oversight

The Lansing Housing Commission, Lansing, Michigan Failed to Follow HUD's Requirements for Its Nonprofit Development Activities

Published by the Department of Housing and Urban Development, Office of Inspector General on 2008-09-30.

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

                                                                 Issue Date
                                                                              April 30, 2008
                                                                 Audit Report Number
                                                                              2008-CH-1008




TO:        Robert E. Nelson, Director of Public Housing Hub, 5FPH


FROM:      Heath Wolfe, Regional Inspector General for Audit, 5AGA

SUBJECT: The Lansing Housing Commission, Lansing, Michigan Failed to Follow HUD’s
           Requirements for Its Nonprofit Development Activities

                                   HIGHLIGHTS

What We Audited and Why

            We audited the Lansing Housing Commission’s (Commission) nonprofit
            development activities. The review of public housing authorities’ development
            activities is set forth in our fiscal year 2007 annual audit plan. We selected the
            Commission because it was identified as having high-risk indicators of nonprofit
            development activity. Our objective was to determine whether the Commission
            diverted or pledged resources subject to its annual contributions contract
            (contract), other agreement, or regulation for the benefit of non-U.S. Department
            of Housing and Urban Development (HUD) developments.

What We Found

            The Commission defaulted substantially on its contract when it improperly
            pledged resources for the benefit of the Lansing Housing Commission Nonprofit
            Development Corporation (Corporation) and the Oliver Gardens Limited
            Dividend Housing Association Limited Partnership (Partnership), organizations
            created by the Commission without HUD approval. In May 2006, the
            Commission inappropriately and without conditions guaranteed the obligations of
            the Partnership’s general partner, the Oliver Gardens Limited Liability Company,
            in a guaranty agreement. Further, the Commission executed another guaranty
            agreement in September 2006 that unconditionally and irrevocably guaranteed the
           full and punctual payment of a loan entered into by the Corporation. As of
           February 29, 2008, the Commission has placed $1.4 million in federal assets at
           risk by entering into the guaranty agreements which made it responsible for all
           operating deficits and potential judgments of the Corporation and Partnership.
           The Commission also inappropriately used more than $745,000 in Public Housing
           funds for two nonfederal developments, Oliver Gardens and The Abigail.

           Lastly, the Commission managed and provided Section 8 housing assistance to
           the Oliver Gardens, a 30-unit senior housing project that the Partnership owns,
           and it performed unit inspections of the project’s units, thus creating a conflict of
           interest.

           We informed the Commission’s executive director and the Director of HUD’s
           Detroit Office of Public Housing of minor deficiencies through a memorandum,
           dated April 17, 2008.

What We Recommend

           We recommend that the Director of HUD’s Detroit Office of Public Housing
           require the Commission to amend the guaranty agreements regarding the
           Corporation and the Partnership to remove the Commission’s pledging of its
           federal assets, submit the amended guaranty agreements to HUD for review and
           approval to ensure that they comply with its contract with HUD, reimburse the
           applicable programs for the improper use of Public Housing funds and its receipt of
           Section 8 administrative fees related to Oliver Gardens, contract with an
           independent third-party to perform housing quality standards inspections of
           Oliver Gardens as required by HUD, and implement procedures and controls to
           address the findings cited in this audit report. We also recommend that the
           Director refer the Commission’s substantial default of its contract to HUD
           headquarters and request appropriate action be taken against the Commission.

           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 Commission’s executive
           director, its board president, and HUD’s staff during the audit. We held an exit
           conference with the Commission on March 28, 2008. We asked the
           Commission’s executive director to provide comments to our discussion draft
           report by April 10, 2008. The executive director provided written comments,
           dated, April 10, 2008. The executive director generally agreed with our findings


                                             2
and recommendations with the exception that the Commission’s Public Housing
funds were not available for its intended purposes, and unit inspections and rent
reasonableness determinations were improper. The complete text of the written
comments, except for two attachments consisting of four pages of documentation
that were not necessary to understand the Commission’s comments, along with
our evaluation of that response, can be found in appendix B of this report. A
complete copy of the Commission’s comments plus the documentation was
provided to the Director of HUD’s Detroit Office of Public Housing.




                                3
                            TABLE OF CONTENTS

Background and Objective                                                      5

Results of Audit
      Finding 1: The Commission Substantially Defaulted on Its Contract and
                 Inappropriately Used Public Housing Funds for Nonfederal
                 Development Activities                                       6
      Finding 2: The Commission Violated HUD’s Section 8 Requirements
                 Regarding the Oliver Gardens Development                     10

Scope and Methodology                                                         12

Internal Controls                                                             13

Appendixes
   A. Schedule of Questioned Costs and Funds to Be Put to Better Use          15
   B. Auditee Comments and OIG’s Evaluation                                   16
   C. Federal Requirements                                                    23




                                            4
                     BACKGROUND AND OBJECTIVE

The Commission is a public housing agency created by the City of Lansing (City), Michigan on
August 2, 1965, to provide decent, safe, and sanitary housing for low- and moderate-income
families under the Housing Act of 1937. The Commission entered into contracts with the U.S.
Department of Housing and Urban Development (HUD). Under its annual contributions contract
(contract), the Commission operates 833 units of subsidized housing in the City for its Public
Housing program. Under a separate contract with HUD, the Commission manages a Section 8
Housing Choice Voucher (Section 8) program with subsidies for 1,700 vouchers for qualifying
low- and moderate-income households. The Commission also received Shelter Plus Care grant
funds to address homelessness in the City from HUD’s Office of Community Planning and
Development. Further, the Commission operates a homeownership program under an
administrative use agreement with HUD, dated April 1, 1993. This program is funded from
monies forgiven by HUD under the Turnkey III Homeownership Program. As of December 31,
2007, the Commission has funded 10 homeownership properties since 1993.

In July 2003, the Commission formed the Lansing Housing Commission Nonprofit Development
Corporation (Corporation), a 501(c)(3) nonprofit entity, to promote the advancement of
affordable housing through loans, development, and other financial and technical assistance.
The Corporation and its nonfederal developments (Oliver Gardens and The Abigail) are
instrumentalities of the Commission. The Commission is a member of the Corporation and
oversees its affairs.

The Commission also formed the Oliver Gardens Limited Dividend Housing Association
Limited Partnership (Partnership) on June 21, 2005, to provide housing for low- and moderate-
income families. The Partnership constructed the Oliver Gardens development on land obtained
from the Commission. The Commission provides Section 8 housing assistance to and manages
the Oliver Gardens Section 8 Project-Based Voucher program for the Partnership.

On October 13, 2006, the Corporation purchased a large track of land formally known as the
School for the Blind to develop a portion of the land for low-income housing and for the
Commission’s administrative offices. In April 2007, the Corporation formed the Abigail Limited
Dividend Housing Association Limited Liability Company (Company) to own and operate low-
and moderate-income housing on the land purchased from the Corporation.

A five-member board of commissioners, appointed by the City’s mayor governs the
Commission. HUD has classified the Commission as a standard performer or a high performer
under its Public Housing Assessment System since fiscal year 1999. The Commission’s books
and records are located at 310 Seymour Avenue, Lansing, Michigan.

Our objective was to determine whether the Commission diverted or pledged resources subject to
its contract, other agreement, or regulation for the benefit of non-HUD developments.




                                              5
                                RESULTS OF AUDIT

Finding 1: The Commission Substantially Defaulted on Its Contract and
      Inappropriately Used Public Housing Funds for Nonfederal
                       Development Activities
The Commission substantially defaulted on its contract when it executed guaranty agreements
related to the Corporation’s and the Partnership’s nonfederal developments. It improperly and
without conditions guaranteed the obligations of the Partnership’s general partner, the Oliver
Gardens Limited Liability Company in May 2006. Further, the Commission unconditionally and
irrevocably guaranteed the full and punctual payment of a loan entered into by the Corporation in
September 2006. The Commission also inappropriately used Public Housing funds for the
nonfederal developments. These conditions occurred because the Commission lacked
procedures and controls to ensure that it complied with federal requirements. As a result, more
than $1.4 million of the Commission’s federal funds could be subject to seizure in the event of
default on the agreements and more than $745,000 of the Commission’s Public Housing funds were
not available for their intended purpose.


 Guaranty Agreement Violates
 the Commission’s Contract

              On September 7, 2006, the Commission executed a guaranty agreement with the
              Local Initiatives Support Corporation to induce it to enter into and disburse
              $867,900 pursuant to a loan agreement in order for the Corporation to purchase
              land to develop The Abigail, a nonfederal development. The Commission did not
              seek prior approval from HUD before entering into the agreement.

              The guaranty agreement makes the Commission unconditionally and irrevocably
              responsible for all liabilities under the Corporation’s loan agreement. The
              agreement states that the Commission is responsible for the loan agreement and
              all other indebtedness, obligations, and liabilities of the Corporation under or in
              connection with the agreement whether for principal, interest, fees, expenses, or
              otherwise including without limitation any and all reasonable expenses that may
              be paid or incurred by the Local Initiatives Support Corporation in collecting any
              or all of the obligations or enforcing any rights under the agreement. The note
              stipulates that payment of the principal balance and unpaid interest are due by
              October 1, 2009.

              Further, the guaranty agreement warrants to the Local Initiatives Support
              Corporation that no authorization, consent, approval, license, exemption of or
              filing a registration with any court of government department, commission, board,
              bureau, agency, or instrumentality is or will be necessary to the valid execution,


                                               6
           delivery, or performance of the agreement. Additionally, the Commission
           warrants that execution of the agreement would violate no law, rule, regulations,
           writ, judgment, injunction, or decree.

           The terms of the guaranty agreement amount to a pledge of the Commission’s
           assets without limitation or restriction of the source of funds. As of January 2008,
           the Commission was entirely dependent on HUD for its funding and lacked any
           nonfederal assets or income.

Guaranty Agreement
Inappropriately Encumbered
Public Housing Funds


           On May 9, 2006, the Commission executed a guaranty agreement with the
           National Equity Fund Assignment Corporation to induce it to invest in the
           Partnership. The agreement relates to the Partnership’s nonfederal development,
           Oliver Gardens.

           The Commission guaranteed the due and punctual performance by the
           Partnership’s general partner, Oliver Gardens Limited Liability Company, of all
           of its obligations under the terms of the Partnership and development agreements.
           The guaranty agreement states that the liabilities of the Partnership’s general
           partner will not exceed the total sum of payments received by the Commission
           from the Partnership including but not limiting to the development fee. Under the
           terms of the development agreement, the fee was $561,933. Further, the guaranty
           agreement provides that the Commission will directly or indirectly through
           affiliates receive certain fees and other benefits from the development of the
           Oliver Gardens development. Per this statement, the Commission could possibly
           be responsible for an affiliate’s funds due under the guaranty. Hence, the
           guaranty makes the Commission unconditionally responsible for all obligations of
           the Partnership’s general partner.

           Further, the guaranty agreement provides that the Commission indemnify the
           National Equity Fund Assignment Corporation. The agreement also states that
           the Commission hereby agrees to indemnify and hold the Partnership and the
           National Equity Fund Assignment Corporation free and harmless from and
           against actual loss, cost, damage, and expenses including reasonable attorneys’
           fees and costs that the Partnership or the National Equity Fund Assignment
           Corporation may sustain because of the inaccuracy or breach of any of the
           representations and warranties.




                                            7
    The Commission Transferred
    Public Housing Funds to
    Nonfederal Developments

                 The Commission inappropriately used $745,436 (The Abigail $499,716, Oliver
                 Gardens $230,7601, and the Corporation $14,960) in Public Housing funds for
                 nonfederal development activities as of June 30, 2007. It began inappropriately
                 using Public Housing funds in September 2004. As a result, the Commission’s
                 Public Housing funds were not available for their intended purpose, which is to
                 provide decent, safe, and sanitary housing for low-income families, the elderly,
                 and persons with disabilities for HUD-approved housing projects.

                 The Commission’s contract allows it to withdraw money from its Public Housing
                 funds only for payment of the costs and operation of the projects covered under
                 the contract. The nonfederal developments were not approved projects under the
                 contract. PIH Notice 2007-15 states that Public Housing funds may be used for
                 costs related to forming an affiliate or instrumentality; however, the development
                 must contain Public Housing units. HUD’s Notice further states funds may be
                 withdrawn from the Commission’s general fund only for: (1) the payment of the
                 costs of development and operation of projects under contract with HUD, (2) the
                 purchase of investment securities approved by HUD, and (3) such other purposes
                 as may be specifically approved by HUD. The Commission did not obtain HUD
                 approval for the use of the Public Housing funds related to the nonfederal
                 developments.

    The Commission Lacked
    Procedures and Controls


                 The Commission lacked procedures and controls to address developing,
                 constructing, financing, and operating nonfederal properties. Its board of
                 commissioners also did not employ a monitoring process to ensure that the
                 Commission did not use Public Housing funds for its nonfederal developments
                 without prior HUD approval.

                 The executive director said he was not aware that the guaranty agreements did not
                 comply with the terms of the contract nor did the Commission’s legal counsel
                 advise him of the noncompliance. He also said the Commission’s legal counsel
                 did not identify any problem with the guaranty agreements and considered them
                 as normal routine agreements required by the investor when there is a lack of
                 experience or satisfactory financial position by the borrower.



1
  The $230,760 includes $163,529 in insurance proceeds the Commission received in May 2001 and June 2007
resulting from two fires in February 2000, that occurred at the Commission’s Oliver Towers. The Commission
received approval for disposition of Oliver Towers from HUD’s Special Applications Center in May 2001.


                                                       8
          Unless the Commission implements procedures and controls to address
          developing, constructing, financing, and operating nonfederal developments, we
          estimate that it could improperly pledge or use $652,581 in federal funds over the
          next year. We determined this amount by adding the $867,900 for the guaranty
          agreement related to the Corporation, the $561,933 for the guaranty agreement
          related to the Partnership, and the $745,436 of Public Housing funds used for the
          nonfederal developments divided by 40 months (total time for the improper
          pledging and use of Public Housing funds) times 12 months.

Recommendations

          We recommend that the Director of HUD’s Detroit Office of Public Housing require
          the Commission to

          1A.     Amend the guaranty agreements related to the pledging of the Commission’s
                  federal assets for the Corporation ($867,900) and the Partnership ($561,933)
                  to protect the $1,429,833 cited in this finding.

          1B.     Submit the amended guaranty agreements to HUD for review and approval
                  to ensure that they comply with its contract.

          1C.     Implement procedures and controls to ensure that it does not pledge and/or
                  use its federal assets contrary to HUD’s requirements. By implementing
                  procedures and controls, the Commission should help to ensure that
                  $652,581 in federal assets would be appropriately used to provide decent,
                  safe, and sanitary housing for its Public Housing households.

          1D.     Reimburse its Public Housing program $745,436 from nonfederal funds
                  for the improper use of funds cited in this finding.

          We also recommend that the Director of HUD’s Detroit Office of Public Housing

          1E.     Refer the Commission’s substantial default of its contract to HUD
                  headquarters and request that appropriate action be taken against the
                  Commission based upon the information in this audit report.




                                            9
Finding 2: The Commission Violated HUD’s Section 8 Requirements
              Regarding the Oliver Gardens Development
The Commission violated HUD’s Section 8 requirements when it performed housing quality
standard unit inspections and rent reasonableness determinations for the Oliver Gardens
development. This is a conflict of interest prohibited by HUD’s Section 8 regulations. The
improper unit inspections and rent reasonableness determinations occurred because the
Commission lacked procedures and controls to ensure that its Section 8 program met HUD’s
requirements. As a result, the Commission improperly received Section 8 administrative fees
related to the development.


 The Commission Created a
 Conflict of Interest


              In January 2006, the Michigan State Housing Development Authority approved
              the Commission as the management agent for the Oliver Gardens development.
              In addition to managing the development, the Commission inspected Oliver
              Garden’s Section 8 housing units and performed contract rent reasonableness
              reviews.

              HUD’s regulations at 24 CFR [Code of Federal Regulations] 982.352 require a
              public housing agency with its own housing or substantially controlled housing to
              use the services of an independent party approved by HUD to perform unit
              inspections before assistance can be provided. HUD also requires that an
              independent party handle contract rent reasonableness and rent negotiations. By
              failing to comply with HUD’s requirements regarding unit inspections and rent
              reasonableness the Commission not only violated HUD’s requirements, but also
              created a conflict-of-interest relationship.

 The Commission Lacks
 Procedures and Controls

              The Commission lacked procedures and controls to ensure that federal
              requirements were appropriately followed. As previously mentioned, the
              Commission violated HUD’s Section 8 requirements when it performed housing
              quality standards unit inspections and the rent reasonableness determinations
              while managing Oliver Gardens. As a result, HUD lacks assurance of the
              reliability of the unit inspections and that contracted rents were reasonable.

              The Commission provided Section 8 assistance at Oliver Gardens without an
              independent third party performing the unit inspections and rent reasonableness
              determinations since it started on-site management in August 2007. From August
              2007 to February 2008, the Commission paid more than $35,000 in housing

                                              10
          assistance and received more than $8,000 in administrative fees related to Oliver
          Gardens.

          HUD’s regulations at 24 CFR [Code of Federal Regulations] 982.152(d) states
          that HUD may reduce or offset any administrative fee to a public housing
          authority, in the amount determined by HUD, if the authority fails to perform its
          administrative responsibilities correctly or adequately under the Section 8
          program. Given the Commission’s noncompliance with HUD’s requirements, it
          should not receive the Section 8 administrative fees. Additionally, unless the
          Commission improves its operations for the Section 8 program, we estimate that it
          could improperly receive $14,410 ($8,406 divided by 7 months times 12) in
          Section 8 administrative fees for Oliver Gardens during the next 12 months.

          The executive director said that he was not aware of any conflict with HUD’s
          Section 8 regulations by the Commission’s legal counsel and plans to contract out
          future Section 8 housing unit inspections and rent reasonableness reviews starting
          in May 2008.

Recommendations

          We recommend that the Director of HUD’s Detroit Office of Public Housing require
          the Commission to

          2A.     Reimburse its Section 8 program $8,406 from nonfederal funds for the
                  improper administrative fees cited in this finding.

          2B.     Implement procedures and controls to ensure compliance with HUD’s
                  regulations regarding housing quality standards unit inspections and rent
                  reasonableness determinations related to Oliver Gardens. By
                  implementing procedures and controls, the Commission should help to
                  ensure that $14,410 in future Section 8 administrative fees is appropriately
                  received.
          2C.     Discontinue performing the housing quality standards unit inspections,
                  rent reasonableness determinations for the Oliver Gardens development,
                  and contract with an independent third party to perform the inspections
                  and determinations to ensure compliance with HUD’s requirements.




                                           11
                        SCOPE AND METHODOLOGY

To accomplish our objective, we reviewed

ƒ      Applicable laws; regulations; HUD’s program requirements at 24 CFR [Code of Federal
       Regulations] Parts 85, 941, 970, 982, 983, and 990; Office of Management and Budget
       Circulars A-87 and A-133; and the Internal Revenue Service’s requirements at 26 CFR
       [Code of Federal Regulations] Part 1.

ƒ      The Commission’s accounting records, general ledgers, bank statements, and check
       vouchers and invoices for fiscal year 2007; annual audited financial statements for fiscal
       years 2005 through 2007; the contract with HUD; by-laws; board meeting minutes;
       applications for financial assistance to the State of Michigan, and consulting contracts
       and property appraisals.

ƒ      HUD’s files for the Commission.

ƒ      The City’s Ordinance 108 and applicable amendments.

ƒ      The Corporation’s articles of incorporation, by-laws, board meeting minutes, accounting
       records, and bank statements.

ƒ      The Limited Partnership’s various agreements including but not limited to the purchase,
       guaranty, development, operating, management, marketing, regulatory, partnership,
       building loan, closing escrow, mortgage loan, real estate mortgage, third-party
       promossory note, warranty deeds, certificate of limited partnership, and housing
       assistance payments contract.

ƒ      The Corporation’s various agreements including but not limited to the loan, purchase,
       guaranty, mortgage, security, and repayable grant for the proposed development known
       as The Abigail; quit claim deed; the Abigail Limited Dividend Housing Association
       Limited Liability Company’s articles of organization and operating agreement; and The
       Abigail Manager Incorporated’s articles of incorporation and by-laws.

ƒ      The Oliver Gardens Limited Liablity Company’s articles of organization and operating
       agreement.

We also interviewed the Commission’s employees and legal counsel and HUD staff.

We performed our on-site audit work between July and December 2007 at the Commission’s
offices located at 310 Seymour Avenue, Lansing, Michigan. The audit covered the period July
1, 2005, through June 30, 2007, and was expanded as determined necessary.

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



                                               12
                             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,
   •   Compliance with applicable laws and regulations, and
   •   Safeguarding resources.

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 objective:

              •       Program operations – Policies and procedures that management has
                      implemented to reasonably ensure that a program meets its objectives.

              •       Validity and reliability of data – Policies and procedures that management
                      has implemented to reasonably ensure that valid and reliable data are
                      obtained, maintained, and fairly disclosed in reports.

              •       Compliance with laws and regulations – Policies and procedures that
                      management has implemented to reasonably ensure that resource use is
                      consistent with laws and regulations.

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

              We assessed the relevant controls identified above.

              A significant weakness exists if management controls do not provide reasonable
              assurance that the process for planning, organizing, directing, and controlling
              program operations will meet the organization’s objectives.

 Significant Weakness
              Based on our review, we believe the following is a significant weakness:

                                               13
•   The Commission lacked procedures and controls to ensure that it complied
    with its contract and/or HUD’s requirements regarding the pledging of the
    Commission’s assets, use of Public Housing funds, and receipt of Section
    8 administrative fees related to its affiliated entities (see findings 1 and 2).




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                                   APPENDIXES

Appendix A

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

                   Recommendation                      Funds to be put to
                       number          Ineligible 1/     better use 2/
                         1A                                  $1,429,833
                         1C                                      652,581
                         1D               $745,436
                         2A                 $8,406
                         2B                                     $14,410
                        Totals            $753,842           $2,096,824

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/   Recommendations that funds to be put to better use are estimates of amounts that could
     be used more efficiently if an Office of Inspector General (OIG) recommendation is
     implemented. This includes reductions in outlays, deobligation of funds, withdrawal of
     interest subsidy costs not incurred by implementing recommended improvements,
     avoidance of unnecessary expenditures noted in preaward reviews, and any other savings,
     which are specifically identified. In these instances, if the Commission implements our
     recommendations, it will remove the pledging and/or the use of the Commission’s federal
     assets and ensure that Section 8 administrative fees related to Oliver Gardens are earned
     appropriately. Once the Commission successfully improves its controls over its pledging
     and/or use of assets and Section 8 administrative fees, this will be a recurring benefit.
     Our estimates reflect only the initial year of these benefits.




                                            15
Appendix B

        AUDITEE COMMENTS AND OIG’s EVALUATION

Ref to OIG Evaluation   Auditee Comments




                         16
Ref to OIG Evaluation   Auditee Comments




Comment 1




                         17
Ref to OIG Evaluation   Auditee Comments




                         18
Ref to OIG Evaluation   Auditee Comments




                         19
Ref to OIG Evaluation   Auditee Comments




                         20
Ref to OIG Evaluation   Auditee Comments




                         21
                        OIG’s Evaluation of Auditee Comments

Comment 1   While the Commission disagreed with our conclusion that its Public Housing
            funds were unavailable for their intended purpose to provide decent, safe, and
            sanitary housing, it inappropriately used more than $745,000 in Public Housing
            funds for nonfederal development activities. The Commission agreed to
            implement procedures and controls to ensure that it does not pledge and/or use its
            federal assets.




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Appendix C

                            FEDERAL REQUIREMENTS

Finding 1

HUD’s PIH Notice 2007-15 defines affiliates and instrumentalities and applies to public housing
agency nonprofit activities pursuant to HUD regulations at 24 CFR [Code of Federal Regulations]
Part 941. Public housing agencies may form affiliates and instrumentalities without HUD approval.
Affiliates are treated like an unrelated third party. Instrumentalities are treated like the public
housing agency. Public housing funds may be used to form an affiliate created to develop mixed
income housing which must contain some public housing units. However, public housing funds
cannot be used to form an affiliate for a housing project using only Low-Income Housing Tax
Credit units or any application fees for tax credits for a development that does not contain public
housing units. These costs must come from non-public housing funds.

Section 401 of the contract with HUD prohibits the Commission from using funds in its general
fund for non-HUD development activities without prior HUD approval.

Section 313 of the contract with HUD states: “Unless and until all temporary notes, advance notes,
permanent notes, and all other indebtness of the local authority to the public housing authority have
been fully paid (except repayment of annual contributions), and all bonds issued in connection with
the project have been fully paid and retired or monies, sufficient for the payment and retirement
thereof in accordance with the terms of such bonds, have been deposited in trust for such purpose
with the fiscal agent, the local authority shall not transfer, convey, assign, lease, mortgage, pledge,
or otherwise encumber, or permit or suffer any transfer, conveyance, assignment, leasing mortgage,
pledge, or other encumbrance of such project, any appurtenances thereto, any rent, revenues,
income, or receipts there from or in connection therewith, or any of the benefits or contributions
granted to it by or pursuant to this contract, or any interest in any of the same.”

Section 506 of the contract with HUD defines substantial default. Events of substantial default
include the default of any of the provisions of section 313.

Finding 2

HUD’s regulations at 24 CFR [Code of Federal Regulations] 982.352 require a public housing
agency with its own housing or substantially controlled housing to use the services of an
independent third party approved by HUD to perform unit inspections before assistance can be
provided. HUD also requires that the independent third party handle contract rent
reasonableness and rent negotiations.

HUD’s regulations at 24 CFR [Code of Federal Regulations] 982.507 state that the Commission
may not approve a lease until it determines that the initial rent is reasonable. The Commission
must redetermine the reasonableness of the rent before an increase in the rent if there is a 5
percent decrease in the published fair market rent in effect 60 days before the contract

                                                  23
anniversary or if directed by HUD. At all times during the assisted tenancy, the rent may not
exceed the reasonable rent as most recently determined or redetermined by the Commission.
The Commission must determine whether the rent to the owner is reasonable in comparison to
rent for other unassisted units.

HUD’s regulations at 24 CFR [Code of Federal Regulations] 983.303 states that the Commission
must redetermine the reasonableness of the rent whenever there is a decrease of five percent or
more in the published fair market rents in effect 60 days before the contract anniversary date;
whenever the Commission approves a change in the allocation of responsibilities for utilities
between the owner and the tenant; whenever the housing assistance payments contract is
amended to substitute a different unit in the same building; and whenever there is a change that
may substantially affect the reasonable rent.




                                              24