not the maintenance contractor. Using
the identity-of-interest maintenance contractor to perform services which are the
management agent’s responsibility, and charging additional fee for it, would not
be reasonable.
Comment 20 We cannot ignore violations of health and safety requirements identified during
HUD OIG inspections simply because the projects passed prior Real Estate
Assessment Center inspections.
Comment 21 The 2001 memo was issued during the audit period in question and has not been
revised, so it is therefore applicable. The document established what HUD
considered a reasonable median amount for bookkeeping fees. The subsequent
San Francisco memo was also provided to the auditee after the exit conference
because it came up during the discussion, and to demonstrate the limitation
applies to other areas and later periods.
Comment 22 Following the exit conference, we provided the auditee detailed schedules
showing how the amount was computed, and also provided copies of the
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auditee’s own vendor ledgers and invoices from which the information was
obtained (per their request).
Based on our discussions with the two staff members in question, they primarily
worked on bookkeeping related functions not occupancy functions. Different
Proland Management staff performed the occupancy functions.
Comment 23 The bookkeeping “bids” provided were primarily resumes and letters from
placement and temporary agencies, all obtained around the end of 2000. It
appears these persons were trying to obtain employment with Proland
Management instead of contracting for a service. In fact, one mentioned they had
read Proland’s add in “the LA Times for the accounting position.” As a result,
these are not true bids for service.
The hourly rates were generally not listed by the applicants but written in by
unknown person(s). There was no information to show how many hours an actual
contractor would have charged to perform the service, to be applied to the
identified rates. Since the bookkeeping charges performed by the identity-of-
interest contractor were fixed and not charged on a per hour basis, we cannot
compare these costs to the “bid” rates. However, a document previously provided
by the auditee showed a consultant previously proposed performing the project’s
bookkeeping for $3.50 per unit per month, which would have been substantially
less than charged by the identity-of-interest contractor.
Comment 24 The actual bookkeeping costs can be charged to the project if the costs do not
exceed the cost of independent vendors to perform the function, subject any cap
set by HUD to ensure these rates are reasonable. The auditee has not adequately
shown what contractors would have charged, nor were subsequent bids obtained
in subsequent years. In addition, since the owner was directly charging the
project for the payroll of staff performing bookkeeping functions, the amounts
paid to the identity-of-interest contractor are unnecessary duplicative costs.
Comment 25 The add on fees mentioned under Handbook 4381.5 are for additional travel costs
associated with scattered site properties and/or maintenance costs in adverse
condition neighborhoods, which should not be allowed if already covered under
the project’s residential management fee. The item cited by the auditee was not
related to bookkeeping.
Comment 26 The auditee is now retroactively down-grading the President’s position to
“resident manager/superintendent,” even though he has acted as the Management
Agent’s representative to HUD, performed supervisor management agent
functions, and has not previously been represented as merely a resident manager.
The position of a resident manager also denotes that he actually lives at the
projects in question, to which we have been provided no support.
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The management agent’s organizational chart also showed all employees
reporting to the President. Also, as mentioned in the report, the job description of
the President included supervisory roles such as overseeing staff, setting policies
and procedures, approving payroll, and acting as liaison with HUD. Only after
the draft report was issued has the auditee included an extra page to the
President’s position description, which now includes additional non-supervisory
activities to make his position appear to be a generalist. However, HUD
Handbook 4381.5 still prohibits generalist staff performing front-line costs from
performing supervisory functions.
Although we had requested documentation to support the President’s charges
during the course of the audit, monthly timesheets were only provided until the
auditee issued its response to the report. HUD Handbook 4381.5 states the hours
spent performing front-line activities should be documented on weekly
timesheets. In addition, the hours listed on these monthly timesheets, although
varying each month, were still allocated to the projects at the same percentage
each month. Also, if the auditee believes it was appropriately charging the
projects, it isn’t clear why the charges suddenly stopped in September 2004, when
there is no evidence his position or activities changed.
Finally, several of the items listed as front-line activities also appear questionable.
The President lists a number of hours dealing with residents, recertifications, and
their paperwork even though the management agent employs occupancy specialist
and maintains resident manager “keyholders.” He also lists he was performing
property level bookkeeping and posting accounts payable even though there was
an identity-of-interest contractor and other staff being charged to the projects for
performing these functions. In addition, he lists property level inspections even
though Action Maintenance’s supervisor was supposed to be performing this
function (the President did not attend any of the OIG inspections). Finally, a
number of hours were designated as budgeting, even though Handbook 4381.5
states preparing budgets required by the owner or HUD, exclusive of rent increase
request and MIO plans, is covered by the management fee.
Comment 27 After further consideration, we have adjusted the report to show the rent and
capital improvement charges as unsupported. Although it may be allowable to
charge central office costs of eligible front-line staff to the projects, the costs
should be reasonable and necessary in accordance with the regulatory agreement.
The lease agreement between the project and the management agent allocates a
disproportionate amount of the actual building’s cost to the projects. A
reasonable amount would be based on the amount the owner/management actually
pays for the building. Any allocation of that cost should be based on the actual
space necessary for the eligible front-line staff. Any improvements to the office
charged to the projects should be reasonable charges for improvements to the
space required by those persons to perform their front-line activities. Currently,
there is insufficient information available to determine the actual space needed
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by the eligible front-line staff, and which improvements were for their space, as
opposed to the owner’s, identity-of-interest contractors’, or the management
agent’s space.
Comment 28 The spreadsheet included in the report clearly designates the entities in question,
and the year in which the payments were made. During the exit conference we
offered to provide the auditee with our calculations and support on finding issues.
No requests were made for the amounts in question. However, we can provide
the auditee with additional information upon request.
Comment 29 The projections of ineligible costs were made to ascertain the potential future
inappropriate activity continuing after our audit period. Although the auditee
does not have to return the estimated amounts, as part of our audit
recommendations, HUD should determine the subsequent ineligible costs charged
to the project and require repayment.
Comment 30 HUD Handbook 4381.5 requires the projects to be in compliance with Housing
Quality Standards, which were the standards applied in determining whether a
unit or building passed or failed the inspection. The Real Estate Assessment
Center uses Uniform Physical Condition Standards for the basis of their
inspections. The inspections are used as a tool by Multifamily to monitor the
physical status of their insured portfolio, not to ensure the project is in compliance
with its requirements to maintain its housing in accordance with Housing Quality
Standards. The violations themselves would be health and safety violations under
both Housing Quality Standards and Uniform Physical Condition Standards.
Comment 31 The issues were designated as health and safety violation by the OIG’s certified
appraiser.
Comment 32 We requested inspection reports from the auditee during the course of the audit,
and were specifically informed these documents were not prepared. Only one
building and one unit inspection report was provided as part of the auditee’s
response, one of which was prepared during the course of our on-site work and
the other after we completed on-site work.
The maintenance log provided only covers selected periods up to 2003, and does
not show when and if the work was completed or which work order it was
performed under. The President and Controller (these two individuals are also the
President and Controller of Proland Real Estate, which does business as Action
Maintenance) specifically told the OIG that Action Maintenance was not tracking
tenant requests, there was no process to prevent duplicative charges of work
orders, and completed work orders were not organized by unit or tenant.
Comment 33 We were specifically told by the President and the Controller of Proland
Management that was no such inventory over appliances. The one page example
now provided by auditee does not appear current.
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Comment 34 We have amended the wording of the report to state the amounts were credited
against the loan balances.
Reserve for replacement funds are restricted escrow and releases must be
approved by HUD. Due to the restriction on the funds, they can be borrowed for
unrestricted purposes as was the case here. Additionally, this transaction is
further defined as a loan because the terms of repayment were defined.
Comment 35 Per the auditee’s request during the course of the audit, we did not contact the
City of Los Angeles concerning the obligations.
Comment 36 The auditee was notified the loan and support was requested in March 2005. This
should have been sufficient time to obtain the documentation. If support is found,
resolution of this matter can be coordinated with the HUD Los Angeles office.
Comment 37 The tenant of B209 had confirmed that maintenance had also performed work on
the shower wall, and in doing so Action Maintenance had removed the shower
head. The wording of the report will be adjusted to reflect this.
The work order for D304 had not been provided when originally requested. It
states the shower leak was repaired and the diverter was replaced.
The auditee included a tenant’s statement claiming the tenant removed the shower
head. However, this tenant did not occupy either of the two units in question,
B209 or D304; instead she resided in unit F111. The OIG inspection of F111
showed the unit had a shower head, so it is unclear how the owner obtained this
statement or why the tenants made these comments.
We discussed the matter of tenants removing shower heads, preferring to have the
water come directly from the pipe, with the OIG appraiser. Throughout his
various unit inspections he has not seen this as a practice of tenants.
Comment 38 There were five windows in the zero bedroom unit, one in the bathroom, two in
the living room/bedroom, and two in the kitchen. The inspection showed two
windows had been clearly replaced (not three as contended by the auditee), and at
least one other clearly needed work but hadn’t received any. In addition, the
support provided for the January work orders only showed $10 of materials
purchased, which would have been insufficient to replace a third window.
Initially, it appeared the window installed in January 2003 was the one that
subsequently fell out, as reported in the subsequent work order. However, upon
further consideration, it may have been one of the other windows so we have
removed that work order from the report. The remaining work orders remain
questionable as the work was poorly performed and left incomplete.
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Comment 39 No original documentation has been retained by the OIG. No documentation
would have been removed from the agent’s office except with the express
permission of the management agent.
Comment 40 The information provided does not address why it required so many attempts to
fix a kitchen sink leak. We discussed the setting of toilets with the OIG appraiser,
who advised if a toilet is properly set and secured, a tenant should not be able to
accidentally jar it loose.
Comment 41 The tenant of unit B203 understood enough English to speak with, and even
verified the amount of rent paid for the unit. For unit B305, no documentation,
such as police report or tenant complaints, has been provided to demonstrate
reports of break-ins or locks being vandalized. The information now listed by the
manangement agent in the auditee’s response was not reflected on the work orders
and invoice documentation during our audit. Further, it does not explain the high
frequency of work on the units’ locks.
The reference to the on-site managers having keys was related to whether it was
necessary to require maintenance to come to the unit for a simple lock out.
Comment 42 We requested work orders for the units as we informed the management agent of
which tenants to notify, at least six to twelve calendar days before the respective
inspections. The short notice was to prevent the auditee from targeting units it
knew we would inspect just to correct existing problems (note: the list for 2005
work on Two Worlds II unit B09, provided as part of the auditee’s response,
shows maintenance did target the unit one day prior to the OIG inspection to
“reinstall smoke alarm, fixed stove burners”). If the management agent
maintained the documentation in order, the work orders should have been readily
available. However, as the President of Proland Management informed us, the
work orders were not organized by unit or tenant. In addition, the missing
invoices were significant, representing 11 percent of the amount charged for all
work orders requested.
Comment 43 We accept the auditee’s response to the paper holder, and it has been removed
from the report.
Comment 44 The auditee provided another response on February 23, 2006. The auditee stated
that work relating to unit B09 was completed, and that the ceiling work had just
been performed on June 8, 2005 just prior to our June 21, 2005 inspection. The
auditee provided a new list of work orders from their system showing this work,
but not the actual work orders themselves. If this information is accurate, the unit
still remained unfinished at the time of our inspection, and the auditee’s additional
records show no painting occurred at least until November 2005, when Action
Maintenance again fixed the bathroom ceiling. However, even the listing for
105
the November work did not mention any painting took place. Also, the attaching
of drywall on top of existing drywall does not demonstrate good workmanship.
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Appendix C
STATISTICAL SAMPLING METHODOLOGY
We used the Texas State Auditor’s Office Statistical Sampling Tool and Audit Command
Language to perform statistical sampling calculations so that we may use the results from the
sample to project the rate of occurrence to the universe from which the sample was drawn.
Using these software programs we were able to review a reasonable number of project-based
Section 8-subsidized units managed by Proland Management Company, determine whether these
units had inappropriate health and safety violations which would fail HUD’s housing quality
standards, and project with a high degree of accuracy to the universe of 609 Section 8 units.
Using the statistical sampling tool with a confidence level of 90 percent, an expected error rate of
50 percent, and desired precision of 10 percent, we calculated that a sample of 60 would be
appropriate. Attribute sampling tests whether a particular condition in the universe exceeds a
specified acceptable level. In this instance, the condition was whether the Section 8 unit met
housing quality standards through the absence of health and safety violations.
The management agent provided form HUD-50059, Owner’s Certification of Compliance with
HUD’s Tenant Eligibility and Rent Procedures, for March and May of 2005, listing the Section 8
units for Holiday Apartments (101-A, 101-B, 101-C, and 102), LA Pro 30, and Two Worlds II.
We selected the sample of 60 units, along with 25 backup units, at random without bias using
Audit Command Language. The backup samples were selected as replacements in case we were
unable to inspect any of the first 60 units and would be reviewed in the sequence selected by the
software. However, we were able to inspect all 60 units so no backup units were reviewed.
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Appendix D
SCHEDULE OF INSPECTION RESULTS
Sample Property Street Unit Pass/fail 24-hour 10-day 30-day Total
item address housing quality violations violations violations violations
standards
Building 1 Holiday 101-A 1102 West 41st Place Fail 6 0 2 8
Unit 1 Holiday 101-A 1102 West 41st Place A227 Fail 2 0 1 3
Building 2 Holiday 101-A 1106 West 41st Place Fail 2 0 1 3
Unit 2 Holiday 101-A 1106 West 41st Place C122 Fail 1 0 0 1
Unit 3 Holiday 101-A 1106 West 41st Place C124 Fail 0 0 1 1
Unit 4 Holiday 101-A 1106 West 41st Place C224 Fail 2 0 0 2
Building 3 Holiday 101-A 1107 West 42nd Street Fail 2 0 1 3
Unit 5 Holiday 101-A 1107 West 42nd Street D114 Fail 1 0 0 1
Building 4 Holiday 101-A 1131 S. Bronson Ave. Fail 6 1 2 9
Unit 6 Holiday 101-A 1131 S. Bronson Ave. E104 Fail 1 0 0 1
Unit 7 Holiday 101-A 1131 S. Bronson Ave. E107 Fail 4 0 0 4
Unit 8 Holiday 101-A 1131 S. Bronson Ave. E111 Fail 1 0 0 1
Unit 9 Holiday 101-A 1131 S. Bronson Ave. E210 Fail 2 0 0 2
Building 5 Holiday 101-A 2962 S. Francis Ave. Fail 0 0 3 3
Unit 10 Holiday 101-A 2962 S. Francis Ave. F106 Fail 2 0 0 2
Building 6 Holiday 101-B 106 N. Commonwealth Ave. Fail 8 3 2 13
Unit 11 Holiday 101-B 106 N. Commonwealth Ave. A206 Pass 0 0 0 0
Unit 12 Holiday 101-B 106 N. Commonwealth Ave. A210 Fail 1 0 0 1
Building 7 Holiday 101-B 112 N. Commonwealth Ave. Fail 4 2 1 7
Unit 13 Holiday 101-B 112 N. Commonwealth Ave. B119 Pass 0 0 0 0
Unit 14 Holiday 101-B 112 N. Commonwealth Ave. B223 Pass 0 0 0 0
Building 8 Holiday 101-B 250 S. Coronado Street Fail 5 0 2 7
Unit 15 Holiday 101-B 250 S. Coronado Street C106 Fail 1 0 0 1
Building 9 Holiday 101-B 258 S. Coronado Street Fail 4 0 2 6
Unit 16 Holiday 101-B 258 S. Coronado Street D005 Fail 2 0 0 2
Unit 17 Holiday 101-B 258 S. Coronado Street D117 Pass 0 0 0 0
Unit 18 Holiday 101-B 258 S. Coronado Street D215 Fail 1 0 0 1
Unit 19 Holiday 101-B 258 S. Coronado Street D217 Fail 1 0 0 1
Unit 20 Holiday 101-B 258 S. Coronado Street D220 Pass 0 0 0 0
Building 10 Holiday 101-B 4163 Monroe Street Fail 1 0 1 2
Unit 21 Holiday 101-B 4163 Monroe Street E101 Fail 1 0 0 1
Unit 22 Holiday 101-B 4163 Monroe Street E212 Fail 1 0 1 2
Building 11 Holiday 101-C 1241 Ingraham Street Fail 6 0 1 7
Unit 23 Holiday 101-C 1241 Ingraham Street A202 Pass 0 0 0 0
Unit 24 Holiday 101-C 1241 Ingraham Street A208 Fail 1 0 1 2
Unit 25 Holiday 101-C 1241 Ingraham Street A305 Fail 1 0 0 1
Building 12 Holiday 101-C 402 S. Burlington Ave. Fail 4 2 1 7
Unit 26 Holiday 101-C 402 S. Burlington Ave. B102 Fail 1 1 0 2
Unit 27 Holiday 101-C 402 S. Burlington Ave. B207 Fail 0 1 0 1
Unit 28 Holiday 101-C 402 S. Burlington Ave. B301 Pass 0 0 0 0
Unit 29 Holiday 101-C 402 S. Burlington Ave. B305 Fail 3 0 0 3
Building 13 Holiday 101-C 408 S. Burlington Ave. Fail 4 0 2 6
Unit 30 Holiday 101-C 408 S. Burlington Ave. C115 Fail 3 0 0 3
Unit 31 Holiday 101-C 408 S. Burlington Ave. C124 Fail 1 0 1 2
Unit 32 Holiday 101-C 408 S. Burlington Ave. C216 Fail 1 0 1 2
Unit 33 Holiday 101-C 408 S. Burlington Ave. C217 Fail 2 0 0 2
Unit 34 Holiday 101-C 408 S. Burlington Ave. C220 Fail 1 0 1 2
Unit 35 Holiday 101-C 408 S. Burlington Ave. C222 Fail 2 0 1 3
Building 14 Holiday 101-C 751 S. Hoover Street Fail 8 0 0 8
Unit 36 Holiday 101-C 751 S. Hoover Street D203 Fail 1 0 0 1
Unit 37 Holiday 101-C 751 S. Hoover Street D304 Fail 4 0 2 6
Unit 38 Holiday 101-C 751 S. Hoover Street D310 Fail 3 0 2 5
108
Sample Property Street Unit Pass/fail 24-hour 10-day 30-day Total
item address housing quality violations violations violations violations
standards
Building 15 Holiday 102 1348 W. 20th Street Fail 3 1 0 4
Unit 38 Holiday 102 1348 W. 20th Street B206 Fail 3 0 0 3
Building 16 Holiday 102 427 S. Union Drive Fail 8 0 7 15
Unit 40 Holiday 102 427 S. Union Drive D207 Fail 2 0 0 2
Unit 41 Holiday 102 427 S. Union Drive D212 Pass 0 0 0 0
Unit 42 Holiday 102 427 S. Union Drive D302 Fail 2 0 0 2
Unit 43 Holiday 102 427 S. Union Drive D304 Pass 0 0 0 0
Building 17 LA Pro 1106 S. Harvard Blvd. Fail 2 0 2 4
Unit 44 LA Pro 1106 S. Harvard Blvd. E102 Fail 2 0 1 3
Unit 45 LA Pro 1106 S. Harvard Blvd. E105 Fail 2 0 1 3
Building 18 LA Pro 1340 S. Westlake Ave. Fail 4 0 1 5
Unit 46 LA Pro 1340 S. Westlake Ave. C108 Fail 2 0 0 2
Unit 47 LA Pro 1340 S. Westlake Ave. C202 Fail 1 0 0 1
Unit 48 LA Pro 1340 S. Westlake Ave. C206 Fail 0 0 1 1
Building 19 LA Pro 1606 W. 47th Street Fail 1 0 3 4
Unit 49 LA Pro 1606 W. 47th Street F111 Fail 1 0 0 1
Building 20 LA Pro 306 S. Columbia Ave. Fail 1 0 1 2
Unit 50 LA Pro 306 S. Columbia Ave. B203 Fail 2 0 0 2
Unit 51 LA Pro 306 S. Columbia Ave. B209 Fail 2 0 1 3
Building 21 LA Pro 817 S. Park View Street Fail 3 0 1 4
Unit 52 LA Pro 817 S. Park View Street D106 Fail 1 0 1 2
Building 22 Two Worlds 1228 S. Kingsley Drive Fail 0 1 1 2
Unit 53 Two Worlds 1228 S. Kingsley Drive C02 Fail 4 0 0 4
Unit 54 Two Worlds 1228 S. Kingsley Drive C06 Fail 2 0 0 2
Building 23 Two Worlds 1401 S. Burlington Ave. Fail 2 0 2 4
Unit 55 Two Worlds 1401 S. Burlington Ave. F11 Pass 0 0 0 0
Building 24 Two Worlds 420 S. Union Ave. Fail 1 0 1 2
Unit 56 Two Worlds 420 S. Union Ave. A17 Fail 1 0 0 1
Building 25 Two Worlds 474 S. Hartford Ave. Fail 1 1 0 2
Unit 57 Two Worlds 474 S. Hartford Ave. B09 Fail 0 0 1 1
Unit 58 Two Worlds 474 S. Hartford Ave. B12 Fail 3 0 1 4
Unit 59 Two Worlds 474 S. Hartford Ave. B22 Fail 1 1 1 3
Unit 60 Two Worlds 474 S. Hartford Ave. B24 Fail 1 0 0 1
Total: 10 pass/75 fail * 166 14 60 240
* 10 units passed, and 50 units and 25 buildings failed
109
The Owner and Agent of Holiday Apartments, LA Pro 30, and Two Worlds II, Los Angeles, California, Mismanaged Project Finances and Operations
Published by the Department of Housing and Urban Development, Office of Inspector General on 2006-03-03.
Below is a raw (and likely hideous) rendition of the original report. (PDF)