oversight

The Associates Group Pioneer Pines Park, Bakersfield, Did Not Follow the Provisions of the Regulatory Agreement

Published by the Department of Housing and Urban Development, Office of Inspector General on 2006-10-20.

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

                                                               Issue Date
                                                                   October 20, 2006
                                                               Audit Report Number
                                                                   2007-LA-1001




TO:         William F. Bolton, Director, Los Angeles Multifamily Housing, 9DHMLA
            Margarita Maisonet, Director, Departmental Enforcement Center, CV
            R. Faye Austin, Regional Counsel, 9AC



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

SUBJECT: The Associates Group Pioneer Pines Park, Bakersfield, California, Did Not
               Follow the Provisions of the Regulatory Agreement

                                  HIGHLIGHTS

 What We Audited and Why

             We audited The Associates Group Pioneer Pines Park (Pioneer Pines), located in
             Bakersfield, California, in response to a request from the U.S. Department of
             Housing and Urban Development’s (HUD) Departmental Enforcement Center.
             Our audit objectives were to assess HUD’s concerns about potential equity
             skimming and to determine whether the project was administered in compliance
             with the regulatory agreement and HUD rules and regulations.

 What We Found


             Pioneer Pines failed to collect $195,202 in rental payments from its mobile home
             dealers; paid $133,049 in unsupported wages; made payments of $373,827 for
             ineligible expenses, of which $27,515 remains outstanding; commingled funds
             and repaid advances while in a non-surplus-cash position; failed to maintain its
             vacant spaces in good repair and condition; and failed to make required mortgage
             payments.
         We attribute the deficiencies to the president of Pioneer Pines’ insufficient
         understanding and in some cases disregard of HUD and regulatory agreement
         requirements and the lack of adequate internal controls and procedures. As a
         result, project funds were used improperly, which unnecessarily increased the risk
         to HUD. Furthermore, Pioneer Pines’ failure to properly maintain the vacant lots
         in a rent-ready condition may have adversely impacted potential homeowners’
         decisions to move to Pioneer Pines, and thus, hampered its ability to maximize its
         occupancy rate.

What We Recommend


         We recommend that the director of HUD’s Los Angeles Multifamily Hub require
         The Associates Group for Affordable Housing, Inc. (owner), to develop and
         implement new procedures and lease agreements to collect full rent from
         affiliated companies once spaces are leased, which will result in $195,202 in
         funds to be put to better use. In addition, we recommend that HUD require the
         owner to repay Pioneer Pines’ project account from non-project funds for the
         $195,202 in uncollected rent, the $133,049 in unsupported salary expenses related
         to non-project activities, and the $27,515 in ineligible expenses. Further, we
         recommend that HUD require the owner to correct the deficiencies relating to the
         vacant spaces we inspected. We recommend that the president discontinue
         commingling funds and repaying advances while in a non-surplus-cash position
         and attend training on HUD’s regulatory agreement and other pertinent rules to
         assure future compliance with the requirements. We also recommend that HUD’s
         Regional Counsel, in conjunction with HUD’s director of the Los Angeles
         Multifamily Housing HUB and HUD’s Office of Inspector General (OIG), pursue
         double damages remedies against the owner for the inappropriate disbursements
         that were used in violation of the regulatory agreement.

         In addition, we recommend the director of the Departmental Enforcement Center
         pursue action under the Program Fraud Civil Remedies Act against the president,
         impose civil money penalties and pursue administrative sanctions against the
         president for his part in the regulatory violations cited in this report, and impose
         administrative sanctions against Pioneer Pines and its owner for the inappropriate
         disposition of project assets cited in this report.

         For each recommendation without a management decision, please respond and
         provide status reports in accordance with HUD Handbook 2000.06, REV-3.
         Please furnish us copies of any correspondence or directives issued because of the
         audit.




                                           2
Auditee’s Response


           We provided Pioneer Pines a draft report on September 5, 2006, and held an exit
           conference with Pioneer Pines’ president on September 18, 2006. Pioneer Pines
           provided written comments on September 25, 2006. Pioneer Pines generally
           disagreed with our report findings.

           The complete text of the auditee’s response, along with our evaluation of that
           response, can be found in appendix B of this report.




                                            3
                             TABLE OF CONTENTS

Background and Objectives                                                        5

Results of Audit
        Finding 1: Pioneer Pines’ Owner Failed to Administer the Project in      7
        Compliance with the Regulatory Agreement and HUD Rules and Regulations

Scope and Methodology                                                            18

Internal Controls                                                                19

Appendixes
   A.   Schedule of Questioned Costs and Funds to Be Put to Better Use           20
   B.   Auditee Comments and OIG’s Evaluation                                    21
   C.   Criteria                                                                 53
   D.   Schedule of Uncollected Rental Income and Utilities – New Homes          56
   E.   Schedule of Uncollected Rental Income and Utilities – Used Homes         57




                                             4
                     BACKGROUND AND OBJECTIVES

Built originally in 1973, The Associates Group Pioneer Pines Park (Pioneer Pines) is a 336-space
mobile home park located in Bakersfield, California, and is insured by the U.S. Department of
Housing and Urban Development (HUD) (project number 122-00225) for $7.83 million under
the Section 207(m) program of the National Housing Act. This federal mortgage program is for
new construction and substantial rehabilitation and insures lenders against loss on mortgage
defaults. The project is also funded by the Housing Authority of the County of Kern with
$350,000 Series 2002 B and $1,517,677 Series 2002 C tax-exempt bonds.

The Associates Group for Affordable Housing, Inc. (owner), was formed in 1988 as a California
nonprofit corporation dedicated to providing persons and families of low and moderate income
with affordable housing. The owner’s initial purchase of Cedar Hill, a 281-space condominium
conversion park, in 1999 was a success. In November 2002, the owner purchased Pioneer Pines
with the intention of mirroring that success. In September 2002, the owner’s board of directors
unanimously agreed to create a supporting organization, The Associates Group Pioneer Pines
Park, to manage the operations of the park. The Internal Revenue Service did not designate the
nonprofit status of the new entity until December 2002 and thus forestalled the transfer of the
project to the new entity. It was held in abeyance until the transfer was made in December 2004.
In the meantime, the owner assumed the role as the supporting organization and stripped itself of
its assets and liabilities to enable it to act as the single asset entity for the park. The former
entity’s assets and liabilities were transferred to another non-HUD-related organization, The
Associates Group Cedar Hill, LLC (The Associates Group Cedar Hill). In February 2004, The
Associates Group Cedar Hill transferred all of its rights and title in the park to Pioneer Pines.
Before HUD’s limited management review, the president shared the managing responsibilities
with management company La Cumbre Management, which was hired in November 2002 and
also manages The Associates Group Cedar Hill.

Pioneer Pines has not achieved the success of The Associates Group Cedar Hill. As of April
2006, Pioneer Pines had a 34 percent vacancy rate and is currently in default on its mortgage
obligation, with the last payment received on July 14, 2006, for the November 1, 2005 loan
payment. As of January 13, 2004, Pioneer Pines has struggled to pay its mortgage obligation and
has requested disbursements from the working capital and operating deficit reserves.

The Los Angeles HUD Multifamily Hub conducted an on-site limited management review of
Pioneer Pines in October 2004, which resulted in nine findings and one observation.

Shortly after meeting with HUD staff in March 2005, the president employed a certified public
accountant to examine the backup documentation (invoices, checks, and vouchers) for all of
Pioneer Pines’ bank accounts to reconcile the questionable items and determine the amount due
back to the project. The accountant identified $346,312 in unauthorized distributions of project
funds relating to the purchase, refurbishment, installation, and transport of mobile home units
and questionable salary, tax, and travel expenses. The total amount was repaid to the project in
the form of home sale proceeds, The Associates Group Cedar Hill loans/advances, and
intercompany transfers.

                                                5
In a February 2006 memorandum, the Departmental Enforcement Center recommended we
review the operations of Pioneer Pines for potential equity skimming. The project was an
elective financial referral from the Los Angeles Multifamily Hub for unauthorized distribution of
project funds. HUD’s Real Estate Assessment Center also referred the project to the
Departmental Enforcement Center for review as a result of the bank accounts not being in the
name of the project, unauthorized distribution of project funds, an unauthorized loan, and
collection of receivables on behalf of an affiliate.

Our audit objectives were to assess HUD’s concerns about potential equity skimming and to
determine whether Pioneer Pines was administered in compliance with the regulatory agreement
and HUD rules and regulations.




                                                6
                                 RESULTS OF AUDIT

Finding 1: Pioneer Pines’ Owner Failed to Administer the Project in
Compliance with the Regulatory Agreement and HUD Rules and
Regulations
Pioneer Pines’ owner failed to administer the project in accordance with requirements relating to
the receipt and expenditure of project funds and did not properly maintain the project. Pioneer
Pines

   ‰   Failed to collect $195,202 in rental income and utilities for the project,
   ‰   Paid $133,049 in unsupported payroll charges for grounds worker wages,
   ‰   Inappropriately used $373,827 in project funds for ineligible expenses,
   ‰   Commingled project and non-project funds,
   ‰   Failed to properly maintain 90 of the 114 vacant lots on the premises, and
   ‰   Failed to make required mortgage payments.

We attribute these deficiencies to the president’s insufficient understanding and in some cases
disregard of HUD and regulatory agreement requirements and the lack of effective internal
controls and procedures. As a result, project funds were used improperly, which unnecessarily
increased the risk to HUD. Furthermore, Pioneer Pines’ failure to properly maintain the vacant
lots in a rent-ready condition may have adversely impacted potential homeowners’ decisions to
move to Pioneer Pines, and thus, hampered its ability to maximize its occupancy rate.


 Pioneer Pines Failed to Collect
 $195,202 in Rental Income and
 Utilities


               The president of Pioneer Pines failed to collect $195,202 in rental income for spaces
               used by 17 new homes that were brought into the park and 46 used homes that were
               purchased and rehabilitated by two of the president’s affiliated companies, Homes of
               the West and The Associates Group Cedar Hill. Homes of the West is a home
               dealership located on the Pioneer Pines premises and owned by the president’s son.
               The Associates Group Cedar Hill operates like a home dealership, except that it
               purchases, rehabilitates, and resells used homes rather than new homes, as does
               Homes of the West.

               According to the accommodations lease agreement between Pioneer Pines and the
               two dealers, they would lease a space on the park for the purpose of rehabilitating
               and selling the mobile home unit located on the space. Monthly rental for the space
               would be $1 (plus utilities) until the mobile home located on the space was



                                                 7
            rehabilitated to the president’s satisfaction, at which time, the monthly rent would
            increase to $350 per month plus utilities.

            Paragraph 18(b) of the regulatory agreement requires that rent paid by dealers for a
            space shall be a set rate and no special consideration will be given to any specific
            dealer (see appendix C). While there is no evidence showing that the two dealers
            actually paid the $1 monthly rent plus utilities, the other home dealers were not
            given the same benefit. Other dealers, like Accent Homes, Wall Street Capitol,
            LLC, and Rimer Homes, were required to pay the full rent amount while they
            rehabilitated the used homes on the lot.

            The president contended that Pioneer Pines could not charge rent for homes that
            were not ready for occupancy (i.e., homes that had not been properly installed with
            electricity and inspected). He also stated that once the homes were habitable,
            Pioneer Pines would charge rent to the dealer or third parties and would continue to
            do so until the home was sold to an interested homebuyer. The owner’s contention
            is obviously not true, as evidenced by the fact that Pioneer Pines charged non-
            affiliated dealers full rent while they rehabilitated the used homes on the lots.
            Therefore, it is apparent that the owner disregarded the regulatory agreement to give
            preferential treatment to its affiliated dealers. We also noted that a majority of the
            homes might sit on their respective lots for a period of time before being inspected.
            For instance, a home was placed on space 86 in January 2004, yet it was not
            inspected until January 2006, which prolonged the period before rent was paid.
            After homes were inspected, the president did not require the two dealers to pay the
            monthly rent; rather, rental payments were received only when the home was sold to
            a homebuyer. Pioneer Pines stood to gain a substantial amount of rental income had
            it properly charged the dealers the full rent. Appendixes D and E list the affected
            spaces, separated by new and used homes on the lot, and the corresponding amounts
            of uncollected rents.

Pioneer Pines Paid $133,049 in
Unsupported Payroll Charges

            Pioneer Pines paid $133,049 in unsupported payroll charges related to grounds
            worker wages because it failed to log work activities that supported the time spent
            on maintaining and operating the park versus other non-project activities.




                                               8
Two currently employed grounds workers told us they did some work on mobile
home units a couple of years ago, but they were not specific on which units and
how much time was spent on those units. The April 2004 to December 2005
payroll journals, time sheets, and time cards sent to La Cumbre Management for
review did not adequately disclose the number of hours spent on each work
activity. As a result, we could not determine the number of hours these and past
grounds workers expended on non-project-related activities.

The former manager stated that logging work activities and related hours were a
waste of time and he abandoned the entire process. It was partly for this reason
that the president terminated the manager from his position. The current manager,
however, told us that Pioneer Pines has been logging work for the past four years,
but the logs are destroyed after a year and are not sent to La Cumbre Management
for review before payroll is processed. Although the manager was not able to
locate the 2004 grounds maintenance reports, she provided samples of the 2005
reports. The reports listed the activities; however, they did not accurately record
and report the time spent on each task. Also, they did not appear to have been
reviewed by the supervisor in charge, although the current manager assured us
that she verified the work reported once a week. For the rest of the week, she
relied on her foreman to supervise. She also told us that the former foreman and
manager consistently supervised the crew, yet according to the president, another
reason the former manager was terminated from his duty was because he
fraternized too much with the grounds workers and would not insist that they
complete their work.

Based on our review of the grounds reports, we could not identify the number of
hours that were spent by the grounds workers on non-project expenses and,
therefore, question their wages and related Social Security and Medicare costs. A
breakdown of the 2004 and 2005 unsupported payroll charges is as follows:

                              April to December 2004
                  Pioneer Pines ground workers wages and taxes
                                       Employer
                            Total                Employer
             Employee                   Social               Total
                          earnings               Medicare
                                       Security
                 1       $ 12,504 $         775 $     181 $ 13,460
                 2       $ 13,871 $         860 $     201 $ 14,932
                 3       $    8,306 $       515 $     120 $    8,941
                 4       $ 14,226 $         882 $     206 $ 15,314
                 5       $    1,676 $       104 $      24 $    1,804
                 6       $    3,713 $       230 $      54 $    3,997
              Subtotal   $ 54,296 $ 3,366 $           786 $ 58,448
               2005 Pioneer Pines ground workers wages and taxes
                 1       $ 13,226 $         820 $     192 $ 14,238
                 2       $ 19,988 $ 1,239 $           290 $ 21,517
                 3       $    3,676 $       228 $      53 $    3,957
                 4       $ 11,663 $         723 $     169 $ 12,555
                 5       $ 20,747 $ 1,286 $           301 $ 22,334
              Subtotal   $ 69,300 $ 4,296 $ 1,005 $ 74,601
               Total     $ 123,596 $ 7,662 $ 1,791 $ 133,049




                                       9
 Pioneer Pines Spent $373,827 in
 Ineligible Expenses


                    Between November 2002 and December 2004, Pioneer Pines paid $373,827 in non-
                    project-related expenses as follows:

                                                                                                Questionable costs
                                                                                                  Other               Removal and
                                                                      Payroll                            Mobile home
                          Description                        Salary                    Travel     entity             installation of        Total
                                                                       tax                                purchase
                                                                                                expenses                 homes
Balance of accounts as of December 31, 2003              $   42,796   $   12,347   $    5,808   $    6,477   $   11,040   $    60,501   $   138,969
Balance of accounts as of February 28, 2004              $   49,410   $   13,346   $    7,954   $    7,982   $   11,040   $    95,168   $   184,900
Balance of accounts as of March 1 to December 31, 2004   $   26,735   $    4,708   $    5,772   $   20,164   $   57,000   $    47,033   $   161,412
           Balance of accounts as of December 31, 2004   $   76,145   $   18,054   $   13,726   $   28,146   $   68,040   $   142,201   $   346,312

                    We verified that $346,312 was repaid through proceeds derived from the sale of
                    mobile home units, intercompany transfers, and loans/advances given by The
                    Associates Group Cedar Hill. However, based on our independent review of
                    invoices, checks, and vouchers, we identified $27,515 in ineligible expenses that
                    was not repaid as follows:

                                               Pioneer Pines ineligible
                                             expenses identified by OIG
                                                Description                            Amount
                                    October 2003 - January 2006 invoices               $ 8,793
                                         Total advertising expense                     $ 18,722
                                                    Total                              $ 27,515

                    Between October 2003 and January 2006, $8,793 was spent on expenses such as
                    electric bills, supplies, and termite fumigation for mobile home units; cable
                    charges for the manager’s unit; and other ineligible expenses that should have
                    been paid by the individual mobile home owners. In addition, $18,722 was spent
                    on advertising consulting fees (supplies, hotels, meals, telephone) incurred by a
                    couple who resided on the premises. During HUD’s review, HUD identified the
                    same items as questionable and stated that it had not resolved the matter with
                    Pioneer Pines. HUD contended that the president did not provide documentation
                    to substantiate the nature of the relationship or provide any documentation to
                    show the services that were rendered. We were only provided a copy of the
                    checks and pay stubs for review.




                                                             10
Pioneer Pines Inappropriately
Commingled Funds and Repaid
Advances While in a Non-
Surplus-Cash Position

           Contrary to paragraph 6(e) of the regulatory agreement, Pioneer Pines
           inappropriately commingled project and non-project funds and repaid them while in
           a non-surplus-cash position (see appendix C). At the president’s request, funds were
           transferred from The Associates Group Cedar Hill to Pioneer Pines to meet
           operating cash shortfalls. Similarly, Pioneer Pines’ mortgage funds were transferred
           into an account the president maintained (now closed) and used for both project and
           non-project expenses. Both types of transactions contributed to the mortgage default
           and unnecessarily increased the risk to HUD’s insurance fund. Some examples are
           as follows:

              •   Between 1999 and November 2002, Pioneer Pines’ expenses were primarily
                  funded by The Associates Group Cedar Hill. In November 2002, Red
                  Mortgage Capital, Pioneer Pines’ lender, transferred $288,487 from escrow
                  to its project account, of which $278,487 was used to repay The Associates
                  Group Cedar Hill advances. Pioneer Pines used the remaining $10,000 for
                  operating expenses. (We could not determine whether Pioneer Pines was in
                  a non-surplus-cash position since a financial report was not required for
                  2002.) Since the funds were fully expended, The Associates Group Cedar
                  Hill was again required to cover Pioneer Pines’ operating expenses through
                  additional advances.

              •   On October 20, 2003, Pioneer Pines repaid The Associates Group Cedar Hill
                  $47,527 for advances while in a non-surplus-cash position. Pioneer Pines
                  used the remainder of its operating funds to pay its November 2003
                  mortgage obligation but then defaulted on its December 2003 payment.

              •   Between March 11, 2003, and July 16, 2004, La Cumbre Management made
                  several fund transfers from the project account it maintained to the account
                  maintained by the president. The combined amount of $365,487 was spent
                  on project and non-project expenses. By April 7, 2004, the funds were fully
                  expended, and The Associates Group Cedar Hill again covered Pioneer
                  Pines’ operating expenses. While we are not taking issue with the
                  expenditures for project expenses, the transfer and use of project funds for
                  non-project expenses was improper.

           Between January and July 2005, The Associates Group Cedar Hill transferred a total
           of $108,333 into the current Pioneer Pines operating account that La Cumbre
           Management maintains. Based on the work prepared by the certified public
           accountant, The Associate Group Cedar Hill still owed Pioneer Pines $27,237 for
           non-project expenses incurred. Therefore, the outstanding advance still owed to


                                            11
              The Associates Group Cedar Hill for advances made was $81,096. Details are as
              follows:

                                               Deposits made into La Cumbre
                                                Management account in 2005
                                                                     Deposits made by
                                                 Deposit
                                                                      The Associates
                                                slip date
                                                                    Group Cedar Hill
                                              July 11, 2005          $          9,502
                                              June 10, 2005          $         25,000
                                              May 11, 2005           $         21,830
                                              March 7, 2005          $         25,000
                                             February 2, 2005        $         30,000
                                               Trustee fees          $         (3,000)
                                                    Total               $      108,333
                                     Less nonproject expenses
                                     incurred                           $      27,237
                                        Net balance of advances still
                                       outstanding for The Associates
                                              Group Cedar Hill          $      81,096



              Collectively, the equity skimming that occurred when the advances were repaid
              precluded Pioneer Pines from making required mortgage payments.

Pioneer Pines Failed to Ensure the
Project Was in Good Repair and
Condition


              Paragraph 7 of the regulatory agreement requires the owner to maintain the
              mortgaged premises, accommodations, and the grounds and equipment in good
              repair and condition (see appendix C). The owner disregarded this requirement.
              Our on-site review performed in April 2006 determined that 90 of the 114 vacant
              spaces observed contained at least one deficiency. We devised a rating schedule
              to assist us in quantifying the number of identified deficiencies and established a
              rating scale to measure the gravity of the deficiencies. A summary of the results
              follows.

                           Rating                        Number of spaces       Percentage
           Excellent condition (0 to 1 deficiency)             29                   25
           Good condition (2 deficiencies)                     32                   28
           Fair condition (3 deficiencies)                     22                   19
           Marginal condition (4 deficiencies)                 14                   12
           Poor condition (5 or more deficiencies)             17                   15
                             Total                             114                  100
                         *Percentages do not add up to 100 percent due to rounding.

              Of the 114 spaces inspected, 17 (15 percent) were in poor condition and contained
              five or more deficiencies. The most common deficiencies identified relate to the
              pedestal, utility hook-ups, and spaces that had uncapped sewer lines; needed

                                                    12
repainting; were missing pedestal panels; had exposed wiring, rusted pipes,
uneven surrounding surfaces, missing or cracked base, or overgrown
weeds/bushes; and needed cleaning.

A majority of spaces with poor conditions were located within the block of spaces
from 285 to 334. The photographs below illustrate a few examples of spaces that
received a rating of poor condition.

‰   Space 306 - The pedestal needed painting, the pipes had large rusted sections,
    and the sewer line was uncapped. In addition, the entire space needed to be
    cleaned.




‰   Space 315 - The pedestal needed painting and was missing a cover panel. The
    gas and water pipes had rusted sections, and the surrounding area needed to be
    cleared of weeds.




‰   Space 327 – The entire top section of the pedestal was missing, while the
    bottom half needed painting. There was some exposed wiring, and the gas



                                13
               and water pipes had rusted areas. There were also trash and debris around the
               pedestal.




Pioneer Pines Failed to Make
Required Mortgage Payments

           Pioneer Pines failed to make its required mortgage payments in a timely fashion
           and as of April 2006, is currently in default on its mortgage obligation, with the
           last payment received on July 14, 2006, for the November 1, 2005 loan payment.
           Due to the loan advancements made during the early part of the loan term,
           mortgage payments were made timely until January 13, 2004, the date of Pioneer
           Pines’ first default. The loan is paid up through October 2005 through
           disbursements from the working capital reserve or operating deficit reserve funds.
           After HUD withdrew permission to draw from these funds in June 2004, the loans
           were paid through a series of rolling defaults. That is, once a loan is past 30 days
           late it is in default and to reinstate the loan to current, Pioneer Pines would need
           to make any outstanding payments due by the current month they are paid in.
           Since Red Mortgage Capital has requested extending the election to assign the
           loan to HUD several times due to Pioneer Pines’ failure to pay its mortgage, they
           appear to be satisfied with the efforts of the owner to try and make the project
           viable.




                                            14
Pioneer Pines Failed to
Establish an Adequate Internal
Control Environment


            Pioneer Pines lacked an adequate internal control environment, which contributed
            to the deficiencies found during our audit. Pioneer Pines failed to segregate work
            duties and provide adequate supervision as discussed below.

            Failure to Segregate Duties

            ‰   La Cumbre Management was not independent of the president’s control and
                could not assure that the president would not circumvent any controls it had in
                place. Also, La Cumbre Management was unaware of the provisions of the
                regulatory agreement and did not know that mobile home unit expenses were
                non-project-related until told by the president, who was also unaware until
                after the results of HUD’s limited management review. During our review,
                we determined that

                ‰   La Cumbre Management paid for non-project expenses related to air
                    conditioning repairs, paint and supplies for the mobile home units, door
                    locks for the units, etc.

                ‰   While Pioneer Pines was in a non-surplus-cash position between 2003 and
                    2004, La Cumbre Management transferred $365,487 in project funds to
                    the account maintained by the president. These funds went to pay for
                    project and non-project expenses at the president’s discretion. When
                    asked whether La Cumbre Management ever refused to cut a check for the
                    president, the bookkeeper stated, “they could have refused, but he was the
                    president so they just wrote the check and believed him.”

                ‰   The bookkeeper incorporated expenses incurred by the president through
                    the bank account he maintained into Pioneer Pines’ general ledger based
                    on the check register amounts that were faxed to La Cumbre Management.
                    La Cumbre Management’s bookkeeper neglected to determine whether
                    those transactions were proper and for the purpose of maintaining and
                    operating the property.

            Lack of Adequate Supervision

            ‰   The president failed to provide adequate oversight on the premises to ensure
                that the work was being completed and documented as required.

                ‰   A week before we inspected the park, the managers, a husband and wife
                    team hired in April 2005, were dismissed. The president claimed that they
                    were let go because they failed to complete their managerial duties



                                             15
                competently. The husband fraternized too much with employees, which
                ultimately reduced his ability to get the employees to accomplish their
                tasks. The husband also did not have adequate organizational skills and
                eliminated the process of logging the work completed. The wife was
                unable to use the computer software and relied heavily on the aid of the
                assistant manager. Contrary to the president’s claim of visiting the park at
                least once a week, the assistant manager stated that he visited the park
                infrequently. Had there been adequate supervision, the president would
                have been aware of the problems with the managers. With inadequate
                oversight and poor record keeping on the part of the grounds workers (see
                Failure of Pioneer Pines Employees to Log Work Activities section
                above), we cannot be assured that the grounds workers were performing
                their duties as required (see Failure to Ensure Project Was in Good Repair
                and Condition section above).

         ‰   Based on our discussion with the president and our inspection of the park, it
             appears that the former manager did not closely supervise the grounds
             workers as required. As evidenced by our site review, maintenance work was
             not sufficient to satisfy the conditions of the regulatory agreement. The
             current assistant manager stated that she reviewed the work completed once a
             week and had deferred most of the supervisory responsibility to the foreman.
             We were told that Pioneer Pines hired another grounds worker who started on
             June 21, 2006, to assist the current manager in this task.

Conclusion


         We attribute the deficiencies noted to the president’s insufficient understanding
         and in some cases disregard of HUD and regulatory agreement requirements.
         Another contributing cause was the lack of adequate internal controls and
         procedures. As a result, the president failed to collect $195,202 in rental income
         and utilities, paid $160,564 in ineligible and unsupported expenses, and
         inappropriately commingled funds and repaid advances while in a non-surplus-
         cash position. These deficiencies resulted in fewer project funds being available
         for mortgage repayment, which unnecessarily increased the risk to HUD. Further,
         the president failed to adequately maintain the Pioneer Pines property in good
         repair and promptly pay its mortgage payments.


 Recommendations

         We recommend that the director of HUD’s Los Angeles Multifamily Housing Hub
         require the owner to

         1A. Repay Pioneer Pines project account for the $195,202 (funds to be put to better
         use) in uncollected rental income (appendixes D and E) from non-project funds.



                                         16
1B. Develop and implement new procedures and lease agreements to collect the
full rent from affiliated companies (dealers) once the spaces are leased or terminate
all work with its affiliated companies.

1C. Provide documentation to support the portion of the $133,049 in grounds
workers’ wages that was related to non-project activities and repay the Pioneer Pines
project account from nonfederal funds for that amount.

1D. Repay the Pioneer Pines project account for the $27,515 in ineligible expenses
from non-project funds.

1E. Correct the deficiencies related to the conditions of the spaces with poor
ratings so they comply with the regulatory agreement, and develop an inspection
process and controls to ensure the inspection process is working effectively.

1F. Implement procedures and controls to ensure that future disbursements for
project expenses comply with the regulatory agreement and HUD requirements.

1G. Discontinue commingling of funds and seek HUD’s approval before making a
repayment of loan advances to an affiliated company.

1H. Attend training on HUD’s regulatory agreement and other pertinent rules to
assure future compliance with the requirements.

We also recommend that HUD’s regional counsel, in coordination with the
director of HUD’s Los Angeles Multifamily Housing Hub and HUD’s Office of
Inspector General (OIG),

1I. Pursue double damages remedies against the responsible parties for the
inappropriate disbursements that were used in violation of the project’s regulatory
agreement.

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

1J. Pursue civil money penalties and administrative sanctions, as appropriate,
up to and including debarment, against responsible parties for their part in the
regulatory violations cited in this report.




                                  17
                         SCOPE AND METHODOLOGY

We performed our audit work at Pioneer Pines, Bakersfield, California, and La Cumbre
Management, Santa Barbara, California. We conducted our fieldwork from March 20 through July
21, 2006. Our review generally covered the period from April 9, 1999, through February 28, 2006.
We expanded the scope of the audit as necessary.

To accomplish our objectives, we

•   Reviewed the HUD requirements and regulations and the regulatory agreement.
•   Obtained an understanding of Pioneer Pines’ procedures, including its controls to ensure that
    the project was properly managed.
•   Interviewed Pioneer Pines’ president, park staff, certified public account, and construction
    and management company staff to acquire an understanding of the operation’s procedures.
•   Reviewed Pioneer Pines’ loan, operating deficit fund, working capital, and reserve accounts
    provided by the lender.
•   Interviewed HUD multifamily and Departmental Enforcement Center personnel.
•   Reviewed the work of Pioneer Pines’ certified public accountant, including the invoices,
    bank statements, and checks related to the financial activities of the park.
•   Reviewed the timesheets, time cards, and payroll journals for Pioneer Pines employees
    between 2004 and 2005.
•   Reviewed January 2003 through April 2006 rent rolls, monthly traffic reports, additions to
    income reports, deductions to income reports, deposit slips, and the president’s collection
    reports pertaining to the new and used homes that were purchased and placed on the lots.
•   Performed a site review to determine whether the park was adequately maintained as
    required by the regulatory agreement.
•   Reviewed HUD’s October 2004 limited management review report to determine whether the
    monitoring identified any findings or concerns that pertain to the scope of our audit work.
•   Reviewed Pioneer Pines’ audited financial statements for years ending 2004 through 2005 to
    determine whether the independent auditor identified any findings that pertain to the scope of
    our audit work.

    We performed our review in accordance with generally accepted government auditing
    standards.




                                                18
                              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 implemented to reasonably ensure
                      that the HUD-insured project is administered in conformity with the
                      regulatory agreement 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:

              •       Pioneer Pines lacked effective internal controls and procedures to ensure that
                      the project was administered in compliance with the regulatory agreement.




                                                19
                                      APPENDIXES

Appendix A

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

          Recommendation            Ineligible 1/    Unsupported 2/     Funds to be put
                 number                                                  to better use 3/
                        1A                                                    $195,202
                        1B                                 $133,049
                        1C               $27,515


1/     Ineligible costs are costs charged to a HUD-financed or HUD-insured program or activity
       that the auditor believes are not allowable by law; contract; or federal, state, or local
       polices or regulations. The $27,515 represents ineligible costs that are unnecessary to
       the project’s operation or disallowed because they were incurred contrary to the
       regulatory agreement.

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. The $133,049 represents unsupported payroll
       charges related to grounds worker wages.

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. The $195,202 represents rental
       income for spaces the park failed to collect for the 17 new homes that were brought into
       the park and 46 used homes that were purchased and rehabilitated by two of the
       president’s affiliated companies, Homes of the West and The Associates Group Cedar
       Hill.

8,793 was spent on expenses such as electric bills, supplies, and termite fumigation for mobile
home units; cable charges for the manager’s unit; and other ineligible expenses that should have
been paid by the individual mobile home owners. In addition, $18,722 was spent on advertising
consulting fees (supplies, hotels, meals, telephone) incurred by a couple who resided on the
premises.




                                                20
Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation   Auditee Comments




Comment 1




                         21
Comment 2




            22
Comment 3




Comment 4




            23
Comment 5




Comment 6




            24
Comment 7




Comment 8




            25
Comment 9




Comment 10




             26
27
Comment 5




Comment 5

Comment 4




            28
Comment 10




             29
Comment 10



Comment 7




             30
31
Comment 11




             Names Redacted for Privacy




             32
33
34
Comment 12




             35
Comment 13




Comment 14




             36
Comment 15




             37
Comment 5




Comment 3




Comment 16




             38
Comment 17




Comment 18




             39
Comment 19




Comment 20




             40
41
42
Comment 21




             43
Comment 22

Comment 21




             44
45
46
OIG Evaluation of Auditee Comments


Comment 1   We disagree. The rental income should have been collected by the owner
            pursuant to Paragraph 11(b) of the regulatory agreement. Since the rental income
            was not collected, the owner violated the regulatory agreement. Pursuant to Title
            12 of the United States Code, Section 1715z-4a, the Secretary of Housing and
            Urban Development may request the Attorney General to bring an action in a
            United States district court to recover any assets or income used by any person in
            violation of a regulatory agreement that applies to a multifamily project whose
            mortgage is insured or held by the Secretary under Title II of the National
            Housing Act.

Comment 2   We acknowledge and empathize with the owner’s marketing burdens and
            difficulty in increasing the occupancy rate. Based on the comments provided by
            the auditee, we have removed any references to our contacts with other mobile
            home parks in the Orange County area, since we agree they may not be similar to
            mobile home parks in Bakersfield. However, we disagree that the conclusions are
            erroneous. The underlying issue is the park’s failure to collect rental income from
            two of the president’s affiliated dealers. We also note that our position is
            consistent with HUD’s position that it took when it raised the issue of uncollected
            rent in its monitoring review.

Comment 3   The auditee did not provide any information that changes our conclusion about
            the disparity between third party dealers and affiliated dealers. Comments 15
            through 18 specifically address the attached commentary and narrative the
            president prepared in response to our report.

Comment 4   Any work performed related to the rehabilitation of mobile home units while
            being paid out of project funds is in violation of the regulatory agreement. When
            we interviewed two of the park’s maintenance employees, we were given the
            impression that rehabilitating of the homes was a secondary part of their
            functions. Because the records did not document the hours spent and duties
            performed on specific tasks, we were compelled to question the entire grounds
            crew’s salaries. We agree that a portion of the salaries is eligible; however, we
            were unable to determine what portion. During the audit resolution process, the
            owner can provide documentation evidencing the portion of the salaries that are
            eligible to resolve the issue. In addition, we noted that the written response did
            not include the entire relevant portion of HUD Handbook 4381.5, which states
            that an agent's generalist staff must document hours spent and duties performed




                                            47
            on front-line activities for each project and those spent on the central office
            functions. Weekly timesheets are an acceptable method of documenting hours
            spent on front-line tasks.

Comment 5   According to HUD’s Multifamily Housing officials, advertising of the vacant
            spaces is a function incumbent on the management company, and the expenses
            should be borne by the management company. Although the Management
            Agent’s Certification signed on April 1, 2002 by the president of The Associates
            Group and March 25, 2002 by the president of La Cumbre Management Company
            does not specifically state that advertising is a function of the management
            company, the management company agreed to “ensure that all expenses of the
            project are reasonable and necessary.” Upon review of the $18,722 in advertising
            and consulting fees incurred within a two and a half month period (January 12 to
            March 23, 2004), we determined that these expenses were questionable because
            the auditee did not provide any documentation to substantiate the services
            provided in order to support that the expenses were reasonable and necessary to
            the project operations. Although The Associates Group claimed that La Cumbre
            Management Company’s services did not involve mobile home sales, our review
            showed that La Cumbre Management performed the bookkeeping and collecting
            of the mortgage premiums of these mobile home sales. In November 2004 the
            president instructed the manager of Pioneer Pines to stop billing residents who
            owe The Associates Group Cedar Hill for payments not made.

Comment 6   By definition, equity skimming is the use of project funds for other than actual or
            necessary expenses when the mortgage is in default or the project is in a non
            surplus cash position. There is no required level of intent. Whether the owner
            willfully, negligently, or without knowledge, utilized project funds for other than
            actual or necessary expenses, it is still equity skimming. We agree that the
            $81,096 can be used to offset the ineligible expenses; however, this needs to be
            reflected in the general ledger before we can consider the issue resolved. The
            main purpose of this section of the report is to point out that there exists a pattern
            of requiring advances to be repaid while the park is in a nonsurplus cash position,
            which is considered equity skimming, and needs to be addressed so that the
            practice does not continue.

Comment 7   We acknowledge that our inspection was not a Real Estate Assessment Center
            inspection, nor was it meant to be in compliance with Real Estate Assessment
            Center requirements. The Real Estate Assessment Center inspection score
            differed from the results of our inspection because the scopes of the inspections
            were different. Real Estate Assessment Center inspected the common areas, but
            did not inspect the vacant spaces that we did. Had Real Estate Assessment Center
            inspected the vacant spaces then the score may have been different. As
            recommended in the report, the owner can provide information to HUD during the
            audit resolution process to demonstrate that corrective action has been taken.




                                              48
Comment 8     We amended the report to state that the mortgagee was apparently satisfied with
              the efforts of the owner to try and make the project viable, and thus has requested
              extension of the loan’s assignment to HUD. We also corrected the misstatement
              that the project’s physical conditions resulted in the lack of funds to pay the
              mortgage.

Comment 9     Since the owner agreed that the internal controls were deficient, we have no
              further comment. Comments on the uncollected rent, ineligible expenses, and
              project condition are specifically addressed in comments 1 through 3, and 20.

Comment 10 We amended the report recommendation regarding the repayment of $29,015, to
           $27,515 (due to removal of trustee fee, see comment 14 below) as agreed upon at
           the exit conference. The recommendations we proposed were directed to the Los
           Angeles Office of Multifamily Housing and the Departmental Enforcement
           Center, thus the appropriateness of the recommendations can be addressed during
           the audit resolution process. We also want to point out that the owner was given
           15 days to respond to the draft report, which is the same amount of time given to
           all our external auditees. The owner was given finding outlines back in July,
           nearly two months before the draft report, but chose not to provide us any
           comments at that time. We have given serious consideration to the written
           comments provided in finalizing the audit report. We agree that advances may be
           used to offset any ineligible expenses; however, this needs to be addressed with
           HUD during the audit resolution process. With regard to the $97,000 that HUD
           has not released, we have no comment on the issue since it was not within the
           scope of our audit.

Comment 11 As stated in Comment 4, these declarations conflict with information provided to
           us during our audit fieldwork and are insufficient to resolve the issue of
           unallowable expenses of maintenance personnel at this time. Documentation
           evidencing the amount of time spent on eligible activities can be provided to
           HUD during the audit resolution process to resolve this issue.

Comment 12 As discussed in Comment 10, we have reduced the ineligible expenses in
           response to your comments. We have provided comments on some of the specific
           expense items raised by the auditee in Comments 5, and 16 through 19.

Comment 13 While the cable expense may be relatively small, it is an unnecessary expense to
           the park operations, and thus, ineligible.

Comment 14 We removed the $1,500 in trustee’s fees from the questioned costs, but we
           maintain that $27,515 should be repaid back out of non-project funds. Specific
           comments on some of the other ineligible expenses are as follows:




                                               49
              ‰   December 22, 2004 $55 payment – This underpayment was the result of a
                  balance carry forward for rental of space number 135. The balance forward as
                  of November 2004 was $952.46 and a payment of $620 was received,
                  bringing the balance to be carried forward down to $332.46 in January of
                  2005. However, only $277.46 was carried over to January 2005, which was
                  an understatement of $55. The president explained to us that the renter was to
                  receive a renter’s credit of $105 per month and had been inadvertently (due to
                  clerical error) been given a $160 renter’s credit, which is an overstatement of
                  $55 and should be repaid back to the project.

              ‰   Christmas Trees and Flowers – As with the cable expenses, these expenses are
                  unnecessary to the project operations, and thus, are ineligible.

              ‰   Trustee Fees – We verified with the internal auditor that this trustee fee was
                  reversed as an accounting entry and resolved. We have removed this from the
                  ineligible expenses.

Comment 15 We cannot provide the space numbers that were involved with the disallowed
           electrical and gas charges dated between February to October 2003 because the
           documentation did not clearly delineate those charges as did the other Pacific,
           Gas, and Electric bills. This is the reason why we questioned those expenses.
           During the audit resolution process, the owner can provide documentation to
           HUD to show the break down of the costs and the proper allocation towards each
           mobile home unit.

Comment 16 As stated in Comment 3, the owner did not provide any additional information
           that changed our conclusion. Between the dates December 2003 and March 2004,
           the rent roll shows that space number 73 was occupied by Accent Homes. The
           same information appears on the president’s collection report. During Accent
           Homes’ occupation of this space, two deposits in the amount of $350 were made,
           one on January 13, 2004 and another for $350 on February 4, 2004. It was not
           until March of 2004 did the dealer stop paying its rent and incurred a balance
           forward of $350. The March 2004 Delinquency report even shows that Accent
           Homes has an amount due of $350 and it’s “on its way out.” Accent Homes was
           required to pay rent while it was rehabilitating the home while it sat on space
           number 73. The Associates Group’s response even admits that Accent Homes
           was required to pay rent while it was rehabilitating the home, although the rent
           was refunded back to the dealer due to non performance, which is irrelevant.




                                              50
Comment 17 In the spreadsheet provided by the president, he stated that the home on space
           #136 “was under contract to LLC and turned over to an outside dealer who later
           sold the home after some remodel.” The response contradicts that statement and
           states the contract for the home was never finalized and Rimer Homes made a
           deal with the homeowner and not the park or LLC. Our review of the dated
           March to July 2005 rent rolls and collection report shows space 136 to be
           occupied by Rimer Homes. It was not until the August 2005 rent roll and
           collection report did the name change to reflect the current tenant. A rent receipt
           record shows rent to have been paid in April 8, 2005, May 9, 2005, and July 8,
           2005. Also, according to the spreadsheet, the park received the tenant application
           in July 2005 and signed the lease agreement on August 2005, which leads us to
           conclude that Rimer Homes was required to make rental payments for the time
           they spent rehabilitating the home.

Comment 18 According to the spreadsheet provided by the owner, homes were moved into
           space number 180 and 181 on January 2005 and passed its inspection on January
           7, 2005. Also, these homes were certified habitable on September 2005 and June
           2005, respectively. We acknowledge that no rent was collected for these spaces
           until the homes were sold; however, our position is that other dealers were
           required to pay the full rent amount. It is evidenced by the balance in the balance
           and credit forward reports that these dealers are required to pay the full rent
           amount. The December 2004 and January 2005 balance and credit forward
           reports show an increasing balance in the amount of rent expected to be collected
           from Wall Street Capital for utilizing spaces 180 and 181. In The Associates
           Group’s response, they openly admitted to collecting back rent when each home
           was sold. Even before the homes were certified as habitable and suitable for
           occupancy, rent was expected from Wall Street Capital. By June 2005, the
           balance forward owed by Wall Street Capital for homes on space number 180 and
           181 amounted to $2,172 each. So although The Associates Group’s claims to
           charge rent after a home passes state inspection and is fit for full-time occupancy,
           the treatment for homes on space numbers 180 and 181 illustrates that they either
           do not follow the policy or do not adhere to it consistently.

Comment 19 As requested by the auditee, we reviewed other homes noted as having been
           installed by other dealers. Based on the spreadsheet provided by the president,
           only two other spaces were occupied by another dealer, Visalia Homes. Given
           that the home was occupied immediately by a tenant or the park’s records
           conflicted with one another, we could not make a determination whether
           differential treatment was made with regard to Visalia Homes. Therefore, we
           were unable to support the auditee’s contention that there was no disparate
           treatment between the affiliated and non-affiliated dealers.




                                              51
               According to the rent roll and collection report, space number 225 was vacant
               between January 2003 and November 2005. In the month of December 2005, as
               evidenced by the Pioneer Pines Changes for the Month of December 2005 report
               and December 2005 rent roll and collection report, a new tenant moved into the
               space and paid rent on January 4, 2006.

               According to the rent roll report, space number 259 was vacant between January
               2003 and August 2005; however the collection report shows the space as vacant
               between January 2003 and December 2005. In such a case, we can not make an
               accurate determination because the records seem to conflict with one another.

Comment 20 As discussed in Comment 2, the underlying issue is the park’s failure to collect
           rental income from two of the president’s affiliated dealers. Based on the
           auditee’s comments, we have removed all references to our contacts with other
           mobile home parks. However, we noted that based on our analysis above in
           Comments 16 through 19, the owner was indeed charging rent to non-affiliated
           dealers during the rehabilitation phase, and in other cases it was unclear whether
           there was disparate treatment or not.

Comment 21 As recommended in our report, the owner can provide evidence of the corrective
           action taken to resolve the issues during the audit resolution process. Specifically
           with regard to the wiring, we are aware that the exposed wiring is not electrical
           wiring and does not pose a health violation; however, we identified it as a
           deficiency due to the fact that the exposed wires may be a safety hazard. Children
           who may play in the vacant lots or even residents may trip over them.

Comment 22 With regard to the deficiency on the uneven surrounding surfaces, these are
           situations where there is a pile of dirt and debris on the front end of the slab and
           the ground surface beside it is dangerously uneven (see space number 328)




                                               52
Appendix C

                                        CRITERIA

Regulatory Agreement

We extracted the pertinent paragraphs from the executed regulatory agreement.

Paragraph 6(e):

The owner shall not without the prior written approval of the Secretary [of HUD] make, or
receive and retain, any distribution of assets or any income of any kind of the project except
surplus cash and except on the following conditions: 1) all distributions shall be made only as of
and after the end of a semiannual or annual fiscal period, and only as permitted by law of the
applicable jurisdiction; 2) no distribution shall be made from borrowed funds, before the
completion of the project or when there is any default under the regulatory agreement or under
the note or mortgage; 3) any distribution of any funds of the project, which the party receiving
such funds is not entitled to retain hereunder, shall be held in trust separate and apart from any
other funds; and 4) there shall have been compliance with all outstanding notices of requirements
for proper maintenance of the project.

Paragraph 7:

The owner shall maintain the mortgaged premises, accommodations, and the grounds and
equipment in good repair and condition.

Paragraph 11(b):

The owner will collect all rents and charges in connection with the operation of the project and
use such collections to pay the owners’ obligations under the regulatory agreement and under the
note and mortgage and the necessary expenses of preserving the property and operating the
project.

Paragraph 15:

The owner warrants that he has not, and will not, execute any other agreement with provisions
contradictory of, or in opposition to, the provisions hereof, and that, in any event, the
requirements of the regulatory agreement are paramount and controlling as to the rights and
obligations set forth and supersede any other requirements in conflict therewith.




                                               53
Paragraph 18 and 18(b):

The mortgagor shall not use or permit the use of any portion of the mortgaged premises for
demonstrating mobile home models or for other sales purposes, except the mortgagor may rent
up to 10 percent of the total number of spaces in the project to mobile home dealers for the
purpose of demonstrating their sales model providing:

The rental paid by dealers for a space shall be the rate set forth on Form HUD 92458, and no
special consideration will be given to any specific dealer.

24 CFR [Code of Federal Regulations] Part 24

According to 24 CFR 24.305, 24.411, 24.700, and 24.1110, HUD is permitted to take
administrative sanctions against recipients of HUD assistance who violate HUD’s requirements.
The sanctions include limited denials of participation, suspensions, and debarments.

An authorized HUD official may issue a limited denial of participation against a person based
upon adequate evidence of any of the following causes:

‰   Failure to honor contractual obligations or to proceed in accordance with contract
    specifications or HUD regulations;

‰   Failure to satisfy, upon completion, the requirements of an assistance agreement or contract;
    and

‰   Violation of any law, regulation, or procedure relating to the application for financial
    assistance, insurance, or guarantee or to the performance of obligations incurred pursuant to a
    grant of financial assistance or pursuant to a conditional or final commitment to insure or
    guarantee.

An authorized HUD official may issue a debarment or suspension against a person based upon
adequate evidence of any of the following causes:

‰   Violation of the terms of a public agreement or transaction so serious as to affect the integrity
    of an agency program, such as

       (1) A willful failure to perform in accordance with the terms of one or more public
       agreements or transactions,

       (2) A history of failure to perform or of unsatisfactory performance of one or more public
       agreements or transactions, or

       (3) A willful violation of a statutory or regulatory provision or requirement applicable to
       a public agreement or transaction.




                                                 54
‰   HUD may debar a person from participating in any HUD programs or activities for material
    violation of a statutory or regulatory provision or program requirement applicable to a public
    agreement or transaction including applications for grants, financial assistance, insurance, or
    guarantees or to the performance of requirements under a grant, assistance award, or
    conditional or final commitment to insure or guarantee.

‰   Title 12, United States Code, section 1715z-4a

Section 421 of the Housing and Community Development Act of 1987, 12 United States Code,
section 1715z-4a, contains double damages remedy for unauthorized use of multifamily housing
project assets and income. The double damages remedy is a civil remedy rather than an
administrative remedy. It permits the secretary of HUD to request that the attorney general bring
an action in a United States district court to recover any assets or income used by any owner or
agent of the owner in violation of a regulatory agreement that applies to a multifamily project
whose mortgage is insured or held by the secretary under Title II of the National Housing Act
and any applicable regulations.




                                                55
Appendix D
 SCHEDULE OF UNCOLLECTED RENTAL INCOMEAND UTILITIES –
                     NEW HOMES

           Space    Potential rent   Trash, sewer &      Number of months rental income not collected
Count                                                                                                                     Period
          number     from dealer     water (utilities)             from Homes of the West

  1         4          $3,615             $355                              10 1/2                      March 2005 to first half of January 2006

  2         5          $2,445             $241                              7 1/2                             April to part of November 2005
  3         18         $2,800             $273                                8                                July 2005 to February 2006
  4         32         $4,140             $406                               12                               March 2005 to February 2006
  5         36         $1,340             $133                                4                                    March to June 2005
  6         49         $1,690             $166                                5                                     March to July 2005
  7         51         $1,050             $101                                3                                    June to August 2005
  8         53         $2,780             $271                                8                                  May to December 2005
  9         55         $3,110             $304                                9                                  April to December 2005
 10         82         $2,450             $240                                7                               August 2005 to February 2006
 11         93         $1,750             $171                                5                              October 2005 to February 2006
 12         99         $2,100             $205                                6                             September 2005 to February 2006
 13        103         $1,750             $171                                5                              October 2005 to February 2006
 14        110          $863               $85                              2 1/2                           August to first half of October 2005
 15        168         $2,100             $205                                6                             September 2005 to February 2006

 16        189         $3,600             $353                              10 1/2                      April 2005 to first half of February 2006

 17        358         $1,050             $103                                3                                  August to October 2005
           Total      $38,633            $3,783                                                         $                                   42,416
The highlighted items indicate that the space was occupied initially by a used home, then a new home.




                                                                 56
Appendix E

         SCHEDULE OF UNCOLLECTED RENTAL INCOME AND
                    UTILITIES– USED HOMES

                                                                         Number of months rental income not collected
            Space                                Trash, sewer &
 Count
           number
                           Potential rent                                from The Associates Group LLC or Homes of                                             Period
                                                 water (utilities)                        the West
                                                                                                                                     August to December 2003, June to August 2004,
   1          1        $               6,580 $                    672                            20
                                                                                                                                           and March 2005 to February 2006
   2          15       $              3,750      $               370                           11                                              January to November 2005
   3          16       $              2,450      $               240                            7                                            August 2005 to February 2006
   4          18       $              3,470      $               366                           11                                        January and March to December 2004
   5          19       $                290      $                33                            1                                                          Apr-04
   6          22       $                660      $                67                            2                                                    June to July 2004
   7          28       $              1,050      $               103                            3                                              October to December 2004
   8          33       $              7,400      $               739                           22                                              May 2004 to February 2006
   9          37       $                990      $               100                            3                                                August to October 2004
   10         46       $              1,400      $               137                            4                                               August to November 2005
   11         53       $              1,160      $               133                            4                                                 July to October 2003
   12         60       $              4,170      $               433                           13                                              March 2004 to March 2005
   13         61       $              2,110      $               233                            7                                                 January to July 2004
   14         65       $              4,170      $               433                           13                                              March 2004 to March 2005
   15         67       $              7,980      $               805                           24                                             March 2004 to February 2006
   16         71       $              1,860      $               200                            6                                                 March to August 2004
   17         72       $              3,335      $               349                          10 1/2                                    March 2004 to first half of January 2005
   18         73       $                580      $                67                            2                                             November to December 2003
   19         78       $              8,560      $               872                           26                                            January 2004 to February 2006
   20         83       $              2,110      $               233                            7                                                 January to July 2004
   21         85       $              8,270      $               839                           25                                           February 2004 to February 2006
   22         86       $              8,210      $               838                           25                                            January 2004 to January 2006
   23         88       $                870      $               100                            3                                                January to March 2004
   24         90       $              2,450      $               240                            7                                            August 2005 to February 2006
   25         97       $                700      $                68                            2                                              August to September 2005
   26        100       $              4,090      $               433                           13                                            January 2004 to January 2005
   27        110       $              1,740      $               200                            6                                                July to December 2003
   28        136       $              1,320      $               133                            4                                          November 2004 to February 2005
   29        139       $              7,280      $               737                           22                                   March 2004 to November 2005 and February 2006
   30        154       $              6,450      $               639                           19                                            August 2004 to February 2006
   31        154       $              2,970      $               300                            9                                             November 2004 to July 2005
   32        158       $              5,460      $               539                           16                                          November 2004 to February 2006
   33        158       $              2,970      $               300                            9                                             November 2004 to July 2005
   34        159       $                580      $                67                            2                                             November to December 2003
   35        162       $              2,520      $               266                            8                                                March to October 2004
   36        173       $              3,400      $               336                           10                                               January to October 2005
   37        174       $                870      $               100                            3                                                   March to May 2004
   38        179       $                580      $                67                            2                                                    April to May 2004
   39        212       $              1,900      $               233                            7                                                 April to October 2003
   40        228       $              3,810      $               373                           11                                              April 2005 to February 2006
   41        230       $              2,125      $               266                            8                                                March to October 2003
   42        236       $              1,900      $               233                            7                                                 April to October 2003
   43        303       $                330      $                33                            1                                                          Feb-05
   44        311       $              1,940      $               200                            6                                                 May to October 2004
   45        344       $                990      $               100                            3                                             September to November 2004
   46        350       $                700      $                68                            2                                               January to February 2006
            Total      $            138,500      $            14,286                                                           $                                                 152,786
The highlighted spaces (18, 46, 53, 73, 110, and 212) indicate the space was occupied initially by a used home, then a new home.
The highlighted spaces (16 and 90) indicate that it was a space identified in new home list the owner provided; however, it appears to have had a used home sitting on the lot.




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