Issue Date
March 18, 2009
Audit Report Number
2009-LA-1008
TO: Thomas W. Azumbrado, Director, San Francisco Multifamily Hub, 9AHMLAP
FROM: Joan S. Hobbs, Regional Inspector General for Audit, Los Angeles, 9DGA
SUBJECT: Campaige Place at Jackson, Phoenix, Arizona, Did Not Use Its Project Funds in
Compliance with HUD’s Regulatory Agreement and Other Federal
Requirements
HIGHLIGHTS
What We Audited and Why
We audited Campaige Place at Jackson (Campaige Place) to determine whether it used its
project funds in compliance with the U.S. Department of Housing and Urban
Development’s (HUD) regulatory agreement and other federal requirements. We
performed this audit because Campaige Place defaulted on its HUD-insured $10 million
mortgage, and the project owed more than $500,000 in interest and back payments for
principal.
What We Found
Campaige Place did not use its project funds in compliance with HUD’s and other federal
requirements. Specifically, we determined that
A. Owner advances of $73,750 were repaid when the project had no surplus cash,
B. Tenant security deposit accounts were underfunded by $57,608,
C. An unexplained payable of $26,328 was mistakenly recorded as a liability,
D. Support was incomplete or missing for operating expenses of at least $8,341, and
E. Management expenses of $20,714 were inappropriately charged to the project.
The expenditures we questioned partially contributed to Campaige Place’s operating cash
shortfalls. As a result of the project’s operating cash shortfall, Campaige Place had fallen
behind in its mortgage payments and, near the end of our audit, the mortgage was
assigned to HUD.
What We Recommend
We recommend that the director of the San Francisco multifamily hub require the
project’s owner/agent to repay or support questioned costs of $160,413 less $81,284
already repaid or supported and to remove the unsupported payable of $26,328 from the
project’s accounts. We also recommend that the director require the project to establish
controls to ensure compliance with HUD’s regulatory agreement and other federal
requirements.
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 Campaige Place on February 11, 2009 and
held an exit conference with the project’s officials on February 18, 2009. The project
provided comments on February 26, 2009. The project generally agreed with the
substance of our report.
The complete text of the auditee’s response, along with our evaluation of that response,
can be found in appendix B of this report. However, the attachments to the response will
be made available upon request.
2
TABLE OF CONTENTS
Background and Objective 4
Results of Audit
Finding 1: Owner’s Advances Were Repaid While the Project Was in a Non- 5
Surplus-Cash Position
Finding 2: Tenant Security Deposits Were Underfunded 7
Finding 3: An Unexplained Payable Was Mistakenly Recorded as a Liability 9
Finding 4: Documentation to Support Operating Expenses Was Not Complete 11
Finding 5: Management Expenses Were Paid from Project Operating Funds 13
Scope and Methodology 15
Internal Controls 16
Appendixes
A. Schedule of Questioned Costs 18
B. Auditee Comments and OIG’s Evaluation 19
C. Criteria 38
3
BACKGROUND AND OBJECTIVE
Campaige Place at Jackson (Campaige Place) is a 302-unit multifamily project insured under
Section 221(d)(4) of the National Housing Act, 12 U.S.C. (United States Code) 1715. U.S.
Department of Housing and Urban Development (HUD) statutory and regulatory provisions
authorized the Federal Housing Commissioner to regulate the borrower through a regulatory
agreement.
Campaige Place Phoenix One, also known as Campaige Place at Jackson, was formed as a
limited partnership under the laws of the State of Arizona on May 9, 2000, for the purpose of
constructing and operating a low-income rental housing project for the downtown Phoenix,
Arizona, workforce. The partnership was between NewHom Management, as a general partner,
with .01 percent interest and John Hancock Corporate Tax Credit Fund, as the limited partner,
with 99.99 percent interest. This owner-managed multifamily project was developed with a $10
million HUD-insured mortgage and $4.5 million in tax credit funds. The project consists of 100
percent affordable units and has always charged rents less than the tax credit limit.
During our audit, we noted that the downtown Phoenix economy remained difficult for
affordable housing and that the market conditions contributed to the project’s financial problems.
Therefore, our audit focused on the extent to which the project’s expenditures were allowable
and reasonable. Specifically, our objective was to determine whether Campaige Place used its
project funds in compliance with its regulatory agreement with HUD and other federal
requirements.
4
RESULTS OF AUDIT
Finding 1: Owner’s Advances Were Repaid While the Project Was in a
Non-Surplus-Cash Position
Campaige Place repaid a total of $73,750 in owner’s advances from 2005 through 2008 while in
a non-surplus-cash position. This condition occurred because the owner/agent had insufficient
knowledge of HUD’s requirements regarding repayment of owner’s advances. The project’s
repayment of the owner’s advances from affiliates while in a non-surplus-cash position partially
contributed to the project’s operating cash shortfalls.
The Project Repaid $73,750
in Owner’s Advances
Campaige Affordable Housing - Company B, an affiliate of the project, advanced a total
of $461,000 to the project from January 2005 through November 2008. Financial records
showed that the project repaid advances that totaled $73,750 during the audit period:
three repayments in 2005 (in January, February, and April), one repayment in March
2007, and two in 2008 (in July and September). As of November 2008, the balance of
the advances payable to the affiliate was $854,974 instead of $928,724 as it should have
been.
Payable to affiliate* ending
Year Repayment
balances
2005 $ 523,974 $ 26,750
2006 558,974 0
2007 742,974 22,000
2008 (As of November) 854,974 25,000
Total $ 73,750
*Campaige Affordable Housing - Company B
The Project Was in a
Non-Surplus-Cash Position
Since its inception in 2003, Campaige Place had not been in a surplus-cash position.
Review of the project’s 2005, 2006, and 2007 financial statements showed net losses
before depreciation. Operating expenses increased each year, while rental income fell
5
short of projections. Additionally, the surplus (deficiency) cash amounts for 2005, 2006,
and 2007 were $(368,555), $(266,719), and $(378,516), respectively.
Campaige Affordable Housing - Company B advanced funds to the project during deficit
periods. HUD allows repayment of such owner’s advances subject to its approval only
when the project has surplus cash (see criteria in appendix C). According to the
regulatory agreement, the project’s surplus cash position should be computed at the end
of the annual or semiannual periods. The project’s repayment of owner’s advances while
in a non-surplus-cash position violated the regulatory agreement. Because Campaige
Place repaid $73,750 in owner’s advances while in a non-surplus-cash position, its
financial situation became more difficult.
The owner/agent acknowledged insufficient understanding of HUD rules and regulations
regarding repayment of owner’s advances. After our audit work was completed, the
owner/agent took corrective actions to resolve some of the discrepancies. Campaige
Affordable Housing – Company B repaid $15,000 to the project on January 27, 2009.
Recommendations
We recommend that the director of the San Francisco multifamily hub require the owner
of Campaige Place to
1A. Reimburse HUD’s Federal Housing Administration insurance fund $73,750 less
amounts repaid after the completion of the audit ($15,000) for the ineligible
disbursements cited in this report.
1B. Ensure that controls are in place to determine the project’s surplus-cash position in
accordance with its regulatory agreement and only make distributions or
repayment of owner’s advances when authorized.
6
Finding 2: Tenant Security Deposits Were Underfunded
During our audit, project records showed a liability of $57,608 for tenant security deposits.
However, the tenant security deposit bank account was underfunded because its balance ranged
from $0 to $20,000. This condition occurred because project management disregarded financial
statement audit findings and HUD rules and regulations regarding security deposits. As a result,
the tenants’ security deposits were not safeguarded and were at risk of being diverted by
management for unauthorized uses.
The Security Deposit Account
Had Been Underfunded for Years
Originally, the project had two separate bank accounts designated for tenant security
deposits; however, it did not deposit the security deposit collections into these bank
accounts dollar for dollar. The project commingled receipts for tenant security deposits
with rent receipts and other revenue by keeping all of the funds in the project’s operating
bank account. Over time, the tenant security deposit accounts became underfunded; i.e.,
the balance of the tenant security accounts was less than the aggregate of all outstanding
obligations. At the time of our audit, the project had no separate bank account designated
for tenant security deposits, and the recorded liability was $57,608. In November 2008,
the project opened a new security deposit account, and management transferred an initial
amount of $20,000 into the account. After we completed our work, the owner/agent
provided documentation to show that the tenant security deposit account had been fully
funded as of December 31, 2008.
Tenant Security Deposits Were
Not Safeguarded
The financial statement audit reports for years 2005 through 2007 disclosed the project’s
noncompliance under HUD regulations and the project’s regulatory agreement regarding
tenant security deposit requirements. According to HUD regulations, deposits paid by a
tenant at the time a unit is rented (security deposits) should be placed into an account
specifically for tenant deposits and held until the tenant vacates the unit (see criteria in
appendix C). According to the owner, management did not heed the findings because
local real estate practices did not require segregation of tenant deposits. As a result, the
tenants’ security deposits were not safeguarded and were at risk of being diverted by
management for unauthorized uses.
7
Recommendations
We recommend that the director of the San Francisco multifamily hub require the
management (owner/agent) of Campaige Place to
2A. Fully fund the security deposit account for the liability amount of $57,608 less
amounts deposited during the audit.
2B. Establish controls to ensure that all tenant security deposits are safeguarded and
maintained in the designated security depository bank accounts in compliance with
the regulatory agreement.
8
Finding 3: An Unexplained Payable Was Mistakenly Recorded as a
Liability
The project mistakenly recorded a professional service fee of $26,328 as an operating expense.
Management initially stated that this was a development expense that had not yet been paid to
the project’s architect but did not provide documentation to support this assertion. Management
had inadequate internal controls over classification and support of project operating expenses.
As a result, liabilities were overstated.
Management Failed to Support
a Questioned Cost
Campaige Place recorded a payable in 2004 for an architect fee of $26,328. HUD
questioned this cost in July 2008 and determined that it was an unallowable development
expense. During our review this amount was still recorded as past due in the aged
accounts payable; however, the owner/agent could not provide an invoice or other
documentation as support.
Management Had Inadequate
Controls Over Project
Expenses
Campaige Place was the owner/agent’s first HUD-insured property and, therefore,
management’s experience with HUD rules was limited. HUD requires the owner/agent
to maintain documentation for project expenses and to establish a financial accounting
system that segregated operating funds from other project funds (see criteria in appendix
C). In this instance, the project’s failure to follow HUD requirements occurred because
there were inadequate controls over the classification and support of project operating
expenses. After our audit work was completed, the owner/agent stated that the former
controller mistakenly entered the payable without supporting documentation.
Management also confirmed that all of the architectural fees for the project had been paid
in full. The owner/agent planned to remove this expense from the project’s liabilities.
By leaving this payable in its accounts, Campaige Place had overstated its liabilities.
9
Recommendation
We recommend that the director of the San Francisco multifamily hub require the
management (owner/agent) of Campaige Place to
3A. Confirm that the $26,328 in unallowable expense has been removed from the
project’s books.
3B. Establish controls to ensure all recorded transactions are properly classified and
adequately supported.
10
Finding 4: Documentation to Support Operating Expenses Was Not
Complete
The project did not always provide detailed vendor invoices to support expense items paid with
its corporate credit card. This condition occurred because management did not have adequate
internal controls to ensure expenses were properly supported. Without the proper supporting
documentation, auditors and other reviewers could not verify that expenses were eligible and
recorded accurately. As a result, we questioned $8,341 in expenses based on the sampled
transactions tested.
Credit Card Statements Were
Paid with Incomplete or Missing
Invoices
Campaige Place management (owner/agent) used an affiliate’s American Express
corporate credit card to pay for operating expenses for all six projects that it owned and
managed. When the credit card statement was received, management allocated the
charges to whichever project had incurred the expense. However, expense items were
not always adequately supported by detailed vendor invoices. The following table shows
details of the unsupported transactions pertaining to Campaige Place that were identified
in a test sample.
Unsupported
Date Item Expense
amount
Aug. 3, 2007 Allied Forces $1,443.48 $1,443.48
Oct. 1, 2007 Uniforms 258.60 258.60
Oct. 1, 2007 Minimart supplies 450.23 136.59
Oct. 1, 2007 Advertising - Phoenix New Times 2,580.00 2,580.00
Oct. 1, 2007 M&R - materials 1,817.10 817.11
Oct. 1, 2007 Newspaper 500.00 500.00
Nov. 1, 2007 M&R - materials 447.92 447.92
Nov. 1, 2007 Tenant incentive 540.94 477.56
Nov. 27, 2007 Cox Communications 54.96 54.96
Dec. 31, 2007 Newspaper 1,625.00 1,625.00
Total $8,341.22
11
Controls over Documentation of
Expenses Were Inadequate
Management did not have adequate internal controls to ensure expenses were properly
supported. The above expenses were paid with inadequate supporting documentation,
which was not in compliance with requirements outlined in the HUD handbook (see
criteria in appendix C). As a result, the project’s records could not provide assurance that
the unsupported expenses were reasonable and properly allocated to Campaige Place.
We questioned $8,341 in unsupported costs. After our audit work was completed, the
auditee provided supporting documentation for $6,210 in questioned expenses and repaid
a total of $2,131 for the unsupported amounts using nonfederal funds.
Recommendations
We recommend that the director of the San Francisco multifamily hub require the
management (owner/agent) of Campaige Place to
4A. Provide documentation to show the unsupported costs of $8,341 were either repaid
using nonfederal funds, or are now adequately supported.
4B. Establish controls to ensure expenses are properly supported.
12
Finding 5: Management Expenses Were Paid from Project Operating
Funds
The project used its operating funds to pay for management (owner/agent) expenses to supervise
project staff and oversee project operations. The owner/agent had an insufficient understanding
of HUD rules and regulations regarding allowable management costs because Campaige Place
was its first HUD-insured project. As a result, $20,714 in operating funds was not available for
project expenses, including the mortgage payments.
Management Expenses Were Paid from
Project Funds
Management charged unallowable expenses to the project for management agent staff
travel and incentives. Our review of a limited number of transactions from the years
2005 through 2007 identified the following unallowable expenses:
Ineligible project expenses
Date Description Amount
Apr. 29, 2005 Lease commission $9,000.00
July 26, 2005 Lease commission 1,000.00
Feb. 10, 2006 Lease commission 3,210.00
Feb. 10, 2006 Lease commission 1,000.00
Apr. 30, 2007 Lunch 27.14
Apr. 30, 2007 Airfare 108.80
Apr. 30, 2007 Rental car 87.39
May 2, 2007 Per diem 118.00
June 1, 2007 Travel – auto 575.48
July 1, 2007 Travel 1,007.20
July 31, 2007 Per diem 590.00
Aug. 1, 2007 Travel 380.63
Aug. 7, 2007 Per diem 590.00
Nov. 1, 2007 Airfare 256.80
Nov. 1, 2007 Travel 952.64
Nov. 1, 2007 Employee incentive 206.01
Nov. 30, 2007 Airfare 247.30
Nov. 30, 2007 Travel 860.08
Nov. 30, 2007 Meals 99.03
Dec. 31, 2007 Ground transportation 362.04
Dec. 31, 2007 Lunch 35.92
Total $20,714.46
13
The management owner/agent’s director of operations stated that management staff
traveled to Campaige Place to hire employees, provide training, and perform inspections.
However, these tasks were the responsibility of management and, therefore, the travel
costs should have been paid by management from the fee it received. Campaige Place
paid the owner/agent a fee of 3.6 percent of its residential, commercial, and
miscellaneous income collected. This management fee should have been used to pay for
services that were not front-line activities; for example, management staff travel,
recruiting, hiring, training, monitoring, filling staff vacancies, and supervising project
personnel (see criteria in appendix C). In addition, because the project collected a
management fee on its commercial leases, management costs such as brokerage
commissions should be paid from that fee.
Operating Expenses Were
Overstated
As a result of charging management expenses to the project, operating expenses were
overstated, and insufficient funds were available to pay front-line project expenses and
other eligible costs, including mortgage payments. After our audit work was completed,
the auditee repaid $335 of the total amount owed to the project.
Recommendations
We recommend that the director of the San Francisco multifamily hub require the
management (owner/agent) of Campaige Place to
5A. Reimburse HUD’s Federal Housing Administration insurance fund $20,714 less
amounts already repaid ($335) for ineligible project expenses cited in this report.
5B. Establish controls to ensure that costs covered by management fees are not paid
from operating funds.
14
SCOPE AND METHODOLOGY
The audit covered the use of project funds for the period January 1, 2005, through December 31,
2007. However, to quantify the results of two findings, we extended the scope to November
2008. Our audit was performed at Campaige Place located in Phoenix, Arizona, and at the
management agent’s office in San Diego, California. We performed our audit work from
September 15 through November 30, 2008.
To perform our audit, we
Reviewed applicable laws, regulations, and guidance issued by HUD (see criteria in
appendix C);
Reviewed pertinent financial records maintained by the project on site and at the
corporate office of the owner/agent;
Interviewed staff from the project and the owner/agent;
Reviewed HUD files and interviewed HUD officials in the Phoenix Office of Multifamily
Housing; and
Physically inspected the property.
Specifically, our audit included the review of Campaige Place’s financial records and the
management agent’s accounting system, policies, and procedures. We reviewed transactions
from 2005 through 2007 and tested a non-statistical sample of receipts and disbursements for
support, accuracy, and compliance with HUD rules and regulations. We did not project our
results to the universe of transactions in our audit scope.
We conducted the audit in accordance with generally accepted government auditing standards.
Those standards require that we plan and perform the audit to obtain sufficient, appropriate
evidence to provide a reasonable basis for our findings and conclusions based on our audit
objective. We believe that the evidence obtained provides a reasonable basis for our findings
and conclusions based on our audit objective.
15
INTERNAL CONTROLS
Internal control is an integral component of an organization’s management that provides
reasonable assurance that the following objectives are achieved:
Program operations,
Relevance and reliability of information,
Compliance with applicable laws and regulations, and
Safeguarding of assets and resources.
Internal controls relate to management’s plans, methods, and procedures used to meet its
mission, goals, and objectives. They include the processes and procedures for planning,
organizing, directing, and controlling program operations as well as the systems for measuring,
reporting, and monitoring program performance.
Relevant Internal Controls
We determined that the following internal controls were relevant to our audit objectives:
Administering the project’s operations in compliance with applicable laws and
regulations,
Maintaining complete and accurate records, and
Safeguarding the project’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.
16
Significant Weaknesses
Based on our review, we believe that the following items are significant weaknesses
The project did not have adequate controls in place to ensure that
Project financial transactions complied with applicable laws and regulations
(findings 1, 2, 3, 4, and 5).
Tenant security deposits were adequately safeguarded (finding 2).
Project financial records were complete and accurate (finding 4).
17
APPENDIXES
Appendix A
SCHEDULE OF QUESTIONED COSTS
Recommendation Ineligible 1/ Unsupported 2/
number
1A $73,750
2A $57,608
3A $26,328
4A $8,341
5A $20,714
Totals $152,072 $34,669
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
polices or regulations.
2/ Unsupported costs are those costs charged to a HUD-financed or HUD-insured program
or activity when we cannot determine eligibility at the time of the audit. Unsupported
costs require a decision by HUD program officials. This decision, in addition to
obtaining supporting documentation, might involve a legal interpretation or clarification
of departmental policies and procedures.
18
Appendix B
AUDITEE COMMENTS AND OIG’S EVALUATION
Ref to OIG Evaluation Auditee Comments
19
Comment 1
20
Comment 2
Comment 3
21
Comment 4
Comment 5
22
Comment 5
23
Comment 5
Comment 6
24
Comment 6
Comment 7
Comment 8
25
Comment 9
Comment 10
Comment 11
Comment 12
26
Comment 13
27
Comment 13
Comment 14
Comment 15
Comment 14
Comment 16
28
Comment 17
Comment 18
29
Comment 19
Comment 20
30
Comment 21
Comment 22
31
Comment 23
32
33
OIG Evaluation of Auditee Comments
Ref to OIG Evaluation Auditee Comments
Comment 1 We acknowledge the auditee’s comments regarding the difficult rental housing
market in downtown Phoenix. The report did not address this issue in detail
because it was beyond the scope of our audit objective. Specifically, our
objective was to determine whether Campaige Place used its project funds in
compliance with its regulatory agreement with HUD and other federal
requirements. To meet this objective our audit focused on the extent to which the
project’s expenditures were allowable and reasonable. Out report did note the
difficult downtown-Phoenix rental market—the Background and Objective
section stated: During our audit, we noted that the downtown Phoenix economy
remained difficult for affordable housing and that the market conditions
contributed to the project’s financial problems.
The report noted, on page 5, that owners/affiliates of Campaige Place had
advanced more than $900,000 to the project. Such advances were in accordance
with the Partnership agreement between the general partner (NewHom
Management) and the limited partner (John Hancock). The agreement contained
an operating deficit guarantee which required NewHom to advance funds to the
project during the initial operating period if it incurred operating deficits
Comment 2 We recognize that the total amount of costs we questioned was significantly less
than the amount past-due on the HUD-insured mortgage. However, the
unallowed uses of operating funds did contribute to the project’s inability to meet
its obligations. We changed the report language to state that the expenditures we
questioned partially contributed to the project’s operating cash shortfalls.
Comment 3 We changed the language in the Highlights section to acknowledge up front that
the auditee has already repaid, or provided additional supporting documentation
for, some of the costs questioned in the report. However, the report correctly
stated that costs totaling $160,413 plus an unsupported payable of $26,328 were
questioned as a result of our audit. Each finding contained information regarding
specific amounts either repaid or supported after our audit work was completed.
See comments below for our evaluation of the auditee’s position on specific
items.
Comment 4 We added language in the general recommendation section to acknowledge the
amount which the auditee either repaid or supported with additional
documentation after the audit was completed.
Comment 5 We modified the report to state that the repayments of owner advances from
affiliates while in a non-surplus-cash position partially contributed to the project’s
operating cash shortfalls. We recognize that the total amount advanced by
34
affiliates greatly exceeded the amount that was improperly repaid. However, this
was not the basis of the finding. The funds advanced to the project and the
repayments to the project were two separate transactions and did not offset each
other. HUD Handbook 4370.2, REV-1 states clearly that repayment of owner
advances when a project is in a non-surplus-cash position is a violation of HUD
regulations (tantamount to diversion of funds) which can subject the owner to
criminal and civil monetary penalties. Therefore, we did not recognize mistaken
repayments as being offset by subsequent advances.
Comment 6 We acknowledged the $15,000 repayment made on January, 27, 2009 as a result
of the audit. As stated in our response in Comment 5, we cannot offset the other
repayments by subsequent advances that were made. Thus, $58,750 was still
outstanding for this finding. Regarding the auditee’s implementation of new
control procedures over repayments of advances, after the report is issued HUD
officials will verify that any corrective actions are responsive to the final
recommendations.
Comment 7 The report acknowledged that the tenant security deposit account was fully
funded after our field work was completed. However, the underfunded account
remains a report finding and a questioned cost. We modified recommendation 2A
to require full funding of the tenant security deposit account less amounts already
deposited.
Comment 8 We agree that the caption for finding 3 inaccurately characterized the questioned
cost. We modified the caption to state: An Unexplained Payable Was Mistakenly
Recorded as a Liability.
Comment 9 We modified the title to state: Management Failed to Support a Questioned Cost
Comment 10 The auditee’s comments understated the significance of the unsupported liability.
Management had been submitting monthly accounting reports to HUD (with an
attached schedule of aged open invoices) that showed this payable as overdue.
Our report noted that HUD questioned the cost as early as July 2008, yet the
undocumented payable remained on the project’s operating accounts at the time
of our review. By failing to determine the nature of this liability and investigate
why it had not been paid for four years, management did not practice due
diligence over expenses allocated to the project. After our audit work was
completed, the auditee obtained confirmation that the architect (to whom the
expense was originally attributed) had been paid in full. Therefore, we modified
the finding text to more accurately portray the questioned amount as an error.
Comment 11 Recommendation 3A was modified to require confirmation that the $26,328 in
unallowable expense has been removed from the project’s books.
Comment 12 We agreed that recommendation 3B was not necessary because the project will
not incur any more development costs. We removed this recommendation and
35
recommendation 3C is now shown in the report as 3B.
Comment 13 The report acknowledged that, after audit work was completed, the auditee
provided supporting documentation for $6,210 in questioned expenses and repaid
$2,131 to the project. OIG verified the supporting documentation provided by the
auditee.
Comment 14 Recommendation 4B required the project to establish controls to ensure expenses
are properly supported. After the report is issued, HUD officials will verify that
corrective actions, including the training and oversight procedures referred to in
the auditee’s comment, were adequately implemented.
Comment 15 Recommendation 4A properly addressed an issue that was identified as a result of
the audit. After our report is issued, HUD officials will verify that corrective
actions were taken.
Comment 16 HUD’s Office of Multifamily Housing regularly issues notices and other guidance
to clarify and update its comprehensive handbooks. Like the auditee, OIG relied
on HUD’s published guidance to arrive at its conclusions. HUD officials will
evaluate OIG’s conclusions and recommendations during the formal audit
resolution process. Accordingly, any policy changes would be made by HUD
program offices, and not OIG.
Comment 17 We modified the report to acknowledge the additional repayment of $75.64
deposited on February 26, 2009 for a total repayment of $334.89 for the
questioned management expenses paid from project funds.
Comment 18 We questioned the eligibility of the brokerage commissions paid to lease the
project’s commercial spaces primarily because the project collected a
management fee percentage on its commercial rents as it did on the housing units.
The management fees were designed to cover management services not
performed by front-line staff, such as supervising and overseeing project
operations. According to HUD Handbook 4381.5, paragraph 3-6, the owner can
propose a special management fee to accomplish a specific task such as
―obtaining or renewing a lease for commercial space at the project.‖ However,
HUD officials noted that no special fees were requested in this instance, and
concurred with our conclusion.
Comment 19 We determined that commissions paid to an affiliate of the management agent
were management expenses. HUD officials concurred that the task of reviewing
the commercial leases was a management responsibility. Although the auditee
stated that the review expense was incurred in lieu of legal fees, we note that the
affiliate was not a lawyer, and therefore the expense cannot qualify as a legal
expense.
36
Comment 20 We determined that travel expenses for management agent staff to temporarily fill
in vacant front-line positions on site were management expenses. HUD
Handbook 4381.5 REV-2, paragraph 6-38, Figure 6-2 clearly states that travel
expenses for the agent’s supervisory staff are costs to be paid from the
management fee. We note that figure 6-2 also shows that the salary for a
supervisory (management) employee designated to replace a project employee for
hours worked at the project above and beyond the first 40 consecutive hours may
be charged to the project. In addition, HUD Handbook 4381.5 REV-2, paragraph
6-38(b)(3) specifies that a reasonable hourly rate can be used to bill the project
for time spent by agent staff performing front-line functions. HUD officials
concurred with our conclusion.
Comment 21 We acknowledge that the HUD Handbook is ambiguous regarding the
allowability of recruiting expenses. Although the handbook can be interpreted to
state that recruiting costs for front-line staff are chargeable to the project, the
auditee did not provide documentation of the recruiting activity. Instead the cost
was for travel expenses, and the handbook clearly states that travel expenses for
the agent's supervisory staff should be paid from the management fee (see
comment 20). HUD officials concurred with our conclusion.
Comment 22 As reported under finding 5, the total amount of unallowed management expenses
we identified during our audit was $20,714.
Comment 23 The report acknowledged repayment of $335 for the questioned ineligible
expenses that should have been paid from the management fee received. We
considered the auditee’s response regarding the remainder of the ineligible
expense items, and our conclusions are presented under comments 17 through 21.
37
Appendix C
CRITERIA
Finding 1
1. HUD Handbook 4370.2, REV-1, paragraph 2-11, states that advances made for reasonable
and necessary operating expenses may be paid from surplus cash at the end of the annual or
semiannual period. Such repayment is not considered an owner distribution. It is considered a
repayment of advances. Repayment of owner advances when the project is in a non-surplus-cash
position will subject the owner to criminal and civil monetary penalties.
Finding 2
2. HUD Handbook 4370.1, REV-2, paragraph 2-21, states that deposits are paid by a tenant at
the time a unit is rented. The deposit is placed into an account specifically for tenant deposits
and held until the tenant vacates the unit. A security deposit may be applied to pay for any
damages caused by the tenant.
3. HUD Handbook 4370.1, REV-2, paragraph 3-9, states that under the regulatory agreement,
tenant security deposits must be fully funded. A security deposit deficiency will often indicate a
diversion of funds. The diversion could be for payment of project operating costs or for the
personal use of the owner or management agent.
4. HUD Handbook 4370.2, REV-1, paragraph 2-12, states that any funds collected as security
deposits must be kept separate and apart from all other project funds in an account maintained in
the name of the project. The balance of the account must not at any time be less than the
aggregate of all outstanding obligations under the account for security.
Finding 3
5. HUD Handbook 4370.2, REV-1, paragraph 2-3, states that in establishing a financial
accounting system, auditing problems can be avoided by keeping operating funds separate from
other project funds. Particularly when occupancy occurs before final closing, care must be taken
to segregate construction and operating funds. Accounting of any construction expenses shall be
in accordance with HUD Handbook 4470.1, Mortgage Credit Analysis for Project Mortgage
Insurance, section 207.
Finding 4
6. HUD Handbook 4370.2, REV-1, paragraph 2-1, states that the financial operations and
accounting requirements of a HUD-insured multifamily project must include maintenance of
books and accounts; completeness and accuracy of books and accounts; auditable paper trail,
invoices, etc.; treatment of specific transactions such as surplus cash and residual receipts;
38
distribution to owners; cash controls; and use of management agreements.
7. HUD Handbook 4370.2, REV-1, paragraph 2-12, states that a request for a check must have
supporting documentation (i.e., invoice itemizing amount requested with an authorized
signature) in order for approval to be obtained to make the disbursement.
8. HUD Handbook 4981.5 REV-2, paragraph 3-6, states:
a.Use of Special Fees. In addition to the percentage-based fees described above, owners may
agree to pay special management fees if a project has special needs or problems. Proposing
special fees (rather than adjusting the fee percentage) is an appropriate and cost effective way
to address specific project conditions that should be temporary in nature.
b.Circumstances When Special Fees Are Allowed. Agents may earn special management
fees only if all six conditions listed below are met.
(1)The agent did not cause the problem the fee is designed to address.
(2)The fee is tied to the correction of specific problems or the accomplishment of specific
tasks. Examples of such tasks include:
(a)Renting-up the project (unless compensation for this is provided from a
supplemental management fund);
(b)Obtaining or renewing a lease for commercial space at the project;
(c)Completing significant rehabilitation work or utility conversion;
(d)Reducing vacancies or improving rent collections;
(e)Reducing a specific excessive expense (e.g., utility costs or property taxes); and
(f)Processing membership transfers at cooperatives.
Finding 5
9. HUD Handbook 4381.5, REV-2, paragraph 6-38, states:
a. Front-line Costs and Day-to-Day Activities
(1) Reasonable expenses incurred for front-line management activities may be charged to
the project operating account. HUD Handbook 4370.2, Financial Operations and
Accounting Procedures for Insured Multifamily Projects, provides a complete listing of
allowable expenses. Front-line activities include:
o taking applications;
o screening, certifying, and recertifying residents;
o maintaining the project; and
o accounting for project income and expenses.
Figure 6-2 provides examples of front-line management costs.
(2) If front-line management functions for several properties are performed by staff of the
agent operating out of a single office, the following conditions apply.
39
(a) The agent must prorate the total associated costs among the projects served in
proportion to the actual use of services. Allowable total associated costs include:
(i)Salaries and fringe benefits of personnel performing front-line duties; and
(ii) Actual office expenses, fees, and contract costs directly attributable to the
performance of front-line duties.
(b) The agent may not impose surcharges or administrative fees in addition to actual
costs.
(c) The cost of performing front-line management functions off-site may not exceed the
total cost of performing these functions at the property.
(3) The salaries of the agent's supervisory personnel may not be charged to project accounts,
with the exception of supervisory staff providing oversight for centralized accounting
and computer services for the project.
10. HUD Handbook 4381.5, REV-2, paragraph 6-39, states:
a. Expenses for services that are not front-line activities must be paid out of
management fee funds, except for centralized accounting and computer services.
b. Salaries, fringe benefits, office expenses, fees, and contract costs for the following
activities must be paid out of management fee funds. These costs include
(1) Designing procedures/systems to keep the project running smoothly
and in conformity with HUD requirements.
(2) Preparing budgets required by the owner or HUD, exclusive of rent
increase requests and MIO [management improvement and operating]
Plans.
(3) Recruiting, hiring, and supervising project personnel.
(4) Training for project personnel that exceeds the line item budget for
training expenses.
(5) Monitoring project operations by visiting the project or analyzing
project performance reports.
(6) Analyzing and solving project problems.
(7) Keeping the owner abreast of project operations.
(8) Overseeing investment of project funds.
(9) Ensuring that project positions are covered during vacations, sickness,
and vacancies.
40
Campaige Place at Jackson, Phoenix, Arizona, Did Not Use Its Project Funds in Compliance with HUD's Regulatory Agreement and Other Federal Requirements
Published by the Department of Housing and Urban Development, Office of Inspector General on 2009-03-18.
Below is a raw (and likely hideous) rendition of the original report. (PDF)