oversight

Alameda County HOME Investment Partnership Consortium Did Not Use Program Funds in Compliance with HUD Requirements

Published by the Department of Housing and Urban Development, Office of Inspector General on 2008-11-26.

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

                                                                             Issue Date
                                                                                 November 26, 2008
                                                                             Audit Report Number
                                                                                    2009-LA-1004




TO:               Steven B. Sachs, Director, Community Planning and Development Division, 9AD



FROM:             Joan S. Hobbs, Regional Inspector General for Audit, Region IX, 9DGA

SUBJECT:          Alameda County HOME Investment Partnership Consortium Did Not Use Program
                  Funds in Compliance with HUD Requirements

                                             HIGHLIGHTS

    What We Audited and Why

           We reviewed the Alameda County HOME Investment Partnership Consortium’s (the
           consortium) use of HOME Investment Partnerships Program (HOME) funds to determine
           whether it used its allocation of HOME funds in accordance with U.S. Department of
           Housing and Urban Development (HUD) rules and regulations. We performed the
           review because there was a high risk for noncompliance due to a lack of HUD monitoring
           since 2003.

    What We Found

           Six of the consortium’s 22 construction and rehabilitation projects had construction
           commencement delays for unreasonably long periods, ranging from 31 to 81 months.
           Total development costs on the six delayed projects increased by more than $15 million.
           The consortium used an additional $5.6 million in HOME funds to cover the increase.

           We also noted that one of the American Dream Downpayment Initiative (downpayment
           initiative1) projects provided $81,873 in excessive assistance to home buyers.
           Specifically, the consortium used the appraised market value instead of the actual
           purchase price of the homes to calculate the six percent maximum limitation for
           downpayment assistance. Moreover, the consortium did not comply with HUD’s
           requirements for committing HOME funds within 24 months from the date the funds
           became available to the consortium. Specifically, the consortium entered HOME funds
           into HUD’s Integrated Disbursement and Information System (information system)
           without executing a binding agreement within 24 months from the date the funds were
1
    The downpayment initiative is an affordable housing downpayment assistance portion of the HOME program.
     allocated to the consortium. This action provided incorrect information to HUD, leading
     it to believe that the consortium was in compliance with the 24-month commitment
     requirement.

What We Recommend

     We recommend that the Director of the San Francisco Community Planning and
     Development Division require the consortium to

                Repay the consortium’s HOME trust fund more than $5.6 million from
                nonfederal sources for HOME funds used to pay for the cost increases
                resulting from unreasonable lengthy construction delays and implement
                policies and procedures to plan and monitor HOME projects in a more
                efficient manner to ensure that foreseeable construction delays do not occur.

                Repay the consortium’s HOME trust fund $81,873 from nonfederal sources
                for the ineligible use of downpayment initiative assistance and implement
                policies and procedures to ensure that downpayment assistance is calculated
                using the purchase price.

                Review all agreements for the use of HOME funds entered into the
                information system from October 1998 to the present and change the entry
                dates to the dates of the agreements; repay HUD or have the consortium’s
                future funding reduced by the amount determined not to have been committed
                within the requisite 24-month period; and implement policies, procedures, and
                internal controls to comply with HUD’s statutory and regulatory requirements
                for committing HOME funds within 24 months from the time HUD allocates
                them to the consortium.

     For each recommendation 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 our discussion draft report to the Alameda County Housing and Community
     Development Department on October 21, 2008, and held an exit conference with the
     consortium’s officials on October 29, 2008. The consortium provided written comments
     on November 5, 2008. The consortium generally disagreed with our report. The
     complete text of the auditee’s response (with the exception of auditee’s Appendix B
     [comprised of copies of downpayment initiative contracts], which was redacted due to its
     voluminous nature and identification of individual homebuyers’ names and addresses),
     along with our evaluation of that response, can be found in appendix B of this report.




                                             2
                          TABLE OF CONTENTS
Background and Objectives                                                    4

Results of Audit
   Finding 1: Construction on Six New Construction and Rehabilitation HOME   5
              Projects Did Not Commence within the Required Amount of Time
   Finding 2: The Consortium Used HOME Funds to Pay Excessive Downpayment    8
              Assistance to Homebuyers
   Finding 3: The Consortium Did Not Commit Funds within 24 Months           10

Scope and Methodology                                                        13

Internal Controls                                                            14

Appendixes
   A. Schedule of Questioned Costs                                           16
   B. Auditee Comments and OIG’s Evaluation                                  17
   C Criteria                                                                54




                                         3
                     BACKGROUND AND OBJECTIVES

The Alameda County Housing and Community Development Department (Department) was
established in 1975 pursuant to the Housing and Community Development Act of 1974. The
Department is an integral part of the Alameda County Community Development Agency. The
Department is the lead agency for the Alameda County HOME Investment Partnership
Consortium (the consortium). The consortium includes the cities of Alameda, Fremont,
Hayward, Livermore, Pleasanton, San Leandro, and Union City and the Alameda Urban County
(which includes the unincorporated areas of Alameda County and the cities of Albany, Dublin,
Emeryville, Newark, and Piedmont). The consortium is the second largest HOME Investment
Partnerships Program (HOME) entitlement jurisdiction in the San Francisco Bay area with a
current total population of 982,132, comprising 65.5 percent of Alameda County’s population.

The consortium receives an annual allocation of HOME funds, which is divided among the eight
Community Development Block Grant entitlement jurisdictions. In addition, as mandated by the
U.S. Department of Housing and Urban Development (HUD), 15 percent of the annual funding
is set aside for community housing development organizations (community organizations).
Community organizations are locally based nonprofit organizations, which provide affordable
housing to lower income persons.

The Department coordinates and monitors the consortium’s participation in the HOME program.
It also administers urban county and community organization projects, while the rest of the cities
administer their own HOME funding allocations.

Our objective was to determine whether the consortium used its HOME funding allocations in
compliance with HUD requirements.




                                                4
                                 RESULTS OF AUDIT

Finding 1: Construction on Six New Construction and Rehabilitation
HOME Projects Did Not Commence within the Required Amount of
Time
Of 22 construction and rehabilitation projects active during the period between July 1, 2004, and
June 30, 2007, construction work did not commence within the required amount of time on six
projects. Contrary to regulatory requirement to commence construction within the required period
(12 months), construction on these six projects did not commence for 31 to 81 months from the date
the binding agreements for the use of HOME funds were executed. This condition occurred
because the consortium committed HOME funds to projects before satisfying other contingencies
(additional financing, zoning and environmental issues, property liens, etc.) needed for projects to
move forward. As a result, HOME funding unnecessarily increased by more than $5.6 million.




 Construction and Rehabilitation Work
 Did Not Commence for Unreasonably
 Long Periods

       Between July 1, 2004, and June 30, 2007, the consortium had 22 active construction and
       rehabilitation projects with more than $24 million entered into the HUD’s Integrated
       Disbursement and Information System (information system). Contrary to the regulatory
       requirements at 24 CFR (Code of Federal Regulation) 92.2, construction on six of these
       projects did not commence within a reasonable time after executing binding agreements
       for the use of HOME funds. Specifically, construction on these projects did not
       commence until between 31 and 81 months after HOME funds were committed to them.
       Not commencing construction for more than 24 months was not reasonable because it
       was more than twice the 12 months prescribed by regulations as a reasonable amount of
       time for commencing construction.

 HOME Funding for Construction and
 Rehabilitation Projects Increased by
 More than $5.6 Million

       Because of construction delays on the six projects, the total development costs increased
       by more than $15 million, including more than $5.6 million in increased HOME funding.
       A large portion of the cost increases was paid with HOME funds. The table below shows
       each of the six projects’ total development costs and HOME funding.




                                                 5
                              Actual/most
           Proposed total                          Total           Initial         Final       Increase in
Project                       current total
            development                        development        HOME            HOME           HOME
  no.                         development
                cost                           cost increase      funding         funding        funding
                                  cost
 180        $    9,787,754    $ 12,583,601     $    2,795,847    $ 1,250,000    $ 1,280,000     $   30,000
 193             2,280,000        3,362,953         1,082,953        280,000      1,030,000        750,000
 196             8,043,962       11,589,868         3,545,906        594,773      2,954,853      2,360,080
 239             8,900,000       13,548,023         4,648,023        600,000      1,790,929      1,190,929
 281             8,100,000        8,899,000           799,000        100,000        400,000        300,000
 326            10,135,510       12,714,860         2,579,350        678,500      1,700,481      1,021,981
Totals     $ 47,247,226      $ 62,698,305      $ 15,451,079      $ 3,503,273    $ 9,156,263    $ 5,652,990

            When asked, the consortium officials provided the following reasons for the delays in
            commencing construction work: delays in meeting environmental requirements,
            changing zoning designations, mixed financing, failure to identify a specific project,
            inability to clear a prior state government lien, etc. For example, construction on project
            239 did not commence for 53 months after the initial agreement for the use of $600,000
            in HOME funds was executed. Main reasons for the delay were attributed to
            environmental clearance and re-zoning issues. This project is located on a parcel of land
            that used to be a military base. The consortium committed HOME funds to this project
            without first ensuring construction could commence within a reasonable timeframe.
            Although the particular parcel for this project reportedly had environmental clearance, it
            took more time to obtain clearance for the entire base. In order for any construction work
            to commence, the parcel in question had to be zoned for civilian multifamily. However,
            the City of Alameda could not zone this parcel separately from the rest of the base
            without first transferring ownership of the entire base from the U.S. Department of
            Defense.

            With proper planning and due diligence the barriers that caused unreasonably long
            construction commencement delays could and should have been foreseen and addressed
            before HOME funds were committed and expended on these six projects.

       Conclusion


            The lengthy construction commencement delays resulted in substantial increases in total
            development costs. Over 36 percent of the cost increases on six projects were paid with
            HOME funds. The substantial increases in HOME funding to cover lengthy construction
            delays were neither reasonable nor necessary because with proper planning and diligence
            the causes could and should have been identified, and HOME funds should not have been
            committed to these projects prematurely. It was not prudent for the consortium to use
            more than $5.6 million in limited HOME funds to pay for the total development cost
            increases resulting from foreseeable delays in project planning and management.



                                                     6
Recommendations


    We recommend that the Director of the San Francisco Community Planning and
    Development Division require the consortium to

    1A. Reimburse its HOME Investment Trust Fund $5,652,990 from nonfederal sources
        for the HOME funds used to pay for the cost increases resulting from lengthy
        construction delays.

    1B. Implement policies and procedures to plan HOME projects in a more efficient
        manner to ensure that foreseeable construction delays do not occur and implement
        policies and procedures to monitor construction commencement activities to ensure
        that construction commences within a reasonable period after execution of a
        binding agreement for the use of HOME funds.




                                          7
Finding 2: The Consortium Used HOME Funds to Pay Excessive
Downpayment Assistance to Homebuyers
The consortium provided excessive downpayment assistance on 16 of 17 American Dream
Downpayment Initiative (downpayment initiative) loans. This condition occurred because the
consortium used the appraised market value instead of the actual affordable purchase price of the
homes to calculate the maximum threshold set forth by the applicable regulations. The excessive
downpayment assistance was not an allowable use of $81,873 in HOME funds under the
regulations governing the downpayment initiative program.



 The Consortium Spent $81,873 for
 Downpayment Assistance in Excess of the
 Maximum Allowed Threshold

       On project number 429, the consortium approved downpayment assistance to 17
       homebuyers for a total of $363,817. Contrary to the regulatory requirements at 24 CFR
       92.602(e), the consortium exceeded the maximum allowed threshold of the greater of
       $10,000 or six percent of the purchase price for downpayment assistance using HOME
       funds. Specifically, 16 of the 17 homebuyers received excessive downpayment
       assistance totaling $81,873. The following table shows pertinent details of each of the
       home purchase transactions and the 16 transactions with excessive downpayment
       assistance.

                                6% of purchase
              Purchase price                        Loan amount            Excess
                                      price
                 $ 180,630.00          $ 10,837.80        $ 12,500.00         $ 1,662
                   180,630.00            10,837.80          30,000.00          19,162
                   202,626.00            12,157.56          11,900.00               0
                   559,950.00            33,597.00          33,600.00               3
                   265,680.00            15,940.80          24,651.66           8,711
                   198,000.00            11,880.00          20,590.86           8,711
                   199,440.00            11,966.40          20,677.26           8,711
                   199,440.00            11,966.40          20,677.26           8,711
                   207,360.00            12,441.60          21,152.46           8,711
                   208,440.00            12,506.40          21,217.26           8,711
                   199,440.00            11,966.40          20,677.26           8,711
                   346,320.00            20,779.20          20,796.00              17
                   216,360.00            12,981.60          12,997.00              15
                   301,680.00            18,100.80          18,110.00               9
                   192,600.00            11,556.00          11,573.00              17
                   231,840.00            13,910.40          13,918.00               8
                   228,600.00            13,716.00          13,719.00               3
                      Total excessive downpayment assistance                 $ 81,873




                                               8
 Conclusion


    Calculating the downpayment assistance by using the fair market value of the homes
    instead of the actual purchase price resulted in excessive downpayment assistance. Using
    $81,873 in HOME funds to pay for downpayment assistance in excess of the regulatory
    limitations was not an eligible use of scarce HOME funds. The excessive downpayment
    assistance could and should have been used to help additional low income families to
    achieve homeownership.

Recommendations


    We recommend that the Director of the San Francisco Community Planning and
    Development Division require the consortium to

    2A. Reimburse its HOME Investment Trust Fund $81,873 from nonfederal funds for the
        excessive assistance provided to homebuyers.

    2B. Implement policies and procedures to ensure that downpayment initiative assistance
        is calculated using the purchase price instead of the appraised value of a home.




                                           9
Finding 3: The Consortium Did Not Commit Funds within 24 Months
The consortium entered funds for its projects into the information system without first executing
binding agreements for the use of HOME funds. This condition occurred because the
consortium considered the funds to be committed to a project when it received an application
from a subrecipient. Because of this practice, the consortium did not execute binding agreements
for multiple funding entries on seven of its projects for more than 24 months from the time HUD
allocated those HOME funds to the consortium. Accordingly, the consortium did not commit
HOME funds within the requisite 24 months.


    The Consortium Did Not Commit at
    Least $5.1 Million within 24 Months


         Between July 1, 2004, and June 30, 2007, the consortium had 28 active HOME projects,
         with more than $27 million entered into the information system. Contrary to the statutory
         requirements of 42 U.S.C. (United States Code) 12748(g), the consortium did not commit
         HOME funds to affordable housing projects within 24 months of their allocation.
         Specifically, the consortium did not execute binding agreements for the use of more than
         $5.1 million.2

         The consortium considered the funds committed as of the date it made the funding entry
         into the information system. The information system is HUD’s tracking system for
         verifying compliance with commitment and expenditure requirements of the HOME
         program. However, regulations at 24 CFR 92.2 define “commitment” as a legally
         binding agreement for the use of HOME funds executed by the participating jurisdiction
         and the project owner (for construction and rehabilitation projects) or the property owner
         (for acquisition only projects).

         Contrary to statutory and regulatory requirements, the consortium entered more than $15
         million (or 57 percent of the total funds for the 28 projects we reviewed) into the
         information system without first executing binding agreements. Of the $15 million, the
         consortium entered more than $5.1 million without executing the requisite binding
         agreements for more than 24 months. The following table lists the HOME funds entered
         into the information system with binding agreements executed after the required 24
         months.


2
 Pursuant to HUD’s Community Planning and Development Notice 98-6, as amended, revised, or superseded, HUD
monitors compliance with the 24-month commitment requirement by determining whether a recipient’s cumulative
historical commitments are greater than or equal to the cumulative allocations of HOME funds to the recipient. For
the purposes of this report, the auditors used the current year’s allocation date corresponding to the entry date in the
information system by the consortium. However, the actual compliance determination is to be made during the
implementation process of recommendations 3A and 3B of this report.



                                                          10
                                    Last date of
                                                   HOME loan
                   Information      most recent
        Project                                     agreement/
                   system entry    possible fund
          no.                                      commitment
                       date          allocation
                                                       date           Amount
                                       month

             133   July 29, 1999   Oct. 31, 1998 Sept. 24, 2002     $ 1,444,757
             201   June 25, 2001   Aug. 31, 2000 Sept. 15, 2004       1,169,095
             201   June 25, 2003   July 31, 2002 Sept. 15, 2004         830,905
             239   June 19, 2002   Aug. 31, 2001 Feb. 11, 2004          600,000
             326   May 17, 2004    July 31, 2003  July 1, 2006          519,403
             424   Dec. 20, 2005   Aug. 31, 2005 Dec. 11, 2007          200,000
             287    July 3, 2003   July 31, 2002     None               160,000
             287    June 2, 2005   Aug. 31, 2004     None               112,426
             435   June 22, 2006   Aug. 31, 2005     None               101,698
             435   June 20, 2007   Sept. 30, 2006    None                32,119
                                   Total                            $ 5,170,403


     NOTE: Projects 287 and 435 are downpayment assistance projects for which the
     consortium entered funding into the information system without executing agreements or
     identifying homeowners as of September 30, 2008.

Conclusion


     The consortium did not comply with HUD’s requirements for committing HOME funds
     within 24 months from the date the funds became available to the consortium. The
     consortium’s practice of entering the wrong date into the information system for
     committing HOME funds created a false representation to HUD regarding the
     consortium’s compliance with the 24-month commitment requirement.

Recommendations


     We recommend that the Director of the San Francisco Community Planning and
     Development Division require the consortium to

     3A. Review all agreements for the use of HOME funds for each entry in the information
         system from October 1998 to the present, change the entry dates in the information
         system to the dates of the binding agreements, and redetermine annual compliance
         with the requirement to commit HOME funds within 24 months of HUD’s
         allocating the funds to the consortium.


                                           11
3B. Repay the United States Treasury or have the consortium’s future funding reduced
    by the total amount determined not to have been committed within the requisite 24-
    month period from the date HUD allocated the funds to the consortium.

3C. Implement policies and procedures to comply with HUD’s statutory and regulatory
    requirements for committing funds within 24 months of their allocation to the
    consortium.

3D.    Implement policies and procedures for internal controls to ensure compliance with
      the policies and procedures recommended in recommendation 3C.




                                       12
                        SCOPE AND METHODOLOGY

We performed on-site work at the consortium’s county offices in Hayward, California, from
February through September 2008. Our review covered all 28 acquisition, construction, and
rehabilitation projects active during the period July 1, 2004, through June 30, 2007 (we excluded
all tenant based rental assistance projects). Some of the active projects during our audit period
began as early as 1999. Therefore, we adjusted our audit scope to include all projects active
during the period July 1, 2004, through June 30, 2007. Our objective was to determine whether
the consortium used HOME program funds in accordance with HUD requirements.

To accomplish our objective, we

       Interviewed HUD and consortium personnel to obtain background information about the
       consortium’s operations, policies, and procedures.

       Reviewed the consortium’s accounting records including audited financial statements,
       general ledgers, expenditure vouchers, and supporting documentation.

       Reviewed HUD requirements and regulations regarding the use of HOME funds.

       Reviewed project master files, construction files, individual city files, and project owner
       files.

       Visited and observed ongoing and completed projects.

We performed our review in accordance with generally accepted government auditing standards.




                                                13
                              INTERNAL CONTROLS

Internal control is an integral component of an organization’s management that provides
reasonable assurance that the following objectives are being achieved:

       Effectiveness and efficiency of operations,

       Reliability of financial reporting, and

       Compliance with applicable laws and regulations.

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



 Relevant Internal Controls

       We determined the following internal controls were relevant to our audit objectives:

                  Administering the consortium’s operations in compliance with applicable laws
                  and regulations,

                  Maintaining complete and accurate records, and

                  Safeguarding the consortium’s resources.

       We assessed the relevant controls 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.




                                                 14
 Significant Weaknesses

Based on our review, we believe the following items are significant weaknesses:

           The consortium did not safeguard its resources when it spent more than $5.6
           million on cost increases caused by unreasonably lengthy construction
           commencement delays and when it provided $81,873 in downpayment
           assistance in excess of the maximum threshold specified by the downpayment
           initiative regulations (findings 1 and 2).

           The consortium’s policies, procedures, and operations did not comply with laws
           and regulations requiring the execution of a binding agreement for the use of
           HOME funds before the funds are set up in the information system. In addition,
           the consortium did not maintain complete and accurate records when it recorded
           HOME fund commitment dates before executing binding agreements for the use
           of HOME funds (finding 3).




                                        15
                                   APPENDIXES

Appendix A

                SCHEDULE OF QUESTIONED COSTS

         Recommendation                        Ineligible 1/           Unreasonable or
             number                                                     unnecessary 2/
                1A                                                          $5,652,990
                2A                                 $81,873


    1/      Ineligible costs are costs charged to a HUD-financed or HUD-insured program or
    activity that the auditor believes are not allowable by law; contract; or federal, state, or
    local policies or regulations. We determined that the $81,873, which the consortium
    spent on downpayment assistance, was not allowable by law.

    2/      Unreasonable/unnecessary costs are those costs not generally recognized as
    ordinary, prudent, relevant, and/or necessary within established practices. Unreasonable
    costs exceed the costs that would be incurred by a prudent person in conducting a
    competitive business. We determined that the consortium spent $5,652,990 on costs that
    could have been avoided by exercising ordinary prudent practices.




                                             16
Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation   Auditee Comments




Comment 1




                         17
Comment 2




Comment 1




Comment 3




            18
Comment 1




Comment 2



Comment 3




            19
Comment 4




            20
Comment 5




            21
Comment 6




            22
Comment 7




Comment 8




            23
Comment 9




Comment 10




             24
Comment 11




Comment 12



Comment 13




             25
Comment 14




Comment 15




             26
27
Comment 16




Comment 17




             28
Comment 11




Comment 5




Comment 3




             29
30
Comment 3




            31
32
33
34
35
36
37
38
Redacted for privacy concerns.




                                 39
Comment 13




             40
41
42
43
44
45
                          OIG Evaluation of Auditee Comments

Comment 1   The audit report does not provide an inflexible mischaracterization of the
            regulations found at 24 CFR 92.2. On the contrary, the auditors (in coordination
            with HUD’s Community Planning and Development field office), used a highly
            flexible standard in the application of section 92.2 requirements. Section 92.2
            provides the reasonableness standard for commencing construction after
            committing funds to a construction or rehabilitation project. The regulations state
            that when a participant commits HOME funds to a construction or rehabilitation
            project, it must have a reasonable expectation to commence construction within
            12 months.

            Of the 22 construction and rehabilitation projects reviewed, the auditors found
            construction work had not commenced within 12 months on 11 projects. The
            auditors sited only six of those 11 projects because construction on those six
            projects did not commence for a period ranging between 31 to 81 months. The
            other five projects, whose construction commenced within at least 24 months or
            did not have increases in HOME funding, were not cited in this report. The audit
            report used a very flexible and reasonable standard for citing projects by affording
            twice the time than the reasonable 12 months prescribed by 24 CFR 92.2.

            Furthermore, periodic HUD guidance issued in HOME Fire Volume 3 #5, April
            2001 states:

               The definition of commitment found at 24 CFR 92.2, when referring to a specific local
               project, states that rehabilitation or new construction (with or without acquisition) must
               reasonably be expected to start within twelve months … after the participating
               jurisdiction (PJ) and owner execute a legally binding written agreement….

               The regulations require that construction or rehabilitation be reasonably expected to start
               within twelve months…. When committing HOME funds to a project, a participating
               jurisdiction must have immediate plans to produce such housing….

               A PJ should consider canceling a construction project nearing the end of the twelve
               month period … if it does not appear that construction is likely to begin … within the
               required time frame or within a reasonable period thereafter.

            When more than twice the prescribed reasonable time for commencement of
            construction passed, the construction did not commence within a reasonable time
            after the passage of the initial 12 months. Therefore the delays on the six projects
            identified in Finding 1 were unreasonable by an objective application of 24 CFR
            92.2.

Comment 2   The audit report does not assume that the additional HOME funds spent on the six
            projects identified in Finding 1 were due to construction delays. The total
            development costs of these six projects increased over time. The total
            development costs on these six projects increased by over $15 million (or 32.7
            percent), with HOME funds constituting over $5.6 million of those unplanned



                                                 46
            increases. Therefore, the additional HOME funds were used to pay for the
            increased costs.

            The consortium asserts that construction delays are common, especially in the San
            Francisco Bay area. The consortium further asserts that rising costs over time are
            a reality of the construction industry, especially in the San Francisco Bay area.
            Therefore, the consortium could and should have foreseen such cost increases
            before committing the limited HOME funds to projects that were not
            appropriately planned for immediate production (see HOME Fire Volume 3 #5,
            April 2001).

Comment 3   The brief summary of the causes for construction delays on page 6 of the audit
            report is provided only for general demonstrative purpose. Despite the causes, the
            unreasonably lengthy delays, ranging from 31 to 81 months, on all six projects
            resulted in imprudent use of HOME funds when those funds could have been used
            for other more readily attainable projects. Each project’s delay is addressed
            below.

            Project 180

            The consortium asserts that its different members provide funding for one project
            despite or because their individual shares may at times be inadequate to complete
            a project. Therefore, the consortium has shown the ability to reallocate its
            members’ HOME fund shares in order to pursue a project to its completion.
            Accordingly, the consortium’s assertion that individual members’ or CHDO’s
            annual funding is inadequate to complete a project on time does not provide an
            adequate reason to disregard the regulatory requirement for commencing
            construction within a reasonable amount of time. Moreover, the regulations apply
            to all recipients in a similar and consistent manner. It would be unfair to hold a
            single recipient to a higher standard of compliance than a consortium with
            multiple members.

            Moreover, it was not reasonable for the consortium to expect that obtaining HUD
            section 202 funding was guaranteed for immediate approval because such funding
            is subject to application, review, and approval or denial. Therefore, the
            consortium’s assertion that its expectation for approval of funding was reasonable
            is not supported by the facts.

            Throughout the audit and during the October 30, 2008, exit conference,
            consortium officials asserted and maintained that the consortium committed
            HOME funds based on the information contained in the application for the use of
            HOME funds. The initial application for HOME funding for this project was
            based on a total development cost estimate of $9.7 million, which the consortium
            (though erroneously) deemed sufficiently binding to commit HOME funds. After
            using this application to commit $1.25 million in HOME funds to this project, the
            consortium incurred additional expenses for its completion. The final cost of the



                                            47
project was over $12.5 million. The almost $2.8 million increase in the
development cost included a $30,000 increase in HOME funding. The
consortium’s assertion that the additional HOME funding was part of the original
commitment is not supported by any documentation provided by the consortium.

Project 193

The consortium’s assertion that after acquiring the land for developing this project
it became apparent that costs were going to be higher than originally anticipated
provides another reason for executing an enforceable binding agreement for the
use of HOME funds. If the consortium relied on the application information for
approving HOME funds and executed a binding agreement to fund the project, the
consortium should have had recourse for its reliance on those estimates.

As a steward of limited HOME funds, it was incumbent upon the consortium to
ensure increased costs did not affect the level of federal funding by seeking
enforcement of the terms of the agreement for the use of HOME funds. This is
especially true in light of the cause for increased costs like construction defect
liability insurance. This is a cost borne by the developer and the developer was in
the best position for knowing this cost. Therefore, the developer should have
known and anticipated this cost. The consortium should not have incurred the
increased cost of insurance or the additional consequential and incidental costs of
completely revamping the project. The consortium could and should have also
sought recourse from the previous consultant and developer. Turnover of the
executive director should not have had a significant impact on the increase of total
development costs by over $1 million (or 47.5 percent), which included $750,000
in additional HOME funding.

Notes in the project file depicting conversations with HUD about moving the
project forward after over four years of delay did not change the facts that the
project was delayed unreasonably long and substantial increases in the total
development cost resulted in an additional $750,000 in HOME funding. With
proper planning, the increased costs either could have been avoided or at the least
should not have been paid with HOME funds.

Project 196

Management and staff turnover issues are normal for any organization. Such
issues should have no substantial bearing on increased costs. Construction on this
project did not commence for 49 months after the initial HOME funding
commitment.

Prudent practices would dictate the consortium to select an experienced
community housing development organization. The selection of an inexperienced
organization for such a large project (over $11.5 million) with over $1 million in




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HOME funding was not a prudent use of limited funds for the development of
much needed affordable housing.

Moreover, the consortium admits on page 17 of its comments (Appendix B, page
33 of this report) that at least the additional $309,000 used to pay for work to
comply with the fire code was a foreseeable expense. This expense could and
should have been foreseen, had the architectural planning been prepared in a
prudent manner. At the least, the consortium should have sought relief from the
parties responsible for the improper fire code compliance planning instead of
using additional HOME funds to pay for this necessary work. Furthermore, it was
incumbent upon the consortium to select experienced and prudent consultants,
community housing development organization, contractor, architectural and other
services providers.

Project 239

If the consortium relied on the project developer and suffered increased costs to
the detriment of public funds, then the consortium (as a prudent steward of those
public funds) should have sought adequate remedies from the developer, instead
of approving additional public funds for the project.

After dismissal of the lawsuit, at least two more years passed before commencing
construction. The consortium asserts that during the time between the lawsuit
dismissal and construction commencement it worked to secure tax credit
financing. This process took approximately two years. The consortium should
have known that obtaining approval for tax credit financing was not the type of
funding that was guaranteed for approval, its timing, or the amount sought.

The consortium claims that the predevelopment funding was not recoverable if
the project did not move forward. However, the very purpose for having written
agreements for the use of HOME funds is to be able to enforce the agreement and
move the project forward or recover the damages suffered as a result of
detrimental reliance on the developer or the contractor, or both.

Commencing construction 53 months after committing the initial $600,000 in
HOME funds was clearly beyond any reasonable expectation and the additional
expenses incurred as a result of delays and naturally rising costs were not
reasonable. Although the consortium claims that the initial funding was used for
acquiring the land for the project, regulations at 24 CFR 92.2 clearly state that the
reasonable expectation for construction commencement applies to all construction
or rehabilitation projects, “with or without acquisition.”

Project 281

Again, it was incumbent upon the consortium to seek remedy from the original
developer, which retreated from the project to the detriment of the consortium and



                                 49
            the public funds entrusted to it. Once again, the consortium relied on HUD
            section 202 financing as guaranteed financing instead of the full application,
            review, and potential delay or denial process of any such financing. The
            consortium’s reliance was neither justifiable nor reasonable. Therefore, its
            expectation to commence construction within 12 months of committing HOME
            funds to this project was not reasonable.

            Project 326

            During the audit the consortium never asserted lawsuits as a reason for delaying
            commencement of construction on this project. Regardless, despite the
            potentially unexpected lawsuits, the consortium still acted in an imprudent
            manner when it continued to add HOME funds to a project, which was at risk of
            being halted by a court order.

            The total HOME funding for this project was over $1.7 million. The initial
            HOME funding approved for this project was $678,500. The consortium
            approved over $1 million in additional HOME funding while it had active
            lawsuits seeking to discontinue the project. This was not a prudent action because
            the consortium could not have had a guaranteed anticipation of a completely
            favorable outcome of the two lawsuits filed against it.

            Additionally, the consortium committed over $1.2 million to this project without
            first executing a binding agreement for the use of HOME funds. Over half a
            million of those funds were committed more than 24 months after the funds were
            allocated to the consortium. To keep funding a project that was at risk of being
            halted by a court order without even executing binding agreements that would
            ensure some kind of recourse for recovering HOME funds is further indication of
            the consortium’s failure to act as a prudent steward of limited federal funds under
            the HOME program.

Comment 4   The consortium’s recommendation resolution and implementation proposals will
            be addressed during the management decision and audit resolution process with
            HUD.

Comment 5   It is inaccurate to characterize the consortium’s assertion that it used the total
            borrower obligation to determine the purchase price of the homes under the
            downpayment initiative program. It is also incorrect to characterize purchase
            subsidy that does not cost any actual money being transferred as secondary
            financing. The consortium actually used the amount encumbered against each
            property in order to ensure affordability in case the borrowers sold or transferred
            interest in their property. However, if the borrowers sold the homes for less than
            the actual loan amount, the borrowers would only be liable for the outstanding
            balance of the loan.




                                             50
            The auditors obtained an opinion from the HUD program desk officer, which is
            consistent with the plain language of the regulation that does not include the
            difference between the fair market value and affordable price paid by the buyers.
            Lack of prior HUD guidance does not mean the consortium may substitute its
            own definition inconsistent with the plain meaning of “purchase price” specified
            in 24 CFR 92.602(e): “The amount of ADDI funds provided to any family shall
            not exceed the greater of six percent of the purchase price of the single family
            housing or $10,000.”

            The regulations governing the downpayment initiative (24 CFR Part 92 Subpart
            M) were published in the Federal Register on March 30, 2004 (69 FR 16766).
            This was over two years before the consortium committed the initial funding to
            this downpayment initiative project on June 19, 2006. Therefore, OIG’s audit
            finding and recommendation does not constitute a retroactive application of the
            regulations.

Comment 6   At the exit interview of October 30, 2008, the auditors did not state that they used
            the date that funds were committed to homebuyers as the key to which fiscal
            year’s downpayment initiative funding was used. Instead, the auditors stated that
            they used the commitment worksheet “Rental/Homebuyer/Homeowner Rehab
            Set-Up Report” form HUD-40094 to determine which fiscal year’s downpayment
            initiative funds were used to commit to this project. Specifically, the form
            indicates that of the total $363,817 committed to this project, $267,330 was from
            fiscal year 2004, $64,368 was from fiscal year 2005, and $32,119 was from fiscal
            year 2006. Because this worksheet was prepared in the ordinary course of the
            consortium’s business there is no cause for doubting the veracity of the
            information contained therein.

            Additionally, if these funds were fiscal year 2003 funds, then they would have
            been subject to recapture by HUD as of July 31, 2005 (or within 24 months after
            the last date of the month in which the HUD made the funds available to the
            consortium), because none of the contracts for purchase of the homes were
            executed before July 17, 2006, see 42 U.S.C. 12748. Therefore, if during the
            management decision and audit resolution process for Finding 3 of this audit
            report, it is determined that all the assistance provided under the downpayment
            initiative is subject to recapture by HUD, then the recommendations under
            Finding 2 will also be satisfied.

Comment 7   The consortium’s recommendation resolution and implementation proposals will
            be addressed during the management decision and audit resolution process with
            HUD.

Comment 8   The consortium’s practice of entering funds in the information system without
            first executing binding agreements misled HUD into believing that the consortium
            was in compliance with the 24-month statutory commitment requirement of 42
            U.S.C. 12748. During the review, the auditors noticed a pattern or practice



                                             51
              exercised by the consortium for assigning HOME funds in the information system
              during the month of June, the last month of its fiscal year. Over the course of a ten
              year period between 1998 and 2007, over 31 percent of all funds entered in the
              information system were entered in the month of June.

              For all the projects that were active during the period between July 1, 2004, and
              June 30, 2007, over 34 percent of the funds were entered in the information
              system in the month of June. Furthermore, 55 percent of the $5.1 million entered
              in the information system without executing a binding agreement within the
              requisite 24 months, were entered in the month of June of a given year. Although
              this pattern or practice of disproportionate entries in the information system does
              not provide clear and convincing evidence of a deliberate intent to mislead HUD,
              the entries without binding agreements resulted in a false presumption that the
              consortium complied with the 24-month commitment requirement.

Comment 9     Even though the regulations at 24 CFR 92.2 and Community Planning and
              Development guidance issued by HUD provide for different types of
              documentation for committing HOME funds to affordable housing projects, the
              auditors used the only documents found in project files provided by the
              consortium. Despite raising the assertion about the existence of other
              documentation for committing HOME funds, the consortium did not provide any
              such documentation for review in order to support its assertion.

Comment 10 The auditors used a project by project method of analysis to determine whether
           the consortium’s actual compliance with the statutory requirement of 42 U.S.C.
           12748 for committing HOME funds within 24 months. Although the auditors
           found sufficient evidence that the consortium is not in compliance of the 24-
           month commitment requirement, the audit report clearly indicates in footnote 2
           (page 10) that a final determination of compliance with the 24-month
           commitment requirement is to be made using the cumulative method prescribed
           by applicable HUD notices (see also recommendations 3A and 3B on pages 11
           and 12 of this report).

Comment 11 The statement referenced on page 10 of the audit report is accurate. Although the
           excerpt isolated on its own may appear to be misleading, the statement itself
           within the context of the entire sentence in which it is used is accurate because
           that sentence further elaborates on the sentence immediately preceding it:
           “Contrary to the statutory requirements of 42 U.S.C. (United States Code)
           12748(g), the consortium did not commit HOME funds to affordable housing
           projects within 24 months of their allocation. Specifically, the consortium did not
           execute binding agreements for the use of more than $5.1 million.” The report
           further provides additional details in the two paragraphs following the statement
           in question. Specifically, the sentence in the second paragraph following the
           statement in question states: “Of the $15 million, the consortium entered more
           than $5.1 million without executing the requisite binding agreements for more
           than 24 months.” Therefore, the overall assertion and conclusion of Finding 3



                                               52
              that the consortium entered $5.1 million in the information system without
              executing binding agreements within the requisite 24-month period are accurate
              and supported by all parts of the Finding.

Comment 12 As stated on page 13 of the audit report, the scope of the audit was expanded in
           order to afford a complete review of all the files active during the original scope
           period of July 1, 2004, to June 30, 2007. This meant that the auditors needed to
           review files dating as far back as 1999. Nevertheless, the consortium’s
           recommendation resolution and implementation proposals will be addressed
           during the management decision, audit resolution, and possible audit verification
           and follow-up process.

Comment 13 The consortium did not provide any support for its assertion that it complied with
           the 24-month commitment requirement prior to the effectiveness of Community
           Planning and Development notice 01-13 issued by HUD. Nevertheless, the
           consortium’s assertion of overall compliance with the 24-month commitment
           requirement (including information provided in Charts 1 and 2 in appendix “C” of
           its comments) is to be determined and verified during the management decision,
           audit resolution, and possible audit verification and follow-up process.

Comment 14 Any information system corrections resulting from the implementation of
           recommendations 3A and 3B should be coordinated between the consortium and
           HUD.

Comment 15 The consortium’s offer to return $325,972 to its trust account is commendable,
           but inadequate. The recommendation calls for a review of all the commitments
           since 1998 because the accuracy of all information system entries is in question.
           Additionally, any funds found not to have been committed within 24 months are
           statutorily subject to recapture by HUD and not subject to a permissive deposit of
           the funds into the consortium’s trust account (see 42 U.S.C. 12748).

Comment 16 Although the consortium used the HOME funds for providing affordable housing,
           the noncompliant use of the funds with lengthy delays in executing binding
           agreements resulted in a natural rise in project completion costs (as explained in
           greater detail in Finding 1 of this report). The increased costs for completing each
           delayed project resulted in reduced potential to provide additional affordable
           housing by the consortium or another HOME program participant. Accordingly,
           the statutory requirement to recapture funds not committed within 24 months will
           not necessarily reduce the number of affordable housing units for low income
           households because those funds will be reallocated to other participants of the
           HOME program (see 42 U.S.C 12748).

Comment 17 The consortium’s recommendation resolution and implementation proposals will
           be addressed during the management decision and audit resolution process with
           HUD.




                                              53
Appendix C

                                              CRITERIA
Regulations at 24 CFR 92.2 define “commitment” of HOME funds to a specific local
construction or rehabilitation project as execution of a legally binding agreement between the
participating jurisdiction and project owner under which HOME assistance will be provided for a
project. If the project constitutes any new construction or rehabilitation (with or without
acquisition), construction work is reasonably expected to begin within 12 months of the
execution of the agreement for the use of HOME funds; and if the project constitutes acquisition
only, the purchase transaction is reasonably expected to be completed within six months of the
execution of the agreement for the use of HOME funds.

Regulations at 24 CFR 92.504(a) state that “[t]he participating jurisdiction is responsible for
managing the day to day operations of its HOME program, ensuring that HOME funds are used
in accordance with all program requirements and written agreements, and taking appropriate
action when performance problems arise.” Section 92.504(c)(4)(iii) further expounds on written
agreement requirements and requires the binding agreement to “specify the duration of the
contract. Generally, the duration of a contract should not exceed two years.”

Regulations at 24 CFR 92.602(e) limit the maximum amount of assistance using downpayment
initiative funds to any family at “the greater of six percent of the purchase price of the single
family housing or $10,000.”

Regulations at 24 CFR 92.551(c)(1) state that “HUD may instruct the participating jurisdiction to
submit and comply with proposals for action to correct, mitigate and prevent a performance
deficiency, including: ... (v) Reimbursing its HOME Investment Trust Fund in any amount not
used in accordance with the requirements of this part...”

Statutes at 42 U.S.C. 12748(g) state:
   If any funds becoming available to a participating jurisdiction under this subchapter are not placed under
   binding commitment to affordable housing within 24 months after the last day of the month in which such
   funds are deposited in the jurisdiction's HOME Investment Trust Fund, the jurisdiction's right to draw such
   funds from the HOME Investment Trust Fund shall expire. The Secretary shall reduce the line of credit in
   the participating jurisdiction's HOME Investment Trust Fund by the expiring amount and shall reallocate
   the funds by formula in accordance with section 12747(d) of this title.




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