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)

                                                        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)


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.

 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

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

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

    The specific standards not followed include planning, internal controls and communications.

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,

                                    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

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


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.

    $26,574 for the Bath Housing Authority and $5,725 for the Brunswick Housing Authority.


Appendix A

                         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.

Appendix B


Ref to OIG Evaluation              Auditee Comments



Comment 1


Comment 2


Appendix B


Ref to OIG Evaluation              Auditee Comments




Comment 2 



Appendix B


Ref to OIG Evaluation              Auditee Comments






Appendix B


Ref to OIG Evaluation              Auditee Comments






                          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.