U. US Department of Housing and Urban Development Office of Ins Inspector General for Audit, Region I Thomas P. O’Neill, Jr. Federal Building 10 Causeway Street, Room 370 Boston, Massachusetts 02222-1092 Phone (617 7 ) 994-8380 Fax (617) 565-6878 Internet http://www.hud.gov/offices/oig/ January 27, 2009 Audit Memorandum No: 2009-BO-1801 MEMORANDUM FOR: Robert P. Cwieka, Acting Director, Office of Public and Indian Housing, Boston Hub, 1APH FROM: John A. Dvorak, Regional Inspector General for Audit, 1AGA SUBJECT: Housing Authorities at Bath and Brunswick, Maine, Overpaid Basic Rent and Housing Assistance Payments for Section 8 Tenants in a Subsidized Multifamily Project (Orchard Court) INTRODUCTION We performed an audit of the Orchard Court project, a Section 236 multifamily property, located in Bath, Maine. As part of our audit, we reviewed subsidy payments made to Orchard Court from Bath and Brunswick, Maine, Housing Authorities (Authorities). Our objective was to determine whether Section 8 voucher program subsidies paid to Orchard Court from the Authorities were for basic rent,1 rather than market rent. The Authorities did not always pay basic rents failing to follow applicable U.S. Department of Housing and Urban Development (HUD) requirements in determining Section 8 rental subsidies for the tenants housed at the Orchard Court project. 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. If you agree with our recommendations, please describe what actions you plan to take to correct the deficiencies. If you disagree, your response should fully explain the reasons for the disagreement. In addition, please furnish us copies of any correspondence or directives issued because of the recommendations. 1 Basic rent is the minimum rent a tenant would pay under the Section 236 HUD-subsidized housing program, and market rent is the rent a property would obtain from any tenant if the rental unit was free of income restrictions and available for leasing. METHODOLOGY AND SCOPE Our audit of the Orchard Court project generally covered the period October 1, 2004, through September 30, 2007, and was expanded to cover other periods as needed. From October 1, 2004, through September 30, 2007, the project’s financial records coincide with the federal fiscal year. The Orchard Court project is a landlord common to both the Bath and Brunswick Housing Authorities. We reviewed payments made by the Authorities to the project under four different management agents that managed Orchard Court from October 2004 to February 2008. We reviewed the tenant files at the project, interviewed management agent personnel, and obtained supporting documents from the management agents and from Section 8 voucher program representatives at both the Bath and Brunswick Housing Authorities. We also reviewed applicable laws, regulations, and other requirements relating to control weaknesses and our audit objective. During our review, we selected sample tenant files from the period October 2004 to February 2008 and reviewed the file documentation and supporting data for new and recertified tenants. The information we developed pertaining to the Bath and Brunswick Housing Authorities was obtained in regard to their overpayment of subsidies for units at Orchard Court. We also interviewed Authority officials regarding their policies and procedures for leasing and compared their statements to the information contained in the project’s applicant/tenant files. Generally accepted government auditing standards2 were not fully followed for the review of the overpayment of subsidies, since we did not initially plan to review this subject area and our primary audit scope and focus of the assignment was limited to Orchard Court’s project administration. Also, we did not communicate with the HUD Office of Public and Indian Housing or with the Authorities in advance of reviewing this area. When we obtained the data from the Authorities on the overpayments made to the project, we did not fully assess the internal control processes of the Authorities as they pertained to these payments. However, the fact that we did not fully comply with the audit standards did not have a material effect on our audit results. The issue of overpayments by the Authorities was reportable but not materially significant. BACKGROUND Orchard Court is a scattered-site duplex project with 70 two-bedroom units located in Bath, Maine. One of the units is used as an on-site office. In 1994, HUD provided a flexible subsidy residual receipts loan to the project for $3.2 million. All of the project’s units operate under the provisions of Section 236 of the National Housing Act. 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. 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. Several tenants also receive subsidies, as Section 8 voucher holders, from the Bath or Brunswick Housing 2 The specific standards not followed include planning, internal controls and communications. 2 Authority. Residents of Bath, Maine, can qualify for Section 8 vouchers from either Authority since the Authorities share jurisdiction. The Section 236 program was established to facilitate the construction and substantial rehabilitation of affordable multifamily rental housing for lower income households. In return for this preferential treatment, Orchard Court agreed to maintain the rental affordability of the project according to program regulations and criteria, which include 24 CFR (Code of Federal Regulations) Part 982. Regulations at 24 CFR 982.521 address Section 8 tenant-based assistance under the Housing Choice Voucher program. Subpart K (Rent to Owner in Subsidized Project) states: “(a) This regulation is applicable to subsidized projects which include tenancy in both insured and non- insured Section 236 projects; and (b) Rent to owner is the subsidized rent as determined in accordance with these regulations.” It is under these regulations that the owner and the management agents of Orchard Court (and all Section 236, 202, 221(d)(3) below market interest rate, and Section 515 projects) agree to lease their units to low-income tenants at the basic rent. Project tenant files and records are located in the offices of the management agent, C&C Realty Management, in Augusta, Maine. Four different management agents managed the Orchard Court project, from October 2004 to November 2008: Avesta Housing Management Corporation (October 1, 2004-March 31, 2006), Chartwell Management Corporation (April 1, 2006-September 30, 2007), Affordable Housing of New England (October 1, 2007-March 15, 2008), and C and C Realty Management (March 16, 2008-present). RESULTS OF REVIEW The audit included a review of a sample of eight tenant files for the Section 236 project; four of the eight were under a project rent supplement, and the remaining four were under the Section 8 program. These four tenants were Section 8 voucher holders from the Bath and Brunswick Housing Authorities. Of these four tenants, three were charged market rent instead of basic rents. As a result, the Authorities overpaid the project when making the subsidy payments for these three tenants. We made this determination from our review of the rent rolls at the Orchard Court project. It had been determined that the tenants were eligible Housing Choice Voucher program participants; however, the payments made by the Authorities were based on the incorrect rent. The Authorities substantially overpaid Orchard Court for subsidized housing assistance because they were unaware of multifamily program regulations for subsidized projects. Because the Authorities were unaware of the requirements, there was a lack of control in determining rent reasonableness at the time of lease-up of the units and a lack of procedures for obtaining the basic rents established for landlords who have subsidized mortgages through any of the multifamily programs (identified in 24 CFR 982.521K). Regulations at 24 CFR Part 982 limit low-income tenant rents and the Section 8 subsidies paid to the basic rent established for 3 subsidized multifamily projects. During the period July 2005 to February 2008, these overpayments to Orchard Court totaled $26,574 from the Bath Housing Authority and $5,725 from the Brunswick Housing Authority. In addition, there was a potential weakness in all of the rent reasonableness determinations performed by the Authorities in relation to these subsidy payments. The Authorities did not use basic rents to determine rent reasonableness and calculate subsidy amounts for multifamily developments. The Bath and Brunswick Housing Authorities should obtain from the Orchard Court project and repay their Section 8 program the amount identified as overpayments to project totaling $32,299 (projected annual cost) from nonfederal funds.3 RECOMMENDATIONS We recommend that the Director of the Office of Public Housing require the Bath and Brunswick Housing Authorities to 1A. Recover from the Orchard Court project and reimburse $32,299 to the Section 8 program from nonfederal funds. 1B. Develop and implement controls and procedures to ensure that future subsidy payments made for Section 8 unit leases at multifamily developments do not exceed basic rents authorized under 24 CFR 982.521K. 3 $26,574 for the Bath Housing Authority and $5,725 for the Brunswick Housing Authority. 4 APPENDIXES Appendix A SCHEDULE OF QUESTIONED COSTS AND FUNDS TO BE PUT TO BETTER USE Recommendation Funds to be put to number better use 1/ 1A $32,299 1/ Recommendations that funds be put to better use are estimates of amounts that could be used more efficiently if an Office of Inspector General (OIG) recommendation is implemented. These amounts include reductions in outlays, deobligation of funds, withdrawal of interest subsidy costs not incurred by implementing recommended improvements, avoidance of unnecessary expenditures noted in preaward reviews, and any other savings that are specifically identified. 5 Appendix B AUDITEE COMMENTS AND OIG’S EVALUATION Ref to OIG Evaluation Auditee Comments Comment 1 Comment 2 6 Appendix B AUDITEE COMMENTS AND OIG’S EVALUATION Ref to OIG Evaluation Auditee Comments Comment 2 7 Appendix B AUDITEE COMMENTS AND OIG’S EVALUATION Ref to OIG Evaluation Auditee Comments 8 Appendix B AUDITEE COMMENTS AND OIG’S EVALUATION Ref to OIG Evaluation Auditee Comments 9 OIG Evaluation of Auditee Comments Comment 1 The HUD-PIH response to the OIG Draft Memo dated January 15, 2009 identified the memorandum number as 2008-BO-1802. This memo number changed to 2009-BO-1801 on the final memorandum report. Comment 2 The planned actions satisfy the recommendations. The final action target dates for the first recommendation will be recorded when the HUD’s Office of Housing and the Office of Public and Indian Housing reach an agreement on when the Orchard Court project can make restitution. Also, the closure of the second recommendation will occur when the Office of Public and Indian Housing has published the advisory letter to all public housing authorities in the Region. 10
Housing Authorities at Bath and Brunswick, Maine, Overpaid Basic Rent and Housing Assistance Payments for Section 8 Tenants in a Subsidized Multifamily Project (Orchard Court)
Published by the Department of Housing and Urban Development, Office of Inspector General on 2009-01-27.
Below is a raw (and likely hideous) rendition of the original report. (PDF)