oversight

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)

                                                       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