oversight

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)

                                                               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.




                                            2
                            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


                                                  9
                 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.




                            11
•   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


                                 12
    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.


                                 13
            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

                                               14
            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




             74
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




                             84
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




             94
95
                         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.




                                             96
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

                                               97
              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

                                              98
              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.



                                               99
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



                                              100
              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.




                                             101
              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

                                               102
              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.

                                              103
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




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      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




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