U.S. Department of Housing and Urban Development Office of Inspector General Region IX 611 West Sixth Street, Suite 1160 Los Angeles, California 90017-3101 Voice (213) 894-8016 Fax (213) 894-8115 Issue Date June 16, 2009 Audit Report Number 2009-LA-0801 MEMORANDUM FOR: Dominique G. Blom, Deputy Assistant Secretary, Office of Public Housing Investments, PI FROM: Joan S. Hobbs Regional Inspector General for Audit, 9DGA SUBJECT: Corrective Action Verification Housing Authority of Maricopa County – Mixed-Finance Development Activities, Phoenix, Arizona Audit Report 2005-LA-1002 INTRODUCTION We performed a corrective action verification for audit recommendation 1F of Audit Report 2005-LA-1002: Housing Authority of Maricopa County – Mixed Finance Development Activities. The purpose of the corrective action verification was to determine whether U.S. Department of Housing and Urban Development (HUD) officials appropriately closed audit recommendation 1F in accordance with the management decision dated July 12, 2005. SCOPE AND METHODOLOGY Our corrective action verification focused on recommendation 1F from Audit Report 2005-LA- 1002: Housing Authority of Maricopa County – Mixed Finance Development Activities, issued March 14, 2005. We reviewed the audit report and associated supporting documentation, as well as the HUD management decision. We also reviewed applicable HUD regulations and the recorded documents at the Maricopa County Recorder’s Office. Finally, we consulted with officials at the HUD Office of Inspector General (OIG) Office of General Counsel. BACKGROUND On March 14, 2005, we issued audit report 2005-LA-1002 on the Housing Authority of Maricopa County’s (Authority) management and development of two mixed-finance housing projects—Rose Terrace and Maricopa Revitalization. The audit report noted that the Authority did not obtain required HUD approval of its mixed-finance proposals for Rose Terrace and Maricopa Revitalization. The Rose Terrace project was completed in December 2002, and the Maricopa Revitalization project was completed around October 2003. The audit determined that, because the Authority did not obtain HUD approval for the mixed-finance projects, it also did not or could not make amendments to its declaration of trust, which were required by HUD to protect the low-income character of the developments and HUD’s interest. The report included six recommendations, and recommendation 1F specifically addressed the Authority’s failure to appropriately amend the declarations of trust as follows: We recommended that the Deputy Assistant Secretary for Public Housing Investments 1F. As part of the ongoing approval process, require the Authority to prepare and submit to HUD for approval the appropriate amendments to its declaration of trust for the units included in these projects. RESULTS OF REVIEW Our corrective action verification found that HUD officials inappropriately closed audit report 2005-LA-1002 recommendation 1F. Although the declarations of restrictive covenants were not properly recorded, HUD officials closed the recommendation without obtaining an opinion from HUD’s Office of General Counsel which stated that this condition posed no significant risk to HUD. Criteria Our audit recommendation was based on guidance for mixed-finance evidentiary materials and criteria in the mixed-finance amendment to the consolidated annual contributions contract. The guidance stated that the housing authority should submit to HUD for review evidentiary materials required in conjunction with a mixed-finance public housing development. A declaration of restrictive covenants (declaration) is the first document to be recorded and assures HUD that the public housing units will be subject to a covenant obligating the owner entity and public housing authority (and any successors in title) to (1) Maintain and operate the public housing units for the period required by law in compliance with all applicable public housing requirements, including the annual contributions contract and the mixed-finance annual contributions contract amendment, and (2) Not to encumber, demolish, or sell the public housing units without HUD approval. 2 The mixed-finance amendments to the consolidated annual contributions contract stated that the Authority shall require the owner entity to execute and file for record against the development, before recording any other encumbrances, a declaration of restrictive covenants in the form approved by HUD. Recorded Documents We reviewed documents recorded with Maricopa County to verify that the Authority appropriately executed and recorded declarations when it obtained retroactive approval of the projects from HUD. For each of the two mixed-finance projects, the declarations were not filed in the first position, and the declaration of affirmative land use and restrictive covenants agreements1 were not subordinated to HUD’s declaration. The recorded documents for the two mixed-finance projects with the Maricopa County Recorder’s Office showed that the Arizona Department of Housing’s declaration of affirmative land use and restrictive covenants agreements for both projects were recorded before the HUD declaration of restrictive covenants. There was a subordination recorded in June 2008 for the Maricopa Revitalization project (subordination of deed of trust); however, this document subordinated the deed of trust and not the declaration of affirmative land use and restrictive covenants agreement. The following table lists the pertinent recorded documents. Project Document recorded Date recorded Maricopa Deed of Trust2 Aug. 14, 2003 Revitalization Maricopa Declaration of Affirmative Land Use and Jan. 8, 2004 Revitalization Restrictive Covenants Agreement Maricopa Declaration of Restrictive Covenants Aug. 24, 2007 Revitalization Maricopa Subordination of Deed of Trust Jun. 19, 2008 Revitalization Declaration of Affirmative Land Use and Rose Terrace Aug. 8, 2003 Restrictive Covenants Agreement Rose Terrace Declaration of Restrictive Covenants Apr. 11, 2007 HUD’s Retroactive Approval We reviewed allegations that HUD officials retroactively approved the Maricopa Revitalization and Rose Terrace projects despite advice from the HUD Office of General Counsel that the declarations should be filed in the first position. Internal HUD documents showed that the Authority requested a waiver of the requirement to subordinate the declaration of affirmative land use and restrictive covenants agreement to the declaration. HUD’s Office of General Counsel denied the waiver, stating that HUD would incur significant legal risks if the document 1 Agreement between the owner entity of the projects (Maricopa Revitalization Partnership/Rose Terrace Development Partnership) and the Arizona Department of Housing regarding federal low-income housing tax credits to the projects. 2 Between Maricopa Revitalization Partnership and the Housing Authority of Maricopa County. 3 was not subordinated to the declaration. According to the reply from HUD’s Office of General Counsel, because the tax credit declaration of affirmative land use and restrictive covenant was recorded before HUD’s declaration, the owner could sell the project without retaining HUD’s restrictions. Specifically paragraph 2(g) of the declaration of affirmative land use states that the owner may sell the project as long as it notifies the buyer in writing that the project is subject to the declaration of affirmative land use. Additionally, paragraph 2(j) prohibits the owner from encumbering the project unless the encumbrance complies with tax credit restrictions and loan documents. Conclusion HUD officials closed recommendation 1F despite concerns by HUD’s Office of General Counsel that the recorded status of the declaration posed a significant risk to HUD. HUD OIG Office of General Counsel agreed with this conclusion. If HUD program officials determined that it was appropriate to grant retroactive approval in this manner, they should have requested a revised management decision to reflect the conditions of HUD’s retroactive approval. Moreover, HUD’s 2005 management decision stated that additional review of the revised project documentation was required to ensure legal sufficiency. Because HUD’s Office of General Counsel did not concur, we question whether legal sufficiency was ensured. RECOMMENDATION Based on the results of our review, we are reopening recommendation 1F from Audit Report 2005-LA-1002 because HUD program officials inappropriately closed the recommendation without an opinion from HUD’s Office of General Counsel that stated the recorded status of the covenants posed no significant risk to HUD. In accordance with Audits Management System Handbook 2000.06, REV-3, paragraph 8-1C, the reopened recommendation should have the final action taken within 180 calendar days of the date of this memorandum. Within 30 days, please prepare an action plan with target dates for implementing the corrective action for the reopened recommendations. The plan should be provided to HUD OIG for review and concurrence. AUDITEE’S RESPONSE We provided a discussion draft report to your office on April 23, 2009, and held an exit conference with your representative on May 6, 2009. Your department provided written comments on May 22, 2009. It generally disagreed with our findings. The complete text of the auditee’s memorandum response, along with our evaluation of that response, is in appendix A of this report. Appendix A also reprints Attachment number 7 to the auditee’s memorandum. The remaining attachments contain confidential correspondence or are too voluminous to attach. Attachments numbered 8 and 9, the Regulatory and Operating Agreements for Rose Terrace Apartments and the Maricopa Revitalization project, are available on request. 4 Appendix A AUDITEE COMMENTS AND OIG’S EVALUATION 5 Comment 1 6 Comment 2 7 Comment 3 8 Comment 4 Comment 5 Comment 6 9 10 Comment 7 11 12 OIG Evaluation of Auditee Comments Ref to OIG Evaluation Auditee Comments Comment 1 The attached electronic mail (Attachment 2) did not provide evidence that, at that time, Ms. Forrester, HUD OGC, agreed that there was nothing to waive as there is no regulatory requirement regarding the position of the declaration of trust. The electronic mail only provided evidence that Ms. Forrester stated that she did not believe it is a waiver that can be granted. Comment 2 We acknowledge that title information (which showed the declaration of trust was in second position) for the Maricopa Revitalization Project was not received until after the recommendation was closed in August 2007. This information supported our conclusion that the declarations of restrictive covenants were not recorded in the first position as required and, therefore, the reason we recommend reopening recommendation 1F from Audit Report 2005-LA-1002. Comment 3 We agree with Ms. Forrester’s opinion dated May 19, 2009 in Attachment 7 that 24 CFR 941.610(a)(2)(i) requires that HUD approve an arrangement of public record that will assure to HUD’s satisfaction that the public housing units will be available for use by eligible-low income families in accordance with all applicable public housing requirements for the maximum period required by law. We also note that language in the mixed-finance amendments to the consolidated annual contributions contract between HUD and the Housing Authority of Maricopa County was more restrictive, and stated that the Authority shall require the owner entity to execute and file for record against the development, before recording any other encumbrances, a declaration of restrictive covenants in the form approved by HUD. Comment 4 We do not agree with option (1) because the Office of Public Housing Investments closed the audit recommendation 1F without notifying OIG that HUD OGC had concerns regarding the filing of the declarations of restrictive covenants in the second position. The Deputy Assistant Secretary for Public Housing Investments should have made HUD OIG aware that, although HUD OGC had concerns, a program decision was made to approve the closing documentation despite this condition. The basis of the program decision should also have been provided to OIG at that time. Comment 5 Option (2) does not address our concerns that the declarations of restrictive covenants were not properly recorded. Comment 6 Option (3) presents a possible solution. We could accept a revised management decision that states the Deputy Assistant Secretary for Public Housing Investments should request an amendment to the Declaration of Affirmative Land 13 Use and Restrictive Covenants for Rose Terrace and Maricopa Revitalization to require the owner to notify the Department if the property is sold. Alternatively, the Office of Public Housing Investments could submit a revised management decision for recommendation 1F to explain that the declarations of restrictive covenants for Rose Terrace and Maricopa Revitalization were not recorded in first position and include the reasons this condition was determined to be acceptable. In addition the revised management decision and corrective action plan should disclose the communications with HUD OGC. Comment 7 When HUD closed recommendation 1F in August 2007, it did not disclose the fact that HUD OGC identified some risk to HUD’s interests in allowing the declaration to be recorded in second position but ultimately advised that it was a business and policy decision as to whether recording the declaration in second position was satisfactory. This information, provided here in the May 19, 2009 letter from HUD’s Assistant General Counsel, should have been disclosed to the OIG. 14
Corrective Action Verification, Housing Authority of Maricopa County, Mixed-Finance Development Activities, Phoenix, Arizona
Published by the Department of Housing and Urban Development, Office of Inspector General on 2009-06-16.
Below is a raw (and likely hideous) rendition of the original report. (PDF)