oversight

HUD's Office of Multifamily Housing Needs a Uniform Process to Ensure That Commercial Rent Rates Are Comparable to Market Rate Rents

Published by the Department of Housing and Urban Development, Office of Inspector General on 2009-09-25.

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

                                                               Issue Date
                                                                        September 25, 2009
                                                               Audit Report Number
                                                                            2009-KC-0002




TO:        Carol J. Galante, Deputy Assistant Secretary, Multifamily Housing Programs, HT

           //signed//
FROM:      Ronald J. Hosking, Regional Inspector General for Audit, 7 AGA


SUBJECT: HUD’s Office of Multifamily Housing Needs a Uniform Process to Ensure That
           Commercial Rent Rates Are Comparable to Market Rate Rents


                                   HIGHLIGHTS
 What We Audited and Why

             We audited the U.S. Department of Housing and Urban Development’s (HUD)
             process for reviewing and approving commercial rents for multifamily properties.
             We performed this audit to follow up on a previous audit, report # 93-SE-11-
             0001, which disclosed that the regional HUD office did not ensure that properties
             received commercial rents that were comparable to market rate rents. Our
             objective was to determine whether HUD’s review and approval process for
             commercial rents ensured that multifamily properties received commercial rents
             that were comparable to market rate rents.

 What We Found


             HUD’s Office of Multifamily Housing did not have a uniform process to ensure
             that commercial rent rates were comparable to market rate rents. HUD’s Office
             of Multifamily Housing, Asset Management Division, allowed each regional
             office to establish its own procedures for determining the adequacy of commercial
             rents. As a result, multifamily properties may not have received an appropriate
             level of rents for all commercial space.
What We Recommend

           We recommend that the Deputy Assistant Secretary of Multifamily Housing
           Programs, develop and implement a uniform, written process to ensure that
           regional and field office staff fully understand and uniformly comply with
           requirements to ensure that owners set commercial rents at appropriate levels.

           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. Please furnish us copies of any correspondence or
           directives issued because of the audit.


Auditee’s Response


           We provided the discussion draft of the audit report to HUD on August 31, 2009,
           and requested its comments by September 15, 2009. HUD provided its written
           response on September 18, 2009, and generally agreed with the finding and
           recommendation.

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




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                           TABLE OF CONTENTS

Background and Objective                                                          4

Results of Audit                                                                  5
      Finding: HUD’s Office of Multifamily Housing Did Not Have a Uniform
                Process to Ensure That Commercial Rent Rates Were Comparable to
                Market Rate Rents

Scope and Methodology                                                             7

Internal Controls                                                                 8

Appendix
   A. Auditee Comments and OIG’s Evaluation                                       9




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                      BACKGROUND AND OBJECTIVE

The U.S. Department of Housing and Urban Development’s (HUD) Office of Asset Management
is responsible for oversight of multifamily properties after development. The office develops
policy for and oversees field office asset management operations. It is also responsible for
oversight of regulated property ownership and management, routine mortgage servicing, default
servicing, acquisition and disposition of loans (mortgage notes) and properties, and management
of properties for which HUD is the owner or lender in possession.

Our audit related specifically to the HUD multifamily properties with commercial space(s) that
were rented to commercial tenants. Property owners and management agents are required to
lease the commercial space at comparable market rates, at least covering debt service and related
operating costs. Commercial space is to be self-sustaining and operate in a financially sound
manner. HUD multifamily asset managers are responsible for reviewing and approving the
commercial rents.

Our objective was to determine whether HUD’s review and approval process for commercial
rents ensured that multifamily properties received commercial rents that were comparable to
market rate rents.




                                                4
                                RESULTS OF AUDIT

Finding: HUD’s Office of Multifamily Housing Did Not Have a
           Uniform Process to Ensure That Commercial Rent Rates
           Were Comparable to Market Rate Rents
HUD's Office of Multifamily Housing did not have a standardized process for determining
whether commercial rent rates were comparable to market rate rents. HUD’s Asset Management
Division within the Office of Multifamily Housing, allowed each regional office to establish its
own procedures for determining the adequacy of commercial rents. As a result, multifamily
properties may not have received an appropriate level of rents for all commercial space.



HUD Did Not Have a
Uniform Process to Ensure
That Commercial Rent
Requirements Were Met


              HUD did not have a uniform process for reviewing and approving commercial
              rent rate amounts to ensure that they were adequate. HUD requires owners to set
              commercial rents at market rate levels or, at least, at levels that will cover the
              commercial space’s share of project debt service and operating expenses. HUD
              multifamily asset managers are responsible for reviewing and approving the
              commercial rents.

              Although responsible for reviewing and approving commercial rents, none of the
              HUD asset managers interviewed, for the four properties in our sample, knew the
              market rent rates for his or her respective properties. Additionally, none of the
              other HUD field office personnel interviewed knew of or performed rental studies
              to determine the fair market value of multifamily property commercial space.
              Further, HUD personnel did not have the information necessary to determine
              whether the commercial rents were sufficient to cover the cost of operating the
              commercial space.

              In general, when a commercial rent increase request came to an asset manager,
              the asset manager approved it. If something suspicious or abnormal was readily
              apparent or if HUD’s Real Estate Assessments Center’s review of the property’s
              audited financial statements identified anything unusual, the asset manager may
              have reviewed the rent increase request(s) with more scrutiny. Otherwise, asset
              managers did not normally apply extra scrutiny before approving requested rents
              for commercial space.




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            The New York City hub was the only field office reviewed that had a written
            procedure for the review and approval of commercial rents. This hub required
            property owners to provide market rent data that they had developed when
            submitting requests to HUD to approve commercial space leases. This procedure
            provided the New York hub with data to consider when reviewing the request to
            approve commercial rent rates. Neither of the other two field offices reviewed
            had these or other written review procedures.

Multifamily Properties
May Not Have Received
Appropriate Levels of Rent


            Multifamily properties may not have received the fair market value for
            commercial space or, at least, rent sufficient to cover the cost of operating the
            space. HUD did not know the market value rents or the costs to operate the
            commercial spaces, and, therefore, it could not determine whether the rent
            requirements were met before approving the commercial rent requests submitted.
            Because the market value was unknown for the four properties reviewed, we
            could not determine whether the commercial space rates charged were at
            appropriate levels.

Recommendation

            We recommend that the Deputy Assistant Secretary of Multifamily Housing
            Programs

            1A.    Develop and implement a uniform, written process to ensure that regional
                   and field office staff fully understands and uniformly complies with
                   requirements to ensure that owners set commercial rents at appropriate
                   levels.




                                             6
                       SCOPE AND METHODOLOGY

Our audit covered the period January 1, 2007, through December 31, 2008. We performed our
on-site audit at the Denver, St. Louis, and New York multifamily hubs from March 10 through
April 1, 2009.

To accomplish our objectives, the Office of Multifamily Housing, Asset Management Division,
in headquarters provided to us a list of all properties with commercial space between January 1,
2007, and December 31, 2008. The list included information such as the corresponding property
name, property identification number, Federal Housing Administration number, property
address, responsible hub jurisdiction, property owner and/or management agent name, property
owner and/or management agent address, and amount of monthly rent charged for the
commercial space according to its audited financial statements.

We selected our sample from a nationwide universe of 974 properties with more than $52
million in commercial rents reported during 2007 and 2008. To help us gather information more
efficiently, we chose properties with subsidized units in three large metropolitan areas that also
had an OIG office: Denver, Colorado; Brooklyn, New York; and St. Louis, Missouri. We
reviewed the properties that had the highest amount of commercial rents in each of those cities as
reported during 2007. We added a fourth property in Denver, Colorado because its proximity to
our office. We interviewed multifamily hub staff and officials in Denver, St. Louis, and New
York. We reviewed the four related asset management files, rent schedules, and annual financial
statements. We also visited the commercial space and spoke with the property owner or
management agent.

We used the computer-generated data list provided by headquarters to obtain background
information and as a basis to select multifamily properties with commercial rent space to audit. We
did not use computer-generated data as evidence to support our audit conclusions.

We conducted the audit in accordance with generally accepted government auditing standards.
Those standards require that we plan and perform the audit to obtain sufficient, appropriate
evidence to provide a reasonable basis for our findings and conclusions based on our audit
objective. We believe that the evidence obtained during our audit provides a reasonable basis for
our finding and conclusions based on our audit objective.




                                                 7
                              INTERNAL CONTROLS
Internal control is an integral component of an organization’s management that provides
reasonable assurance that the following controls are achieved:

     •   Program operations,
     •   Relevance and reliability of information,
     •   Compliance with applicable laws and regulations, and
     •   Safeguarding of assets and resources.

Internal controls relate to management’s plans, methods, and procedures used to meet its
mission, goals, and objectives. They include the processes and procedures for planning,
organizing, directing, and controlling program operations as well as the systems for measuring,
reporting, and monitoring program performance.



 Relevant Internal Control


              We determined that the following internal control was relevant to our audit
              objective:

              •       HUD policies and procedures for ensuring that multifamily commercial
                      property rents are accurate and compliant.

              We assessed the relevant control 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 audit, we did not identify any significant weaknesses.




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Appendix A

        AUDITEE COMMENTS AND OIG’S EVALUATION

Ref to OIG Evaluation    Auditee Comments




Comment 1




Comment 2




Comment 3




                          9
                          OIG Evaluation of Auditee Comments

Comment 1 The "Identity of Interest" problem discovered during the prior audit was
          mentioned during the exit conference to disclose details behind what occurred, but
          does not have any bearing on our current audit effort, and in our opinion, would
          not enhance the clarity of the final audit report.

Comment 2    HUD Handbook 4350.1, Chapter 7, Section 8, Charges For Commercial-
             Facilities, 7-41. Determining Charges, provides HUD's guidance relating to
             properties with commercial rents. The guidance specifically states that,
             "Generally, Field Offices should require owners to set commercial rents at least at
             levels that will cover the commercial space's share of project debt service and
             operating expenses." We left the wording in the report as it was to be consistent
             with the wording in the handbook.

Comment 3    We agree that HUD's intended action(s) should adequately address our audit
             recommendation.




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