The Wilmington Housing Authority of Wilmington, NC, Misused Federal Funds in the Purchase of Two Properties

Published by the Department of Housing and Urban Development, Office of Inspector General on 2010-05-19.

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

                                                                           U.S. Department of Housing and Urban Development
                                                                           Region 4, Office of Inspector General
                                                                           Office of Audit, Box 42
                                                                           Richard B. Russell Federal Building
                                                                           75 Spring Street, SW, Room 330
                                                                           Atlanta, GA 30303-3388
                                                                           (404) 331-3369

                                                                           MEMORANDUM NO.

May 19, 2010

MEMORANDUM FOR:                   Michael A. Williams, Director, Office of Public Housing,
                                   Greensboro, NC, 4FPH

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

SUBJECT:       The Wilmington Housing Authority of Wilmington, NC, Misused Federal Funds
                in the Purchase of Two Properties


We performed a review of selected transactions at the Wilmington Housing Authority
(Authority) in conjunction with our review of a citizen’s hotline complaint. Among other
concerns, the complainant alleged that the Authority misused U.S. Department of Housing and
Urban Development (HUD) funds in conjunction with its purchase of Eastbrook Apartments in
September 2005. Our objective was to determine whether the Authority misused HUD funds in
its purchase of either Eastbrook Apartments or a tract of vacant land known locally as the
“Winfield Smith” property. Our review revealed two instances in which the Authority, under its
former management, misused HUD funds totaling $267,914 for these properties.

We provided the draft memorandum to the Authority on May 7, 2010, and discussed the results
with Authority officials at an exit conference on May 10, 2010. We received written comments
on May 12, 2010. The Authority expressed agreement with the results and recommendations in
both its written comments and during the exit conference. We have included the comments in
appendix B.

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.

            Visit the Office of Inspector General on the World Wide Web at http://www.hud.gov/offices/oig
                               SCOPE AND METHODOLOGY

To accomplish our objective, we reviewed

               Federal land acquisition requirements at 24 CFR (Code of Federal Regulations)
               941.303, HUD Notice 2003-10 (HA), Office of the Inspector General Audit
               Reports 2007-AT-1004 and 2007-AT-1011, and HUD’s Greensboro Office of
               Public and Indian Housing’s correspondence and files pertaining to the Authority.

               The Authority’s documentation for the purchase of Eastbrook Apartments and a
               vacant tract of land known as the “Winfield Smith” property.

               The Authority’s accounting policies, accounting records, and procedures manuals
               related to our objective.

We also interviewed the Authority’s employees and HUD staff familiar with the Authority’s

We performed intermittent onsite audit work from January through March 2010 at the
Authority’s office located at 1524 16th Street, Wilmington, NC. The review was limited to the
Authority’s 2005 purchase of Eastbrook Apartments and 2004 purchase of the vacant tract of
land. The land purchase came to our attention during the review as a result of a local newspaper

This review was not conducted in accordance with generally accepted government auditing
standards. It was limited to our stated objective and should not be considered a detailed analysis
of the Authority’s internal controls or operations.


The Authority was formed December 9, 1940, pursuant to the North Carolina Housing
Authorities Law. Its primary objective is to provide decent, safe, and sanitary housing in
Wilmington, NC, and the surrounding area in compliance with HUD regulations. The Authority
is governed by a nine-member board of commissioners appointed by the mayor of Wilmington.
The Authority’s records are located at 1524 16th Street, Wilmington, NC.

A citizen’s complaint alleged that the Authority had misused an unspecified amount of HUD
funds in the purchase of Eastbrook Apartments, a development it purchased from a private owner
in September 2005. The Authority had a history of misusing HUD funds. In 2007, our office
performed extensive audit work at the Authority and issued two reports (2007-AT-1004 and
2007-AT-1011). Among several other concerns, these reports detailed the Authority’s misuse of
$744,916 in HUD public housing operating subsidies to pay expenses of other Federal and non-
Federal programs and the inappropriate transfer of more than $296,000 in HUD HOPE VI funds
to an affiliate. The audits are closed with the exception of one recommendation
(Recommendation 2A of 2007-AT-1011) requiring the Authority to repay HUD $1.2 million in
home sales proceeds that the Authority allowed its affiliate to retain in violation of program

                                          RESULTS OF REVIEW

Finding: The Authority Misused HUD Funds Totaling $267,914 in the Purchase of Two

The Authority misused $209,938 in HUD Section 8 reserves to make mortgage payments on a
non-HUD development, Eastbrook Apartments, and $57,976 in HUD replacement housing factor
funds to purchase vacant land. This violation occurred because the Authority’s former
management disregarded a HUD directive warning it not to use the Section 8 reserves for
mortgage payments and HUD’s requirements regarding the use of replacement housing factor
funds. As a result, these funds were not available to assist the Authority’s low-income residents
as HUD intended.

The Authority Misused Section 8 Reserves

In September 2005, the Authority purchased Eastbrook Apartments, a 32-unit development
housing a large number of Housing Choice Voucher program tenants. The complaint alleged
that the Authority purchased the development using a $1.4 million bank loan and misused HUD

The Authority obtained a bank loan from Wachovia Bank to finance the more than $1.3 million
purchase price of Eastbrook. It also used $7,619 in HUD Turnkey III funds to pay part of the
closing costs, which was a permissible use of the funds under the Turnkey III use agreement with
HUD. In addition, it inappropriately used $209,000 in HUD Section 8 administrative fee
reserves to make mortgage payments on the property. The misuse of HUD funds occurred
despite a letter from HUD’s Greensboro office denying the Authority’s request to use the funds
in that manner.

When the former Authority management decided to purchase Eastbrook, it determined that the
property could be sustained using its cash flow. However, in 2007, less than 2 years after the
purchase, a potentially hazardous mold infestation became apparent, and the Authority had to
relocate all of the tenants. Since Eastbrook’s cash flow was curtailed and the Authority could
not continue funding its mortgage payments as originally planned, in October 2007, it requested
HUD’s permission to use pre-2004 Section 8 administrative fee reserves for the payments.1
However, before that request, in May 2007, the Authority had already made an interfund transfer
of $119,163 from its Section 8 administrative fee reserve to Eastbrook to pay the mortgage.
Before the Authority received a response to its request from HUD, it made a second interfund
transfer of $ 90,775 to Eastbrook. In November 2007, unaware that the Authority had already
used the Section 8 funds, HUD denied the requested use of the funds. HUD’s letter explained
 HUD’s regulations provided that pre-2004 Section 8 administrative fee reserves could be used for “other housing
purposes permitted by state and local laws,” while administrative fee reserves accumulated after 2004 could only be
used in the Section 8 voucher program.
the denial by stating that the units were unoccupied and would not pass HUD’s Section 8
housing quality standards inspections.

Despite HUD’s decision denying the use of the Section 8 funds for Eastbrook mortgage
payments, as of January 13, 2010, the Authority had not repaid the funds. The Authority’s
director of finance stated that she was directed by the former executive director to use the
Section 8 reserves for the mortgage payments. She also stated that the former executive director
did not inform her that HUD had denied the Authority’s request to use the funds for that purpose.

The Authority Misused Replacement Housing Factor Funds

In 2004, the Authority purchased a parcel of vacant land, known locally as the “Winfield Smith”
property, using $57,976 in HUD replacement housing factor funds as a down payment. HUD
provided these funds to the Authority in 2001 for the purpose of replacing public housing units.
As of March 2010, the Authority had not built housing on the property. Its purchase of vacant
land using replacement housing factor funds and the lack of development violated several HUD

The regulations (24 CFR 941.303) required that public housing authorities submit a site
acquisition plan and have HUD approval for any land purchases. The Authority made the
purchase without providing the site acquisition plan or requesting HUD approval. In 2003, HUD
issued Notice 2003-10 (HA) containing additional requirements. The notice required that
housing authorities provide HUD with a replacement housing factor plan and a development
plan. The Authority did not provide HUD with either of the required plans until November

Since the Authority failed to provide HUD the required documentation and used the funds to
make the land purchase without HUD’s knowledge or consent, its use of replacement housing
factor funds was ineligible. In November 2009, the Authority submitted a request to use
replacement housing factor funds to pay off the remaining mortgage balance on the land. When
HUD received that request, it requested a site acquisition plan, which the Authority provided in
February 2010. HUD reviewed the plan and rejected the Authority’s request because its plan did
not provide for new public housing units.


Our review showed that the Authority disregarded the applicable program requirements as well
as HUD’s instructions and used $267,914 in Federal funds in violation of the regulations.


We recommend that the Director of HUD’s Greensboro Office of Public Housing require the
Authority to

       1A.    Repay its Section 8 administrative fee reserves $209,938 from non-Federal funds.

       1B.    Repay its capital fund account $57,976 from non-Federal funds.

       1C.    Provide HUD evidence that it has implemented effective controls to better ensure
              the proper use of HUD funds.


Appendix A


                             number              Ineligible 1/
                               1A                   $209,938
                               1B                     $57,976

                               Total                $267,914

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.

Appendix B