oversight

The City of Jacksonville, Florida, Lacked Adequate Controls over Its HOME Program

Published by the Department of Housing and Urban Development, Office of Inspector General on 2008-09-05.

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

                                                                  Issue Date
                                                                    September 5, 2008
                                                                  Audit Report Number
                                                                     2008-AT-1012




TO:        Gary A. Causey, Director, Jacksonville Community Planning and Development,
            4HD


FROM:      James D. McKay, Regional Inspector General for Audit, Region IV, 4AGA

SUBJECT:   The City of Jacksonville, Florida, Lacked Adequate Controls over Its HOME
            Program


                                  HIGHLIGHTS

 What We Audited and Why


           We audited the City of Jacksonville/Duval County’s (City) HOME Investment
           Partnerships Program (HOME) as part of our annual audit plan. We selected the
           City because it had the largest funded program in northern Florida and other risk
           factors. Our audit objectives were to determine whether the City administered its
           HOME program in accordance with the U.S. Department of Housing and Urban
           Development’s (HUD) requirements concerning the (1) eligibility of cost and
           affordable housing for three foreclosed multifamily rental rehabilitation projects,
           (2) commitment of program funds, and (3) five-year expenditure.

 What We Found

           The City did not comply with program requirements for affordability/eligibility of
           three foreclosed multifamily rental rehabilitation projects and record keeping.
           The audit identified more than $2.7 million in questioned costs that were subject
           to repayment for violation of requirements. The City also had not established and
           maintained an adequate system for filing and retrieving program records. The
           violations occurred because City management and staff did not follow and
           enforce program requirements. The review did not identify any reportable
           violations concerning the City’s compliance with the HOME program’s
           commitment and five-year expenditure requirements.


What We Recommend


           We recommend that the Director of HUD’s Jacksonville Office of Community
           Planning and Development require the City to reimburse more than $2.7 million
           in funds approved for three foreclosed multifamily rental rehabilitation projects
           that did not accomplish the program’s affordability requirement or meet other
           program eligibility requirements. We also recommend that the Director require
           the City to take appropriate actions to ensure management and staff follow
           program requirements for approval and oversight of multifamily rental
           rehabilitation activities and improve its system for filing and maintaining program
           records.

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

Auditee’s Response


           We provided our discussion draft audit report to the City on July 10, 2008 and
           held an exit conference on July 15, 2008. The City provided written comments on
           July 29, 2008. It generally agreed with the facts presented in the finding but felt
           extenuating circumstances existed that justified not requiring it to repay certain
           amounts questioned by the audit.

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




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                            TABLE OF CONTENTS



Background and Objectives                                                             4


Results of Audit
      Finding 1: The City Lacked Adequate Controls over Its HOME Program              5

Scope and Methodology                                                                 8

Internal Controls                                                                     10


Appendixes

   A. Schedule of Questioned Costs                                                    11
   B. Auditee Comments and OIG’s Evaluation                                           12
   C. Schedule of Deficiencies for Three Foreclosed Multifamily Rental Developments   16




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                       BACKGROUND AND OBJECTIVES

The City of Jacksonville/County of Duval (City) is a participating jurisdiction in the HOME
Investment Partnerships Program (HOME) administered through the U.S. Department of
Housing and Urban Development’s (HUD) Office of Community Planning and Development.
For program years 1999 to 2007, HUD awarded the City more than $32 million in HOME funds.
The City had the largest funded HOME program in northern Florida. The City is a political
entity created by Chapter 67-1230 of the Laws of Florida. The consolidated city government is
comprised of 19 elected city council members and the mayor.

The City administers the HOME program through its Housing Services Division (Division). The
Division administers various HOME programs targeted at improving the quality of life for low-
to moderate-income residents of Jacksonville. The Division also provides funding to external
agencies for new home construction, housing rehabilitation, downpayment assistance, housing
counseling, emergency rental assistance, emergency shelter, rental housing, special needs
housing, and technical and administrative support for nonprofit housing agencies.

HUD’s past monitoring of the City’s HOME program identified violations in the City’s
administration of multifamily rental rehabilitation activities. Because of these concerns, we
focused our review on multifamily rental rehabilitation activities in which owners were in
financial default or the developments ended in foreclosure.

Our audit objectives were to determine whether the City administered its HOME program in
accordance with the HUD requirements concerning the (1) eligibility of cost and affordable
housing for three foreclosed multifamily rental rehabilitation projects, (2) commitment of
program funds, and (3) five-year fund expenditure.




                                                4
                                RESULTS OF AUDIT

Finding 1: The City Lacked Adequate Controls over Its HOME Program


The City did not adequately administer its HOME program and did not always follow program
requirements. These violations occurred because the City’s management and staff did not follow
and enforce program requirements for its multifamily rental rehabilitation program and record
keeping. The audit identified more than $2.7 million in questioned costs that were subject to
repayment and an inadequate system for filing and retrieving program records.

  Affordable Housing Objectives
  Not Met


              The City spent more than $2.7 million in questioned costs for three multifamily
              rental rehabilitation developments that were subject to repayment because they
              ended in foreclosure, did not accomplish their affordable housing period
              objectives, and involved other violations. The amount consisted of (1) more than
              $1.4 million for rehabilitation (activity 6), (2) more than $824,000 for acquisition
              of a single development (funded through activity numbers 1169 and 1170), and
              (3) $500,000 for acquisition (activity 1252). The banks foreclosed against the
              project owners because they defaulted on the private financing obtained in
              conjunction with the HOME funds. Regulations at 24 CFR (Code of Federal
              Regulations) 92.503(b)(1) provide that any HOME funds invested in housing that
              does not meet the affordability requirements for the period specified in section
              92.252 must be repaid by the participating jurisdiction.

              Appendix C provides details concerning the above-foreclosed properties and other
              issues concerning the City’s questionable funding and oversight summarized
              below. Specifically, the City

                     Approved rehabilitation funding for activity 6, although several major
                     items in the work write-up did not appear reasonable. This action was
                     followed by housing quality violations and appraiser comments shortly
                     after the renovation that raised concerns as to whether the work was
                     completed to the required HOME standard. Regulations at 24 CFR
                     92.251(a)(1) provide that housing that is rehabilitated with HOME funds
                     must meet all applicable local codes, rehabilitation standards, ordinances,
                     and zoning ordinances.

                     Disbursed a $900,000 acquisition loan directly to the second owner
                     (activities 1169 and 1170) without support that the owner used the funds
                     to acquire the project. The files showed that the second owner held title to

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                   the property more than two years before the date of the HOME agreement.
                   Further, the loan assisted the second owner with acquiring the property
                   less than five years from the date the first owner (activity 6) renovated the
                   property. Regulations at 24 CFR 92.214(a)(6) provide that HOME funds
                   may not be used to provide assistance to a project previously assisted with
                   HOME funds during the period of affordability established by the
                   participating jurisdiction in the written agreement. Also, the files
                   contained no explanation of why the City allowed the second owner to
                   duplicate major work included in the prior rehabilitation for items such as
                   carpeting, roofing, and exterior painting. The City recovered $75,791
                   from the foreclosure sale, leaving the remaining $824,209 ($900,000-
                   $75,791) as ineligible cost.

                   The City, in an effort to avoid having to repay HOME funds for the
                   previously foreclosed development, required the second owner to assume
                   more than $1.3 million of the HOME loan obtained by the first owner
                   (activity 6).

                   Disbursed the $500,000 acquisition loan for activity 1252 without support
                   that the owner used the funds to acquire the project. The files did not
                   contain documentation to show when the owner purchased the property
                   and the purchase price.

Inadequate System for Filing
and Retrieving Records

            The City did not maintain an organized system of records to permit ready
            identification and retrieval of information and documents needed for the audit. It
            took excessive time in locating and providing records that should have been
            readily available. This condition slowed the progress of our work. Regulations at
            24 CFR 92.508(a) require each participating jurisdiction to establish and maintain
            sufficient records to enable HUD to determine compliance with requirements.

  Conclusion


            The audit identified more than $2.7 million in HOME funds that were subject to
            repayment because three foreclosed multifamily rental rehabilitation projects did
            not meet HOME eligibility/affordability requirements. The audit also identified
            an inadequate system for filing and retrieving program records. The violations
            occurred because City management and staff did not ensure compliance with
            program requirements.




                                             6
Recommendations


         We recommend that the Director of HUD’s Jacksonville Office of Community
         Planning and Development require the City to

         1A.      Reimburse the HOME program from nonfederal funds $1,456,224 spent
                  for activity number 6. The activity was foreclosed, did not accomplish its
                  affordable housing objective, and involved other violations discussed in
                  appendix C.

         1B.      Reimburse the HOME program from nonfederal funds $824,209 spent for
                  activities 1169 and 1170. The activities were foreclosed, did not
                  accomplish their affordable housing objectives, and involved other
                  violations discussed in appendix C. The repayment is the net due
                  following the City’s recovery of $75,791 from the foreclosure sale
                  ($900,000 - $75,791 = $824,209).

         1C       Reimburse the HOME program from nonfederal funds $500,000 spent for
                  activity 1252 if it cannot support that the owner used the funds for
                  acquisition specified in the HOME agreement. If HUD determines that
                  the $500,000 was spent for acquisition, we recommend that the City
                  reimburse from nonfederal funds the prorated amount of $200,000
                  attributed to four years of the affordability period which was not
                  accomplished due to foreclosure.

         1D.      Take appropriate actions to ensure management and staff follow HOME
                  program requirements for approval and oversight of multifamily rental
                  rehabilitation activities. This should include, if necessary, the
                  establishment and implementation of additional controls and procedures to
                  ensure proper staff performance.

         1E.      Improve its system for filing and maintaining the required HOME
                  program records.




                                           7
                         SCOPE AND METHODOLOGY


We performed our audit fieldwork from November 2007 to June 2008 at locations in
Jacksonville, Florida, including the HUD Office of Community Planning and Development and
the City government office.

We did not review and assess general and application controls over computer-processed data for
the City’s general ledger and HUD’s Integrated Disbursement and Information System (IDIS).
We conducted other tests and procedures to ensure the integrity of computer-processed data that
were relevant to the audit objectives. The tests included but were not limited to checking by
electronic means the validity of computer-processed data, reconciling account balances with trial
balances, and comparing IDIS commitment dates to those supported by executed legal
agreements. The tests did not disclose concerns regarding the City’s general ledger data but did
indicate that the commitment dates shown in IDIS were inaccurate. We determined that the
commitment dates shown in IDIS were system generated based on activity funding setup dates
versus the actual commitments created by the executed legal agreements. The incorrect data
entries did not impact our report because we obtained correct information for the activities
reviewed.

The audit generally covered the period October 1999 through January 2008 and was expanded as
determined necessary. To accomplish our objectives, we

      Reviewed HUD’s monitoring reports and files for the City’s HOME program.

      Researched HUD handbooks, the Code of Federal Regulations, the HOME program
       statute, and other requirements and directives that govern the City’s HOME program.

      Reviewed the City’s procedures and controls used to administer its HOME program
       activities.

      Interviewed officials of the Jacksonville HUD Office of Community Planning and
       Development and the City.

      Reviewed HUD’s IDIS reports and training manual.

      Reviewed the City’s consolidated annual performance and evaluation reports for its
       HOME program.

      Reviewed the City’s general ledgers for expenditures and revenues.

      Performed site visits to nine selected multifamily rental projects.

      Selected and tested 44 of 153 HOME activities identified in our universe for commitment
       compliance. The universe included a stratification of activities based on consideration of

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       factors such as (1) commitments for program years 1999 to 2006, (2) IDIS commitment
       dates that were more that 24 months after HUD approved the City’s HOME program year
       agreements, (3) commitments equal to or greater than $150,000, and (4) activities with
       fund balances equal to or greater than $60,000. From the universe, we selected 44
       activities for review based on leads and other factors we considered relevant to the
       corresponding audit objective.

      Selected and reviewed the three (100 percent) known multifamily rental rehabilitation
       developments that were foreclosed without accomplishing their affordable housing period
       objectives. We did not complete reviews and assessments for any other multifamily
       rental rehabilitation developments.

We conducted the audit in accordance with generally accepted government auditing standards.




                                              9
                             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 implemented to reasonably ensure
              that resource uses are consistent with laws and regulations.

              Policies and procedures that management has implemented to reasonably ensure
              that resources are safeguarded against waste, loss, and misuse.

       We assessed the above controls.

       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 item is a significant weakness:

              The City lacked adequate controls over components of its HOME program (see
              finding 1).




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                                   APPENDIXES

Appendix A
                SCHEDULE OF QUESTIONED COSTS


                Recommendation
                    number               Ineligible 1/      Unsupported 2/

                       1A                 $1,456,224
                       1B                    824,209
                       1C                                       $500,000


                      Total               $2,280,433            $500,000


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.




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Appendix B
        AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation   Auditee Comments




Comment 1




                         12
Comment 2




Comment 1




Comment 3




            13
14
                           OIG Evaluation of Auditee Comments

The City generally agreed with our recommendations, except as indicated below.

Comment 1     Based on the City’s response and our discussions with HUD officials, we revised
              the report to delete reference to violations associated with the commitment of
              program funds and the unexpended balance of funds previously committed to
              activity number 6.

Comment 2     The City did not dispute the facts presented in the finding but contended that it
              entered into the agreement in good faith. The City provided no new information
              that warranted a revision to the report. As stated in the report, the City provided
              questionable funding and oversight of the foreclosed developments. It did not
              identify and follow up and resolve questions related to (1) planned and completed
              work, (2) housing quality standards, (3) duplicate funding of the same
              development, and (4) the missing or incomplete documentation needed to support
              that HOME funds were used for the purpose cited in written agreements.

Comment 3     We considered the City’s comments and revised the report concerning the
              $500,000 paid for activity 1252. We showed the total $500,000 as not properly
              supported, noting that a prorated $200,000 of the amount is ineligible due to the
              project’s foreclosure and failure to meet the full required affordability period. As
              cited in the report, the files did not support that the owner used the HOME funds
              for acquisition required by the written agreement. Regulations at 24 CFR
              92.504(a) provide that the participating jurisdiction is responsible for managing
              the day-to-day operations of its HOME program, ensuring that HOME funds are
              used in accordance with all program requirements and written agreements, and
              taking appropriate action when performance problems arise.




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Appendix C

  SCHEDULE OF DEFICIENCIES FOR THREE FORECLOSED
       MULTIFAMILY RENTAL DEVELOPMENTS


                                                          Developments funded by
                                                                 Activities
                                                                 1169 and Activity
                    Violations                        Activity 6  1170*        1252            Notes
  Affordability period not met                            x          x           x              a
  Questionable work scope and cost estimates              x          x                          b
  Housing quality violations                              x                                     c
  Dual and questionable funding                                      x                          d
  Missing support for acquisition cost                                           x              e
  *The City used two different IDIS activity numbers to track the HOME funds for this one development.

  a. Affordability period not met - The City spent more than $2.7 million for three
     developments that were not allowable because they ended in foreclosure and did not
     accomplish their affordable housing period objectives. Regulations at 24 CFR
     92.503(b)(1) provide that any HOME funds invested in housing that does not meet the
     affordability requirements for the period specified in 24 CFR 92.252 must be repaid by
     the participating jurisdiction. Specifically, the City

              Spent more than $1.4 million in HOME funds for the first owner (activity 6) to
              purchase and renovate a 210-unit multifamily rental rehabilitation project. The
              expenditure was funded by a HOME loan obtained in March 1993 and an
              additional loan in February 1994. The owner defaulted on the private financing,
              and in October 1995, the property ended in foreclosure without accomplishing its
              five-year affordable housing requirement.

              The files contained no evidence that the City considered actions to protect the
              $1.4 million in HOME funds at the time of the foreclosure, considering that the
              defaulted private financing amounted to just over $895,000. The bank purchased
              the property for only $700,000 in a foreclosure sale. Regulations at 24 CFR
              92.252(e) state that the participating jurisdiction may use purchase options, rights
              of first refusal, or other preemptive rights to purchase the housing before
              foreclosure or deed in lieu of foreclosure to preserve affordability. Considering
              the more than $1.4 million HOME expenditure, the City should have documented
              why it did not pursue purchasing the property to preserve affordability.

              Approved a $900,000 HOME loan to a second owner (activities 1169 and 1170)
              of the same multifamily rental rehabilitation project mentioned above for activity
              6. The City approved the loan for the second owner in April 1999 and later
              disbursed the funds to assist the owner in acquiring the development. The owner

                                                    16
           defaulted on the private financing, and in July 2005, the property ended in
           foreclosure without accomplishing its 20-year affordable housing requirement.
           The City recovered $75,791 from the foreclosure and is subject to repayment of
           the remaining $824,209 ($900,000-$75,791 recovered) spent on the project.

           Approved a $500,000 HOME loan under activity 1252 to acquire a 221-unit
           multifamily rental rehabilitation project in December 1999. The owner defaulted
           on the private financing, and in May 2008, the property ended in foreclosure
           without accomplishing the 10-year affordable housing requirement. Based on our
           review of the files and discussions with City staff, the property provided
           affordable housing for only six of the required 10 years. The prorated loan
           amount, attributed to the four-year “unaccomplished” affordability period, equates
           to $200,000 and represents an ineligible cost due to the foreclosure.

b. Questionable work scope and cost estimates (activity 6) - The dollar amounts and
   description for several major items in the work write-up performed by the first owner did
   not appear reasonable. This condition, coupled with housing quality violations and
   appraiser comments discussed below, raised concerns as to whether the renovation was
   completed to the required HOME standard. Regulations at 24 CFR 92.251(a) provide
   that housing that is substantially rehabilitated with HOME funds must meet all applicable
   local codes, rehabilitation standards, ordinances, and zoning ordinances. For instance,
   the following work items and estimated costs did not appear reasonable for the 210-unit
   complex.

      Work write-up description              Auditor observation

      *Replace all carpet – $94,403          This equates to only $450 per unit and did
                                             not appear reasonable.
      *Replace 105 refrigerators             The equal distribution resembles a rough
      ($35,700) and repair 105               estimate versus work based on an actual
      refrigerators ($11,919)                detailed unit inspection.
      *Replace 105 ranges ($22,785)          Same as above
      and repair 105 ranges ($7,455)
     *The renovation work performed by the second owner about five years later also included work for
      this category.

c. Housing quality violations (activity 6) - The project had housing quality violations
   immediately following completion of renovation by the first owner. Regulations at 24
   CFR 92.251(a) provide that housing that is substantially rehabilitated with HOME funds
   must meet all applicable local codes, rehabilitation standards, ordinances, and zoning
   ordinances.

   The City should have detected and taken action to address the effect of the housing
   quality violations on the eligibility of the HOME funding. We examined 56 unit
   inspection reports conducted within 2 to 10 months after the last construction draw in
   April 1994. The inspections showed that 32 of the 56 units (57 percent) failed the initial
   inspection. Many of the failed units were reinspected in a timely manner and passed.

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   The 19 failed units included 10 units (7 occupied) for which the files contained no
   evidence of a reinspection and nine units (six occupied) for which reinspections were
   performed and the units passed more than five to eight months after the initial inspection.
   The files did not show that the City detected and took action to assess the impact of the
   violations on the eligibility of the HOME funds.

   The files contained indications that the whole project was not renovated as it should have
   been. For instance, the inspection report for unit number 502, dated November 29, 1994,
   noted that the unit had not been renovated. This notation was significant considering that
   all of the units were supposed to have been renovated before or shortly after the last
   construction draw in April 1994. Unit 502 was inspected more than six months after the
   last draw. The files also contained a project appraisal, dated August 1995, about 15
   months after the renovation. The report commented that the project suffered from
   extensive deferred maintenance and the need for renovation was estimated at $590,000.
   The housing quality violations, lack of renovation of unit 502, and the appraiser’s
   comment were not indicative of a project that was recently renovated to HOME
   standards.

d. Dual and questionable funding (activities 1169 and 1170) - The City provided dual and
   questionable assistance for this development which, as previously discussed, was
   renovated using HOME funds about five years earlier by another owner (activity 6).
   Regulations at 24 CFR 92.214(a)(6) provide that HOME funds may not be used to
   provide assistance to a project previously assisted with HOME funds during the period of
   affordability established by the participating jurisdiction in the written agreement under
   section 92.504. The files also showed that the project was questionable for other reasons.
   Specifically,

           The files showed that the second owner already owned the property. Thus, the
           HOME funds were not supported as needed and used to acquire the property as
           stated in the HOME agreement executed in April 1999. Regulations at 24 CFR
           92.504(a) provide that the participating jurisdiction is responsible for managing
           the day-to-day operations of its HOME program, ensuring that HOME funds are
           used in accordance with all program requirements and written agreements, and
           taking appropriate action when performance problems arise.

           The City’s files contained a $1.1 million private lender mortgage and promissory
           note on the property obtained by the second owner on February 3, 1997, more
           than two years before the HOME agreement. The promissory note stated that the
           loan would be payable within seven days after satisfaction of all “Tax Credit
           Conditions.” Yet on May 17, 1999, the City wrote a $900,000 check (number
           00203352) paid directly to the second owner with a description of site acquisition.
           The files did not contain specific documentation to show how the owner used the
           funds.

           The City, in an effort to avoid having to repay HUD for activity 6, required the
           second owner to assume $1,343,082 of the HOME loan obtained by the first

                                           18
           owner (activity 6). The first owner, as previously discussed, defaulted and
           allowed the project to be foreclosed without accomplishing its affordable housing
           objective. The foreclosure ended the affordability restriction required by the
           HOME agreement with the first owner. Regulations at 24 CFR 92.252(e) provide
           that the affordability restrictions may terminate upon foreclosure or transfer in
           lieu of foreclosure. Thus, the requested assumption did not appear reasonable for
           the prior HOME loan that involved more than a three-year time lapse between the
           prior foreclosure and the date the second owner assumed the loan. The file
           contained a May 13, 2004, memorandum from a City official stating that the City
           requested that the developer assume the loan so that the City would not have to
           refund the foreclosure balance to HUD.

           Some of the major work items called for by the second loan duplicated work
           included in the prior rehabilitation. These items included carpeting, roofing, and
           exterior painting. The files did not contain a cost estimate for the work and no
           explanation of why the second owner needed to perform renovation performed
           about five years earlier. The City did not address or document that it addressed
           this issue.

e. Missing support for acquisition cost (activity 1252) - The files did not contain adequate
   documentation to support that the owner used the $500,000 in HOME funds to acquire
   the project as required by the June 2000 HOME agreement. On May 1, 2000, the owner
   requested the HOME funds as reimbursement for acquisition cost advanced by a private
   bank. On July 24, 2000, the City disbursed the HOME funds directly to the owner in two
   separate payments totaling $500,000 ($366,619 + $133,381 = $500,000). The files did
   not contain a settlement statement to show when the owner purchased the property and
   the purchase price. The owner apparently already owned the property, considering that
   the requested reimbursement was to repay a bank advance for the acquisition.




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