oversight

The Puerto Rico Department of Housing Did Not Ensure Compliance With HOME Program Objectives

Published by the Department of Housing and Urban Development, Office of Inspector General on 2010-08-25.

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

                                                                  Issue Date
                                                                           August 25, 2010
                                                                  Audit Report Number
                                                                           2010-AT-1011




TO:        José R. Rivera, Director, Community Planning and Development, San Juan Field
             Office, 4ND


           //signed//
FROM:      James D. McKay, Regional Inspector General for Audit, Atlanta Region, 4AGA

SUBJECT: The Puerto Rico Department of Housing, San Juan, PR, Did Not Ensure
           Compliance With HOME Program Objectives


                                    HIGHLIGHTS

 What We Audited and Why

             We audited the Puerto Rico Department of Housing’s (Department) HOME
             Investment Partnerships Program (HOME). We selected the Department for
             review as part of our strategic plan based on the results of a previous audit of the
             Department’s HOME program that disclosed instances of HOME-funded activities
             with slow progress. The objectives of this audit were to determine whether the
             Department’s HOME-funded activities met program objectives and whether the
             Department had adequate controls and procedures to ensure that HOME-funded
             activities met program objectives. This is the second of two reports on the
             Department’s HOME program.

 What We Found

             The Department did not have adequate controls and procedures to ensure that
             HOME-funded activities met program objectives. It disbursed more than $4.4
             million for ineligible expenditures and activities that failed to meet the HOME
             program objectives, disbursed more than $9 million for activities that reflected
           slow progress without assurance that the activities would generate the intended
           benefits, and failed to reprogram and put to better use more than $7.9 million in
           unexpended HOME funds for activities that were not carried out or terminated. As
           a result, HUD had no assurance that funds were used solely for eligible purposes
           and that HOME objectives were met.

What We Recommend

           We recommend the Director of the San Juan Office of Community Planning and
           Development require the Government of Puerto Rico or its designee to reimburse
           the HOME program more than $4.4 million for ineligible expenses and activities
           that failed to meet program objectives, and reprogram and put to better use more
           than $7.9 million in unexpended funds for activities that had not generated the
           intended benefits. The Director should also require the Government of Puerto
           Rico or its designee to establish and implement controls and procedures for its
           HOME program to ensure that HUD requirements and objectives are met.

           We also recommend that the Director of the San Juan Office of Community
           Planning and Development determine the eligibility of more than $9 million
           disbursed for projects with signs of slow progress, reevaluate the feasibility of
           these activities, and recapture any shortfall generated by the closure and
           deobligation of funds associated with terminated activities that do not meet
           statutory requirements for the timely commitment and expenditure of funds.

           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 discussed the findings with HUD and the Department during the audit and at
           the exit conference on July 15, 2010. The Department provided its written
           comments to our draft report on July 21, 2010. In its response, the Department
           generally disagreed with the findings.

           The complete text of the Department’s response, along with our evaluation of that
           response, can be found in appendix B of this report




                                             2
                            TABLE OF CONTENTS

Background and Objectives                                                       4

Results of Audit
      Finding 1: The Department Did Not Meet HOME Program Objectives            5

Scope and Methodology                                                           11

Internal Controls                                                               13

Follow-up on Prior Audits                                                       15

Appendixes
   A. Schedule of Questioned Costs and Funds To Be Put to Better Use            16
   B. Auditee Comments and OIG’s Evaluation                                     17
   C. List of Ineligible Expenditures and Activities That Failed To Meet HOME
      Program Objectives                                                        21
   D. List of Slow Progress Activities                                          22
   E. List of Commitments To Reprogram and Put to Better Use                    23




                                             3
                      BACKGROUND AND OBJECTIVES

The HOME Investment Partnerships Program (HOME) is authorized under Title II of the
Cranston-Gonzalez National Affordable Housing Act as amended. The U.S. Department of
Housing and Urban Development (HUD) allocates funds by formula to eligible State and local
governments for the purpose of increasing the supply of decent, safe, sanitary, and affordable
housing to low- and very low-income families. State and local governments may use HOME
funds to carry out multiyear housing strategies through acquisition, rehabilitation, new housing
construction, and tenant-based rental assistance. HUD’s Integrated Disbursement and
Information System is used to monitor HOME commitments and draws for the various activities,
including program income, repayments, and recaptured funds, among others.

The Puerto Rico Department of Housing (Department) has administered the State HOME
program since 1992. It is the largest participating jurisdiction in Puerto Rico administering nearly
$50 million in HOME funds as of January 2010. HUD’s information system reflected
expenditures exceeding $24 million during the fiscal year ending June 30, 2009, for the following
activities:

                             HOME activity                      Fiscal year 2009
           Units for rental                                         $11,866,058
           Home buyer                                                  4,589,875
           Community housing development organization                  2,620,766
           Planning and administration                                 2,487,586
           Units for sale                                              1,902,876
           Homeowner                                                   1,031,362
           Total                                                    $24,498,523

During the last 7 years, the Department has received the lowest overall performance ranking when
compared with the other 50 State participating jurisdictions.

The Department’s HOME office was responsible for administering HOME funds through June
30, 2010. Its books and records were maintained at 606 Barbosa Avenue, San Juan, PR. We
audited the Department’s HOME program as part of the HUD Office of Inspector General’s
(OIG) strategic plan. The Department was selected for review based on the results of a previous
audit of the Department’s HOME program that disclosed instances of HOME-funded activities
with slow progress.

The objectives of this audit were to determine whether the Department’s HOME-funded activities
met program objectives and whether the Department had adequate controls and procedures to
ensure that HOME-funded activities met program objectives.

Effective July 1, 2010, the Governor of the Commonwealth of Puerto Rico transferred the
administration of the HOME program to the Puerto Rico Housing Finance Authority, a subsidiary
of the Government Development Bank for Puerto Rico.




                                                   4
                                          RESULTS OF AUDIT

Finding 1: The Department Did Not Meet HOME Program Objectives
The Department disbursed more than $4.4 million for activities that failed to meet HOME
program objectives and for other ineligible expenditures. In addition, it disbursed more than $9
million for activities that reflected slow progress without assurance that the activities would
generate the intended benefits. The Department also failed to reprogram and put to better use
more than $7.9 million in unexpended HOME funds for activities that were not carried out or
terminated. This condition occurred because the Department did not develop and implement
controls and procedures to properly monitor HOME-funded activities and ensure that program
objectives were met. As a result, HUD had no assurance that funds were used solely for eligible
purposes and that HOME program objectives were met.



    Defaulted/Terminated Activities

                    The Department disbursed more than $3.5 million for activities in which the
                    developer defaulted on its construction loan, the properties were never occupied, or
                    the activities were terminated and did not generate the intended benefits.
                    Regulations at 24 CFR (Code of Federal Regulations) 92.205(e) provide that a
                    HOME-assisted project that is terminated before completion, either voluntarily or
                    otherwise, constitutes an ineligible project and any HOME funds invested must be
                    repaid to the participating jurisdiction’s treasury account.

                    On March 26, 1998, the Department executed an agreement for the construction of
                    201 housing units in a project named Palmas del Sol. The developer completed 72
                    housing units in March, 2003. The construction of the remaining units was to be
                    completed by February 27, 2007. However the developer defaulted on its
                    construction loan and the bank foreclosed on the loan. Although more than 12
                    years had passed since the agreement was signed, the construction of 107 housing
                    units had not been completed.1 As of April 2010, there were 91 units for which
                    construction had not started and 16 housing units for which construction was
                    stopped. We visited the project site on April 8, 2010, and it appeared to have been
                    abandoned for some time. Because the Palmas del Sol activity was not completed,
                    it did not fully meet the HOME program objectives and provide the intended
                    benefits.




1
    The developer completed 22 of the remaining 129 units after the initial phase.


                                                             5
                     Partial view of 16 houses under construction       Partial view of site for construction of 91 housing units


                  Other activities that did not meet program objectives included the project Alturas
                  de San Rafael, for which the grant recipient claimed that it lacked the capacity to
                  develop the project without additional government assistance. More than 8 years
                  had passed since the initial land acquisition, but the land remained vacant. Also,
                  the developer of Pedro Marquez Apartments discontinued his project because the
                  Department withdrew its funding from a State subsidy program that was needed to
                  complete the project. The Department thus failed to ensure that the activities
                  provided the intended benefits and met HOME objectives.

                  The Department did not take the appropriate measures to reimburse its letter of
                  credit for ineligible expenditures, cancel ineligible activities in HUD’s information
                  system, and reprogram unexpended funds associated with these activities to other
                  eligible efforts. The information system reflected eight terminated activities as
                  open activities and one activity that was never occupied as completed. A
                  description of activities that failed to meet HOME program objectives is included
                  appendix C.


    Improper Land Acquisition


                   Contrary to HUD's regulations, the Department disbursed more than $879,000 for
                   the purchase of land that could not be used to provide housing for low- and very
                   low-income families. Regulations at 24 CFR 92.205(a)(2) state that acquisition of
                   vacant land or demolition must be undertaken only with respect to a particular
                   housing project intended to provide affordable housing.

                   On July 19, 2007, the Department awarded a contract totaling more than $2.3
                   million for the acquisition of approximately 71 acres of land for the development
                   of 288 housing units. The site purchased included approximately 26 acres of
                   protected green areas2 that were home to endangered species and could not be
                   developed. The Department was aware of this condition. The use of HOME

2
  This pertains to a protected wilderness area for endangered species that could not be developed or used to benefit
low and very-low income families. The grant recipient was required to transfer the ownership of this area to the
Puerto Rico Department of Natural Resources.


                                                                    6
            funds to acquire vacant land that was not intended to provide affordable housing
            was an ineligible use of HOME funds.




            The Department disbursed more than $879,000 in HOME funds to purchase approximately 26.23 acres
            of green areas that could not be used to provide affordable housing.



Slow Progress Activities


           The Department disbursed more than $9 million for activities that reflected slow
           progress without assurance that the projects were feasible. HUD regulations at 24
           CFR 92.504(a) provide that the Department is responsible for managing the day-
           to-day operations of its HOME program, ensuring that HOME funds are used in
           accordance with all program requirements and written agreements, and taking
           appropriate action when performance problems arise.

           For example, the Department executed an agreement on February 9, 2007, for the
           construction of a 162-unit housing project named Plaza del Batey. According to
           the agreement, the construction of the housing units should have ended on or
           before August 8, 2009. However, as of March 2010, the construction of 132
           housing units had not been completed, and there was no indication that the units
           would be completed in the near future.




              Partial view of 30 houses under construction        Partial view of site for construction of 102 housing units


           Only 8 of a completed 30 housing units were occupied, and the developer had not
           been able to sell the remaining completed units. The developer indicated that the


                                                             7
          demand for housing in the area had decreased considerably. Under these
          circumstances, it was not beneficial to start the construction of the remaining
          housing units because it would increase the project costs and housing inventory
          while there was no demand for housing in the area. Based on this condition, HUD
          had no assurance that the Plaza del Batey activity would fully meet HOME
          program objectives and provide the intended benefits.

          For the activities of Bello Monte, La Puerta de Carolina, Las Piedras Elderly, and
          O.B.R.A.S., the construction of 541 housing units had not started. Although the
          La Cima Apartments, Altos del Rio, and Villas del Naranjal projects had been
          completed or substantially completed, 93 of 143 HOME-assisted units remained
          unoccupied, and their continued feasibility under the program was not assured.

          The Department thus failed to ensure the timely completion of activities. As a
          result, HUD had no assurance that these activities provided the intended benefits
          and met HOME objectives. Appendix D provides a description of proposed
          housing activities that had not been completed as well as unsupported amounts in
          relation to these activities.

Commitments for Ineligible or
Uncompleted Activities

          The Department failed to provide evidence that it reprogrammed and put to better
          use more than $4.2 million for nine activities that had not been carried out and did
          not reflect disbursements in HUD’s information system. These activities were
          funded between 4 and 13 years ago. In addition, a project named San Miguel
          Home for the Elderly was completed in 2006 but still reflected more than $106,000
          as committed in HUD’s information system. The Department did not adequately
          monitor these activities to ensure that they were carried out in a timely manner and
          that funds were used in accordance with all program requirements as required by
          24 CFR 92.504(a). It should not continue with these activities, and the
          unexpended funds reported in HUD’s information system should be reprogrammed
          to other eligible efforts.

          In addition, the Department failed to provide evidence that it reprogrammed and
          put to better use obligations of more than $3.6 million for activities that were
          ineligible, not carried out, or terminated. HUD’s information system reflected
          unexpended obligations of more than $2.7 million for ineligible activities (see
          activities in appendix C). The Department also failed to provide evidence that it
          reprogrammed assistance of $600,000 for a project named La Puerta de Carolina,
          for which the developer reduced the number of housing units from 60 to 42. It also
          did not provide evidence that it reprogrammed more than $258,000 for the project
          Quintas de Santa Elena, an activity that was terminated after HUD questioned it.
          The Department should reprogram these funds to other eligible efforts. A
          description of activities with funds to be put to better use is included appendix E.


                                           8
Lack of Monitoring


             The Department did not take appropriate measures to ensure the timely completion
             of activities and that funds were used in accordance with all program requirements
             as required by 24 CFR 92.504(a). It lacked controls to properly monitor HOME-
             funded activities. These conditions occurred because the Department did not
             develop and implement procedures and controls to properly monitor HOME-
             funded activities and ensure that program objectives were met.

             A Department official with monitoring functions indicated that although certain
             monitoring of activities had been carried out in the past, the Department’s HOME
             program did not have a monitoring function in place as required by HUD. In
             general, HOME program directors did not assign the required importance to the
             monitoring function and did not ensure that adequate staff resources were available
             to perform monitoring activities. Frequent changes of HOME directors also
             affected program performance. The Department stopped performing monitoring of
             its HOME activities after 2006.

             In addition, the Department’s officials in charge of monitoring the HOME program
             activities were not knowledgeable of the status of activities and did not review the
             progress of funded activities to ensure that commitments resulted in disbursements
             and that the projects were completed in a timely manner. As a result, HUD had no
             assurance that HOME activities provided the intended benefits and met program
             objectives.

Conclusion

             The Department disbursed more than $4.4 million for activities that did not
             provide the intended benefits. In addition, it disbursed more than $9 million for 10
             activities that reflected slow progress, and there was no assurance that the activities
             would generate the intended benefits. The Department also failed to reprogram
             and put to better use more than $7.9 million in unexpended HOME obligations.
             As a result, HUD had no assurance that funds were used solely for eligible
             purposes and that HOME program objectives were met. This condition occurred
             because the Department did not develop and implement procedures and controls to
             properly monitor HOME-funded activities and ensure that program objectives
             were met.




                                                9
Recommendations


         We recommend that the Director of the San Juan Office of Community Planning
         and Development

         1A.      Require the Government of Puerto Rico or its designee to reimburse the
                  HOME program from non-Federal funds $4,428,179 for ineligible
                  expenses and activities that defaulted or were terminated without
                  generating the intended benefits.

         1B.      Determine the eligibility of the $9,027,082 disbursed for projects with
                  signs of slow progress and reevaluate the feasibility of these activities. The
                  Government of Puerto Rico must reimburse HUD from non-Federal funds
                  for activities that HUD determines to have been terminated and reprogram
                  and put to better use any unexpended funds associated with the terminated
                  activities.

         1C.      Require the Government of Puerto Rico or its designee to close out,
                  reprogram, and put to better use $4,349,580 in commitments for open
                  activities that are more than 4 years old or activities that were completed
                  and commitments were not reprogrammed.

         1D.      Require the Government of Puerto Rico or its designee to reprogram and
                  put to better use $3,608,645 associated with unexpended funds of the
                  activities that defaulted, were terminated, or for which assistance was
                  reduced or not necessary.

         1E.      Recapture any shortfalls generated by the closure and deobligation of funds
                  associated with recommendations 1C and 1D that do not meet statutory
                  requirements for the timely commitment and expenditure of funds pursuant
                  to the National Defense Authorization Act of 1991 and/or Title II of the
                  Cranston-Gonzalez National Affordable Housing Act, as amended.

         1F.      Require the Government of Puerto Rico or its designee to establish and
                  implement controls and procedures for its HOME program to ensure that
                  HUD requirements and objectives are met.




                                            10
                         SCOPE AND METHODOLOGY

The objectives of the audit were to determine whether the Department’s HOME-funded activities
met program objectives and whether the Department had adequate controls and procedures to
ensure that HOME-funded activities met program objectives.

To accomplish our objectives, we

       Reviewed applicable HUD laws, regulations, and other HUD program requirements;

       Reviewed the Department’s controls and procedures as they related to our objectives;

       Interviewed HUD, Department, developer, and community housing development
       organization officials;

       Reviewed monitoring, internal review, and independent public accountant reports;

       Reviewed the Department’s files and records, including activity files and accounting
       records;

       Traced information reported in HUD’s information system to the Department’s records,
       including accounting records and executed agreements; and

       Performed site inspection of the activities.

HUD’s information system reflected that the Department had 38 open HOME-funded activities as
of December 31, 2009, for which the last draw was more than a year ago and with draws
amounting to 95 percent or less of the total amount funded. From these activities, we selected the
10 activities with the highest unexpended balance, which totaled more $20 million in
commitments and more than $12.7 million in disbursements. We selected 10 additional activities
with disbursements totaling more than $6.1 million based on HUD’s and/or the Department’s
concerns. We reviewed the 20 activities in the sample to determine the status of activities for
which HOME funds were disbursed but which reflected slow progress.

HUD’s information system also reflected that the Department had 124 open HOME-funded
activities with funds committed totaling more than $11.4 million but no draws from its HOME
account as of December 31, 2009. We selected activities funded before January 1, 2006, which
reflected commitment balances of more than zero. This process resulted in the selection of 10
activities totaling more than $4.5 million. We determined the status of these activities.

To achieve our audit objectives, we relied in part on computer-processed data contained in the
Department’s database and HUD’s information system. Although we did not perform a detailed
assessment of the reliability of the data, we performed a minimal level of testing and found the
data adequate for our purposes. The results of the audit apply only to the items selected and
cannot be projected to the universe or population.

                                                 11
The audit generally covered the period July 1, 2008, through December 31, 2009, and we
extended the period as needed to accomplish our objectives. We conducted our fieldwork from
October 2009 through June 2010 at the Department’s offices in San Juan, PR.

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.




                                               12
                               INTERNAL CONTROLS

Internal control is a process adopted by those charged with governance and management designed
to provide reasonable assurance about the achievement of the organization’s mission, goals, and
objectives with regard to

       Effectiveness and efficiency of operations,
       Reliability of financial reporting, and
       Compliance with applicable laws and regulations

Internal controls comprise the plans, policies, methods, and procedures used to meet the
organization’s mission, goals, and objectives. Internal controls 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:

                      Effectiveness and efficiency of operations - Policies and procedures that
                      the audited entity has implemented to provide reasonable assurance that a
                      program meets its objectives, while considering cost effectiveness and
                      efficiency.

                      Reliability of financial reporting – Policies, procedures, and practices that
                      officials of the audited entity have implemented to provide themselves with
                      reasonable assurance that operational and financial information they use for
                      decision making and reporting externally is relevant and reliable and fairly
                      disclosed in reports.

                      Compliance with applicable laws and regulations and provisions of
                      contracts or grant agreements - Policies and procedures that the audited
                      entity has implemented to provide reasonable assurance that program
                      implementation is in accordance with laws, regulations, and provisions of
                      contracts or grant agreements.

               We assessed the relevant controls identified above.

               A deficiency in internal control exists when the design or operation of a control does
               not allow management or employees, in the normal course of performing their
               assigned functions, the reasonable opportunity to prevent, detect, or correct (1)


                                                 13
            impairments to effectiveness or efficiency or operations, (2) misstatements in
            financial or performance information, or (3) violations of laws and regulations on a
            timely basis.


Significant Deficiency

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

                   The Department did not develop and implement procedures and controls to
                   properly monitor HOME-funded activities and ensure that program
                   objectives were met (see finding 1).




                                              14
                   FOLLOW-UP ON PRIOR AUDITS


Puerto Rico Department of
Housing State HOME
Investment Partnership
Program – Audit Report 2003-
AT-1006


           HUD OIG issued an audit report on July 30, 2003, on the Department’s
           administration of the HOME program. The objectives were to assess the
           Department’s progress in correcting deficiencies identified in HUD’s monitoring
           report, dated August 31, 2001, and review selected projects to determine whether
           they were carried out in accordance with HOME requirements. Among the
           deficiencies found, the Department did not accomplish program objectives in two
           projects. As a result, HOME funds totaling more than $2.2 million were spent for
           ineligible and unsupported costs. The Department disbursed HOME funds of
           $627,015 to a project for unsupported costs. In addition, it disbursed more than
           $1.6 million for a housing project that was constructed in a flood zone.

           OIG recommended, among other things, that HUD

                  Require the Department to reimburse its HOME Program $1,629,086 in
                  ineligible costs for the project that was constructed in a flood zone and
                  reprogram the remaining $610,914.

                  Require the Department to determine whether a project should continue
                  and the eligibility of $627,015 disbursed for the project or reimburse the
                  HOME program and put the remaining $418,900 unexpended balance to
                  better use.

                  Establish and implement policies and procedures for its HOME program to
                  ensure compliance with 24 CFR Part 92 and other HUD requirements. At a
                  minimum, the policies and procedures should ensure that (1) fiscal controls
                  and accounting procedures were sufficient to permit the tracing of funds to
                  a level which ensured that such funds were not used in violation of the
                  restrictions and prohibition of applicable statutes, (2) HOME funds were
                  used in accordance with all program requirements and written agreements,
                  and (3) appropriate action was taken when performance problems arose.

           All audit recommendations included in the report were resolved between May
           2004 and December 2005. However, similar deficiencies were found during this
           audit as discussed throughout this report.




                                            15
                                    APPENDIXES

Appendix A

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

         Recommendation                             Unsupported     Funds to be put
                number         Ineligible 1/                 2/     to better use 3/

                1A              $4,428,179           $9,027,082
                1B
                1C                                                       $4,349,580
                1D              _________            _________           $3,608,645
               Total            $4,428,179           $9,027,082          $7,958,225


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. In this instance, if the Department implements
     recommendations 1C and 1D, funds will be available for other eligible activities consistent
     with HOME requirements.




                                               16
Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation   Auditee Comments




Comment 1




                          17
Ref to OIG Evaluation   Auditee Comments




Comment 2


Comment 3


Comment 4




                          18
                          OIG Evaluation of Auditee Comments

Comment 1   The Department stated that it did not believe it was responsible for repayment in
            the event of non-performance when an agreement exists that provides enforcement
            rights and such rights can be reasonably pursued.

            Regulations at 24 CFR 92.504(a) provide that the Department is responsible for
            managing the day to day operations of its HOME program, ensuring that HOME
            funds are used in accordance with all program requirements, and taking
            appropriate action when performance problems arise. The use of contracts with
            enforcement rights does not relieve the participating jurisdiction of its
            responsibilities under this Section.

            In addition, HOME regulations at 24 CFR 92.551 provides that if the participating
            jurisdiction fails to demonstrate to HUD’s satisfaction that it has met an applicable
            requirement, HUD will take remedial actions. Remedial actions may include,
            among others, requiring the participating jurisdiction to reimburse its HOME
            Investment Trust Fund in any amounts not used in accordance with requirements.
            We therefore maintained our recommendation that HUD require the Government
            of Puerto Rico or its designee to reimburse more than $3.5 million for activities
            that failed to meet HOME program objectives.

Comment 2   The Department stated that the inclusion of green space as part of a housing
            development was not an excluded use, and including green space can enhance a
            quality housing development. Also, the Department indicated that it will review
            the integration of green space with the housing development.

            According to a letter dated June 5, 2007 of the Puerto Rico Department of Natural
            Resources concerning the project’s environmental approval process, the green
            areas which were habitat to endangered species should be protected by a perimeter
            area with vegetation in its natural state. In addition, the proposed mitigation plan
            included the installation of a fence to separate the protected areas from the project.
            As a result, the protected green areas cannot be developed to provide affordable
            housing. We therefore did not modify the report finding and recommendations.

Comment 3   The Department stated that the Puerto Rico Housing Finance Authority and the
            Department will review slow progress activities and require current assurances of
            completion or proceed to enforcement.

            The Department should not only require assurances, but it must re-evaluate the
            feasibility of activities. It must indicate how it will ensure HOME activities fully
            meet program objectives and provide the intended benefits. The Department must
            reimburse HUD for those activities not considered feasible regardless of whether
            their agreements with contractors are enforceable or not. See Comment 1.




                                              19
Comment 4   The Department stated that the Puerto Rico Housing Finance Authority and the
            Department will review terminated activities as well as activities that were not
            carried out and require current assurances of completion or proceed to
            enforcement.

            The Department did not address the lack of evidence that it reprogrammed and put
            to better use more than $7.9 million in unexpended balances for activities that were
            terminated, or not carried out.




                                             20
Appendix C

     LIST OF INELIGIBLE EXPENDITURES AND ACTIVITIES
     THAT FAILED TO MEET HOME PROGRAM OBJECTIVES


                                       Grant                                         Last
          Activity      Activity     agreement        Funded         Ineligible      draw       Number
          number         name           date          amount          amount         date       of units                 Comments
                                                                                                             The developer defaulted on the
                      Palmas del     March 26,                                      March                    construction loan. The activity
            603                                      $5,620,000      $890,4393                     201
                         Sol          1998                                         17, 2006                  was declared in default in October
                                                                                                             2008.
                          Las                                                                                The grant recipient defaulted on
                                                                                     March
                        Piedras      March 17,                                                               the construction loan. The
            713                                      $796,812        $880,2454        21,          108
                        Elderly       1997                                                                   activity was declared in default in
                                                                                     20005
                        Housing                                                                              April 2000.
                                                                                                             The Department disbursed HOME
                                                                                                             funds for the purchase of land that
                         Bello         July 19,                                     July 31,
            9743                                     $2,383,263      $879,1246                     288       was not intended for the
                         Monte          2007                                         2007
                                                                                                             development of affordable
                                                                                                             housing.
                                                                                                             The developer defaulted on the
                                                                                                             construction loan, and the bank
                       Casa Rosa       July 24,                                     August                   took possession of the property.
            3818                                     $600,000        $600,000                      75
                          III           2000                                        1, 2000                  The activity was substantially
                                                                                                             completed in February 2006 but
                                                                                                             was never occupied,
                      Alturas de      August 6,                                      August                  The grant recipient lacked the
            4657                                     $307,000        $307,000                      58
                      San Rafael       2001                                         15, 2001                 capacity to develop the project.
                                                                                                             Predevelopment costs. The grant
                      Alturas de     January 28,                                   Sept. 21,
            3404                                     $101,340        $101,340                     N/A        recipient lacked the capacity to
                      San Rafael        2000                                         2000
                                                                                                             develop the project.
                                                                                                             The grant recipient defaulted on
                        Aparts.      October 9,                                    February                  the construction loan and was
            710                                      $564,790        $610,9813                     30
                       Miraflores      1996                                         1, 2001                  sued for mortgage default on
                                                                                                             December 2001.
                                                                                                             Predevelopment costs. The grant
                        Aparts.       February                                       March                   recipient defaulted and was sued
            709                                       $58,485         $57,825                     N/A
                       Miraflores     20, 1996                                      21, 2000                 for mortgage default on December
                                                                                                             2001.
                        Pedro                                                                                The developer discontinued the
                                      April 15,                                    April 14,
            6537       Marquez                       $588,989         $55,275                       8        project because the Department
                                       2004                                         2005
                       Aparts.                                                                               withdrew funding.
                                                                                                             The grant recipient in December
                      CODEIFA        January 25,                                    July 17,
            8225           7                         $145,494         $45,950                      30        2008 notified the Department that
                                        2007                                         2007
                                                                                                             it had sold the project site.
                           Total                    $11,166,173     $4,428,179




3
  To determine the amount of ineligible HOME expenditures, we reduced the $3,518,698 that the Department reported in HUD’s information
system by the estimated HOME assistance applicable to 94 occupied housing units.
4
  The ineligible amount represents HOME program funds that the Department disbursed for this activity. The Department’s general ledger showed
that the Department disbursed more funds than the amount reported to HUD’s information system.
5
  The drawdown date (March 21, 2000) corresponded to the date of HUD’s information system conversion from a predecessor information system,
not to the actual drawdown dates.
6
  Ineligible amount represents the portion of project site cost applicable to the area that could not be used for development of affordable housing.
7
  Corporacion de Desarrollo Integral de Fajardo




                                                                        21
Appendix D

                          LIST OF SLOW PROGRESS ACTIVITIES


                                    Grant       Scheduled
     Activity     Activity        agreement     completion        Funded        Unsupported       Number
     number        name              date          date           amount          amount          of units                 Comments
                                                                                                               132 of a total of 162 units had not
                  Plaza del      February 9,     August 8,                                                     been completed, and there was no
      7908                                                      $5,187,243       $1,722,8078         162
                   Batey            2007           2009                                                        indication that the units would be
                                                                                                               completed in the near future.
                                                                                                               Although housing units were
                  Altos del        April 20,    October 26,                                                    substantially completed in July
      7002                                                      $1,852,549        $1,691,564          60
                    Rio             2006           2008                                                        2009, the project was unoccupied
                                                                                                               and without use permit.
                                                                                                               Although the project site was
                                                                                                               acquired in August 2007,
                   Bello           July 19,       July 18,
      9743                                                      $2,383,263       $1,504,1399         288       construction of housing units had
                   Monte            2007           2010
                                                                                                               not started, and project viability
                                                                                                               was not properly supported.
                                                                                                               Although the Department had
                  La Puerta        April 6,       April 5,                                                     disbursed HOME funds as of
      7558                                                      $2,000,000       $1,481,00010         60
                 de Carolina        2005           2009                                                        February 2008, construction of
                                                                                                               housing units had not started.
                                                                                                               Although substantially completed
                  Villas del      January 7,    January 6,
      7001                                                      $1,911,508         $938,713           47       in April 2009, 25 of 47 housing
                  Naranjal          2005          2007
                                                                                                               units were not occupied.
                                                                                                               Although the Department
                                   April 30,
                 Las Piedras                    October 31,                                                    disbursed HOME funds in June
      10814                         2008                         $845,000          $845,000          123
                   Elderly                         2009                                                        2008, construction of housing units
                                                                                                               had not started.
                                  November      November                                                       Predevelopment loans.
                   Bello          5, 2004, &    4, 2007 &                                                      Construction of housing units had
      7341                                                       $387,863          $300,659          N/A
                   Monte          November      November                                                       not started, and project viability
                                   26, 2008                                                                    was not properly supported.
                                                 25, 2009
                                                                                                               Although the project site was
                                 February 3,      May 2,                                                       acquired in April 2005,
      7443       O.B.R.A.S                                       $295,200          $295,200           70
                                    2005          2005                                                         construction of housing units had
                                                                                                               not started.
                                                                                                               Predevelopment loan. Although
                                  November      November                                                       the project site was acquired in
      7342       O.B.R.A.S                                       $229,444          $163,594          N/A
                                   22, 2004      21, 2006                                                      April 2005, construction of
                                                                                                               housing units had not started.
                                                                                                               Although the project construction
                  La Cima         August 28,    January 31,
      5459                                                       $720,000          $84,406            36       was completed in July 2008, eight
                 Apartments         2003           2009
                                                                                                               housing units were unsold.
                               Total                            $15,812,070       $9,027,082



8
  To determine the amount of questioned (unsupported) costs for the Plaza del Batey activity, we reduced the Department's disbursements totaling
$1,978,967 by the estimated assistance applicable to the occupied housing units. HUD’s information system reflected total draws of $1,978,937
for this activity. We used the Department disbursements for the purpose of our review.
9
  The amount funded for the Bello Monte activity included $879,124 which the Department disbursed for the purchase of land that was not
intended for the development of affordable housing. To determine unsupported costs, we reduced the Department’s disbursements totaling
$2,383,263 by the $879,124 in ineligible costs included in recommendation 1A.

10
  The Department reported in HUD’s information system total draws of $1,400,000 for the activity La Puerta de Carolina. The amount disbursed
for this activity, according to the Department’s general ledger, was $1,481,000. We used the Department disbursements for the purpose of our
review.



                                                                      22
Appendix E

                  LIST OF COMMITMENTS TO REPROGRAM
                          AND PUT TO BETTER USE


                                                                     Number of
                                                                      days in
                            IDIS*         IDIS                       IDIS up to
Activity     Activity      funding      committed       Amount       December
number        name           date        amount       unexpended      31, 2009                          Comments
                                           Funded activities with no disbursements
            Villas de                                                                The developer decided not to pursue the project.
                           July 22,
 7909        Johnny                     $2,300,000     $2,300,000       1,623        The Department did not cancel the activity or
                            2005
             Toledo                                                                  deobligate the HOME funds.
                                                                                     The developer decided not to pursue the project.
           Balcones de     July 22,
 7910                                   $1,693,410     $1,693,410       1,623        The Department did not cancel the activity or
            Santiago        2005
                                                                                     deobligate the HOME funds.
                                                                                     The Department did not maintain documentation
 6254,
                          December                                                   evidencing whether six HOME-funded activities
 6257,
                          13, 2000,                                     1,758        met program objectives. The Department did
 6278,
             Various          to         $233,799       $233,799          to         not provide a copy of the executed contract,
 7412,
                          March 9,                                      3,305        activity files, or other documentation evidencing
 4220,
                            2005                                                     the status and progress of the activity and the
 4866
                                                                                     cause of delays in completing the activities.
                                                                                     Department records did not evidence that the
            Luis A.                                                                  activity was carried out. The most recent
                          November
  504        Rivera                       $16,325       $16,325         4,797        information dated to 2003, but the activity still
                          12, 1996
            Martinez                                                                 appeared as committed in HUD’s information
                                                                                     system.
                           Completed activity with unexpended balance in HUD’s information system

                                                                                     On August 22, 2006, the Department issued a
           San Miguel
                          August 28,                                                 certificate of project completion. However,
 6298      Home for the                 $1,628,500      $106,046        2,317
                            2003                                                     HUD’s information system reflected
             Elderly
                                                                                     unexpended commitments for this activity.

                          Terminated activities with unexpended balances in HUD's Information system
                                                                                     HUD questioned the activity in a 2001
                                                                                     monitoring report, and the Department
           Quintas de     November                                                   reimbursed $1.3 million. However, it did not
  687                                    $258,425       $258,425        3,711
           Santa Elena     3, 1999                                                   deobligate all funds committed and did not
                                                                                     cancel the activity in HUD’s information
                                                                                     system.
                                                                                     The developer defaulted on the construction
            Palmas del    March 26,                                                  loan. A total of 107 of 201 planned assisted
  603                                   $5,620,000     $2,101,302       4,298
               Sol         1998                                                      housing units were not completed and did not
                                                                                     provide intended benefits.
                                                                                     The developer indicated that the project was
                                                                                     discontinued because the Department withdrew
             Pedro
                          January 30,                                                its funding from a State program necessary to
 6537       Marquez                      $588,989       $533,714        2,162
                             2004                                                    complete the project. However, the activity
           Apartments
                                                                                     appeared as committed in HUD’s information
                                                                                     system.
                           July 17,                                                  The grant recipient notified the Department in
 8225       CODEIFA                      $145,494       $99,544          898
                            2007                                                     December 2008 that it had sold the project site.




                                                              23
                                                                        The developer reduced the number of housing
                                                                        units from 60 to 42. However, the
          La Puerta de   April 26,
  7558                               $2,000,000    $600,000     1,710   corresponding commitment of $600,000
            Carolina      2005
                                                                        appeared as committed in HUD’s information
                                                                        system.
                                                                        The Department exempted the activity from the
                                                                        environmental evaluation requirement.
                         April 28,
  7342    O.B.R.A.S.                  $229,444      $15,000     1,708   However, the corresponding commitment of
                          2005
                                                                        $15,000 appeared committed in HUD’s
                                                                        information system.

         Apartamentos    March 28,                                      The Department did not reprogram unexpended
  709                                 $58,485        $660       5,026
          Miraflores      1996                                          amounts for this activity.

               Total                 $14,772,871   $7,958,225
* IDIS = HUD’s Integrated Disbursement and Information System




                                                         24