oversight

Orchard Court Multifamily Project, Located in Bath, Maine, Was Not Properly Managed in Accordance with HUD Regulations

Published by the Department of Housing and Urban Development, Office of Inspector General on 2008-11-06.

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

                                                                  Issue Date
                                                                           November 6, 2008

                                                                  Audit Report Number
                                                                           2009-BO-1002




TO:         Philip W. Holmes, Director of the Office of Housing, 1FHMLAT
            Henry S. Czauski, Deputy Director, Departmental Enforcement Center, CV


FROM:
            John A. Dvorak, Regional Inspector General for Audit, Boston, 1AGA


SUBJECT: Orchard Court Multifamily Project, Located in Bath, Maine, Was Not Properly
         Managed in Accordance with HUD Regulations


                                    HIGHLIGHTS

 What We Audited and Why

             We audited the Orchard Court project, located in Bath, Maine, in response to a
             referral received by the Office of Inspector General’s (OIG) Office of
             Investigation (Region 1). The referral indicated a potential inappropriate use of
             project funds by the Orchard Court Housing Corporation (project owner) and/or
             the management agent.

             Our overall objective was to determine whether the project owner and/or
             management agents operated the project in accordance with U.S. Department of
             Housing and Urban Development (HUD) requirements.


 What We Found


             The project owner and/or prior management agents failed to operate the Orchard
             Court project in accordance with HUD regulations. The owner and/or prior
             management agents did not comply with HUD requirements with regard to
                                              2
         maintaining vacancies at a reasonable rate; making payments that were eligible,
         reasonable, adequately supported; following proper procurement procedures;
         maintaining the project in good physical condition; and ensuring that tenants
         qualified for subsidized rental housing. As a result, the project had $265,226 in
         vacancy losses and incurred ineligible, unreasonable, and unsupported costs of
         $511,727.

         The project owner and a prior management agent executed two interest-bearing
         promissory notes in violation of the regulatory agreement, and a “Letter of
         Agreement” that may have violated the Project Owner’s/Management Agent’s
         Certification (Certification). The two notes allowed for the inappropriate accrual
         of interest in the amount of $56,086.

         Further, accounting records were incomplete, inaccurate or unavailable. The
         project’s current certified public accounting firm refused to prepare the project’s
         2007 financial statements because it considered the project’s records not
         auditable. The project also lacked controls over the calculation of management
         fees and bad debts.


What We Recommend


         We recommend that the Director of the Office of Housing require the project
         owner to reimburse or require the responsible management agents to reimburse
         the project $49,270 for ineligible administrative, site supervisor, HUD 202, and
         site management fees paid to mangement agents; eliminate from the project’s
         accounting records $151,436 in accrued administrative, maintenance, site
         management, other administrative, and HUD 202 fees that are ineligible project
         costs; and request from responsible management agents supporting documentation
         for the $265,412 in unsupported costs charged to the project so that the eligibility of
         these costs can be determined. For any amounts determined to be ineligible, the
         project owner should repay or seek reimbursement from responsible management
         agent to pay the project from non-project funds; and remove $56,086 in interest
         accrued on the notes payable of $303,653 from the accounting records. In addition,
         HUD should consider pursuing administrative sanctions against the project owner
         and three prior management agents, including recovering management fees paid
         and removing payables representing unpaid management fees from the project’s
         accounting records.

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



                                            3
Auditee’s Response


           We provided the auditee the draft report on October 2, 2008, and requested a
           response by October 17, 2008. We held an exit conference on October 10, 2008,
           attended by the Chairman of Orchard Court’s Board of Directors and HUD staff.
           The auditee requested and we granted a one week extension to submit a response.
           We received the auditee’s response on October 24, 2008. The auditee generally
           agreed with the facts, conclusions and recommendations in Finding 3 of this
           report. The auditee partially agreed with certain comments and conclusions
           contained in Findings 1 and 2.

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




                                            4
                             TABLE OF CONTENTS

Background and Objectives                                                            6

Results of Audit
        Finding 1: The Project Was Not Properly Managed in Accordance with HUD       8
        Requirements
        Finding 2: Promissory Notes and an Agreement Violate Regulations             16
        Finding 3: The Project’s Financial and Accounting Controls Were Inadequate   19

Scope and Methodology                                                                23

Internal Controls                                                                    24

Appendixes
   A.   Schedule of Questioned Costs                                                 26
   B.   Auditee Comments and OIG’s Evaluation                                        27
   C.   Schedule of Ineligible Payments Made by Chartwell                            40
   D.   Schedule of Ineligible Fees Paid to Chartwell and Avesta                     41
   E.   Schedule of Unsupported Costs Incurred by Chartwell and Affordable Housing   42
   F.   Criteria                                                                     44




                                              5
                      BACKGROUND AND OBJECTIVES

Orchard Court is a scattered-site duplex project with 70 two-bedroom units and one unit used as
an on-site office. The project is located in Bath, Maine, and is operating under the provisions of
Section 236 of the National Housing Act. The Section 236 program was established to facilitate
the construction and substantial rehabilitation of affordable multifamily rental housing for lower
income households. For projects assisted under Section 236, the U. S. Department of Housing
and Urban Development (HUD) provides mortgage insurance and a monthly interest reduction
payment subsidy to reduce the effective mortgage interest rate paid by the project to 1 percent.
This subsidy helps the owner maintain the rental affordability of the project. In addition to
Section 236, the project receives financial assistance for eight units under a rent supplement
contract.

The project was built in 1945 and 1946 and is owned by the Orchard Court Housing Corporation
(project owner), a 501(c) (3) corporation formed by the York-Cumberland Housing Development
Corporation. The project was previously named Lambert Park in the early and middle 1990s
before being renamed Orchard Court. Orchard Court underwent substantial rehabilitation in
1995 and 1996, and later improvements include the installation of new roofs and siding.

The previous Board of Directors including the President of the Orchard Court Housing
Corporation resigned as of March 31, 2006 and a totally new Board of Directors and a new
President were appointed.

Throughout its 60-year history, the project has gone through several bankruptcies, workout
agreements, and transfers of ownership and management. Although the project is not delinquent
on its mortgage payments, it has been in a non-surplus-cash position for the past three years and
experienced vacancy losses of $265,226 over the 41-month period October 2004 to February
2008. Orchard Court was managed by four different management agents throughout our audit
period.

             Management company                                Period managed
 Avesta Housing Management Corporation              October 1, 2004, to March 31, 2006
 Chartwell Management Corporation                   April 1, 2006, to August 31, 2007
 Affordable Housing of New England                  September 1, 2007, to March 15, 2008
 C and C Realty Management                          March 21, 2008, to present

HUD determined that the Chartwell Management Company (Chartwell) was not an acceptable
manager for Orchard Court, and on August 16, 2007, HUD notified the project’s owner of its
desire to terminate the management agreement. The termination was based on Chartwell’s
failure to address outstanding findings from an unsatisfactory HUD management review
completed on February 16, 2007. Affordable Housing of New England (Affordable Housing)
was hired to manage the project on a short-term basis. After a considerable search, the project
owner, with HUD approval, selected C and C Realty Management (C and C Realty), located in
Augusta, Maine, to manage the project.

                                                6
HUD provided $3.2 million to Orchard Court in 1994 via a flexible subsidy residual receipts
loan. By design, this loan may only be paid back from residual receipts of the project. Since the
inception of this loan, the project has not made a payment. Due to low occupancy, ineligible
expenses, and other poor management practices of prior management companies, this project has
not generated sufficient income to have any residual receipts. The current management
company, C and C Realty, has met with HUD to discuss a feasible financial plan to address the
viability of the project.

The Bath, Maine, area can support a higher occupancy level than exists at the project. We found
that the prior management agents did not make a sufficient effort to fill the vacancies. However,
C and C Realty has taken the initiative and filled 7 of the 20 vacant units since it assumed
management duties on March 21, 2008. The seven units required only minimal work to prepare
them for occupancy. The prior management companies did not make on-site staff available to
assist tenants, accept leasing applications, and show units. However, C and C Realty changed
this practice and are staffing Orchard Court’s on-site office on a regular basis.

To further address the vacancies, as well as the lack of income, C and C Realty increased
marketing efforts and made adjustments to reduce cash outflow. Specifically, the management
agent has

   •   Expanded outreach, including advertising and notifying housing authorities in the area of
       the availability of units;
   •   Reduced unnecessary maintenance;
   •   Applied for a real estate tax exemption, which is allowed for nonprofit-owned real estate
       in the state of Maine;
   •   Applied for a rent increase;
   •   Contacted the Maine State Housing Authority to discuss additional sources of funds or
       capital; and
   •   Considered applying for a subsidized rental contract (such as Section 8).

The overall objective of our audit was to determine whether the project owner and/or the
management agents managed and operated the project in accordance with HUD requirements.
Specifically, our objectives were to (1) determine the reasons for excessive vacancies and
identify any unsupported, ineligible, and unreasonable expenses, particularly payments made to
identity-of-interest companies; (2) obtain supporting documentation and determine the basis for
the $315,076 in notes/loans payable; and (3) determine if the project’s financial and accounting
controls were adequate.




                                                7
                                 RESULTS OF AUDIT

Finding 1: The Project Was Not Properly Managed in Accordance with
HUD Requirements
The project owner and/or prior management agents of the Orchard Court project did not comply
with the applicable HUD requirements to (1) maintain project vacancies at a reasonable rate; (2)
make payments for project expenses that were eligible, reasonable, and adequately supported; (3)
follow proper procurement procedures; (4) maintain the project in good physical condition; and
(5) ensure that potential project tenants qualified for rental housing. These deficiencies occurred,
in large part, because the management agents failed to properly manage the project in accordance
with HUD requirements. As a result, the project incurred $265,226 in vacancy losses and
$511,727 in ineligible, unreasonable, or unsupported project costs. In addition, project tenants
were living in units that did not always meet health and safety standards, and qualified tenant
applicants may have been deprived of housing.




  Vacancies Were Excessive



               The project owner failed to ensure that prior management agents, including Avesta
               Housing Management Corporation (Avesta), Chartwell Management Company
               (Chartwell), and Affordable Housing, made sufficient effort to reduce vacancies at
               Orchard Court. The project incurred $265,226 in vacancy losses over the 41-
               month period October 2004 to February 2008. One of the primary reasons for the
               high vacancy rate was the management agents’ failure to make regular on-site staff
               available to accept and process tenant applications, and show units to prospective
               tenants. Additionally, the owner of Affordable Housing informed us that
               addressing the vacancy problem was not a priority. On February 28, 2008, 17 of
               the 20 vacant units had been vacant 90 days or longer.

               Orchard Court is located in an area that can support a higher occupancy level than
               existed at the project. However, the prior management agents failed to take
               advantage of this potential market. We evaluated four projects in the immediate
               area of the Orchard Court project and found that two projects had only a small
               number of two-bedroom units with rents that greatly exceeded the rents at Orchard
               Court. Two other properties we evaluated were more comparable to the Orchard
               Court project, and both were 100 percent occupied and had extensive waiting lists.
               The rents for two-bedroom units at both of these projects exceeded the two-
               bedroom rents charged at Orchard Court.

                                                 8
                 The current management agent, C and C Realty, began addressing the vacancy
                 problem immediately after assuming management duties on March 21, 2008.
                 C and C Realty is making onsite staff available at specific times to accept and
                 process tenant applications and to show units to prospective tenants.


    $511,727 In Project Expenses
    Were Ineligible, Unreasonable
    or Unsupported


                 We identified ineligible payments totaling $15,331 made by Chartwell from the
                 project’s operating account. These payments included an unexplained payment of
                 $6,167 to another project owned/managed by Chartwell; a payment to a
                 manufacturer for $4,000, which the check register indicated was for interest on a
                 notes payable; and a payment to Chartwell for $3,200, which represented a
                 payment on the notes payable. These payments violated the regulatory agreement
                 which prohibit payments other than for necessary expenditures. We also identified
                 two payments totaling $1,9641 that were ineligible because the charges were not
                 related to the Orchard Court project but represented storage charges incurred by an
                 affiliate company of Chartwell (see appendix C).

                 We identified various fees of $49,270 paid to management agents that were
                 ineligible project costs. The management agents were only authorized to charge a
                 management fee and did not receive HUD approval to charge other service fees.
                 Chartwell was paid $25,0002 for $21,000 in administrative fees and $4,000 in site
                 supervisor fees which are ineligible. In addition, Avesta was paid $24,2703 for
                 $16,173 in HUD 202 fees and $8,097 in site management fees which are also
                 ineligible (see appendix D). Some of the above services were included as part of
                 the management fees paid.

                 Avesta’s general ledger showed that a $214,995 notes payable (see finding 2)
                 represented $82,337 in management fees4 and $132,658 comprised of ineligible
                 maintenance, site management, other administrative, and HUD 202 fees owed to
                 Avesta. The fees charged covered the period April 28, 2003, to October 1, 2005.
                 In addition to the $132,658 in fees, another $18,7785 owed to Avesta was accrued
                 for administrative, maintenance, and site management fees, all of which were


1
  $670 + $1,294 = $1,964.
2
  Covering the period November 8, 2006, to November 12, 2007.
3
  Covering the period January 20, 2005, to March 9, 2006.
4
  The management fees covered services, such as site supervisor and site management services.
5
  Covering the period November 2005 to March 2006.
                                                        9
                 ineligible project costs. The total amount of $151,4366 reportedly owed to Avesta
                 is an ineligible cost.

                 Chartwell and Affordable Housing’s poor performance in reducing vacancies and
                 failure to pay their bills on time resulted in $11,294 in late charges owed to a fuel
                 company and $12,205 in sewer liens owed to the Bath, Maine, Water District.
                 C and C Realty paid $5,643 of the $12,205 owed on sewer liens over a period from
                 April 28 to May 21, 2008. The $86,283 in outstanding fuel bills covered the
                 period January 28, 2007 to June 30, 2008, and the $26,053 in outstanding charges
                 from the Water District covered the period June 29 to December 31, 2007. As a
                 result of Chartwell and Affordable Housing’s failure to take advantage of the
                 favorable rental market and fill vacant units, the project sustained $127,627 in
                 vacancy losses over the period April 2006 to February 2008. Had these
                 management agents properly addressed project vacancies, the project would have
                 had sufficient funds to pay the fuel and water bills totaling $112,336,7 thereby
                 avoiding late charges and the sewer lien penalties. The $23,4998 in late charges
                 and sewer liens was unreasonable and unnecessary.

                 Chartwell paid $20,417 for mowing and trimming of the lawns for the project’s 70
                 units for the five-month period from May to September 2006. However,
                 Chartwell’s use of the lawn care company for Orchard Court was not the most
                 efficient use of funds, particularly since the project was in a non-surplus-cash
                 position and the contract included unnecessary work items for the Orchard Court
                 project. A contractor recently solicited by the current management agent for
                 mowing and trimming lawns efficiently met the project’s needs and would have
                 saved the project $6,779 for a five-month period. The new lawn care company
                 agreed to a rate of $7 per unit for the 70 units, which would total $10,780 for the
                 22-week period, compared to the $17,863 charged by the previous lawn company.
                 Therefore, the potential savings was $6,779. We consider the difference of $6,779
                 in costs to be unreasonable, and the project owner and/or Chartwell should
                 reimburse the project that amount. Chartwell’s use of the more expensive lawn
                 company was not an economical use of funds, particularly since the contract
                 included unnecessary work items for the Orchard Court project. For example, the
                 prior lawn company’s work items included keeping walks, drives, and parking
                 areas clean of debris. However, there were no walks or parking areas requiring
                 attention and minimal work would be required on driveways, since most tenants’
                 cleaned debris off their driveways. In our opinion, the work outlined in the more
                 recent contract would be more consistent with this scattered site neighborhood. In
                 addition, the prior lawn company was not procured properly as described below.


6
  $132,658 plus $18,778.
7
   $86,283 + $26,053 = $112,336.
8
   $11,294 + $12,205 = $23,499.
                                                  10
                   There was a payable of $100,081 that includes $88,658 later converted to a Note
                   (see finding 2) owed to Avesta and a loan of $11,423 made to the project by
                   Avesta in fiscal year 2007 that were unsupported. We reviewed the management
                   agent’s records and contacted Avesta for documentation to determine the basis for
                   these payables, but Avesta was unable to provide adequate supporting
                   documentation.

                   Chartwell could not provide adequate supporting documentation to demonstrate that
                   disbursements from the project’s operating account totaling $105,6959 were for
                   reasonable and necessary operating expenses. The unsupported charges included
                   payments to management agent companies, affiliated projects, and various vendors
                   for construction, lawn care, cleaning, maintenance supplies, and seal coating/paving.
                   For example, an identity-of-interest company hired to clean vacant tenant units
                   started billing monthly at a flat rate of $100 per unit and later began billing $620
                   monthly without explaining the basis for the change in price or identifying the
                   number of units cleaned. Therefore, the charges billed at $620 totaling $7,440 were
                   unsupported (see appendix E for details).

                   Chartwell failed to provide supporting documentation for $26,382 in payroll expenses
                   in 2006 and $33,254 in 2007 reported in the project’s annual financial statements.
                   The owner/management agent is responsible for providing documentation to support
                   expenditures charged to the project. These costs were unsupported since the
                   management agents could not provide adequate supporting documentation to
                   substantiate that these expenses were reasonable and necessary.

    Management Agents Did Not
    Follow HUD Procurement
    Regulations

                   Chartwell did not follow proper procedures for seven separate procurements and
                   Avesta did not follow proper procedures for one procurement. In accordance with
                   HUD requirements, management agents are expected to solicit written or verbal
                   cost estimates, including making a record of any verbal estimates obtained, to
                   ensure that the project was obtaining services at the lowest possible cost. There
                   was no documented evidence to substantiate that management agents adhered to
                   these requirements. For the procurements reviewed, supporting documentation and
                   records were available for only two, and we found deficiencies and irregularities
                   with both of these procurements. We identified three bids received by Chartwell
                   for procurement of lawn care services submitted in October 2006 and learned that
                   the lowest bidder had been receiving payments from Orchard Court for the same
                   services since June 2006. Avesta made available a request for proposal for waste

9
    Covering the period April 19, 2006, to December 12, 2007.
                                                         11
            removal and a list including the names and addresses of five bidders, but there was
            no evidence of the actual bid prices having been submitted by the companies.
            Therefore, there was no assurance that the waste company selected submitted the
            lowest bid. Also, the owner and Chartwell Management certified on the Project
            Owner’s/Management Agent’s Certification that no identity-of-interest exists
            among the owner, agent, and any individuals or companies that regularly do
            business with the project. However, Chartwell actually had identity-of-interest
            with three of the companies it hired. Only one company entered into a written
            agreement/contract with the respective management agent. The current
            management agent, C and C Realty, is not utilizing the services of any of these
            companies subject to our review of procurement.

Physical Deficiencies Found in
Rental Units Were Not
Corrected in a Timely Manner

            Chartwell failed to address physical deficiencies reported by tenants, and Affordable
            Housing did not follow up on deficiencies found in annual physical inspections that it
            conducted in October 2007. We performed inspections on seven units and identified
            serious deficiencies requiring immediate attention in three of those seven units. One
            unit had a seriously damaged kitchen ceiling caused by a leak from the upstairs
            tub/shower. A second unit had a large number of boxes scattered throughout the unit
            and these boxes were blocking access to the heating unit, and there was evidence of
            significant insect infestation. The third unit was unsanitary due to extreme
            untidiness and bad odor, and was unsafe due to a loose railing in the stairway to
            upstairs, and items blocking access to the boiler. Both the tenant with the damaged
            kitchen ceiling and the tenant requiring immediate storage of boxes reported the
            conditions to Chartwell, but the company failed to respond.

            The current management agent, C and C Realty, stated that it planned to address these
            deficiencies. Several other tenants stated that, with the exception of C and C Realty,
            none of the management agents made on-site staff available to assist tenants. Further,
            a former tenant, who resided at the project from February 2006 to April 2008, stated
            that a contact phone number was removed from the door of the on-site office several
            months after she moved in, and a new phone number was never posted until C and C
            Realty assumed management duties in March 2008. Our review of 48 outstanding
            work orders generated from the physical inspections performed by Affordable
            Housing during October 2007 showed that none of the deficiencies had been
            addressed by Affordable Housing as of March 2008.




                                              12
Tenants May Not Have Been
Eligible for Subsidized Housing

             A review of files for 17 tenants who moved into Orchard Court during May and
             June of 2006 found concerns with seven of the tenants. Under the Section 236
             program, a tenant’s income is verified for the purpose of determining the tenant’s
             rent which is the greater of thirty percent (30%) of the tenant’s adjusted gross
             income or the basic rent, but not greater than the fair market rent. For projects
             assisted under Section 236, HUD provides mortgage insurance and a monthly
             interest reduction payment subsidy to reduce the effective mortgage interest rate
             paid by the project to 1 percent.
             In four of the tenant files, social security numbers and proof of income had not
             been included for all household residents. The remaining tenant files showed that
             single persons were improperly allowed to occupy two-bedroom units. HUD
             regulations state that a single person must not be permitted to occupy a unit with
             two or more bedrooms, except for the following persons: (1) a person with a
             disability who needs a larger unit as a reasonable accommodation, (2) a displaced
             person when no appropriate-size unit is available, (3) an elderly person who has a
             verifiable need for a larger unit, and (4) a remaining family member of a resident
             family when no appropriate-size unit is available. The tenant files did not show
             that any of the above conditions were present. Three of the seven tenants
             considered ineligible continue to reside at Orchard Court.



Conclusion


             The Orchard Court project had difficulty generating sufficient income to remain a
             financially and physically viable project. Since 2004, the project had experienced
             cumulative vacancy losses totaling $265,255 and was beginning to show signs of
             physical deterioration. In addition, the project had deferred payments to
             vendors/suppliers, including $112,336 in fuel and water bills. The project was not
             managed in a manner that maximized rental income because prior management
             companies did not comply with the requirements with regard to maintaining
             vacancies at a reasonable rate. During the audit period, the prior management
             agents did not always pay costs that were eligible, reasonable, and adequately
             supported; follow proper procurement procedures; maintain the project in good
             physical condition; and ensure that tenants qualify for subsidized rental housing.
             As a result, some tenants were living in units that did not meet health and safety
             standards because unit deficiencies were not corrected in a timely fashion, and
             qualified tenant applicants may have been deprived of housing. These deficiencies
                                              13
          were the result of poor management and resulted in the project’s incurring
          ineligible, unsupported, and unreasonable costs totaling $511,727.



Recommendations


          We recommend that the Director of the Office of Housing require the owner of
          Orchard Court to

          1A. Implement controls to ensure vacancies are monitored and maintained in
               accordance with HUD requirements.

          1B. Reimburse or require the responsible management agent(s) to reimburse
              $64,601 to the project for ineligible project costs of $15,331 and for ineligible
              administrative, site supervisor, HUD 202 and site management fees of $49,270.

          1C. Eliminate from the project’s accounting records $151,436 in accrued
              administrative, maintenance, site management, other administrative, and HUD
              202 fees that are ineligible project costs.

          1D. Reimburse or require the responsible management agent(s) to reimburse
              $30,278 to the project for unreasonable late charges on fuel bills and sewer
              lien penalties of $23,499 and for unreasonable lawn care payments of $6,779.

          1E. Request from responsible management agents supporting documentation for the
              $265,412 in unsupported costs charged to the project so that the eligibility of
              these costs can be determined. For any amounts determined to be ineligible, the
              project owner should repay or seek reimbursement from responsible
              management agent to pay the project from non-project funds or remove
              payables from the project’s accounting records.

          1F. Develop and implement controls to ensure expenses are eligible and adequately
              supported.

          1G. Require the current management agent to address the deficiencies noted from
              the physical inspections performed by Affordable Housing in October 2007.
          1H. Require the current management agent to review the eligibility status for all the
              tenants of the project, and ensure that adequate supporting documentation is
              maintained in the tenant files to support and justify the eligibility of each tenant.

          1I   Consider taking sanctions against the three prior management companies
                                            14
                        including recovery of management fees paid and the removal of payables
                        representing unpaid management fees from the accounting records.

                  We also recommend that the Director of the Departmental Enforcement Center

                 1J.    Pursue against the project owner and three prior management agents
                        appropriate administrative and/or civil monetary or criminal penalties for the
                        regulatory agreement violations and the other discrepancies disclosed in this
                        report. 10




10
  In implementing this recommendation, the Deputy Director should consider all of the issues discussed in this
report.
                                                        15
                                RESULTS OF AUDIT

Finding 2: Promissory Notes and an Agreement Violate HUD
Regulations
An individual who served as president of both Avesta (former management agent) and Orchard
Court (project owner) executed two interest-bearing promissory notes totaling $303,653, without
HUD authorization and assigned the notes to third parties. In addition, the same individual
representing Avesta and the project owner entered into a “Letter of Agreement” with the owner of
Chartwell (former management agent after Avesta) that may have been in violation of the Project
Owner’s/Management Agent’s Certification. The president of Avesta and the ownership entity
stated that he was not aware that HUD approval was required for the two notes or that the Letter
of Agreement was in violation of any specific regulations or requirements. The two notes were
inappropriate because they did not have HUD approval and the interest of $56,086 attached to the
notes was not a valid project expense. In addition, the project owner and Avesta failed to follow
the provisions of the Project Owner’s/Management Agent’s Certification.


 Owner and Management Agent
 Executed Notes Without HUD
 Approval

              There were two interest-bearing promissory notes executed by Avesta, one for
              $214,995 and another for $88,658. The first note for $214,995 was executed on
              October 15, 2005, and assigned to a company owned/managed by relatives of the
              president of Chartwell, who became the management agent for Orchard Court on
              April 1, 2006. The second note for $88,658 was executed on March 30, 2006, and
              assigned to Chartwell. The two notes were in violation of the regulatory
              agreement which states that owners shall not encumber or assign any personal
              property of the project without prior written approval of HUD. HUD never gave
              its approval for the two notes. The individual serving as president of Avesta and
              Orchard Court stated that he was not aware that HUD approval was required
              because the notes were based on existing debt and were a method of formalizing
              this debt.


 $56,086 in Interest Accrued
 on the Notes Was Ineligible


              The promissory notes for $214,995 and $88,658 accrued interest at the rate of 8
              percent annually. As reported on the 2007 financial statements, $45,966 in interest
                                               16
             had been accrued. In addition, $10,120 in interest accrued during the first five
             months (October to February) of fiscal year 2008. The notes were an inappropriate
             encumbrance of the project, and the interest accrued totaling $56,086 ($45,966
             plus $10,120) was ineligible.


The Letter of Agreement Did
Not Have HUD Approval


             In accordance with a “Letter of Agreement,” Avesta ceased managing Orchard
             Court and Chartwell assumed management duties of the project. In consideration
             of Avesta relinquishing it right to manage the project, and upon assignment to
             Chartwell of all receivables (currently in excess of $200,000) due to Avesta with
             respect to the project, Chartwell paid Avesta $100,000.

             In our opinion, this transaction may have violated the terms of the Project
             Owner’s/Management Agent’s Certification which require the project owner and
             the management agent to certify that they will comply with HUD requirements and
             contract obligations, and agree that no payments have been made to the owner in
             return for awarding the management contract to the agent. There are obvious
             concerns including the fact that Chartwell paid for the receivables before being
             chosen as the management agent. This transaction presents the appearance that
             Chartwell’s designation as management agent was contingent on Chartwell making
             the $100,000 payment to Avesta. Had Chartwell not made this payment, it
             probably would not have been selected as the management agent. The president of
             Avesta stated that he was not aware that the Letter of Agreement was in violation
             of any rules or regulations.

             HUD was not aware of the Agreement, and there was no clear evidence that the
             project’s board of directors were adequately informed of the transaction.
             Considering the amount of money involved, a board resolution should have been
             declared to address the Agreement, and HUD should have been informed before
             the terms of the Agreement were carried out.


Conclusion


             The two promissory notes with the provision to accrue interest is an encumbrance
             of the project and is not a valid project expense. In addition, the owner and Avesta
             did not follow provisions of the Project Owner’s/Management Agent’s
             Certification when executing the “Letter of Agreement.” The president of Avesta

                                              17
          stated that he was not aware that the related parties were required to obtain HUD
          approval for the two notes and was not aware that the “Letter of Agreement”
          violated any specific rules or regulations.



Recommendations



          We recommend that the Director of the Office of Housing require the owner of
          Orchard Court to

          2A. Remove $56,086 in interest accrued on the notes payable of $303,653 from the
              accounting records and ensure that no further interest is accrued or paid on the
              notes.

          2B. Ensure that all future notes and agreements are approved by HUD.

          2C. Obtain a legal opinion regarding whether the Letter of Agreement violates the
              Project Owner’s/Management Agent’s Certification.




                                           18
                                RESULTS OF AUDIT

Finding 3: The Project’s Financial and Accounting Controls Were
Inadequate
The owner of the Orchard Court project and/or prior management agents did not adequately
monitor the project’s financial and accounting records. The audit found that (1) vital financial
and accounting records for the project were unreliable, incomplete, or unavailable, (2)
management fees were calculated incorrectly, (3) controls over tenant receivables/bad debts were
inadequate, and (4) one of the previous management agents inappropriately paid sales tax on fuel
bills. These deficiencies occurred because of a lack of adequate controls. Without accurate and
reliable financial and accounting records for the project, the project owner and/or the management
agent could not provide adequate assurance that the project was properly managed.


 Financial Records Were
 Unreliable, Incomplete, or
 Unavailable


              The certified public accounting firm that prepared the 2006 financial statements
              and was to prepare the 2007 financial statements declined to perform the financial
              audit because it considered the accounting records unauditable. The 2007 financial
              statements were certified by the project owner and later submitted to the HUD
              Real Estate Assessment Center. However, the statements were not considered a
              certified public accountant-audited submission, and the project was given a six-
              month extension for a complete audit.

              Vital records for the project were unreliable, incomplete, or unavailable. For
              example, a complete general ledger for fiscal year 2006 was not made available
              during our audit. In addition, balances of certain accounts in the 2007 certified
              financial statements were not in agreement with the project’s general ledger
              accounts, as shown below:

                   Account         Account          2007 general      2007 certified financial
                                   number              ledger               statements
                Tenants             1130              $35,090                 $4,294
                receivable
                Heating and          6546             $17,975                  $6,475
                cooling
                Snow removal         6548             $7,333                  $12,583

                                               19
            The previous management agents failed to maintain adequate documentation to
            support the amount of excess income reported for fiscal years 2006 and 2007. We
            could not reconcile excess income from project records to the annual financial
            statements because supporting data were missing, inaccurate, or inconsistent. In
            addition, Chartwell failed to submit to HUD the required annual narrative description,
            which identifies the amount of excess income available, and the purpose(s) for which
            this excess income was used during the prior fiscal year.

            We attempted to reconcile $65,603 in reserve for replacement withdrawals from
            the 2007 financial statements to funding authorizations (HUD-9250). However,
            the funding authorization, required for all replacement withdrawals, could not be
            located in the records. In addition, written policies and procedures for
            procurement and general accounting procedures were not readily available. The
            only written policies and procedures that were available were the occupancy
            requirements and tenant selection criteria. Because of these and similar conditions,
            we have limited confidence in the accuracy of the financial and accounting records
            for the project.


Management Fees Were
Calculated Incorrectly



            Management controls were not adequate to ensure that Chartwell charged the
            project the correct amount of management fees. Based on our review of invoices
            and checks in fiscal year 2007, we determined that Chartwell undercharged for
            management fees. For example, the management agent improperly calculated fees
            in October 2006 and January to May 2007 based on a rate used by another
            government agency in lieu of the HUD rate. In addition, we found several
            instances where the monthly management fees were not posted to the general
            ledger and supporting documentation for fees was missing or not available.



Controls over Tenant
Receivables, Including
Collection and Write-Offs,
Were Inadequate


            Chartwell did not establish adequate controls and procedures regarding the
            management of tenant receivables, including collections and write-offs of
            receivables from prior tenants. Therefore, we could not be assured that all rent
                                             20
           receivables due from tenants had been properly accounted for because the
           management agent failed to maintain a reliable tenant receivable subsidiary ledger.
           In addition, there was no evidence that Chartwell initiated collection efforts on
           behalf of the project or turned over debts to a collection agency for collection. The
           owner of Affordable Housing stated that a collection company had not been used
           to collect past-due amounts for approximately a year and a half. Additionally,
           Chartwell had not established an “allowance for doubtful account” to record the
           amount of the tenants receivables considered to be uncollectible. A journal entry
           should be made crediting the “allowance for doubtful account,” as well as, debiting
           bad debt expense for the estimated amount of uncollectible tenant receivables; and
           the allowance for doubtful account would be decreased when the receivables are
           formally written off. The write-offs should occur only after all collection efforts
           have failed. Consequently, bad debts were 9 percent and fifteen percent of gross
           rents in fiscal years 2006 and 2007, respectively. HUD considers bad debts in
           excess of 1 percent as excessive.


The Project Was
Inappropriately Charged Sales
Tax on Fuel Bills


           A fuel company consistently charged Orchard Court a sales tax for materials on
           repair work. This charge was an oversight on the part of Chartwell because
           nonprofit organizations are exempt from paying sales tax.

           HUD determined that the Chartwell was not an acceptable manager for Orchard
           Court, and on August 16, 2007, HUD notified the project’s owner of its desire to
           terminate the management agreement primarily because of Chartwell’s failure to
           address outstanding findings from an unsatisfactory HUD management review
           completed on February 16, 2007. To further address the vacancies, as well as the
           lack of income, the current management agent, C and C Realty, increased
           marketing efforts and made adjustments to reduce cash outflow. Specifically, the
           management agent has

               •   Expanded outreach, including advertising and notifying housing authorities
                   in the area of the availability of units;
               •   Reduced unnecessary maintenance;
               •   Applied for a real estate tax exemption, which is allowed for nonprofit-
                   owned real estate in the state of Maine;
               •   Applied for a rent increase;
               •   Contacted the Maine State Housing Authority to discuss additional sources
                   of funds or capital; and

                                            21
                •   Considered applying for a subsidized rental contract (such as Section 8).



Conclusion


             The owner and/or previous management agents of Orchard Court did not ensure
             that adequate controls were maintained over the project’s financial and accounting
             records. The project’s current certified public accounting firm declined to prepare
             the project’s 2007 financial statements because it considered the records
             unauditable. Consistent, reliable, and accurate records were not maintained
             because several prior management agents over the past four years failed to exercise
             due diligence in managing the project. Without accurate and reliable financial and
             accounting records for the project, the project owner and/or the management agent
             could not provide adequate assurance that the project was properly managed.



Recommendations



             We recommend that the Director of the Office of Housing require the owner of
             Orchard Court to

             3A. Initiate the appropriate procurement actions to hire independent accounting
                 firms, one to prepare the 2007 financial statements for audit and one to audit the
                 statement for submission of audited financial statements to HUD.

             3B. Develop and implement controls to ensure the current management agent
                 properly calculates its management fees.

             3C. Ensure that a policy for collection of prior tenant accounts is established and
                 implemented, including procedures to analyze each account, determine
                 collection activities necessary, and determine when an account should be
                 written off.

             3D. Require the current management agent to determine the amount of sale tax paid
                 on repair bills from the fuel company and request reimbursement from the fuel
                 company.



                                               22
                        SCOPE AND METHODOLOGY

We performed an audit of the Orchard Court project, owned by the Orchard Court Housing
Corporation. Our fieldwork was completed at the office of C and C Realty located at 219 Capitol
Street, Augusta, Maine, from March through July 2008. Our audit generally covered the period
October 1, 2004, through September 30, 2007, and was expanded to cover other periods as
needed. To accomplish our objectives, we

   •   Evaluated the management company’s procurement practices by selecting for review all
       companies, excluding utility companies, providing services and showing two or more
       payments throughout the audit period. In addition, for those companies selected, we
       evaluated the reasonability or necessity of charges related to these procurements.

   •   Using the check register covering the audit period, we selected for review all (100
       percent) expenditures, excluding utility companies, of $1,000 and up, verifying that costs
       were eligible, reasonable, and supported.

   •   Reviewed supporting documentation for management fees to ensure that they were
       properly supported, calculated, and within HUD approved limits.

   •   Requested and reviewed supporting documentation related to maintenance fees, other
       administrative fees, site management fees, HUD 202 fees, and site supervisor fees. In
       addition, we reviewed supporting documentation for certain payroll and contract charges.

   •   Determined the basis for $315,076 on notes/loans payable owed by Orchard Court to
       Avesta and determined whether HUD authorized the notes/loans. In addition, we
       calculated the interest accrued on the notes/loans.

   •   Determined the reasons for the vacancy problem by reviewing marketability,
       maintenance, vacancy turnover, and on-site staffing.

   •   Randomly selected a sample of eight tenant files for review to ensure tenants were
       qualified and/or were eligible for housing.

   •   We inspected a sample of units. The sample of units selected for inspection was the same
       as those selected for review of tenant files.

   •   Evaluated the management the agents’ controls and procedures regarding tenant
       receivables, including collection and write-off of receivables from prior tenants.

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




                                               23
                             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:

              •       Advances and execution of notes and loans involving related party
                      transactions;
              •       Requirements that project costs be eligible, supportable, and reasonable;
              •       Payment of management fees;
              •       Procurement and purchasing procedures when awarding contracts to
                      identity-of-interest companies;
              •       Tenant eligibility;
              •       Maintaining units in decent, safe, and sanitary condition; and
              •       Tenant receivables.

              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 owner and management agent did not have an adequate system to ensure
                      that resources were properly safeguarded in its recordkeeping when it
                                                24
    charged ineligible, unsupported, and unreasonable expenditures to the
    project (findings 1 and 3).

•   The owner and management agent did not have adequate controls to ensure
    that vacancies were monitored and maintained at minimum levels (finding
    1).

•   The owner and management agent did not have adequate controls to ensure
    management fees were accurately calculated (finding 3).

•   The owner and management agents did not establish adequate policies and
    procedures over the management of tenant receivables, including
    collections and write-offs of receivables from prior tenants (finding 3).




                             25
                                       APPENDIXES

Appendix A

                    SCHEDULE OF QUESTIONED COSTS

The audit identified questioned costs totaling $567,813 as follows:

          Recommendation            Ineligible 1/        Unsupported 2/   Unreasonable or
              number                                                       unnecessary 3/

                  1B                    $64,601
                  1C                   $151,436
                  1D                                                             $30,278
                  1E                                      $265,412
                  2A                    $56,086




1/     Ineligible costs are costs charged to a HUD-financed or HUD-insured program or activity
       that the auditor believes are not allowable by law; contract; or federal, state, or local
       policies or regulations.

2/     Unsupported costs are those costs charged to a HUD-financed or HUD-insured program
       or activity when we cannot determine eligibility at the time of audit. Unsupported costs
       require a decision by HUD program officials. This decision, in addition to obtaining
       supporting documentation, might involve a legal interpretation or clarification of
       departmental policies and procedures.

3/     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.




                                                    26
Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation   Auditee Comments




Comment 1




Comment 2




                         27
Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION

Ref to OIG Evaluation   Auditee Comments




Comment 2




Comment 3




Comment 4




                         28
Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION

Ref to OIG Evaluation   Auditee Comments




Comment 5




Comment 6



Comment 7




Comment 5

Comment 5




                         29
Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION

Ref to OIG Evaluation   Auditee Comments




Comment 5
Comment 8




Comment 5
Comment 8




Comment 5
Comment 9




Comment 5
Comment 10




                         30
Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION

Ref to OIG Evaluation   Auditee Comments




Comment 5




Comment 11
Comment 5


Comment 12




Comment 5




                         31
Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION

Ref to OIG Evaluation   Auditee Comments




Comment 11




Comment 13
Comment 5




Comment 5
Comment 14




Comment 5




                         32
Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION

Ref to OIG Evaluation   Auditee Comments




Comment 2
Comment 5




                         33
Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION

Ref to OIG Evaluation   Auditee Comments




                         34
Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION

Ref to OIG Evaluation                Auditee Comments




                        OIG Evaluation of Auditee Comments




                                       35
Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION

Ref to OIG Evaluation                     Auditee Comments

Comment 1   The report was revised to note that the current Board has been in place since
            March 31, 2006. However, the auditee’s response on questionable expenditures is
            incorrect and many of the questionable expenditures occurred after the Board was
            appointed on March 31, 2006.

Comment 2   The report did not address whether the Corporation was aware of the problems
            identified in the report or its reliance on the management agent to manage the
            project as required. However, regardless of what the Corporation was aware of
            or its reliance on its management agent, we emphasize that the primary
            responsibility for managing the Orchard Court project rests with the owner, and it
            is the owner that is held accountable by HUD. We did not perform a financial
            audit and did not evaluate the financial audit that was performed, therefore, we
            cannot attest to the statements made in the financial audit or on what basis they
            were made. It is clear our audit, which is more in depth than a financial audit,
            found material instances of non compliance.

            The letter referred to from Mr. Jim Grimes, former president and management
            agent, was cited as evidence that the Board had no reason to question Chartwell’s
            management of the project. As emphasized above the primary responsibility for
            managing the Orchard Court project rests with the owner, and it is the owner that
            is held accountable by HUD. Therefore, it is the Orchard Court Housing
            Corporation as the owner that was ultimately responsible for the actions or
            inactions of its management agents. The project’s Regulatory Agreement
            between the owner (Orchard Court Housing Corporation) and HUD stipulates that
            the owner will comply with the requirements of Section 236 of the National
            Housing Act and regulations adopted by HUD, and that the owner is responsible
            for providing for the management of the project in a manner satisfactory to HUD.
            Our audit concluded that the project generally was not operated in accordance
            with HUD requirements. As noted, the primary responsibility for management
            and operation of the project rests with the Orchard Court Housing Corporation.

Comment 3   We acknowledge that the current management agent is addressing the vacancy
            problem, but we do not agree that the problem has been entirely resolved yet.
            The owner is required to monitor the management agent’s efforts and ensure that
            vacancies are maintained at a reasonable rate, going forward. We advise that the
            owner report to HUD on a continuing basis as to the status of vacancies for the
            project until HUD is satisfied that this is no longer a problem.

                                            36
Comment 4   Many of the improper expenditures occurred after the Board was appointed on
            March 31, 2006. We also provided details of the improper expenditures so the
            board would be able to further evaluate the propriety of the charges. The current
            management agent is aware of all questioned costs after March 31, 2006. Also,
            the Regulatory Agreement does not contain a provision that prohibits
            expenditures when the project is in a non-surplus cash position as indicated in the
            comments and the report was revised accordingly. The Corporation must
            immediately reimburse the project from non-federal funds regardless of whether
            they recover any funds from previous management agents.

Comment 5   The Corporation is the owner of the project, regardless of the board members
            seated at the time, and entered into a Regulatory Agreement with HUD stating
            they would comply with HUD’s regulations and the terms of the Agreement. The
            owner contracts with a management agent to act on their behalf but this does not
            allow the owner to delegate this responsibility to the agent. The owner remains
            responsible to HUD under the Regulatory Agreement.

            During our audit work we worked diligently to obtain as much documentation as
            was available from the previous management agents. We reported all questioned
            costs we were unable to resolve with the management agents. The Corporation
            must immediately reimburse the project from non-federal funds regardless of
            whether they recover any funds from previous management agents.

Comment 6   The Corporation acknowledged that the project’s physical deficiencies were not
            being corrected in a timely manner, and stressed that this should not continue to
            be a problem under the current management agent. However, the owner should
            report to HUD on a continuing basis as to the physical condition of the project
            until HUD is satisfied that the physical deficiencies were addressed and resolved,
            and that any newly reported deficiencies are also addressed and resolved in a
            timely manner.

Comment 7   Upon request, the information regarding these tenants can be provided again
            including the three tenants who continue to reside at Orchard Court. The current
            management agent is aware of these tenants. Also, the report was changed to
            clarify that income data needed for the purpose of determining the tenant’s rent
            was missing.

Comment 8   During the audit, Avesta was given the opportunity to justify the propriety of the
            fees in question (see Comment 5). The Corporation can contact Avesta to allow
            them the opportunity again to justify these fees. The audit also questioned the HUD
            202 fees and why the owners would have allowed the management agent to identify
            any charges as HUD 202 fees. Regardless, the Corporation does bear the liability
            for the ineligible project costs. The Corporation must immediately reimburse the

                                             37
              project from non-federal funds regardless of whether they recover any funds from
              the previous management agent.

Comment 9     The recommendation was revised to require the current management agent to review
              the eligibility status for all of the tenants, and to ensure that adequate supporting
              documentation is maintained in the tenant files to support the eligibility of each
              tenant.

Comment 10 The Corporation has misinterpreted the Regulatory Agreement when it states the
           Corporation is not liable for matters not under their control. The agreement actually
           states that the project’s individual owners are not personally liable for matters not
           under their control. Therefore, this stipulation does not include the Corporation as
           the owner, and the Corporation should have controls in place to ensure it has these
           matters under its control. The primary responsibility for managing Orchard Court
           rests with the owner and the Corporation as the owner is accountable to HUD.
           Therefore, the Corporation is subject to any administrative and/or civil monetary or
           criminal penalties for the regulatory agreement violations and the other
           discrepancies disclosed in this report regardless of the board seated at the time.

              We do not agree with the auditee’s position that it is not responsible since many of
              the improper expenditures occurred after the Board was appointed on March 31,
              2006. Regardless of the letter to the Board by the former President of the
              Corporation, the auditee’s comment that matters identified by the Report were not
              under control of the Corporation is incorrect. If the Corporation acknowledges that
              its former President may have engaged in deception with the Board, then the
              Corporation cannot also now claim that matters addressed in the Report were not
              under their control. The President of the Corporation represents the project’s
              ownership entity to HUD as the owner. Therefore, the Corporation is subject to any
              administrative and/or civil monetary penalties for the regulatory agreement
              violations and the other discrepancies disclosed in this report.

              We do not agree with the auditee’s position since many of the improper expenditures
              occurred after the Board was appointed on March 31, 2006. The Corporation as the
              owner is subject to any administrative and/or civil monetary or criminal penalties for
              the regulatory agreement violations and the other discrepancies disclosed in this
              report. The Corporation through its agents authorized the actions identified in the
              Report and through acts of its agents violated provisions of the Regulatory
              Agreement. Lack of proper controls by the owner to oversee the management agent
              and prevent improper transactions does not relieve responsibility.

Comment 11 The Promissory Notes with the provision to accrue interest is an encumbrance of
           the project and without HUD’s approval, the interest is not a valid and reasonable
           operating expense of the project.



                                               38
Comment 12 The Letter of Agreement was enacted under unusual circumstances because one
           of the parties involved in the transaction simultaneously represented both the
           management agent and the ownership entity. Therefore, because this individual
           was the president of the Corporation and executed the relevant documents in his
           capacity as President, the Corporation (the owner) did authorize the $100,000
           payment made by Chartwell.

              The Corporation as the owner has the primary responsibility for the management
              and operation of the Orchard Court project, and as such, it is accountable to HUD.

Comment 13 The Corporation was in fact party to the Agreement because the Agreement was
           enacted by the President of the ownership entity, namely the Orchard Court
           Housing Corporation.

Comment 14 Provisions under the regulatory agreement between the owner and HUD state in
           paragraph 9(c) the requirement that books and records be maintained in
           reasonable condition for proper audit. The Corporation has primary responsibility
           for managing the Orchard Court project as the owner, and it is the owner that is
           held accountable by HUD for the requirement regarding the maintenance of the
           accounting records.




                                              39
         Appendix C

               SCHEDULE OF INELIGIBLE PAYMENTS MADE BY
                             CHARTWELL


Amount       Check   Date of check     Invoice      Date of        Business or                   Comments
            number                     number       invoice          payee
$3,200.00     1840   Sept 18, 2007      12149     Jan. 1, 2007      Chartwell             Payment on Notes Payable
 $670.30    001580   Aug. 21, 2006      10784     Aug. 1, 2006      Chartwell         Storage cost should be charged to
                                                                                       affiliated company of mgt agent
$1,293.60   001632   Oct. 23, 2006     10874      Sept. 7, 2006     Chartwell         Storage cost should be charged to
                                                                                       affiliated company of mgt agent
$6.166.66   001602   Sept. 25, 2006   Not known    Not known      Barron Hills 1      Payment made to another project
                                                                                        owned/managed by Chartwell
$4,000.00    1791    June 12, 2007    Not known    Not known      Manufacturing    Check register shows payment represents
                                                                                           interest on notes payable
  Total
 $15,331
(rounded)




                                                       40
      Appendix D
          SCHEDULE OF INELIGIBLE FEES PAID TO CHARTWELL

 Check    Date of check    Invoice      Date of       Administrative   Site supervisor fee   Overall totals
number                     number       invoice            fee
001639    Nov. 8, 2006      10984     Oct. 19, 2006     $2,625.00            $0.00            $2,625.00
001650    Dec. 12, 2006     11124     Dec. 1, 2006      $2,625.00            $0.00            $2,625.00
001655    Dec. 12, 2006     11042     Nov. 1, 2006      $2,625.00            $0.00            $2,625.00
 1886     Nov. 12, 2007      2134     Oct. 30, 2007     $2,625.00            $0.00            $2,625.00
001752    Apr. 10, 2007     11237    Dec. 27, 2006        $0.00            $2,000.00          $2,000.00
001737    Mar. 19, 2007     11430     Mar. 2, 2007      $2,625.00            $0.00            $2,625.00
001721    Mar. 9, 2007      11344    Feb. 2, 2007       $2,625.00            $0.00            $2,625.00
001681    Jan. 23, 2007     11197    Dec. 27, 2006        $0.00            $2,000.00          $2,000.00
 1776     May 21, 2007      11555     Apr. 2, 2007      $2,625.00            $0.00            $2,625.00
 1823     Aug. 10, 2007     12017     May 3, 2007       $2,625.00            $0.00            $2,625.00
 Totals                                                $21,000.00          $4,000.00          $25,000.00



             SCHEDULE OF INELIGIBLE FEES PAID TO AVESTA

 Check    Date of check    Invoice      Date of        Site mgt fees     HUD 202 fees        Overall totals
number                     number       invoice
 5516     Jan. 20, 2005     4852         None            $771.50             $0.00              $771.50
 5516     Jan. 20, 2005      646         None             $0.00            $2,107.89           $2,107.89
 5516     Jan. 20, 2005      648         None           $1,445.78            $0.00             $1,445.78
 5598     June 10, 2005      405         None             $0.00             $451.83             $451.83
 5598     June 10, 2005      104         None             $0.00            $2,107.89           $2,107.89
 5608     June 22, 2005     1250         None             $0.00             $966.26             $966.26
 5608     June 22, 2005     1252         None           $1,445.78            $0.00             $1,445.78
 5618     July 13, 2005     1452         None             $0.00            $2,107.89           $2,107,89
 5654     Sept. 22, 2005    1454         None           $1445.78             $0.00             $1,445.78
 5654     Sept. 22, 2005    1740         None             $0.00            $2,107.89           $2,107.89
 5691     Dec. 15, 2005     1742         None           $1445.78             $0.00             $1,445.78
 5691     Dec. 15, 2005     1937         None             $0.00            $2,107.89           $2,107.89
 5717     Jan. 27, 2006     1939         None            $771.50             $0.00              $771.50
 5727      Feb. 8, 2006     2141         None            $771.50             $0.00              $771.50
 5743      Mar. 9, 2006     2139         None             $0.00            $2,107.89           $2,107.89
 5743      Mar. 9, 2006     2338         None             $0.00            $2,107.89           $2,107.89
 Totals                                                   $8,097            $16,173             $24,270




                                                         41
     Appendix E

           SCHEDULE OF UNSUPPORTED COSTS INCURRED BY
              CHARTWELL AND AFFORDABLE HOUSING
Amount     Check    Date of check     Invoice   Date of invoice   Buisness or                Comments
          number                     number                          payee
$1,134     001582   Aug. 21, 2006    Unknown      July 6, 2007      Supplies        Invoice lacked sufficient detail
$1,000     001567   July 26, 2006    Unknown     June 13, 2007       Supplies       Invoice lacked sufficient detail
$3,500     001606   Sept. 25, 2006   Unknown       Unknown          Paving                 Missing invoice
$9,000     001576   Aug. 17, 2006    Unknown       Unknown          Paving                 Missing invoice
$1,150     001636   Nov. 3, 2006     6056-1A     Aug. 11, 2006    Construction      Invoice lacked sufficient detail
$10,000    001563   July 24, 2006     6046-1     June 15, 2006    Construction      Invoice lacked sufficient detail
$3,000    01004M    Aug. 29, 2006    6046-1A     Aug. 1, 2006     Construction      Invoice lacked sufficient detail
$3,694     001593   Sept. 7, 2006    6046-1A     Aug. 1, 2006     Construction      Invoice lacked sufficient detail
$2,000     001643   Nov. 8, 2006     Unknown    Unknown            Lawn care     Missing invoice and lack of contract
$5,250     001648   Nov. 28, 2006    Unknown    Unknown            Lawn care     Missing invoice and lack of contract
$2,083     001659   Dec. 18, 2006    Unknown    Unknown            Lawn care     Missing invoice and lack of contract
$2,000     001662   Dec. 22, 2006      13315     Nov. 24, 2006     Lawn care     Invoice lacked detail and no contract
$3,250     001679   Jan. 19, 2007      13315     Nov. 24, 2006     Lawn care     Invoice lacked detail and no contract
$6,000      1006    Feb. 14, 2007    Unknown       Unknown         Lawn care     Missing invoice and lack of contract
$4,500     001723    Mar. 9, 2007      13484      Feb. 1, 2007     Lawn care     Invoice lacked detail and no contract
$1,500     001723    Mar. 9, 2007      13575      Mar. 1, 2007     Lawn care     Invoice lacked detail and no contract
$3,750     001744    Apr. 6, 2007      13575      Mar. 1, 2007     Lawn care     Invoice lacked detail and no contract
$2,000     001764   Apr. 24, 2007      13753      Apr. 4, 2007     Lawn care     Invoice lacked detail and no contract
$1,000     001769   Apr. 30, 2007      13753      Apr. 4, 2007     Lawn care     Invoice lacked detail and no contract
$2,250      1783    May 21, 2007       13753      Apr. 4, 2007     Lawn care     Missing invoice and lack of contract
 $750       1783    May 21, 2007       13891     May 16, 2007      Lawn care     Missing invoice and lack of contract
$3,000      1797    June 29, 2007      13891     May 16, 2007      Lawn care     Invoice lacked detail and no contract
$1,500      1814    July 27, 2007      13891     May 16, 2007      Lawn care     Invoice lacked detail and no contract
 $500       1814    July 27, 2007      14141     May 25, 2007      Lawn care     Invoice lacked detail and no contract
$3,000      1826    Aug. 14, 2007      14141     May 25, 2007      Lawn care     Missing invoice and lack of contract
$1,135      1838    Sept. 14, 2007     14141     May 25, 2007      Lawn care     Missing invoice and lack of contract
 $620       1905    Dec. 12, 2007       112        Unknown         Cleaning         Invoice lacked sufficient detail
 $620       1888    Nov. 12, 2007        100     Nov. 12, 2007     Cleaning         Invoice lacked sufficient detail
 $620       1849     Oct. 4, 2007       902       Oct. 1, 2007     Cleaning         Invoice lacked sufficient detail
 $620       1841    Sept. 20, 2007       901     Sept. 1, 2007     Cleaning         Invoice lacked sufficient detail
 $620       1828    Aug. 22, 2007        801      Aug. 1, 2007     Cleaning         Invoice lacked sufficient detail
 $620       1800     July 9, 2007        701      July 5, 2007     Cleaning         Invoice lacked sufficient detail
 $620       1792    June 13, 2007       601       June 2, 2007     Cleaning         Invoice lacked sufficient detail
 $620       1782    May 21, 2007          8       May 2, 2007      Cleaning         Invoice lacked sufficient detail
 $620      001743    Apr. 6, 2007       1038      Apr. 1, 2007     Cleaning         Invoice lacked sufficient detail
 $620      001722    Mar. 9, 2007       1026      Mar. 1, 2007     Cleaning         Invoice lacked sufficient detail
 $620      001704   Feb. 19, 2007       1016      Feb. 1, 2007     Cleaning         Invoice lacked sufficient detail
 $620      001678   Jan. 19, 2007       1008      Jan. 9, 2007     Cleaning         Invoice lacked sufficient detail
$11,423     5853    Aug. 21, 2007      82107     Aug. 21, 2007     Chartwell               Missing invoice
$1,400      1001    Apr. 19, 2006    Unknown       Unknown         Chartwell               Missing invoice
$2,000    001520A   May 22, 2006       10570      May 1, 2006      Chartwell               Missing invoice
$4,805     001531    June 2, 2006      10607      May 1, 2006      Chartwell               Missing invoice
 $680      001632   Oct. 23, 2006      10896     Sept. 14, 2006    Chartwell               Missing invoice
 Total
                                                       42
Amount      Check   Date of check   Invoice   Date of invoice   Buisness or   Comments
           number                   number                        payee
$105,695




                                                    43
Appendix F
                                        CRITERIA

Provisions under the regulatory agreement:

   •   Paragraph 6(a) provides that owners shall not convey, transfer, or encumber any of the
       mortgaged property, or permit the conveyance, transfer, or encumbrance of such
       property.

   •   Paragraph 6(b) provides that owners shall not, without prior written approval of HUD,
       assign, transfer, dispose of, or encumber any personal property of the project, including
       rents, or pay out any funds except from surplus cash, except for reasonable operating
       expenses and necessary repairs.

   •   Section 6(i) states that owners shall not, without the prior written approval of the HUD,
       incur any liability, direct or contingent, other than for current operating expenses,
       exclusive of the indebtedness secured by the mortgage and necessarily incident to the
       execution and delivery thereof.

   •   Paragraph 7 states that the owners shall maintain the mortgaged premises,
       accommodations, and grounds in good repair and condition.

   •   Section 9(a) states that the owners shall provide for the management of the project in a
       manner satisfactory to the HUD.

   •   Paragraph 9(b) provides that payment for services, supplies, or materials shall not exceed
       the amount ordinarily paid for such services or materials in the area where the services
       are rendered or the supplies or materials are furnished.

   •   Paragraph 9(c) requires that books and records be maintained in reasonable condition for
       proper audit.

   •   Paragraph 9(e) provides that within 60 days following the end of each fiscal year, HUD
       shall be furnished with a complete annual financial report, based upon an examination of
       the books and records of the borrower, prepared in accordance with the requirements of
       HUD, certified by an officer or responsible owner, and when required by HUD, prepared
       and certified by a certified public accountant or other person acceptable to HUD.

The project owner’s/management agent’s certification provides that the project owner and
management agent certify under



                                               44
   •   Part 1 to comply with HUD requirements and contract obligations and agree that no
       payments have been made to the project owner in return for awarding the management
       contract to the agent and that such payments will not be made in the future.

   •   Part 3(d) to refrain from purchasing goods or services from entities that have identify of
       interest unless the costs are as low as or lower than arms-length, open-market purchases.

   •   Part 4(a) to ensure that all expenses of the project are reasonable and necessary.

   •   Part 4(b) to exert reasonable effort to maximize project income and take advantage of
       discounts, rebates, and similar money-saving techniques.

   •   Part 4(c) to obtain contracts, materials, supplies, and services on terms most
       advantageous to the project.

   •   Part 4(d) to credit the project with all sales tax granted through the government.

   •   Part 4(e) to obtain the necessary verbal or written cost estimates and document the
       reasons for accepting other than the lowest bid, and part 4(f) requires that copies of such
       documentation be maintained and made available during normal business hours.

   •   Part 6(b) that the management agent agrees to establish and maintain project accounts,
       books, and records in accordance with HUD’s administrative requirements and generally
       accepted accounting principles.

Provisions of the management agreement between Orchard Court Housing Corporation and
Chartwell

   •   Section I, part 2, stipulate that the project owner is to ensure that the property is operated
       in a fashion consistent with good professional management practices. The project owner
       has a responsibility to provide decent, safe, and sanitary housing; provide housing to
       meet the needs of the population; and to accept financial responsibility for the project.

   •   Section I, part 3, states that the management company has the responsibility for the
       general supervision and the execution of the duties and services as outlined in the
       management plan.

   •   Section IV, part A, Responsive Maintenance, dictates that routine maintenance requests
       are to be made to the property manager via weekly visits or toll-free telephone calls to the
       main office. The request is entered on a work order that includes the date and time the
       request was made and is assigned to a site technician. Generally, work is performed
       within a 48-hour period unless emergency conditions require prompt attention.



                                                 45
Provisions of HUD Handbook 4350.3, Occupancy Requirements for Subsidized Multifamily
Projects:

   •   Chapter 3, section G(2), Assigning Units Larger Than Required, states that a single
       person must not be permitted to occupy a unit with two or more bedrooms, except for the
       following persons: (1) a person with a disability who needs a larger unit as a reasonable
       accommodation, (2) a displaced person when no appropriate-size unit is available, (3) an
       elderly person who has a verifiable need for a larger unit, and (4) a remaining family
       member of a resident family when no appropriate-size unit is available.

   •   Chapter 5, section 3, paragraph 5-12(A), states the following as key requirements for
       income verification: (1) Owners must verify all income, assets, expenses, deductions,
       family characteristics, and circumstances that affect family eligibility or level of
       assistance; (2) Applicants and adult family members must sign consent forms to authorize
       the owner to collect information to verify eligibility, income, assets, expenses, and
       deductions. Applicants and tenants who do not sign required consent forms will not
       receive assistance; (3) Family members six years of age and older must provide the
       owner with a complete and accurate Social security number. For any members of the
       family who do not have a Social Security number, the applicant or family member must
       certify that the individual has never received a Social Security number.

The management plan is part of the management agreement between the project owner and
Chartwell. Section IV of the plan dictates that a high level of occupancy will be maintained by
constant marketing efforts to target groups of potential residents and word-of-mouth referrals.
Brochures and flyers and presentations at community functions are used to encourage applicants
as needed. Inquiries are answered by a 24-hour answering services as well as regular staff
available at posted hours to show units.

HUD Handbook 4370.2, Financial Operations and Accounting Procedures for Insured
Multifamily Projects, paragraph 2-6E, stipulates that all disbursements from the regular
operating account must be supported by approved invoices/bills or other supporting
documentation. The request for project funds should only be used to make mortgage payments,
make required deposits to the reserve for replacements, pay reasonable expenses necessary for
the operation and maintenance of the project, pay distributions of surplus cash permitted, and
repay owner advances authorized by HUD.

HUD Handbook 4381.5, The Management Agent Handbook, paragraph 6.50(a), provides that the
management agent is expected to solicit written cost estimates from at least three contractors or
suppliers for any contract, ongoing supply, or services which are expected to exceed $10,000 per
year. Paragraph 6.50(b) provides that for any contract, ongoing supply, or service estimated to
cost less than $5,000 per year, the agent should solicit verbal or written cost estimates to ensure
that the project is obtaining services, supplies, and purchases at the lowest possible cost. The
agent should make a record of any verbal estimates obtained. In addition, paragraph 6.50(c)
prescribes that documentation of all bids should be retained as a part of the project records for
three years following the completion of the work.
                                                46
24 CFR (Code of Federal Regulations) 236.60(g)(2) states that a narrative description of the
amount and the uses made of excess income during the prior fiscal year of the project is required.
The report must contain the following wording: “I certify that (1) the amount of excess income
retained and used was for the purposes approved by HUD, (2) all eligibility requirements for
retaining excess income were satisfied for the entire reporting period, and (3) all the facts and
data on which this report is based are true and accurate.” The monthly report of excess income
(HUD 93104) shows total gross rental income collections in excess of approved basic rent per
unit for all units in the project. Owners/management agents are required to keep copies of the
completed forms as part of the books and records of the project for at least seven years from the
dates the forms are prepared.




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