oversight

Phoenix Apartments Did Not Use Project Funds in Compliance with HUD Requirements

Published by the Department of Housing and Urban Development, Office of Inspector General on 2008-02-04.

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

                                                                   Issue Date
                                                                         February 4, 2008
                                                                   Audit Report Number
                                                                          2008-LA-1006




TO:          Thomas W. Azumbrado, Director, San Francisco Multifamily Hub, 9AHMLAP



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

SUBJECT: Phoenix Apartments Did Not Use Project Funds in Accordance with HUD
            Requirements

                                     HIGHLIGHTS

 What We Audited and Why

      We reviewed the Phoenix Apartments’ (the project) expenditures to determine whether
      the project used its funds in accordance with U.S. Department of Housing and Urban
      Development (HUD) rules and regulations. The HUD Office of Inspector General
      received a hotline complaint alleging that the project had not used its funds for eligible
      purposes.

 What We Found

      The project did not use project funds in accordance with the requirements of its
      regulatory agreement and applicable HUD rules and regulations. Specifically, during
      fiscal years 2004, 2005, and 2006, the project

         •    Used $89,751 of its funds for unnecessary purposes and

         •    Did not support the necessity and/or reasonableness of $118,220 spent for the
              project.

      We also found unsafe conditions, some of which the project’s management ignored for
      more than two years. Additionally, we found that the project’s resident manager, a
     Section 8 recipient, had an unauthorized tenant residing in her unit for approximately
     three years.

What We Recommend

     We recommend that the Director of the San Francisco Multifamily Hub require the
     project’s owner, Phoenix Apartments, Inc., to

            •   Repay the project $89,751 from nonproject funds for the unnecessary
                expenditures and provide support for the reasonableness of the $118,220 paid
                for the unsupported services and goods or repay the project for the
                unsupported amount from nonproject funds.

            •   Immediately obtain the services of a HUD-approved professional management
                agent to manage the project and implement policies and procedures for
                ensuring that project funds are spent only for reasonable and necessary
                purposes.

            •   Immediately procure repair services for all of the unsafe conditions and
                implement adequate policies and procedures for periodic inspection, reporting,
                repair, and follow-up of any wear, tear, or other condition that may pose a
                hazard to the project’s residents or visitors.

            •   Review and recertify the resident manager’s eligibility for housing assistance
                payments from July 1, 2003, through the present and implement policies and
                procedures for periodic monitoring to ensure that no unauthorized tenants reside
                in the project.

     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 report to Phoenix Apartments, Inc., on December 10,
     2007, and held an exit conference with its officials on December 13, 2007. Phoenix
     Apartments, Inc., provided written comments on January 9, 2008. Phoenix Apartments,
     Inc., agreed in part and disagreed in part with our report findings, conclusions, and
     recommendations. The complete text of the auditee’s response (with the exception of
     two redacted attachments to preserve the confidentiality of named individuals), along
     with our evaluation of that response, can be found in appendix B of this report.




                                              2
                            TABLE OF CONTENTS

Background and Objectives                                                         4

Results of Audit
   Finding 1: The Project Did Not Use Its Operating Funds for Reasonable and      5
              Necessary Purposes
   Finding 2: The Project Deferred Repairs                                        10
   Finding 3: An Unauthorized Tenant Resided in the Resident Manager’s Assisted   13
              Unit

Scope and Methodology                                                             15

Internal Controls                                                                 16

Appendixes
   A.   Schedule of Questioned Costs                                              18
   B.   Auditee Comments and OIG’s Evaluation                                     19
   C    Criteria                                                                  33
   D    Summary of Unnecessary and Unsupported Expenditures                       35




                                            3
                          BACKGROUND AND OBJECTIVES

Phoenix Apartments (the project) is an 11-unit project-based Section 8 complex funded by a
direct U.S. Department of Housing and Urban Development (HUD) Section 202 loan. Phoenix
Apartments, Inc. (the corporation), a California nonprofit corporation, owns and manages the
project. Directors of the corporation must also be members of the corporation and in turn must at
all times be directors of the project’s sponsor, Anka Behavioral Health Services, Inc. (Anka), a
California nonprofit corporation. Anka’s board of directors appoints the members of the
corporation, and Anka establishes the general policies of the project’s operations. Until June
2006, Anka’s name was Phoenix Programs, Inc.

The project’s loan originated on April 1, 1982, in the amount of $616,300 and carries an annual
interest rate of 9.25 percent. The monthly payments are $4,873, with the final payment due on
February 1, 2023. 1 The project’s Section 8 housing assistance payments contract was executed
in April of 1982, and it was renewed in December 2002 for an additional five years.

Anka provides bookkeeping and accounting services for the project. With the exception of the
project’s resident manager, the rest of the management and front-line personnel working or
providing services for the project also work for Anka (shared employees). Anka allocates the
salaries of the shared employees to the project. Anka also owns, leases, and/or operates more
than 50 facilities in addition to the project.

Our objective was to determine whether project funds were used in compliance with HUD
requirements. During our review, we also noticed safety hazard conditions and observed an
unauthorized tenant living in one of the project’s units.




1
  During our review period between July 1, 2003, and June 30, 2006, the project was not in default of its loan
obligations.


                                                         4
                                RESULTS OF AUDIT

Finding 1: The Project Did Not Use Its Operating Funds for Reasonable
and Necessary Purposes
The project did not use its operating funds for reasonable and necessary products and services.
This condition occurred because the project’s owner and manager, the corporation, and its
sponsor and controlling corporation, Phoenix Programs, Inc., did not follow the project’s
regulatory agreement and applicable HUD regulations and handbooks. The project also lacked
basic procurement and internal control procedures, which exacerbated the use of project funds
for goods and services that were not necessary or reasonable. As a result, during three fiscal
years between July 1, 2003, and June 30, 2006, the project spent $89,751 (approximately 17
percent of its revenues) for unnecessary purposes and did not support the reasonableness of
$118,220 (approximately 23 percent of its revenues) used for the project.


 The Project Paid $55,476 in
 Excess of Allowable
 Management and Bookkeeping
 Fees and Reasonable Front-
 Line Salaries

       Between July 1, 2003, and June 30, 2006, the project reimbursed its sponsor, Phoenix
       Programs, Inc., $111,601 for management, bookkeeping, and front-line and other
       employee salaries and related expenses. Contrary to the requirements of HUD Handbook
       4381.5 and approved management and bookkeeping fees for the project’s geographic
       area, the project’s sponsor, Phoenix Programs, Inc., overallocated these fees as salaries to
       the project without regard to allowable limitations. In addition, there was no
       proportionate allocation of front-line employee salaries among all of the projects owned
       or operated by the managing company. For example, Phoenix Programs, Inc., allocated
       40 percent of its property manager’s salary to the project for management and front-line
       duties, while the property manager managed more than 50 residential facilities owned or
       operated by Phoenix Programs, Inc.

           •   Management and bookkeeping fees: The maximum allowable management fees
               during the project’s fiscal years ending June 30, 2004 and 2005, was $53.50 per
               unit per month and $62 during the fiscal year ending June 30, 2006. In addition,
               the project was allowed to pay $7.50 per unit per month for bookkeeping fees.
               Therefore, the allowed management and bookkeeping fees over the three-year
               period would total $25,278.




                                                5
             •    Front-line salaries: To be allowed as the project’s operating expenses, the
                  remaining day-to-day services needed for the project’s operations must have been
                  provided by front-line employees. According to HUD requirements, the front-line
                  employees’ salaries and benefits compensation could not exceed the comparable
                  industry standards. Therefore, the project could pay for reasonable salaries and
                  benefits for a front-line occupancy clerk and a minimal stipend for a resident
                  manager performing minimal duties.

                  Generally, an occupancy clerk would be responsible for such tasks as prospective
                  tenant interviews, initial and annual certifications, unit inspections, and other
                  front-line maintenance and operations tasks. We determined that a part-time
                  occupancy clerk’s salary and related expenses (benefits, payroll taxes, and
                  unemployment insurance) would be approximately $9,877 for the three years.

                  The project’s resident manager’s duties included collecting monthly rents,
                  answering the residents’ calls during the night and when the property manager
                  was absent during regular business hours, and reporting to management any
                  maintenance and repair needs for the project. The resident manager’s stipend
                  during the reporting period was $10,800.

                  In total, the reasonable front-line salaries of the project for the three years of the
                  audit period should have totaled approximately $20,677.

             •    Service coordinator salary: In 2000, HUD approved a service coordinator grant in
                  the amount of $45,050 for the project’s sponsor, Phoenix Programs, Inc. The
                  purpose of the grant was to pay a social service staff person to link the project’s
                  tenants with supportive or medical services between September 1, 2000, and
                  August 31, 2003. Phoenix Programs, Inc., continued to employ a service
                  coordinator beyond August 31, 2003. Beginning January 1, 2004, the project was
                  approved to use $4,068 of its operating funds to pay for a service coordinator.
                  Therefore, from January 1, 2004, to June 30, 2006, the project was allowed to
                  spend a total of $10,170 for a service coordinator. Through June 30, 2006, the
                  allowed amount for a service coordinator would total $10,170. 2

         For the above reasons, the maximum allowable management, bookkeeping, and service
         coordinator fees and front-line employees’ salaries and benefits for the three-year review
         period amounted to approximately $56,125. The remaining $55,476 paid to Phoenix
         Programs, Inc., for salary reimbursements were excessive and unnecessary.




2
 The service coordinator’s salary paid with the project’s operating funds is included in the $111,601 the project paid
for management and bookkeeping fees and for front-line salaries and related expenses.


                                                          6
    The Project Used $34,275 to Pay
    for Unnecessary Services and
    Products

         The project did not follow the requirements of its regulatory agreement with HUD when
         it approved payments for services and products that were not reasonable or necessary for
         the project’s operation. As a result, the project spent $34,275 of its funds for services and
         products that were not reasonable or necessary for the project. The payments for
         unnecessary services totaled $21,738 and included payments for consulting and
         bookkeeping 3 services, professional liability insurance, and the resident manager’s
         utilities and telephone services (land based and cellular). The project also used $12,537
         of its operating funds to pay for unnecessary supplies and materials. The unnecessary
         items included food and beverage purchases, restaurant meals, parties for the project’s
         tenants, a cellular telephone and a wireless hands-free accessory not used for the project,
         unnecessary furniture, and a digital camera dock. Other unnecessary items paid for with
         the project’s operating funds included supplies and equipment that should have been paid
         for by the management agent using management agent fees.

    The Project Spent $118,220 on
    Services and Products without
    Documenting the
    Reasonableness of the Amounts
    Paid

         The project did not follow the requirements of its regulatory agreement and the
         applicable regulations when it approved expenditures for services and products. The
         regulatory agreement requires the project to ensure that payments for all services,
         supplies, or materials do not exceed the amounts ordinarily paid in the project’s
         geographic area. HUD regulations also require the project to document the cost or price
         analysis in connection with every procurement action. The project did not have evidence
         of cost comparisons for any of its insurance policies, routine landscaping, pest control,
         and janitorial services. There was also no indication of cost comparisons for maintenance
         and repair services, which included the building’s air conditioning, water heating, and
         carpet maintenance.

         Further, contrary to the requirements of its regulatory agreement, the corporation did not
         allocate $12,951 4 between the project and other facilities owned by the corporation. It
         allocated the entire amount of its corporate expenses to the project, although it owned
         two other residential facilities in Southern California. Over the three years under review,
         these corporate expenses included

3
  The project is allowed to use its operating funds to pay $7.50 per unit per month for bookkeeping services. The
project’s sponsor, Phoenix Programs, Inc., provided those services, and the maximum allowable amount is shown on
page 5 of the report along with allowable management fees.
4
  This amount is already included in the $116,604 figure for services without ensuring the reasonableness of the
amount paid for those services.


                                                       7
        •    $9,035 for insurance premiums for its members, directors, and officers and

        •    $3,916 for tax preparation and filing services.

     Failure to allocate these corporate expenses among all the facilities owned by the
     corporation is a clear indication that the project overpaid for these services.

     As a result, the project spent $116,604 on services without ensuring the reasonableness of
     the amounts paid for those services. Additionally, the project spent $1,616 for supplies
     and materials without adequate or any supporting receipts to show that the purchased
     items were necessary or the prices paid were reasonable.

The Project Did Not Have
Adequate Internal Control and
Procurement Procedures


     The project lacked basic internal control and procurement procedures, which exacerbated
     the use of project funds for goods and services that were not necessary or reasonable. For
     example, receipts and invoices were not stamped or otherwise marked as “paid,” to
     prevent double payment. The lack of internal controls over cash disbursements resulted
     in at least one instance of paying for an item twice (a $444 office armoire) and 25
     instances of paying for goods and services without an accompanying receipt or invoice.
     These payments amounted to $3,666. In addition, the project did not have written
     policies or procedures for procurement and contract administration. This condition
     resulted in hiring various service contractors (including professional and maintenance
     service providers) and paying for insurance premiums without ensuring the
     reasonableness of the prices.

Conclusion


     The project did not follow the requirements of its regulatory agreement, HUD
     regulations, and applicable handbook requirements when it approved expenditures for
     services and products. Additionally, the project did not have adequate internal controls to
     ensure that project funds were used for reasonable and necessary purposes. As a result,
     the project spent $89,751 for unnecessary services and products and did not support the
     reasonableness of $118,220 spent for other services, supplies, and materials.




                                               8
Recommendations


    We recommend that the Director of the San Francisco Multifamily Hub require the
    corporation to

    1A.    Repay the project from nonproject funds $89,751 for the funds spent for
           unnecessary purposes.

    1B.    Provide support for the reasonableness of $118,220 paid for unsupported services
           and goods or repay the project from nonproject funds for the unsupported amount.

    1C.    Immediately obtain the services of a HUD-approved professional management
           agent to manage the project.

    1D.    Implement controls and establish procurement policies and procedures to ensure
           that project funds are spent only for reasonable and necessary purposes.




                                           9
Finding 2: The Project Deferred Repairs
The project deferred some substantial external repairs and maintenance items that posed safety
hazards. This condition occurred because the project's management ignored the requirements of
its regulatory agreement and the Section 8 program requirements. As a result, the project’s
external premises were unsafe.



 The Project Deferred
 Maintenance and Failed to
 Repair Potential Safety
 Hazards

       For at least two years,

          •    The project’s outdoor deck has been cordoned off with a tape due to its unsafe
               surface caused by serious deterioration of the wood floor (see image on the next
               page), and

          •    A portion of the project’s back yard fence has been leaning to a noticeable and
               potentially hazardous extent (see image on the next page).

       Additionally,

          •    The back yard soil had eroded to such a significant degree that the irrigation
               sprinkler pipes became exposed in more than 20 locations and posed potential
               safety hazards (see image on the next page), and

          •    Some of the stairs leading to the back yard were significantly cracked and
               weakened, with loose nails protruding out (see image on the next page).

       The project’s management was aware of these conditions but ignored them.

  Conclusion


       Contrary to the requirements of its regulatory agreement and Section 8 program
       requirements, the corporation did not maintain the project’s premises in a safe condition.




                                               10
          Back yard deck (rotten and cordoned off)             Back yard fence leaning




Irrigation hoses exposed from erosion                Cracked stairs leading to the back yard




                                                11
Recommendations


    We recommend that the Director of the San Francisco Multifamily Hub require the
    corporation to

    2A. Immediately procure repair services for all of the existing safety hazard conditions
        on the project’s property.

    2B. Implement procedures and policies for periodic inspection, reporting, repair, and
        followup of any wear, tear, or other condition that might pose a safety hazard to the
        project’s residents or visitors.




                                           12
Finding 3: An Unauthorized Tenant Resided in the Resident Manager’s
Assisted Unit
There was at least one instance of an unauthorized tenant residing in the project. The
unauthorized tenant resided in the resident manager’s unit. The project’s management failed to
comply with its regulatory agreement requirements to ensure that Section 8 funds are used to
assist only eligible residents. As a result, Section 8 housing assistance payments may have been
used for ineligible purposes.


    The Project and Its Resident
    Manager Violated Their
    Respective Housing Assistance
    Payment Agreements

         The project’s resident manager had an unauthorized tenant living in her unit during the
         three-year review period and into September 2007. The unauthorized tenant indicated
         that she was employed and had lived at the resident manager’s unit since at least 2004. 5
         She also stated that she used the project’s former property manager’s address as a
         fictitious address. Every year, the resident manager executed her rental and housing
         assistance payments agreement, whereby she promised to abide by the family income and
         composition disclosure requirements of 24 CFR [Code of Federal Regulations] Part 5.
         Under these regulations and the project’s Section 8 housing assistance payments
         agreement, the project’s owner-manager is also responsible for the accurate calculation of
         housing assistance payment benefits.

    Conclusion


         The project’s management failed to comply with the project’s housing assistance
         payments agreement when it ignored the regulatory requirements to report and include
         the unauthorized tenant’s income in the resident manager’s housing assistance payment
         calculations. Thus, Section 8 housing assistance payment funds may have been used to
         subsidize the housing of an unauthorized tenant.




5
 It is noted that the project paid the unauthorized tenant $1,920 for providing repair and cleaning services on three
occasions between November 2004 and April 2006.


                                                          13
Recommendations


    We recommend that the Director of the San Francisco Multifamily Hub require the
    corporation to

    3A. Review and recertify the resident manager’s eligibility for housing assistance
        payments from July 1, 2003, through the present.

    3B. Implement policies and procedures for periodic monitoring and inspection to ensure
        that no unauthorized tenants reside in the project.




                                            14
                        SCOPE AND METHODOLOGY

We performed on-site work at the project’s corporate and onsite offices in Concord, California,
from May through October 2007. Our review generally covered the period July 1, 2003, through
June 30, 2006. Our objective was to determine whether the project used project funds in
accordance with HUD requirements. During our review, we also noticed safety hazard
conditions and learned about an unauthorized tenant living in the resident manager’s unit and
developed findings accordingly.

To accomplish our objective, we

   •   Interviewed HUD and project personnel to obtain background information about the
       project’s operations, policies, and procedures.

   •   Reviewed the project’s accounting records including audited financial statements, general
       ledgers, bank statements, expenditure vouchers, and supporting documentation.

   •   Reviewed HUD requirements and regulations regarding the use of Section 202 project
       funds.

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




                                              15
                              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:

           •   Administering the project operations in compliance with the project’s regulatory
               agreement and applicable HUD regulations,

           •   Safeguarding the project’s resources, and

           •   Maintaining complete and accurate records.

       We assessed the relevant controls identified above.

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

 Significant Weaknesses

       Based on our review, we believe the following items are significant weaknesses:

           •   The project did not have adequate controls to ensure that its operations complied
               with its regulatory agreement and HUD regulations (see findings 1, 2, and 3).




                                                 16
•   The project did not have controls in place to ensure that project funds were used for
    reasonable and necessary purposes (see finding 1).

•   The project did not have controls in place to ensure that its records for supporting
    expenditures were complete and accurate (see finding 1).




                                      17
                                    APPENDIXES

Appendix A

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

          Recommendation                    Unsupported 1/             Unreasonable or
              number                                                    unnecessary 2/
                 1A                                                             $89,751
                 1B                                $118,220


1/   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. We determined that the project spent $118,220 on
     services, products, and materials without adequately supporting the reasonableness or the
     necessity of the expenses. For details, see appendix D.

2/   Unreasonable/unnecessary costs are those costs not generally recognized as ordinary,
     prudent, relevant, and/or necessary within established practices. Unreasonable costs
     exceed the costs that would be incurred by a prudent person in conducting a competitive
     business. We determined that the project spent $89,751 on services, materials, and
     supplies that either were not necessary for the project or were excessive. For details, see
     appendix D.




                                              18
Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation   Auditee Comments




Comment 1




                         19
Comment 2



Comment 1


Comment 3




            20
Comment 4




Comment 5




            21
Comment 2




Comment 6




Comment 7




            22
Comment 8




            23
Comment 9



Comment 10




             24
Comment 11


Comment 12


Comment 13



Comment 14




Comment 15




             25
26
27
                          OIG Evaluation of Auditee Comments

Comment 1   The auditee agreed that the $111,601 it paid for management, bookkeeping, and
            front line employees’ compensation exceeded allowed reasonable and necessary
            amounts. However, the auditee asserts that these charges paid for the actual costs
            to obtain those services. The auditee did not provide any evidence to substantiate
            the time and amount Anka charged the project for these services were actually
            necessary and reasonable. On the contrary, based on Anka’s position description
            documentation, it became apparent to the auditors that Anka over-allocated the
            front line employees’ salary to the project. Additionally, as detailed on pages 5
            and 6 of the audit report, the management and bookkeeping fees are fixed
            amounts for the geographic area. Therefore, even if the auditee was able to
            provide evidence supporting the actual charges for management and bookkeeping
            services, the $55,476 over-allocated to the project for those services and front line
            employees’ compensation would still be unreasonable and unnecessary. It is for
            this reason that recommendation 1C requests the project obtain a professional
            management agent for all its management, bookkeeping, and front line activities.

Comment 2   The audit report did not question the resident manager’s stipend amount. Instead,
            the audit report questioned the unreported compensation the resident manager
            received from the project in the form of payments for utilities and other services.

Comment 3   We modified the audit report to show that beginning January 1, 2004, the project
            was allowed to use $4,068 of its operating funds to pay for a service coordinator.

Comment 4   Consulting fees must be paid out of management fee funds. Section 6.39(a) of
            HUD handbook 4381.5 states that “[e]xpenses for services that are not front-line
            activities must be paid out of management fee funds….” In pertinent portions,
            section 6.39(b) states that the following costs must be paid out of management fee
            funds:

               (1) Designing procedures/systems to keep the project running smoothly and in
               conformity with HUD requirements.

               (2) Preparing budgets required by the owner or HUD, exclusive of rent increase requests
               and MIO Plans….

               (4) Training for project personnel that exceeds the line item budget for training expenses.

               (5) Monitoring project operations by visiting the project or analyzing project
               performance reports.

               (6) Analyzing and solving project problems.

               (7) Keeping the owner abreast of project operations….




                                                 28
            Therefore, any fees paid for consulting necessary for the project’s continued
            operation in compliance with HUD regulations must have been paid out of the
            management fee funds.

Comment 5   Professional liability insurance was not reasonably necessary for the project’s
            operation. During the course of the audit, the project’s property manager
            provided a written explanation that the professional liability insurance was for the
            “paraprofessional” service coordinators employed by Anka for the project’s
            benefit. The property manager’s explanation was provided to the auditors via
            email on October 26, 2007. The property manager in turn obtained this
            information from the project’s insurance broker, whose email was embedded in
            the property manager’s email. The insurance broker wrote:

               The reason for the Professional Liability Coverage is that there is one counselor that is on
               the policy. If there is any Professional exposure then this coverage is needed. The
               definition of Professional liability is as follows:

               Coverage for specialists in various professional fields. Since basic liability policies do
               not protect against situations arising out of business or professional pursuits, professional
               liability insurance is purchased by individuals who hold themselves out to the general
               public as having greater than average expertise in particular areas.

               If there is no counselor and only a building manager that doesn’t provide professional
               advice or professional services, then coverage would not be necessary.

            Therefore, the auditee’s comment claiming that the professional liability
            insurance was necessary for the resident manager is not credible because it is
            inconsistent with the auditee’s and its insurance broker’s previous assertions that
            the insurance was only necessary for the “paraprofessional” counselors.

            Additionally, as explained in the response to Comment 3, HUD approved $4,068
            per year for the project to pay for a service coordinator. The project was not
            allowed to spend more than the approved amount.

Comment 6   Although the project’s expenditures on food and beverages may have been for the
            benefit of the tenants, these expenditures were not necessary for the project’s
            operation. The only services listed in section 1.1(e) of the project’s housing
            assistance payments contract are water, trash removal, and ground maintenance.
            No other services have been approved by HUD for the project to provide its
            tenants. Provisions contained in the project’s articles of incorporation about
            providing unspecified services to its tenants do not expand on the project’s
            regulatory agreement and housing assistance payments contract provisions listing
            the allowed uses of the project’s funds.

            Additionally, section 11(c) of the project’s regulatory agreement states that no
            payments may be made for services, supplies, or materials unless such services
            are reasonably necessary for its operation; and the project’s marketing plan


                                                  29
            incorporated in the project’s housing assistance payments contract and marked as
            “Exhibit 4 to HAPC” states that all its tenants must be capable of living
            independently. Therefore, the auditee’s comment quoting a section from HUD
            handbook 4571.3 applicable to “Supportive Housing for the Elderly Section 202
            Program,” is inapplicable to independent living residential facilities.

            Therefore, the $12,537 identified in the audit report as expenditures for
            unnecessary supplies and materials (including parties) were not reasonably
            necessary for the project’s operation.

Comment 7   The auditors found and the report stated that “the project did not have written
            policies or procedures for procurement and contract administration.”

            Finding 1 of the report did not conclude whether the $116,604 spent on services
            were necessary and/or reasonable for the project because the project did not have
            adequate documentation to support the necessity and/or the reasonableness of
            these expenditures. As the auditors explained to the project’s management during
            the exit conference held on December 13, 2007, it is incumbent upon the project
            to provide documentary support for the necessity and/or reasonableness of these
            expenditures.

            Similarly, the corresponding recommendation 1B does not require Anka to pay
            HUD back for these services. The recommendation requires the corporation to
            “repay the project from nonproject funds for the unsupported amount.”

            The project did not have any procurement policies and procedures and it did not
            have adequate internal controls over expenditures at the time the auditors were
            conducting the review. In order for HUD to have the opportunity to evaluate any
            newly implemented internal controls and procurement policies and procedures,
            the project needs to provide evidence of those controls, policies, and procedures
            to HUD’s San Francisco Multifamily Hub during the audit resolution process.
            The Multifamily Hub will evaluate the adequacy of these policies and procedures.

Comment 8   The corporation needs to provide satisfactory evidence to HUD to show the paid
            insurance premiums were reasonable. The auditee enclosed with its comments a
            letter (redacted) from its insurance broker in which the broker asserted that he
            recommended insurance to the project at the lowest cost. This letter is insufficient
            to evaluate the reasonableness of the premiums.

            Additionally, any insurance premiums that must have been allocated to other
            facilities owned by the corporation, must be repaid to the project (not HUD) from
            nonproject funds. Such payment made with Anka funds would be an acceptable
            source of funding.

Comment 9   In Finding 1, the auditors did not disallow payments for the tax preparation
            services. The finding questioned the reasonableness of the amount the project



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               paid for tax preparation services of the corporation, which owned other facilities
               during the audit period. Therefore, similar to the unallocated insurance premiums
               mentioned in the response to Comment 8, the corporation needs to allocate the tax
               preparation service payments between all the facilities owned by it; and the
               portions allocated to the other facilities must be repaid to the project from
               nonproject funds.

Comment 10 The auditee did not dispute the auditors’ recommendation for the corporation to
           repay $1,616 to the project from nonproject funds. However, the auditee
           maintains that these funds were spent on events and services which benefited the
           project’s residents. As explained in the response to Comment 6 above, using
           project funds to pay for client events (e.g., parties) is not an allowable use of those
           funds.

Comment 11 The auditee’s claim that it has taken interim steps to reduce the hazards posed by
           the deteriorated deck and the leaning fence by cordoning the area off with “yellow
           caution tape” does not help remedy the hazardous conditions. These conditions
           existed for at least two years. The deck and the leaning fence regardless of, or in
           addition to, the “yellow caution tape” constitute a hazardous attractive nuisance.

Comment 12 Although the one particular picture used in the audit report shows an exposed
           irrigation line near the fence in the rear of the lot, as stated in finding 2 of the
           audit report, there are over 20 exposed lines spread throughout the entire back
           yard. Many of these exposed lines are in the middle of the back yard and pose a
           safety (tripping) hazard to residents and visitors.

Comment 13 Regardless of Anka’s routine business practice of inspecting the project once a
           year, the project’s resident manager stated that she promptly informed the
           project’s management about all four unsafe conditions reported in finding 2 of the
           report. The project’s management should not have ignored these conditions
           merely because Anka’s inspection team may have noticed them during the annual
           inspection.

Comment 14 The project’s management must not only improve its internal practices to ensure
           the maintenance issues identified during inspection are addressed in a timely
           manner, but it must also promptly address any safety hazard or other maintenance
           issues the resident manager or other residents convey to the management.

Comment 15 The auditors interviewed the unauthorized tenant and the resident manager.
           Although the unauthorized tenant claimed she only visited the resident manager
           (“quite often”), she also indicated that she has not resided anywhere other than the
           resident manager’s home since at least some time in 2004. This evidence was
           collaborated by the resident manager’s statement that the unauthorized tenant in
           question spent about one week in the resident manager’s unit during each visit
           and left for two or three days to visit her family before returning to the resident
           manager’s unit for another week.



                                               31
Additionally, the auditors observed the unauthorized tenant’s vehicle parked at
the complex around six o’clock in the morning almost every business day during
the months of August and September 2007. During the day, the unauthorized
tenant was observed using her vehicle and the project’s laundry facilities. The
auditors’ observations are also corroborated by public and employment records
evidencing the unauthorized tenant resided in the resident manager’s unit since
2004, and has not had another real address of record for herself since then. The
unauthorized tenant admitted that she used the project’s former property
manager’s home as a fictitious address.

The Kaiser Permanente appointment card (redacted) submitted by the auditee to
support the unauthorized tenant’s assertion that she did not reside in the resident
manager’s unit does not constitute sufficient evidence. The auditors gathered
substantial evidence (described in the paragraph above) showing that the
unauthorized tenant resided in the resident manager’s unit since 2004.

Whether the unauthorized tenant actually moved out of the resident manager’s
unit at the end of 2007, remains unanswered. However, even this assertion by the
resident manager indicated that the unauthorized tenant lived in the resident
manager’s apartment until a short time before October 16, 2007: the resident
manager told the auditors on October 16, 2007, that the unauthorized tenant “just
got her own place.”




                                 32
Appendix C

                                        CRITERIA
Management Fees, Bookkeeping Fees, and Salaries:

   •   Chapter 6 of HUD Handbook 4381.5 (The Management Agent Handbook) provides a
       listing of the management agent’s responsibilities and front-line employees’
       responsibilities. The handbook also specifies which services, materials, and products
       must be paid for from the management agent fee and which may be paid for from the
       project’s operating funds. For example, overhead costs, supplies, and equipment are
       management agent expenses.

   •   Section 6.38(a)(1) of the handbook states that reasonable front-line salaries may be paid
       with the project’s operating funds.

   •   Section 6.38(a)(2) requires the management agent to prorate the total associated costs
       among all of the projects (if more than one) for which the front-line employees provide
       services. The proration must be done in proportion to the actual use of services.

Use of Project Funds:

   •   Section 11(a) of the project’s regulatory agreement states:

       “If the Mortgagor has any business or activity other than the project and operation of the
       mortgaged property, it shall maintain all income and other funds of the project segregated
       from any other funds of the mortgagor and segregated from any funds of any other
       corporation or person. Income and other funds of the project shall be expended only for
       the purposes of the project.”

   •   Section 11(c) of the project’s regulatory agreement states:

       “Neither Mortgagor nor its agents shall make any payment for services, supplies, or
       materials unless such services are actually rendered for the project or such supplies or
       materials are delivered to the project and are reasonably necessary for its operation.
       Payments for such services, or materials shall not exceed the amount ordinarily paid for
       such services, supplies, or materials in the area where the services are rendered or the
       supplies or materials furnished.”

   •   Regulations at 24 CFR 84.44(a) require all recipients to establish written procurement
       procedures, which at a minimum ensure avoiding unnecessary purchases.

   •   Regulations at 24 CFR 85.45 state:




                                               33
   •   “Some form of cost or price analysis shall be made and documented in the procurement
       files in connection with every procurement action. Price analysis may be accomplished
       in various ways, including the comparison of price quotations submitted, market prices
       and similar indicia, together with discounts. Cost analysis is the review and evaluation of
       each element of cost to determine reasonableness, allocability and allowability.”

Project Maintenance and Safety:

   •   Section 8 of the project’s regulatory agreement states:

       “Mortgagor shall maintain the mortgaged premises, accommodations and the grounds
       and equipment appurtenant thereto, in good and substantial repair and condition....”

   •   Regulations at 24 CFR 5.703 state:

       “HUD housing must be decent, safe, sanitary and in good repair. Owners… must
       maintain such housing in a manner that meets the physical condition standards set forth in
       this section in order to be considered decent, safe, sanitary and in good repair. These
       standards address the major areas of the HUD housing: the site; the building exterior; the
       building systems; the dwelling units; the common areas; and health and safety
       considerations.”

Section 8 Housing Assistance:

   •   Regulations at 24 CFR 5.216(d)(2)(i) require the participating tenants to immediately
       inform the responsible entity about the addition of any new household member and
       provide the Social Security number of that tenant.

   •   Regulations at 24 CFR 5.240 further require the participating family to promptly provide
       income information to the responsible entity and in turn, the responsible entity to
       determine assistance amount changes or eligibility changes.




                                               34
      APPENDIX D

          SUMMARY OF UNNECESSARY AND UNSUPPORTED
                       EXPENDITURES

                                        Unnecessary expenditures
        Unnecessary salaries                                                        $55,476.00

                                                 Services
        Consulting                                                                   $5,718.00
        Insurance - professional liability                                           $5,400.64
        Professional bookkeeping services                                             $438.75
        Resident manager's services                                                 $10,180.73
                              Total unnecessary services                            $21,738.12

        Supplies or materials                                                       $12,536.52

                           Total unnecessary expenditures                           $89,750.64



                                         Unsupported expenditures
                Services                               Reason for lack of support          Amount
Alarm                                      No procurement                                   $1,732.04
Cleaning                                   No procurement                                   $3,285.00
Heating and cooling                        No procurement                                  $18,318.00
Insurance - commercial liability           No procurement                                  $21,226.71
Insurance - excess liability               No procurement                                   $5,582.62
Insurance - executive liability            No procurement and not allocated                 $9,034.78
Janitorial                                 No procurement                                   $5,700.00
Landscaping                                No procurement                                  $14,391.00
Pest control                               No procurement                                   $1,049.00
Repairs                                    No procurement                                  $32,368.86
Tax preparation services                   Not allocated                                    $3,916.23
                                 Total unsupported services                               $116,604.24

Supplies or materials                      No receipt or description on receipt             $1,616.00

                             Total unsupported expenditures                               $118,220.24




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