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 48 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. 54
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)