oversight

The John C. Cannon Retirement and Assisted Living Residence, Seattle, Washington, Violated Its Regulatory Agreement

Published by the Department of Housing and Urban Development, Office of Inspector General on 2009-04-15.

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

                                                                  Issue Date
                                                                           April 15, 2009
                                                                  Audit Report Number
                                                                           2009-SE-1002




TO:         Roger E. Miller, Director, Office of Insured Healthcare Facilities, HI

            Mona Fandel, Region X Regional Counsel, 0AC



FROM:       Joan S. Hobbs, Regional Inspector General for Audit, Region X, 0AGA

SUBJECT: The John C. Cannon Retirement and Assisted Living Residence, Seattle,
           Washington, Violated Its Regulatory Agreement

                                    HIGHLIGHTS

 What We Audited and Why

      We audited the John C. Cannon Retirement and Assisted Living Residence (project) at
      the request of the Region X Director of the Office of Multifamily Housing. The Director
      referred the project due to regulatory agreement violations. We wanted to determine
      whether the project owner used project funds in accordance with U.S. Department of
      Housing and Urban Development (HUD) requirements and properly maintained the
      property.

 What We Found
      The project’s owner did not use project funds in accordance with HUD’s regulatory
      agreement when it failed to get HUD approval for leases costing $189,000, used project
      funds to obtain unneeded equipment costing $10,700, and failed to keep adequate
      documentation to support expenditures costing $317,000. We found the property was
      properly maintained.
What We Recommend

     We recommend that the Director, Office of Insured Health Care Facilities require the
     owner to repay the amount spent for the unapproved leases and unnecessary equipment.
     We also recommend that the Director, Office of Insured Health Care Facilities, require
     the project owner to provide documentation supporting expenses paid for with project
     funds. Further, we recommend the Regional Counsel pursue double damages remedies,
     civil money penalties, and/or administrative sanctions, as appropriate, against the former
     administrator and the board of directors.

     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 a discussion draft report to the project owner on March 6, 2009, and held an
     exit conference with its board of directors on March 23, 2009. The project provided
     written comments on April 10, 2009. It generally agreed with our findings. The board
     reports they have searched for and found much of the missing supporting documentation.

     The complete text of the auditee’s response, along with our evaluation of that response, is
     in appendix B of this report.




                                              2
                            TABLE OF CONTENTS

Background and Objectives                                              4

Results of Audit                                                       6
      Finding: The Project Owner Violated Its Regulatory Agreement

Scope and Methodology                                                  9

Internal Controls                                                      10

Appendixes

   A. Schedule of Questioned Costs and Funds to Be Put to Better Use   11
   B. Auditee Comments and OIG’s Evaluation                            12




                                            3
                      BACKGROUND AND OBJECTIVES

The John C. Cannon Retirement and Assisted Living Residence, a Washington State nonprofit
corporation governed by a board of directors, is the owner of the John C. Cannon Retirement and
Assisted Living Residence (project), a 120-unit assisted living senior apartment complex located
in Seattle, Washington. In December 2000, the U.S. Department of Housing and Urban
Development (HUD) insured an $11.5 million loan for the project under Section 232 of the
National Housing Act, in consideration of which the project owner agreed to operate in
accordance with a December 12, 2000, regulatory agreement. The project opened for business in
January 2002.

Section 232 of the National Housing Act, as amended, includes insurance for mortgage loans to
facilitate the construction and substantial rehabilitation of board and care homes. Facilities must
accommodate 20 or more residents who require skilled nursing care and related medical services
or those who, while not in need of nursing home care, are in need of minimum but continuous
care provided by licensed or trained personnel. Eligible borrowers include investors, builders,
developers, public entities (nursing homes), and private nonprofit corporations and associations.

When the project development began in 2000, the owner hired Global Health Management
(Global Health) as the management agent. The president of Global Health served as the project
administrator. Because Global Health lacked management agent experience, it hired a
management subcontractor in June of 2000 to meet HUD’s experience requirements. The
management subcontractor resigned and in October 2001, Global Health replaced it with another
management subcontractor. In June 2002, Global Health replaced this subcontractor with a third
subcontractor a few weeks before HUD directed the project owner’s board of directors to
terminate Global Health for improper management.

However, the original project administrator and president of Global Health remained in his
position until HUD directed the board to terminate his employment agreement in December of
2007. HUD advised us that the board immediately rehired the administrator to the position of
fundraiser and provided him with office space at the project. During the administrator’s tenure,
the project missed mortgage payments beginning in May 2002, less than six months after
opening. From 2003 to 2007, the project’s occupancy rate averaged only 74 percent, and as a
result of its insufficient rent revenue, the project’s monthly mortgage payments went into arrears
beginning in February 2005, with the reserve fund for replacement account significantly
underfunded. In 2004 and 2006, Washington state inspectors issued stop placement orders that
lasted about five weeks and four weeks, respectively.

In March 2008 at HUD’s request, the management of the project was turned over to a
professional management agency, Opportunities Industrialization Center. On June 24, 2008, the
HUD Seattle multifamily hub requested that the Departmental Enforcement Center take
enforcement action against the project owner for violations of its regulatory agreement. In
September 2008, the loan servicer filed to record the assignment of the mortgage to HUD.



                                                 4
Our Objective

Our objective was to determine whether the project owner used project funds in accordance with
the regulatory agreement and properly maintained the property.




                                              5
                                RESULTS OF AUDIT

Finding 1: The Project Owner Violated Its Regulatory Agreement

The project’s owner violated its regulatory agreement when it leased copiers costing $189,000
without HUD approval, bought unneeded facsimile equipment costing $10,700, and failed to
properly document other expenditures of $317,000. These violations occurred because (1) the
owner and project administrator did not understand HUD’s requirements and (2) the owner failed
to obtain professional experienced management to operate the project, instead, entrusting the
project’s operations to an inexperienced project administrator. As a result, the mismanagement
of the project’s resources contributed to the default on its $11.5 million HUD-insured mortgage.


  HUD did not approve
  equipment leases


       The project did not obtain HUD approval when it entered into a five-year lease in 2005
       for three copiers and another five-year lease in 2007 for four additional copiers.
       According to the regulatory agreement, HUD must approve any plan to lease equipment.
       The project’s owner entered into the ineligible leases because the former project
       administrator did not believe HUD approval was required. As a result, $62,025 was not
       available for project operations and an additional $127,222 will not be available if the
       project makes the remaining payments.


  Unneeded Equipment
  Purchased


       In December 2006, the project bought facsimile equipment, even though the copiers
       leased in 2005 had facsimile capability. According to the regulatory agreement, only
       reasonably necessary expenditures are allowed. The project administrator purchased the
       facsimile equipment because he thought it was necessary to maintain state certification;
       however, the current management agent has maintained state certification since March
       2008 without using the equipment. As a result, the project incurred almost $11,000 in
       debt for facsimile equipment that has not been installed or used.


 Purchases Not Supported


       The project lacked documentation to support expenditures including $160,415 for legal
       services (of which $140,893 had been paid and $19,522 had not been paid), $39,591 for

                                               6
    accounting services (of which $10,785 had been paid and $28,806 had not been paid),
    and $8,955 for miscellaneous expenditures. This condition occurred because the
    project’s management did not maintain its financial records in an auditable condition as
    required by the regulatory agreement. As a result, the project’s owner could not provide
    assurance that these expenditures were reasonable, necessary, and benefitted the project.

    Additionally, monthly payments of project funds totaling $107,817 were paid to an
    individual for marketing services. There was no documentation showing what marketing
    services were provided.

Conclusion



    Title 12 of the United States Code (12 U.S.C. 1715z-4a) allows HUD to recover double
    the value of any assets or income used by a person or entity that owns or operates a
    nursing home in violation of the regulatory agreement. The project owner’s board of
    directors is responsible to ensure that the project is operated in compliance with the
    regulatory agreement. The board did not ensure this compliance because it failed to
    obtain professional experienced management to operate the project, instead, entrusting
    the project’s operations to an inexperienced project administrator. The following table
    summarizes the cost to the project due to the regulatory agreement violations.

        Questioned cost Expense                      Paid       Owed       Total
        category
        Ineligible          Copier lease             $ 62,025   $127,222   $189,247
        Unnecessary         Facsimile                           $ 10,729   $ 10,729
        Unsupported         Legal                    $140,893   $ 19,522   $160,415
        Unsupported         Marketing                $107,817              $107,817
        Unsupported         Accounting               $ 10,785   $ 28,806   $ 39,591
        Unsupported         Miscellaneous            $ 8,955               $ 8,955
        Total Ineligible, unnecessary, or unsupported costs                $516,754


    This mismanagement contributed to the project’s default on the $11.5 million HUD insured
    mortgage. At HUD’s direction, the board hired a professional management agent in March
    2008.

  Recommendations


        We recommend that the Director, Office of Insured Health Care Facilities,

        1A. Prohibit the project from using project funds to pay $127,222 for the remaining
            terms of the copier leases and $10,729 for the unnecessary facsimile equipment.

        1B. Require the project owner to provide documentation to support payments of
            $140,893 for legal services, $107,817 for marketing services, $10,785 for

                                                  7
    accounting services, and $8,955 for miscellaneous expenses or reimburse the
    unsupported amounts to the Federal Housing Administration insurance fund.

1C. Direct the project owner to provide documentation to support $28,806 in
    expenses incurred for accounting services and $19,522 for legal services or
    prohibit the use of project funds for these expenses.

1D. Reimburse the Federal Housing Administration insurance fund $62,025 for the
    ineligible lease payments.

We also recommend that the Regional Counsel,

1E Pursue double damages remedies against the former administrator and the board
   of directors for the ineligible and unnecessary expenditures and the applicable
   portion of the unsupported disbursements that were used in violation of the
   regulatory agreement.

1F Pursue civil money penalties and administrative sanctions, as appropriate, against
   the former administrator and board of directors for their part in the regulatory
   violations cited in this report.




                                    8
                         SCOPE AND METHODOLOGY

We conducted our fieldwork at the project’s office in Seattle, Washington, between October
2008 and January 2009. To achieve our objectives, we interviewed HUD and project staff,
reviewed HUD and project records including the regulatory agreement, and inspected the project.
Our review generally covered the period January 1, 2005, through July 31, 2008, and was
expanded as appropriate.

Before 2007, the project did not keep the supporting documentation for its financial records in a
reasonable condition for audit. Also, the project’s financial records before 2005 were
unavailable for review. Therefore, our review centered on 88 payments made in 2007. These
payments included payments on a contract that did not have HUD approval and payments to the
former project administrator and his family members. We also reviewed items noted in the
referral from HUD to determine whether the payments were made for eligible purposes. We did
not project the results of the samples.

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
objectives. We believe that the evidence obtained provides a reasonable basis for our findings
and conclusions based on our audit objectives.




                                                9
                              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,
       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:

              Policies and procedures intended to ensure that project assets were used only for
              authorized purposes.

              Policies and procedures intended to ensure proper project maintenance.

       We assessed the relevant controls identified above.

       A significant weakness exists if internal controls do not provide reasonable assurance that
       the process for planning, organizing, directing, and controlling program operations will meet
       the organization’s objectives.



 Significant Weaknesses

       Based on our review, we believe that the following item is a significant weakness:

              The board of directors did not have adequate internal controls to ensure that
              project assets were used only for eligible purposes.




                                                10
                                   APPENDIXES

Appendix A

               SCHEDULE OF QUESTIONED COSTS
              AND FUNDS TO BE PUT TO BETTER USE

 Recommendation          Ineligible 1/            Unsupported 2/      Funds to be put to
     number                                                                better use 3/
      1A                                                                       $137,951
      1B                                               $268,450
      1C                                               $ 48,328
      1D                     $62,025


     Totals                  $62,025                   $316,778                $137,951


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.

3/   Recommendations that funds be put to better use are estimates of amounts that could be
     used more efficiently if an Office of Inspector General (OIG) recommendation is
     implemented. These amounts include reductions in outlays, deobligation of funds,
     withdrawal of interest, costs not incurred by implementing recommended improvements,
     avoidance of unnecessary expenditures noted in preaward reviews, and any other savings
     that are specifically identified.




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Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation   Auditee Comments




                         12
13
Comment 1

Comment 2




            14
                          OIG Evaluation of Auditee Comments

Comment 1     The auditee requested information on the miscellaneous expenses we questioned,
              which we provided via email on April 13, 2009

Comment 2 The board requested to submit the additional supporting documentation to us for
          consideration. The Director, Office of Insured Healthcare Facilities, the action
          official, will review any supporting documentation during the audit resolution
          process.




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