Issue Date
September 15, 2009
Audit Report Number
2009-LA-1019
TO: Thomas W. Azumbrado, Director, San Francisco Multifamily Housing Hub, 9AHMLAP
William M. Elsbury, Region IX Regional Counsel, 9AC
Henry S. Czauski, Acting Director, Departmental Enforcement Center, CV
FROM: Joan S. Hobbs, Regional Inspector General for Audit, Los Angeles, 9DGA
SUBJECT: The Owner of Park Lee Apartments, Phoenix, Arizona, Violated Its Regulatory
Agreement with HUD
HIGHLIGHTS
What We Audited and Why
We audited Park Lee Apartments, an FHA-insured multifamily project in Phoenix,
Arizona, in response to HUD officials’ concerns about the project’s deteriorating
condition and inability to make its mortgage payments. The HUD-insured $23.5 million
mortgage has been assigned to HUD and HUD stands to lose millions on the sale of the
note. Our objective was to determine whether the project complied with the U.S.
Department of Housing and Urban Development’s (HUD) regulatory agreement and
other federal requirements.
What We Found
Park Lee Apartments did not use its project funds in compliance with HUD and other
federal requirements. Specifically, the owner and/or management agents violated the
regulatory agreement with HUD by paying $512,562 in questioned costs from the
project’s operating account when the project was in a non-surplus-cash position. The
questioned costs included the payment of development expenses from operating funds
($439,439), ineligible and unsupported disbursements ($45,623), and a wire transfer of
project revenue to the owner ($27,500). In addition, the owner maintained the project
in poor physical condition and submitted annual audits of the financial statements that did
not meet HUD requirements.
What We Recommend
We recommend that the Director of the San Francisco multifamily hub require the
project’s owner to repay or support questioned costs of $512,562. We also recommend
that HUD’s Regional Counsel pursue double damage remedies. In addition, we
recommend that the Director of HUD’s Departmental Enforcement Center pursue civil
money penalties and administrative sanctions, as appropriate.
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 owner of Park Lee Apartments on August
10, 2009, and held an exit conference with the owner on August 25, 2009. The owner of
the project provided comments on August 24, 2009. The owner generally disagreed with
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.
2
TABLE OF CONTENTS
Background and Objective 4
Results of Audit
Finding 1: The Owner and/or Management Agents Paid $512,562 in Questioned 5
Costs
Scope and Methodology 11
Internal Controls 12
Appendixes
A. Schedule of Questioned Costs 13
B. Auditee Comments and OIG’s Evaluation 14
C. Criteria 30
3
BACKGROUND AND OBJECTIVE
Park Lee Apartments is a 523-unit multifamily project located in Phoenix, Arizona, and was
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.
Park Lee Apartments was constructed in 1958 and was purchased by Community Services of
Arizona, a nonprofit company, in January 2005. Community Services of Arizona then made
more than $6 million in renovations to the project. The project was developed with a $23.5
million HUD-insured mortgage in addition to tax credits and other resources. Community
Services of Arizona – Park Lee, LLC, is the owner and managing member of the project.
The project has not been in a surplus-cash position since it began operations in February 2005.
Review of the project’s 2006 and 2007 financial statements showed net losses before
depreciation.1 In addition, the surplus (deficiency) cash amounts for 2006 and 2007 were
($1,525,272) and ($505,786), respectively. A little more than three years from the start of
operations, the project defaulted on its mortgage (May 2008), and the mortgage was assigned to
HUD in October 2008. Because of the poor financial condition of the project, Community
Services of Arizona made advances to the project for construction and operating costs. The 2007
financial statements show that they advanced $2.1 million to the project as of December 31,
2007.
During our audit period (January 1, 2006, through December 31, 2008), three management
agents managed the project. Bernard/Allison Management Services managed the project from
the beginning of our audit period to April 2006. Community Services of Arizona managed the
project without HUD approval from May 2006 to April 2008 and from October 2008 to the end
of our audit period. Dunlap & Magee Property Management managed the project from May to
October 2008.
Our objective was to determine whether Park Lee Apartments complied with its regulatory
agreement with HUD and other federal requirements.
1
The 2008 financial statements had not been completed at the time of the audit.
4
RESULTS OF AUDIT
Finding 1: The Owner and/or Management Agents Paid $512,562 in
Questioned Costs
The owner and/or management agents violated the regulatory agreement with HUD by paying
$512,562 in questioned costs from the project’s operating account when the project was in a non-
surplus-cash position. The questioned costs included the payment of development expenses
from operating funds ($439,439), ineligible and unsupported disbursements ($45,623), and a
wire transfer of project revenue to the owner ($27,500). These improper payments occurred
because the owner and/or management agents disregarded the project’s regulatory agreement
with HUD, which requires that any distribution of project income only be from surplus cash. As
a result, project operating funds available for debt service were reduced, contributing to the
default on its $23.5 million HUD-insured mortgage. In addition, the owner maintained the
project in poor physical condition and submitted annual audits of the financial statements that did
not meet HUD requirements.
Operating Funds Were Used for
Development Expenses
The owner and/or management agents improperly used the project’s operating account to
pay for development expenses of $439,439. During the development of the project, the
owner initially deposited $325,000 into a reserve account for relocation expenses;
however, the owner stated that it had underestimated the costs for relocation.2
Consequently, the owner expended $404,439 in project operating funds to pay for
additional relocation expenses. According to HUD guidance (see criterion number 5 in
appendix C), project funds should only be used to pay for reasonable expenses necessary
for the operations and maintenance of the project. The owner also paid $35,000 for
development consulting fees for the project. The owner stated that sufficient funds were
not available in the project’s development account for the final payment of development
consulting fees so they were paid from the project’s operating account.
Ineligible and Unsupported
Disbursements Were Made
The owner and/or management agent used project funds of $45,623 for ineligible and
unsupported disbursements. The ineligible disbursements ($30,560) included expenses
such as payroll for nonproject employees, asset management fees paid to the investor
member of the project, and annual compliance reviews. These expenses were owner
2
The investment of HOME Investment Partnerships Program funds in the project required relocation expenses for
displaced residents.
5
and/or management agent expenses that should not have been charged to the project (see
criterion number 6 in appendix C). The unsupported disbursements ($15,063) included
payments to the owner for reimbursement of expenses paid for by the owner. See the
table below for the list of ineligible and unsupported expenses.
Ineligible Unsupported
Date Description
Amount Amount
Mar. 20, 2006 Compliance review $1,300
Apr. 18, 2006 Awards banquet 639
June 7, 2006 Compliance review 1,500
Feb. 23, 2007 Asset management fees 2,561
Mar. 23, 2007 Asset management fees 2,640
Reimbursement for training paid
for same employee two times 270
June 15, 2007 (same course) and meals
July 20, 2007 Wages for nonproject employee 2,105
Aug. 9, 2007 Asset management fees 2,640
Reimbursement of expenses paid $15,063
Sept. 7, 2007 by owner
Sept. 20, 2007 Compliance review 1,400
Nov. 7, 2007 Asset management fees 2,640
Membership dues for other
1,075
Feb. 12, 2008 owner projects
Retainer fees for legal service
5,000
May 7, 2008 (not for project operations)
May 7, 2008 Pre-REAC* inspection review 5,884
Dec. 24, 2008 Wages for nonproject employee 906
Total $30,560 $15,063
* REAC = Real Estate Assessment Center
Project Revenue Was Wired to
the Owner
The management agent improperly wired funds from project revenue to the owner. The
project received $27,500 from a vendor in July 2005 as an incentive for entering into a
four-year and two-month contract for laundry services in February 2005. The funds were
wired from the project’s operating account to the owner’s account in August 2005. As of
May 2009, the funds had not been returned to the project. The regulatory agreement (see
criterion number 2 in appendix C) requires that owners not pay out any funds except from
surplus cash.
6
Other Problems Existed
We noted that other problems existed at the project. Due to the difficult financial position
of the project, the owner was unable to maintain the property at a level that sustained
maximum occupancy and marketability. We also determined that the annual audits of the
financial statements did not meet HUD requirements. We are not recommending that the
owner correct the issues because the mortgage has been assigned to HUD.
The Project’s Physical Condition Was Not Well Maintained
We conducted a physical inspection of the project on March 11, 2009, and noted
many instances of deferred maintenance in both occupied and vacant units as well
as in the project’s common areas. The deficiencies observed included damaged
walls and floors, lack of power/electricity, and apparent mold. Also two of the
vacant units were not accessible because one was nailed shut due to a recent
break-in and the other was damaged by a recent fire at the project. In addition,
the owner stated that of the 322 vacant units at the project, only two were ready to
rent because the project did not have enough operating funds available for repairs.
The deficiencies noted in the common areas included a carport that was damaged
by a fire that had occurred more than one year earlier (and had not been repaired)
and multiple laundry rooms that were either boarded up because of damage or
contained damaged walls and had inoperable equipment. In addition, we noted
deficiencies in the building’s exterior such as damaged walls, peeling stair
coverings, and missing/damaged lights.
The following pictures provide examples of some of the deficiencies observed.
The building stairs had covering that was peeling.
7
This carport was damaged by a fire that had occurred more
than one year earlier.
Multiple laundry facilities had holes in the walls.
8
Multiple laundry facilities had holes in the walls.
The Annual Audits of the Financial Statements Did Not Meet HUD Requirements
The certified public accounting (CPA) firm that performed the audit was not
engaged to review or report on internal controls or compliance with applicable
laws and regulations that may have a material effect on each HUD-assisted
program. HUD Handbook 4370.2, REV-1, requires the submission of various
financial reports including a report on internal controls and compliance with
applicable laws and regulations (see criterion number 5 in appendix C). However,
the project’s electronic submission falsely claimed the reviews had been done and
reported no problems. HUD was unaware the reviews had not been completed.
Neither the project’s owner nor the CPA firm engaged for the audit were aware of
HUD requirements for the auditors to use the Consolidated Audit Guide for
Audits of HUD Programs, which, if followed, would have ensured a complete
audit.
Conclusion
The owner and/or its management agents violated the regulatory agreement with HUD
and incurred $512,562 in questioned costs when they used operating funds to pay for
development expenses, used project funds for ineligible and unsupported expenses, and
wired project revenue to the owner. The questioned costs, in addition to the poor market
condition, contributed to the owner’s default on its $23.5 million HUD-insured mortgage.
In addition, the owner was unable to maintain the property in a condition that sustained
maximum occupancy and submitted annual audits of the financial statements that did not
meet HUD requirements.
Because the mortgage has been assigned to HUD we are not recommending that the
owner address the underlying causes and internal control deficiencies. Instead we are
9
recommending reimbursement to HUD for unallowable costs. We are also
recommending that HUD pursue double damage remedies, civil money penalties, and/or
administrative sanctions, as appropriate, for the regulatory violations.
Recommendations
We recommend that the Director of the San Francisco multifamily hub require the owner
of Park Lee Apartments to
1A. Reimburse HUD’s Federal Housing Administration (FHA) insurance fund
$439,439 for development expenses paid with operating funds.
1B. Reimburse HUD’s FHA insurance fund $30,560 for ineligible disbursements.
1C. Require the owners to either furnish supporting documentation or reimburse
HUD’s FHA insurance fund $15,063 for unsupported expenses.
1D. Reimburse HUD’s FHA insurance fund $27,500 for project revenue
transferred to the owner.
We also recommend that HUD’s Regional Counsel in coordination with the Director of
HUD’s San Francisco Multifamily Housing Hub and HUD’s Office of Inspector General
1E. Pursue double damage remedies against the responsible parties for the
ineligible/inappropriate disbursements and any unsupported disbursements
that were used in violation of the project’s regulatory agreement.
We also recommend that the Director of HUD’s Departmental Enforcement Center
1F. Pursue civil money penalties and administrative sanctions, as appropriate,
against the owner, operator, and/or their principals/owners for their part in the
regulatory violations cited in this report.
10
SCOPE AND METHODOLOGY
The audit covered the period January 1, 2006, through December 31, 2008. However, we also
reviewed several transactions that occurred in 2005 and 2009 based on general ledger entries
indicating that questionable expenditures had occurred in those years. Our audit was performed
at Park Lee Apartments in Phoenix, Arizona, and at the owner’s office in Chandler, Arizona. We
performed our audit work from February to May 2009.
To perform our audit, we
Reviewed applicable laws, regulations, and guidance issued by HUD;
Reviewed pertinent financial records maintained by the owner and the two management
agents;
Interviewed the owner’s staff;
Reviewed HUD files and interviewed appropriate HUD officials in the Phoenix Office of
Multifamily Housing; and
Physically inspected the property.
We selected a nonstatistical sample of disbursements to determine whether they were supported
by invoices or other documentation and were eligible. 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.
11
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 objective:
Ensuring that project funds are used in compliance with applicable laws and
regulations.
Maintaining complete and accurate records.
Administering the project’s operations in compliance with applicable laws and
regulations.
Safeguarding assets
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 organization’s objectives.
Significant Weaknesses
Based on our review, we believe that the following item is a significant weakness:
The project lacked effective control to ensure that project funds were used in
compliance with applicable laws and regulations (finding 1).
12
APPENDIXES
Appendix A
SCHEDULE OF QUESTIONED COSTS
Recommendation Ineligible 1/ Unsupported 2/
number
1A $439,439
1B $30,560
1C $15,063
1D $27,500
Totals $497,499 $15,063
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.
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.
13
Appendix B
AUDITEE COMMENTS AND OIG’S EVALUATION
Ref to OIG Evaluation Auditee Comments
Comment 1
14
Comment 2
15
16
Comment 3
Comment 4
17
Comment 4
Comment 5
Comment 6
Comment 7
Comment 8
18
Comment 7
Comment 9
Comment 10
19
Comment 11
Comment 12
Comment 13
Comment 7
20
Comment 14
Comment 15
Comment 16
Comment 17
Comment 18
21
Comment 19
Comment 20
Comment 21
22
Comment 22
23
24
OIG Evaluation of Auditee Comments
Comment 1 The discussion draft report was mistakenly addressed to Community Services of
Arizona (CSA), the manager of CSA-Park Lee which is a member and manager of
the project. All future correspondence will be addressed to the owner of the
project, Park Lee Highland, LLC.
Comment 2 We acknowledge that Community Services of Arizona advanced funds to the
project and also paid for operating expenses of the project. We changed the
Background section of the report to reflect the funds that were advanced to the
project as reported in the audit of the 2007 financial statements.
Comment 3 We disagree with the auditee’s statement that, because all operating payables
appeared to be current at the time, the $400,000 transfer should be considered
surplus cash. The auditee provided their determination of surplus cash at the end
of the 2005 fiscal year as follows:
$1,729,005 Total revenue
$2,229,740 Total expenses
($878,089) Reduce expenses for depreciation
($52,876) Reduce expenses for amortization
$1,298,775 Total adjusted expenses
$430,230 Balance
The auditee’s calculation demonstrated that the owner/management disregarded
HUD’s definition of surplus cash and HUD’s requirements for surplus cash
computation and documentation for FHA-insured multifamily projects. Section
13(f) of the regulatory agreement between Park Lee Highland, LLC and HUD
defines surplus cash as any cash remaining after:
1. The payment of:
a. All sums due or currently required to be paid under the terms of any
mortgage or note insured or held by the Secretary;
b. All amounts required to be deposited in the reserve fund for
replacements;
c. All obligations of the project other than the insured mortgage unless
funds for payment are set aside or deferment of payment has been
approved by the Secretary; and
2. The segregation of:
a. An amount equal to the aggregate of all special funds required to be
maintained by the project; and
b. All tenant security deposits held.
HUD Handbook 4370.1, REV-2, also states that surplus cash is calculated by
subtracting the sum of the current liabilities on the balance sheet from the sum of
25
the current assets on the balance sheet. The project’s 2005 financial statements
show that the current assets were only $101,662 while the current liabilities
(minus the advances from the investor member) were $2,008,396.
In addition, HUD Handbook 4370.1, REV-2, states that surplus cash is computed
as of the end of an annual or semi-annual period. Therefore, the computation of
surplus cash should not have been made prior to June 30, 2005; however, the
project’s operating funds were improperly transferred to the project’s
development account on June 23, 2005. Also there was no documentation of the
computation of surplus cash prior to the transfer of funds.
Comment 4 The auditee provided documentation to support that funds were transferred from
the project’s development account to the project’s operating account to pay for the
development expenses. These expenses have been removed from the report.
Comment 5 The auditee’s response does not state that it disagreed with OIG’s position that the
relocation expenses should not be paid from the project’s operating account. We
reviewed the invoices during the audit and, as stated in the audit report,
determined that the project’s operating funds were improperly used to pay for
relocation expenses.
Comment 6 We disagree with the auditee’s response that the expenses paid for annual
compliance reviews were for normal operations. These reviews were for
compliance with the bond requirements and were not for normal project
operations. Figure 6-2 of HUD Handbook 4381.5, REV-2, states that visits to
spot check performance of on-site staff (i.e. reviews of occupancy files, office
procedures, etc.) are a management expense. We also consulted with staff at
HUD’s Phoenix Office of Multifamily Housing during the audit and they
concurred with our conclusion that these expenses were ineligible.
Comment 7 The auditee provided documentation to support that the vendor conducted pre-
approval of tenant files. These expenses have been removed from the report.
Comment 8 The auditee’s response does not state that it disagreed with OIG’s opinion that the
expenses should not be paid from the project’s operating account. HUD
handbook 4370.2, REV-1, states that project funds should only be used to pay
reasonable expenses necessary for the operation and maintenance of the project.
Comment 9 The report has been modified to acknowledge that, after audit work was
completed, the auditee provided documentation to support the amount of $53,251.
OIG verified the supporting documentation provided by the auditee.
Comment 10 We agree that the invoice appeared to be noted incorrectly as a security consulting
fee. These expenses have been removed from the report.
26
Comment 11 The auditee’s response does not provide any explanation for these double charges
to the project.
Comment 12 We agree that the timesheet coding and location are inconsistent; however, we are
using the location listed as the determining factor. The auditee did not provide
any documentation to support their claim that the employee worked at the project
during the pay period in question.
Comment 13 We agree with the auditee’s response that the expenses are unsupported.
Comment 14 We agree that the membership dues for apartment listings are an allowable
operating expense; however, the documentation provided does not support the
amount charged to the project. The invoice from the vendor shows that the total
is $4,395.30 and is billed based on a set amount per project times 21 properties
that Community Services of Arizona owns and/or manages. Each property should
have been allocated $209.30 ($4,395.30 divided by 21); however, Community
Services of Arizona allocated the cost based on the number of units for each
property. Also, Park Lee Apartments was not listed on the invoice; however, an
e-mail from the vendor states that Park Lee Apartments was upgraded from gold
to platinum membership and the charge was $84 for three months plus $28 for the
current month. These amounts total $112. The report has been modified to
reflect this amount as allowable and the remaining balance as ineligible.
Comment 15 We disagree with the auditee’s statement that the retainer fee paid for legal work
associated with the project that included regulatory advice in connection with a
financially troubled FHA-insured project and potential workout issues, including
a partial payment of claim are reasonable operating expenses. HUD Handbook
4370.2, REV-1, states that project funds should only be used to pay reasonable
expenses necessary for the operation and maintenance of the project. In addition,
Figure 6-2 in HUD Handbook 4381.5, REV-2, states that legal expenses may be
charged to the project’s operating account; however, the handbook is referring to
legal expenses related to the operation of the project, such as eviction notices.
Comment 16 We disagree that pre-REAC inspection work is an allowable operating expense.
We consulted with staff at HUD’s Phoenix Office of Multifamily Housing during
the audit and they concurred with our conclusion that these expenses were
ineligible.
Comment 17 The auditee did not provide any documentation to support their claim that the
timecard for the employee should have been for the project but was incorrectly
identified as Pinecrest. Also, during the audit Community Services of Arizona
staff stated that the accounting department coded the entire amount of the invoice
to the project instead of distributing the expense between the project and Pinecrest
(the invoice included other timecards for Park Lee Apartments employees).
27
Comment 18 The auditee provided documentation to support that the employees performed
work at the project. The expenses have been deleted from the report.
Comment 19 We disagree with the auditee’s statement that the funds appeared to offset closing
costs incurred by Community Services of Arizona at the property closing in
February 2005. The “Amendment to Lease” dated February 15, 2005 only states
that the laundry company would pay the project an additional $27,500 for
extending the term of the lease for four years and two months. The auditee did
not provide any documentation to indicate that these funds were used to offset
closing costs incurred by Community Services of Arizona. It appears that they
assumed this because the date of the “Amendment to Lease” and for the property
closing both occurred in February 2005. More importantly, the incentive fee was
operating revenue and should only be used for operating expenses.
Comment 20 We received adequate documentation showing that the improper loan repayment
was returned to the project by the Arizona Department of Housing. This section
has been removed from the report.
Comment 21 We agree that the project received a passing score from REAC’s inspection on
September 4, 2008 and that OIG’s inspection was not a formal inspection
conducted by REAC-certified HUD staff. Accordingly, this issue was not a
separate finding in the report and there was no related recommendation. We
modified the report language to reflect the auditee’s response which stated “That
only two other [of 322 vacant units] units were reported as currently ready for
move-in of new residents is also not unreasonable given the financial position of
the project.” In our opinion, the condition of the property made it difficult to
successfully market the property.
Comment 22 We disagree with the auditee’s response that, without formal notification from
either HUD or the certified public accountant, it was not responsible for ensuring
its annual financial audit complied with HUD’s audit requirements. When HUD
insured the multifamily property, the property owners signed a regulatory
agreement to, among other things, maintain financial records in accordance with
HUD’s guidance. HUD publishes its requirements and guidance in the form of
handbooks readily available through HUD’s website. It is the responsibility of
the project’s owners to ensure HUD requirements are followed. The applicable
handbooks are referenced in Appendix C of this report.
The auditee’s response further demonstrated a lack of understanding of the
requirements. The electronic submission format for the annual audited financial
statements to HUD did not ask for a “yes or no” answer regarding the existence of
internal controls. It asked whether the independent auditor’s report on internal
controls identified Significant Deficiencies and/or Material Weaknesses. Park
Lee Apartment’s electronic submission to HUD contained the answer “no,” which
indicated the independent auditor reviewed internal controls and provided a
written report stating no significant deficiencies or material weaknesses were
28
found. Similarly, the electronic submission format required an answer to the
question, “Did the independent auditor’s Report on Compliance (with laws and
regulations) for Major Program include a qualified or an unqualified opinion?” It
also required an answer (yes or no) to the question of whether the report contained
a material noncompliance indicator.
Because all of the questions were answered in a manner certifying the
independent auditor’s reports did not disclose significant deficiencies or material
weaknesses, HUD relied on the certifications and assumed the required audit
work was performed. Below are Park Lee Apartment’s actual submissions for
2006. The 2007 input contained the same answers to the same questions.
29
Appendix C
CRITERIA
1. Paragraph 6(a) of the regulatory agreement states: “Owners shall not, without prior written
approval of the Secretary [of HUD], convey, transfer, or encumber any of the mortgaged
property or permit the conveyance of such property.”
2. Paragraph 6(b) of the regulatory agreement states: “Owners shall not, without prior written
approval of the Secretary, assign, transfer, dispose of, or encumber any personal property of
the project, including rents, or pay out any funds except from surplus cash, except for
reasonable operating expenses and necessary repairs.”
3. Paragraph 6(e) of the regulatory agreement states: “Owners shall not, without prior written
approval of the Secretary, make, or receive and retain, any distribution of assets or any
income of any kind of the project except surplus cash.”
4. Paragraph 7 of the regulatory agreement states: “Owners shall maintain the mortgaged
premises, accommodations, and the grounds and equipment appurtenant thereto, in good
repair and condition.”
5. HUD Handbook 4370.2, REV-1,
Paragraph 2-6E: All disbursements from the Regular Operating Account must be
supported by approved invoices/bills or other supporting documentation. The request
for project funds should only be used to make mortgage payments, make required
deposits to the Reserve for Replacements, pay reasonable expenses necessary for the
operation and maintenance of the project, pay distributions of surplus cash permitted
and repay owner advances authorized by HUD.
Paragraph 3-6A: An independent public accountant shall examine the books and
records of the mortgagor and shall furnish an opinion on the annual financial
statements in accordance with GAAS [generally accepted auditing standards] and
GAGAS [generally accepted government auditing standards].
Paragraph 3-6B: In accordance with GAAS and GAGAS, an independent public
accountant shall obtain an understanding of the project’s internal control structure and
shall furnish a written report on their understanding of the entity’s internal control
structure and the assessment of control risk made as part of a financial statement
audit.
Paragraph 3-6C: In accordance with GAAS, independent public accounts shall
prepare a written report on their tests of compliance with applicable laws and
regulations in accordance with IG [Inspector General] Handbook 2000.4.
30
Paragraph 3-7A: The annual financial report shall include: (1) a certification by the
mortgagor, when the project is owned by an individual; (2) by two or more partners,
when it is owned by a limited partnership; (3) by two officers one of which must be
the president of the corporation, when it is owned by a corporation; (4) all joint
venturers or partners, when the project is a general partnership; or (5) trustee and
appropriate beneficiaries, when it is owned by a trust.
6. HUD Handbook 4381.5, REV-2,
Paragraph 6.41(b): Asset management costs must not be billed to a project’s
operating account. These costs may only be paid from funds available for distribution
to owners in accordance with the terms of the Regulatory Agreement and HUD
Handbook 4370.2.
Figure 6-2: The management agent’s travel expenses to visit the project and meet
with owners should be paid from the management fee.
Figure 6-2: Visits to spot check performance of on-site staff (e.g. reviews of
occupancy files, office procedures, etc.) should be paid from the management fee.
31
The Owner of Park Lee Apartments, Phoenix, Arizona, Violated Its Regulatory Agreement with HUD
Published by the Department of Housing and Urban Development, Office of Inspector General on 2009-09-15.
Below is a raw (and likely hideous) rendition of the original report. (PDF)