oversight

The City of Holyoke, Massachusetts, Office of Community Development, Needs to improve Its Administration of HOME- nd CDBG-Funded Housing Programs

Published by the Department of Housing and Urban Development, Office of Inspector General on 2009-11-23.

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

                                                                 Issue Date
                                                                        November 23, 2009
                                                                 Audit Report Number
                                                                     2010-BO-1002




TO:        Robert L. Paquin, Director, Office of Community Planning and Development,
             Boston Regional Office, 1AD


FROM:
           John A. Dvorak, Regional Inspector General for Audit, Boston Region, AGA

SUBJECT: The City of Holyoke, Massachusetts, Office of Community Development, Needs
           to Improve Its Administration of HOME- and CDBG-Funded Housing
           Programs


                                   HIGHLIGHTS

 What We Audited and Why

             We audited the HOME Investment Partnerships Program (HOME) - and
             Community Development Block Grant (CDBG)-funded housing programs
             administered by the City of Holyoke’s Office of Community Development (City)
             as part of our annual audit plan. The City was selected based upon our analysis of
             risk factors relating to HOME grantees in Region 1.

             Our objective was to determine whether the City properly administered its
             HOME- and CDBG-funded housing programs in compliance with U.S.
             Department of Housing and Urban Development (HUD) requirements.
             Specifically, we wanted to determine whether the City awarded contracts for its
             HOME Development program in accordance with HOME and federal
             requirements. In addition, we wanted to determine whether the City adequately
             monitored its CDBG-funded Rental Neighborhood Improvement program and the
             subrecipient that administers this program.
    What We Found


                 The City did not always award its HOME Development program contracts in
                 accordance with federal requirements. Specifically, it did not obtain or prepare
                 adequate cost estimates or conduct required cost analysis before it awarded $2.6
                 million in funds for three noncompetitive construction contracts. Construction
                 cost estimates developed during the audit showed that expenditures claimed by
                 the developer for the construction of the duplex units were an average of 14
                 percent higher than the construction cost estimates.1 Additionally, all HUD
                 assistance was not properly considered during the City’s evaluations of project
                 total development costs for duplexes developed as part of the HOME
                 Development program. Lastly, the HOME investments subject to recapture were
                 incorrectly calculated so that $344,178 would not be recaptured if the
                 homeowners did not reside in the HUD-funded duplexes for the entire 15-year
                 affordability period.

                 Additionally, 67 percent of the loans (26 of 39) processed under of the HUD-
                 funded Rental Neighborhood Improvement program2 went to properties that were
                 owned by either the subrecipient (Olde Holyoke Development Corporation) or a
                 second, related nonprofit, Contemporary Apartment Inc. (Contemporary
                 Apartments). The subrecipient also did not treat related and nonrelated loans
                 consistently regarding use of contracts, enforcement of timetables for completion,
                 accrual of interest on advances, or project record keeping. In addition, (1) related
                 party rehabilitation was not completed in a timely manner, (2) appropriate reviews
                 and approvals of the projects were not made for all loans before committing the
                 funds, (3) the subrecipient did not secure all program investments to related party
                 loans, and (4) not all project records were maintained in accordance with record-
                 keeping requirements.

                 Further, the City allowed the subrecipient to use program funds totaling $332,105
                 in the form of “grants.” These grants were used for demolition activities which
                 did not meet the Rental Neighborhood Improvement program’s objectives3 and
                 were not carried out in compliance with the CDBG program.


    What We Recommend


                 We recommend that the Director of the Office of Community Planning and
                 Development require the City to establish appropriate internal controls over the

1
  Totaling $288,000 for seven duplexes.
2
  Since program inception in 1977.
3
  The objective of Rental Neighborhood Improvement program is “to make grants/or loans to owners of multi-unit
rental properties to finance eligible improvements, repairs and rehabilitation of the rental properties.”


                                                       2
           HOME procurement process, including the segregation of duties so that the
           process is not entirely controlled by one person. We also recommend that the
           City repay $288,000 in unreasonable construction costs paid under the HOME
           Development program. Additionally, we recommend that HUD and the City
           conduct an independent cost analysis for the 2008 procurements to ensure that
           HOME and CDBG program expenditures of more than $1 million were
           reasonable and supported. For the unreasonable amounts, the City should
           reimburse the HOME/CDBG program from nonfederal funds.

           Finally, we recommend that the Director of the Office of Community Planning
           and Development review the revised subrecipient contract for the Rental
           Neighborhood Improvement program to ensure that it contains appropriate
           controls, particularly when related parties are involved. These increased controls
           will ensure that HUD funds used for future related-party activities will be
           properly spent with appropriate performance measures in place, resulting in more
           than $1.7 million in funds put to better use for activities properly approved and
           overseen by independent parties.

           For each recommendation in the body of the report 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 City officials with a draft audit report on October 23, 2009, and
           requested a response by November 3, 2009. We also provided and discussed
           preliminary results during the course of the audit, including on July 1 and July 9,
           August 5, and September 2, 2009. We held an exit conference with City officials
           on October 27, 2009, to discuss the draft report, and we received their written
           comments on November 2, 2009. The City agreed/disagreed with the facts,
           conclusions, and recommendations, as noted.

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




                                            3
                              TABLE OF CONTENTS

Background and Objective                                                              5

Results of Audit
        Finding 1: The City Did Not Have Adequate Internal Controls over Its          7
        Procurement Process for the HOME Development Program

        Finding 2: The Subrecipient That Administers the City’s Rental Neighborhood   16
        Improvement Program Was Not Adequately Monitored


Scope and Methodology                                                                 25

Internal Controls                                                                     27

Appendixes
   A.   Schedule of Questioned Costs and Funds to Be Put to Better Use                28
   B.   Auditee Comments and OIG’s Evaluation                                         29
   C.   Review of Rental Neighborhood Improvement Loans – Loans Modified              41
   D.   Review of Rental Neighborhood Improvement Loans – Interest Forgone            42
   E    Rental Neighborhood Improvement Loans – Related and Unrelated Loans           43
   F    Criteria                                                                      44




                                              4
                             BACKGROUND AND OBJECTIVE

Congress created the HOME Investment Partnerships Program (HOME) in Title II of the
Cranston-Gonzalez National Affordable Housing Act of 1990. Under the HOME program, the
U.S. Department of Housing and Urban Development (HUD) allocates funds to eligible state and
local governments for the purpose of (1) expanding the supply of decent, safe, and affordable
housing for very low-income and low-income Americans and (2) strengthening public-private
partnerships in the production and operation of such housing. The HOME program gives
participating jurisdictions discretion over which housing activities to pursue. These activities
may include acquisition, rehabilitation, new construction, and resident-based rental assistance.
In addition, participating jurisdictions may provide assistance in a number of eligible forms,
including loans, advances, equity investments, and interest subsidies. Up to 10 percent of the
HOME funds received by a participating jurisdiction may be used to administer the program.

Congress created the Community Development Block Grant (CDBG) in Title I of the Housing
and Community Development Act of 1974. This program is designed to develop viable urban
communities by providing decent housing, a suitable living environment, and expanding
economic opportunities, principally for persons of low and moderate income. Recipient
communities, such as cities, may undertake a wide range of activities directed toward
neighborhood revitalization; economic development; and community services, facilities, and
improvements. Cities develop their programs and set their funding priorities in conformance
with the statutory standards, program regulations, and other federal requirements. One of several
activities that can be carried out with CDBG funds is the rehabilitation of residential and
nonresidential structures. Community-based development organizations may carry out
neighborhood revitalization, community economic development, or energy conservation
activities. Each CDBG-eligible activity must meet one of three national objectives: benefit low-
and moderate-income persons, aid in the prevention or elimination of slums or blight, or meet
other community development needs having a particular urgency that the grantee is unable to
finance on its own.

The City of Holyoke, Massachusetts (City), through its Office of Community Development,
receives both HOME and CDBG funds. For the HOME program, the City is the lead city in a
consortium of three cities called the Holyoke-Chicopee-Westfield consortium. For CDBG, the
City receives its funds directly from HUD.

                                   Year            CDBG                HOME4
                                   2006          $1,130,743            $597,033
                                   2007          $1,122,415            $593,635
                                   2008          $1,085,209            $572,990

Each year, the City reports its planned activities and accomplishments to HUD through an annual
plan and a consolidated annual performance and evaluation report. These documents identify the
City’s priorities, the methodology that the City intends to use to accomplish its priorities, and the

4
    The HOME funds in this table represent only the City’s share of the consortium’s funds.

                                                           5
City’s accomplishments. Its first five priorities addressed homeownership, rehabilitation of
owner-occupied housing, home-buyer assistance, creation of elderly housing, and rental housing
rehabilitation.

Our audit focused on the City’s housing programs, in particular, its homeownership program and
rental housing rehabilitation.

Our audit objective was to determine whether the City properly administered its HOME- and
CDBG-funded housing programs in compliance with HUD requirements. Specifically, we
wanted to determine whether the City awarded contracts for its HOME Development program in
accordance with federal procurement requirements (24 CFR (Code of Federal Regulations)
85.36). In addition, we wanted to determine whether the City adequately monitored its CDBG-
funded Rental Neighborhood Improvement program and the subrecipient that administers this
program




                                              6
                                     RESULTS OF AUDIT

Finding 1: The City Did Not Have Adequate Internal Controls over Its
Procurement Process for the HOME Development Program

The City did not award its HOME Development program contracts in accordance with HOME
program or federal procurement requirements.5 Specifically, it

     •   Improperly awarded $2.6 million for three noncompetitive contracts
     •   Allowed the developer to spend unreasonable amounts to construct duplexes.
     •   Did not properly consider all CDBG assistance during its subsidy-layering evaluations.
     •   Did not ensure that recapture provisions were correctly calculated.

These deficiencies occurred because the City did not adequately establish and implement
appropriate internal controls over its HOME procurement process. As a result, it awarded contracts
totaling $2.6 million that were not processed in a manner that provided full and open competition
consistent with federal procurement requirements. In addition, it expended $288,000 in
unreasonable costs and could not ensure that more than $1 million in costs for an ongoing project
were reasonable. It also provided more than $900,000 in subsidies that exceeded locally adopted
cost guidelines used to evaluate governmental assistance. Lastly, it did not ensure that $413,086
would be returned to the HOME program if the assisted homeowners sold the duplexes before the
expiration of the affordability period.



    Improper Award of $2.6
    Million for Three
    Noncompetitive Contracts


                 In each of the past three years, the City had attempted to award its HOME
                 Development project through a competitive request for proposal. Each year, only
                 one company, Contemporary Apartments, Inc. (Contemporary Apartments),
                 responded with a proposal.6 Each year, the City awarded the contract to
                 Contemporary Apartments. However, the City did not obtain or prepare cost
                 estimates or conduct required cost analyses before it awarded the contracts. The



5
  The HOME program is governed by 24 CFR Part 92. In 24 CFR 92.505, the program requires participating
jurisdictions to follow 24 CFR 85.36 for procurements made under the HOME program.
6
  The City improperly qualified Contemporary Apartments as a community housing development organization
(CHDO). The City has a longstanding partnership with Contemporary Apartments and its related companies. The
City’s actions in improperly qualifying a CHDO were the subject of Office of Inspector General (OIG) Audit Report
2009 BO 1003, dated May 14, 2009.

                                                       7
                 nonprofit developer used the $2.6 million to build eight duplexes. The 2008 project,
                 Allyn-Dwight Homes, was in process7 as of October 2009 at a cost of $1,043,893.

                 Federal procurement regulations at 24 CFR 85.36(c) require competition. When a
                 city has attempted solicitation from a number of sources and competition is
                 determined inadequate, regulations allow a city to accept a sole source contract.
                 However, regulations at 24 CFR 85.36(d) and (f) also require a city to conduct cost
                 estimates and additional cost analyses to ensure that it obtains the best value for its
                 funds. Specifically, a city must perform a cost analysis that verifies the proposed
                 cost data and projections of the data and evaluates specific elements of costs and
                 profits. The City performed some limited analyses for the proposed projects, but
                 these analyses were not sufficient to ensure that the City received the best possible
                 prices.

                 In addition, in 2006 and again in 2007, the City improperly gave the developer these
                 funds to build duplexes on land that was not owned by the City or the developer.
                 The City was attempting to seize a parcel of land for nonpayment of taxes. City
                 rules require that parcels of land seized for nonpayment of taxes be offered to the
                 general public for bidding.


    Unreasonable Amounts Spent
    by Developer to Construct
    Duplexes.

                 The City did not receive the best possible construction prices for the seven
                 duplexes built by the developer, Contemporary Apartments. Contemporary
                 Apartments used an affiliate, Olde Holyoke Development Corporation (Olde
                 Holyoke), to manage the construction of the duplexes. The duplexes, like the
                 two duplexes shown below, are attractive buildings that provide one unit of
                 homeownership and one unit of rental housing,8 but the costs paid by the City
                 exceeded independent estimates by an average of 14 percent.




7
  The project, Allyn-Dwight Homes, consists of three duplexes built on three separate parcels of land. As of June
2009, one of the three duplexes had been constructed.
8
  The same homeowners have occupied these homes since they moved in. The homeowners have maintained the
buildings, which provide stability for the neighborhood.

                                                         8
     The Office of Inspector General (OIG) brought in a specialist with expertise in
     estimating construction costs. This in-house specialist developed a construction
     cost estimate for each duplex using the plans and specification provided by the
     nonprofit developer. The expenditures to build the units exceeded our
     construction cost estimates by 7 to 19 percent. As a result, the City overpaid its
     developer $288,000 (14 percent).

            76-78       80-82
                                   43-45         137-139    108-110    112-114    109-111      Total/
Address     North       North                                                                 average
                                    Ely           Center    Walnut     Walnut      Beech
             East        East
 Cost of
           $228,612    $224,315   $292,197       $314,840   $314,893   $314,893   $349,356   $2,039,106
 duplex
   OIG
            $212,593   $205,313   $254,894       $254,383   $264,024   $264,024   $294,942   $1,750,173
 estimate
Difference $16,019     $19,002    $37,302        $60,457    $50,869    $50,869    $54,414    $288,933
Percentage    7%         8%        13%            19%        16%        16%        16%         14%




                                             9
            The City could have used this $288,933 to build another duplex that would have
            provided another two units of needed, affordable housing. The City also has an
            ongoing project, Allyn-Dwight Homes, with this same developer to build three
            more duplexes at a cost of $1,043,893. Using the average overpayment of 14
            percent, we project that $146,000 of the ongoing $1 million project may be
            unreasonable.


Subsidy-Layering Evaluations
Did Not Include CDBG


            HOME regulations at 24 CFR 92.250(b) require that the City conduct a subsidy-
            layering review of HOME projects using guidelines that it has adopted for this
            purpose. This review should ensure that the City will not invest more HOME
            funds, in combination with other governmental assistance, than necessary to
            provide affordable housing.

            The City developed subsidy-layering guidelines, which were included in the
            annual request for proposal for its HOME Development program. These
            guidelines required the City to recognize all government funding in its
            calculations, but the City did not include all HUD funding in its calculations for
            subsidy layering. It did not recognize demolition expenditures as part of the total
            development cost of these projects.

                                      Original        Demolition costs paid       Revised
                Property
                                   developer’s cost     by federal funds      developer’s cost
         76-78 North East Street      $228,612              $72,454              $301,066
         80-82 North East Street      $224,315              $72,454              $296,769
            45-47 Ely Street          $292,197             $163,685              $455,882
          137-139 Center Street       $314,840                $0                 $314,840
         112-114 Walnut Street        $313,566                $0                 $313,566
         108-110 Walnut Street        $314,893                $0                 $314,893
          109-111 Beech Street        $349,356                $0                 $349,356

            The developer used funds from the Rental Neighborhood Improvement program
            to pay for these demolition expenses. Finding 2 discusses the Rental
            Neighborhood Improvement program and explains how these expenses were not
            appropriate under the program.

            The City’s established local cost guidelines provide that HUD funds, in
            combination with all other government assistance, shall not exceed the lesser of
            (1) the difference between the amounts borrowed by the buyer as a first mortgage
            and the lesser of the actual total development cost, (2) the total development cost
            cap, or (3) 210 percent of the amount borrowed by the buyer as a first mortgage.

                                             10
                      The City allowed the developer to exceed the local guidelines by $974,453 as
                      shown in the table below.

                            Sales                                  Revised                                 Over-
                                       Revised                                    Cap less   210% of
                          price to                             developer’s cost                         subsidy per
        Property                     developer’s     Cap                            1st        1st
                           home-                                   less 1st                                local
                                        cost                                      mortgage   mortgage
                           owner                                  mortgage                               guidelines

76-78 North East St.      $79,900     $301,066     $270,000        $221,166       $190,100   $167,790    $133,276
80-82 North East St.      $79,900     $296,769     $270,000        $216,869       $190,100   $167,790    $128,979
      45-47 Ely St.       $99,900     $455,882     $318,000        $355,982       $218,100   $209,790    $246,092
    137-139 Center St.    $99,900     $314,840     $318,000        $214,940       $218,100   $209,790    $105,050
112-114 Walnut St.       $109,900     $313,566     $318,000        $203,666       $208,100   $230,790    $109,900
108-110 Walnut St.       $109,900     $314,893     $318,000        $204,993       $208,100   $230,790    $109,900
    109-111 Beech St.    $109,900     $349,356     $318,000        $239,456       $208,100   $230,790    $141,256
          Total                                                                                          $974,453


                      The City included the local guidelines in its request for proposals for new projects
                      funded by the homeownership program. Because the City allowed one developer
                      to exceed the local guidelines, this developer knew that the guidelines could be
                      exceeded. This knowledge gave that developer a competitive advantage.



Recapture Amounts Incorrectly
Calculated

                      To ensure that HUD-funded homes remain affordable, HOME regulations at 24
                      CFR 92.254 requires the City to add a contract provision to impose a resale or
                      recapture requirement on each HUD-funded home. The City chose to recapture
                      the HOME funds if the homeowner did not live in the HUD-funded duplex for the
                      affordability period.

                      HUD regulations also allow cities to submit different recapture methodologies to
                      HUD for approval.9 If HUD approves that recapture methodology, HUD allows
                      that city to use the approved methodology. The City submitted a modification to
                      the recapture methodology. This modification allowed the City to use a deferred
                      payment loan to recognize the recapture amount. HUD approved this
                      modification.

                      The City used the deferred payment loan to recognize the amount of the HOME
                      funds to be recaptured if the homeowner did not live in the HUD-funded duplex
                      for the entire affordability period. The amount of recapture should be the


9
    24 CFR 92.254(5)(ii)(A)

                                                              11
                    difference between the fair market value of the duplex and the sales price to the
                    homeowner.10

                    However, the City allowed its developer to use a different recapture methodology.
                    The developer created a second mortgage using a fixed amount that was only a
                    portion of the difference between fair market value and the purchase price. This
                    second mortgage was held by the developer.

                 Property address           Correct recapture         Deferred            Unrecognized
                                               provision            payment loan        recapture amount
             112-114 Walnut Street                    102,693               25,000                    77,693
             108-110 Walnut Street                    102,693               25,000                    77,693
              109-111 Beech Street                     73,700               25,000                    48,700
                   45-47 Ely Street                    61,100               21,000                    41,100
              137-139 Center Street                    72,000               21,000                    51,000
            76-78 North East Street                    62,700               21,000                    41,700
            80-82 North East Street                    96,200               21,000                    75,200
                            Totals                   $571,086             $159,000                  $413,086

                    The homeowners would receive the benefit of the City’s error in incorrectly
                    allowing the use of the developer’s deferred loan amount of $159,000 as the
                    recapture amount. The City recognized recapture amounts of $159,000 when the
                    recapture amount should have been $571,086. The difference of $413,086
                    represents HOME funds that would have been lost initially had homeowners
                    failed to reside in the HUD-funded homes for the entire affordability period. The
                    City mistakenly believed that the reduced amount of the deferred payment loans
                    had also been approved by HUD.

                    For these duplexes, the affordability period is 15 years. Federal regulations at 24
                    CFR 92.254 also allow the recapture amount to be proportionally reduced over
                    the life of the affordability period. The City also uses this feature of the
                    regulations. As a result, the unrecognized recapture amount of $413,086 should
                    be reduced as the homeowners reside in their HUD-funded house over time.

                                                                  Years of                     Outstanding
                                                                                 Expired
                                                                expiration                    liability as of
                           Unrecognize                                           amount
                                               Date of             Years                         June 30,
                           d recapture                                         (Difference/
         Property                              sale to            between                          2009
                            amount or                                           15 years *
                                             homeowner            June 30,                    (Difference -
                            Difference                                           years of
                                                                 2009, and                       expired
                                                                                expiration)
                                                                date of sale                     amount)
 112-114 Walnut St.               $77,693     July 9, 2008         0.97              $5,048         $72,645
 108-110 Walnut St.               $77,693    Nov. 25, 2008         0.59              $3,077         $74,616

10
     24 CFR 92.254(5)(ii)(A)(5)


                                                       12
109-111 Beech St.            $48,700     July 9, 2008      0.97            $3,164         $45,536
45-47 Ely St.                $41,100    Aug. 29, 2007      1.84            $5,034         $36,066
137-139 Center St.           $51,000    Dec. 28, 2006      2.51            $8,517         $42,483
76-78 North East St.         $41,700    Nov. 14, 2003      5.63           $15,641         $26,059
80-82 North East St.         $75,200    Oct. 29, 2003      5.67           $28,426         $46,774
Totals                       413,086              n/a      n/a            $68,908        $344,178

                If the homeowners discontinue their residency in their HUD-funded homes before
                the affordability period expires, the City should repay the HOME program. As of
                June 30, 2009, the contingent liability to the HOME program was $344,178. This
                liability should be further reduced for each additional year that the homeowners
                reside in their HUD-funded home. As of June 2009, the homeowners all
                continued to reside in their HUD-funded homes. Annually, the City must report
                to HUD about its recapture methodology. In the annual plans, the City described
                the deferred payment loans. The annual plans did not identify that the amount of
                the deferred payment loans was less than the difference between fair market value
                of the duplexes and the sales price to the homeowners.

                Allowing one developer to use a nonstandard recapture provision may be
                considered an arbitrary action in the procurement process. Arbitrary actions in
                the procurement process are considered to be restrictive of competition. Had the
                modified approach been included in the request for proposal, other potential
                bidders would have been aware of this “recapture option.” This action may have
                affected the proposal process by discouraging additional proposals.



The City Had Begun Outreach
to Other Entities


                City officials stated that they had begun to reach out to other nonprofit entities
                and for-profit developers in the local area. As part of this outreach, the City was
                making these entities aware of the City’s community development programs
                including the homeownership program. Increasing the competition for
                homeownership funds can help the City to address the issues identified.


Conclusion


                The City needs to improve its award process and administration and oversight of
                its HOME- and CDBG-funded housing programs. Therefore, it needs to revise its
                procurement process for its HOME Development program to

                       • Encourage open competition,

                                                  13
                       • Ensure that it has proper analysis of costs,
                       • Recognize and address unreasonable expenditures,
                       • Include demolition costs in its subsidy-layering calculations,
                       • Correctly calculate the subsidy-layering amounts, and
                       • Properly recapture funds if families do not reside in the housing for the
                           entire affordability period.

                   Because it lacked sufficient controls in these areas, the City paid $288,933 in
                   unreasonable construction costs and could not ensure the reasonableness of an
                   ongoing $1 million project. With sufficiently detailed cost analyses, the City
                   could avoid this situation. It also provided $974,453 in excess subsidies and
                   could lose up to $344,178 if assisted homeowners leave the duplex units before
                   the expiration of the affordability period. Finally, its procurement practices
                   restricted free and open competition


     Recommendations



                   We recommend that the Director of the Office of Community Planning and
                   Development in Boston

                       1A.     Evaluate the City’s local cost guidelines to determine the
                               reasonableness and propriety of the guidelines for each of the subject
                               years, and direct the City to make any needed changes to its guidelines
                               for future HOME activity.

                       1B.     Require the City to use sole source procurement procedures when only
                               one company responds in accordance with HOME requirements.

                       1C.     Evaluate the improperly awarded $2.6 million in awards and work with
                               the City to determine what actions are needed to ensure future awards
                               are in accordance with HOME requirements.

                       1D.     Work with the City to develop a repayment plan for the $288,933 in
                               unreasonable costs and have the City repay these funds. To the extent
                               allowed under law, funds should be repaid to the HOME program for
                               use in additional HOME projects.

                       1E.     Work with the City to develop detailed cost analyses for the ongoing
                               2008 Allyn-Dwight Homes project and have the City reduce costs to
                               reasonable amounts based on these analyses. Using the 14 percent
                               average, we estimate the future cost savings to be $146,145.11


11
     The Allyn-Dwight project is budgeted at $1,043,893. $1,043,893 x 14% = $146,145

                                                       14
                         1F.     Direct the City to develop detailed cost analyses, if needed, for the
                                 2009 City projects and evaluate the procurement for 2009 City projects
                                 to ensure that the City procures projects at a reasonable price.

                         1G.     Direct the City to establish a new protocol for routinely preparing
                                 detailed cost analyses, if needed, for all future homeownership projects.

                         1H.     Direct the City to repay to the HOME program the excess subsidy of
                                 $974,453 based on the City’s guidelines. For the closed grants, the
                                 funds should be repaid to HUD. For the open grants, the funds should
                                 be repaid to the program.

                         1I.     Evaluate the City’s 2008 and 2009 contracts and ensure that the City
                                 used appropriate maximum subsidy guidelines, as provided in the local
                                 guidelines and request for proposals, in its 2008 and 2009 contracts;
                                 and require changes as needed.

                         1J.     Direct the City to set up a contingency account representing the
                                 unfunded balances of $344,178; and to adjust the contingency account
                                 at least annually, as the affordability period expires.12 These unfunded
                                 balances are due to the program if the eligible families dispose of or
                                 lose the property before the affordability period expires.

                         1K.     Direct the City to appropriately change its recapture methodology for
                                 the three duplexes funded as the Allyn-Dwight project and any
                                 homeownership properties developed in the future.

                         1L.     Direct the City to change the annual plans to reflect the revised
                                 recapture methodology to be used.




12
     The affordability period is 15 years.

                                                       15
                                         RESULTS OF AUDIT

Finding 2: The Subrecipient That Administers the City’s Rental
Neighborhood Improvement Program Was Not Adequately Monitored
The subrecipient’s13 administration of the HUD-funded Rental Neighborhood Improvement
Program was not adequately monitored by the City. Specifically, the City’s monitoring failed to
identify that the subrecipient

       •   Did not administer loans to related parties in the same manner as to nonrelated parties,
       •   Did not ensure that rehabilitation work funded by related-party loans was completed in a
           timely manner,
       •   Did not ensure that appropriate reviews and approvals of the projects were obtained for
           all loans before the commitment of funds,
       •   Did not secure all program investments for related-party loans,
       •   Did not ensure that all project records were maintained in accordance with HUD record-
           keeping requirements, and
       •   Used $332,105 for demolition costs that were not eligible expenses of the program.

These deficiencies occurred, in part, because several provisions of the contract between the City
and the subrecipient were amended and revised over the years. These amendments and revisions
gradually diminished the City’s control of the program, and the responsibility for these controls
was assumed by the subrecipient. At the same time that the controls shifted from the City to the
subrecipient, participation in the program by nonrelated owners decreased, and participation by
entities/companies related to the subrecipient increased. A majority of the loans were made to
related parties, however, the program, as designed, did not include additional controls for
related-party loans. While we found deficiencies in both types of loans, there was a greater
frequency and dollar value to the deficiencies with the related party loans than with non related
loans. Ultimately, performance deficiencies for related-party loans went undetected for years and
were not appropriately addressed or corrected by the City. We estimate that program funds
(current and projected) of $1.8 million as of June 30, 2009, are at risk for noncompliance unless
the City increases its oversight of the subrecipient’s management of program loans.
Additionally, the City spent $332,105 on ineligible activities that did not meet the program
objectives and were not carried out in compliance with CDBG program requirements.



     A Majority of the Loans Were
     Made to Related Parties

                    Developed in 1977, the objective of the Rental Neighborhood Improvement
                    program was to make grants or loans to owners of multiunit rental properties to

13
     The subrecipient is Olde Holyoke.

                                                    16
finance eligible improvements, repairs, and rehabilitation of the rental properties.
Since the program’s inception, the City has used a nonprofit subrecipient, Olde
Holyoke, to administer the program.

Olde Holyoke

       •    Obtains applications,
       •    Inspects the properties to identify necessary work required to meet
            state code requirements,
       •    Reviews the loans,
       •    Evaluates the feasibility of the work,
       •    Reviews the credit history the applicant,
       •    Authorizes the loans,
       •    Examines completed work,
       •    Makes payments, and
       •    Administers the loan repayments.

Since the program began, the subrecipient has made 39 loans totaling more than
$4.7 million. Of the 39 loans, 26 (or 67 percent) have been made for properties
that were owned by either the subrecipient or its related nonprofit entity,
Contemporary Apartments.

A majority of the loans outstanding as of June 30, 2009, were for properties that
were owned by either the subrecipient or a second, related nonprofit. The total
loan amount of program loans outstanding as of June 30, 2009, was more than
$1.8 million. Outstanding loans to related parties represented 79 percent of the
amount due as of June 30, 2009.

           Rental Neighborhood Improvement program 
           loans:  amount outstanding as of June 30, 2009



                           $383,926 



                                         $1,471,666 




             Loans to Related Parties     Loans to Unrelated parties




                                    17
           Although a majority of the program participants were related parties, the program,
           as of June 30, 2009, did not include additional controls for these related-party
           loans. Related-party activities were not carried out in compliance with CDBG
           regulations and contained several deficiencies.


The Subrecipient Did Not Treat
All Loans in the Same Manner


           Loans made to related and nonrelated parties were not treated consistently by the
           subrecipient regarding

               •   Enforcement of contracts,
               •   Timetables for completion,
               •   Accrual of interest on advances,
               •   Board review and approvals, and
               •   Project record keeping.

           Specifically, loans made to nonrelated parties had to follow contracts, meet
           timetables for completion, and accrue interest on advances. Related-party loans
           were not required to meet these same standards. For loans to related parties,
           interest did not begin until project completion, which for some situations, was up
           to eight years. This treatment provided a disincentive for the related parties to
           complete the projects. If the related-party loans had been treated in the same
           manner as loans to nonrelated parties, the program would have earned an
           additional $22,52214 in interest. This interest could have been used to further the
           Rental Neighborhood Improvement program.

           Additionally, the files for loans to nonrelated parties contained rental regulatory
           agreements and work write-ups, and the loans were presented for approval by the
           board of directors. The files for related-party loans’ records did not contain rental
           regulatory agreements, work write-ups, and permits for all work. At the time of
           our review, there were 10 outstanding loans for related parties and five
           outstanding loans for nonrelated parties. Of the 10 related-party loans, approvals
           for four of the loans were not recorded in the board minutes of the subreceipient.
           Additionally, the 10 loans to related parties were not recorded in the property
           records of the Hampden County Registry of Deed.




                                            18
Related-Party Rehabilitation
Work Was Not Completed in a
Timely Manner

            In general, the renovations funded by the loans to related parties took at least 30
            months from the first advance to completion, with some renovations taking as
            long as three to eight years. Since loans for open projects (ongoing renovations)
            do not accrue interest, there was a disincentive to complete the renovations.
            Renovations funded by loans to nonrelated parties were generally completed
            within 18 months. For these loans, the loan agreements between the subrecipient
            and the nonrelated parties contained specific time completion requirements for
            renovations and contract provisions that prohibited work from lapsing for more
            than 15 days. The subrecipient strictly enforced these time completion
            requirements for loans to nonrelated parties.


Appropriate Reviews and
Approvals of the Projects Were
Not Made for All Loans

            As noted, we determined that four of the ten outstanding loans made to related
            parties did not contain evidence of review and approval by the board of directors.
            Project summaries and board approvals were generally evidenced in the board
            minutes. The subrecipient could not provide evidence showing that these loans were
            reviewed by the board. Review and approval by the board is a requirement under
            the subrecipient agreement.

            For one of the four loans, project activity R154, the subrecipient increased the
            funding four times, from an initial award of $35,000 in August 2006 to a total award
            of $150,000 as of August 2008. The gradual increase in the total amount of the loan
            over a two-year period rendered this loan agreement as essentially an open line of
            interest-free credit. This activity was still not finished as of June 30, 2009 (see
            appendix E).


The Subrecipient Failed to
Secure All Related-Party Loans


            When we began our review on December 1, 2008, none of the 10 related-party
            loans had been properly secured. To secure the loans, the lender (in this case the
            subrecipient acting for the City) records the loans in the property records of the
            local Registry of Deeds (Hampden County). This action safeguards the City if the
            loan recipient fails to repay the loan. After we notified the City of this
            discrepancy, the subrecipient took action to record these 10 related-party loans

                                             19
                between December 31, 2008, and June 9, 2009, thereby securing more than $1.5
                million in related-party loans, however, two related-party mortgages had not been
                recorded as of May 20, 2009.


     Project Records Were Not
     Maintained as Required


                Project files for the related-party loans did not contain evidence of compliance with
                HUD record-keeping requirements at 24 CFR 570.506. The files did not include
                application submissions, evidence of federal procurement compliance, work write-
                ups, Davis Bacon compliance documentation, or permits for all work (see appendix
                E).



     The Subrecipient Used $332,105
     for Demolition


                The subrecipient used $332,105 in Rental Neighborhood Improvement program
                funds to demolish existing buildings at three different parcels of land, which are
                not eligible activities under the program. The program objective is to finance for
                eligible improvements, repairs, and rehabilitation of rental properties. Demolition
                is neither repair nor rehabilitation of a rental property. In addition, the demolition
                activities were not carried out in compliance with the CDBG program rules
                governing

                       •   Public participation15 - The demolition activities were not specified in the
                           annual action plans to HUD;

                       •   Accurate and transparent reporting16- The demolition activities were not
                           reported in the consolidated annual performance and evaluation reports to
                           HUD;

                       •   Environmental reviews16- One demolition activity did not have an
                           environmental review, while another demolition activity’s environmental
                           review was based on misinformation regarding the source of funding;

                       •   Displacement and relocation of tenants17 - City records indicated that
                           demolition activity R145 displaced 24 people, but the City/subrecipient
                           relocated only one person; and

15
   24 CFR 91.220
16
   24 CFR 570.200(4)
17
   24 CFR 570.606

                                                    20
                       •    Conflicts of interest18 - Contemporary Apartments, a related party of the
                            subrecipient, financially benefited from demolition activity R151. A fire
                            damaged a building owned by Contemporary Apartments. This related
                            party received $303,000 in insurance proceeds. After the fire, the City
                            allowed Olde Holyoke to use program funds totaling $163,685 to
                            demolish the building. The City also allowed Olde Holyoke (as
                            administrator for the program) to purchase the property for $16,300 from
                            its related party, Contemporary Apartments. Our review of the records
                            indicated that Contemporary Apartments was allowed to retain $199,000
                            in net insurance proceeds. Since Contemporary Apartments is a related
                            party of Olde Holyoke, this transaction may have constituted a conflict of
                            interest.

                  Two of these demolition activities were related to homeownership activities as
                  discussed in finding 1. The associated costs were also not reported under the
                  homeownership program or considered when ensuring that the City did not
                  oversubsidize the properties (subsidy layering).


     Program Controls Shifted from
     the City to the Subrecipient


                  The inadequate oversight in administering the Rental Neighborhood Improvement
                  program occurred, in part, because of a shift in program controls from the City to
                  the subrecipient. The subrecipient had administered the program since 1977.
                  During that period, several contract provisions were amended and revised. These
                  amendments and revisions had the effect of diminishing the City’s control of the
                  program.19 These controls were assumed by the subrecipient.

                  During the initial years of the program, the City’s building commissioner was
                  responsible for making the initial determination of code deficiencies and
                  noncompliance for project activities (buildings) that would enable the projects to
                  be included in the program. As of June 30, 2009, the program agreement between
                  the subrecipient and the City provided that the building must be in need of
                  rehabilitation to comply with applicable codes of the Commonwealth of
                  Massachusetts. Also, as part of the agreement, the subrecipient was required to
                  review the list of code violations and determine whether there was sufficient
                  justification for the project activity (building) to be included in the program.

18
  24 CFR 570.611
19
  24 CFR §570.501 - Responsibility for grant administration. (b) The recipient is responsible for ensuring that
CDBG funds are used in accordance with all program requirements. The use of designated public agencies,
subrecipient, or contractors does not relieve the recipient of this responsibility. The recipient is also responsible for
determining the adequacy of performance under subrecipient agreements and procurement contracts, and for taking
appropriate action when performance problems arise, such as the actions described in §570.910.

                                                           21
Since a majority of the loans by the subrecipient were made to related properties,
the program did not have adequate controls to ensure that all items of
noncompliance were appropriately addressed. Buildings, funded by project
activities R147 and R154, underwent rehabilitation without the subrecipient
obtaining the necessary permits. The funds were used for items such as roofs,
moderate unit rehabilitation, and plumbing. Permits are required by local and
state building codes to ensure that work is done properly and in compliance with
state code requirements. Use of building permits provides independent inspection
of rehabilitation work to ensure the safety of residents.

During the initial period of the program, the City solicitor required a certification
that project investors had a marketable interest in the subject property. As of June
30, 2009, the agreement between the subrecipient and the City provided for the
subrecipient’s attorney to make such a certification. Since a majority of the loans
were made for properties that were owned by either the subrecipient or its related
nonprofit entity, the program did not have sufficient independent controls to
ensure that an appropriate marketable interest was held.

During the initial period of the program, certain loan origination functions were
assigned to local cooperating banks. As of June 30, 2009, these loan origination
functions had become the responsibility of the subrecipient. Since a majority of
the loans were made for properties that were owned by either the subrecipient or
its related nonprofit entity, the program did not have sufficient independent
controls to ensure the veracity and accuracy of the loan origination information.

During the initial period of the program, the City monitored Davis-Bacon
compliance activity. The Davis-Bacon Act of 1931 is a federal law which
established the requirement for paying prevailing wages on public works projects.
All federal government construction contracts and most contracts for federally
assisted construction over $2,000 must include provisions for paying workers the
locally prevailing wages and benefits paid on similar projects. As of June 2009,
the subrecipient was responsible for monitoring Davis-Bacon compliance activity.
We determined that the subrecipient did not maintain complete supporting
documentation to demonstrate compliance with Davis-Bacon requirements. This
documentation would include evidence that wages and certified payrolls were
reviewed and interviews were held to ensure that proper wages were paid.

During the initial period of the program, a five-member financial review board
consisting of local bank officers independently reviewed the projects. As of June
30, 2009, the subrecipient’s board of directors acted as the financial review board
for the projects included in the program. As noted, four of the ten related-party
loans were not reviewed by this board.




                                 22
     There Was a Risk of
     Noncompliance Due to
     Deficiencies and Lack of
     Controls

                  As of June 30, 2009, the total of the loans outstanding and the cash balance
                  available was more than $2.6 million.20 Based on the deficiencies noted in this
                  finding, we estimate that at least 67 percent of the total program funds of $2.6
                  million (current and projected use) totaling more than $1.7 million, are at risk for
                  noncompliance. The estimate of 67 percent represents the percentage of the total
                  program loans made to related parties since program inception. As of June 30,
                  2009, this percentage had remained consistent throughout the program for 32
                  years. The deficiencies noted in this finding were concentrated, almost
                  exclusively, on the related-party loans issued by the subrecipient under the
                  program. Until the City takes corrective action to address the deficiencies cited in
                  this finding, the deficiencies will continue to exist, and the program funds will be
                  at risk.


     New Loan Protocols Were
     Being Developed


                  In response to initial results communicated to the City during the audit, the City
                  began to develop new protocols for loans to related parties. These protocols
                  involve additional layers of review by City employees who are independent of the
                  subrecipient’s organization. The City intended to add these protocols to the next
                  agreement for the program. The agreement in place as of June 2009 will expire
                  December 31, 2009. Properly implemented, the independent layers of review can
                  help the City to address the issues identified and help to ensure that future
                  program-funded activities are conducted in compliance with HUD regulations and
                  completed in a timely manner without performance deficiencies.


     Conclusion


                  The City allowed controls over the Rental Neighborhood Improvement program
                  to shift from the City to the subrecipient. These changes in the control
                  environment of the program led directly to the performance deficiencies noted for
                  loans to related parties. These deficiencies went undetected for years and,
                  therefore, were not appropriately addressed or corrected by the City. As a result
20
  The total amount of Rental Neighborhood Improvement program loans outstanding was more than $1.8 million,
and the total cash balance available for the program, as shown in the subrecipient’s (Olde Holyoke) bank accounts,
was $778, 049 totaling more than $2.6 million.

                                                        23
                 of the deficiencies that occurred and the lack of proper internal controls that
                 caused them, we estimate that as of June 30, 2009, program funds (current and
                 projected) of more than $1.7 million are at risk for noncompliance. In addition,
                 the program lost more than $22,000 in forfeited interest and incurred $332,105 for
                 demolition activities that were not eligible program expenses.


     Recommendations

                 We recommend that the Director of the Office of Community Planning and
                 Development in Boston

                 2A.      Review the proposed changes to the Rental Neighborhood Improvement
                          program (RNIP) agreement to ensure that the agreement contains
                          appropriate independent controls for oversight and monitoring of program
                          activities by the City, and require the City to make any changes needed.
                          This action will ensure funds are spent appropriately and result in
                          $1,764,54021 in initial RNIP funds being put to better use.

                 2B.      Direct the City to repay $22,522 in forgone interest to the RNIP fund.

                 2C.      Determine necessary action to ensure that the City’s program objective
                          accurately reflects CDBG authorized activities, and to ensure demolition is
                          not funded using RNIP funding.

                 2D.      Require the City to repay to the program the $332,105 improperly used for
                          demolition activities that are not eligible under RNIP from other funds.




21
  $1,764,540 represents the outstanding balance of $2,633,642 multiplied by 67%, the percentage of loans to related
parties. We used the percentage of loans to related parties because our review found a greater frequency of
occurrence and a larger dollar impact for the problems with loans to related parties.

                                                        24
                         SCOPE AND METHODOLOGY

We performed an audit of the housing activities funded under the CDBG and HOME programs
as administered by the City. Specifically, we examined the City’s HOME Development and
Rental Neighborhood Improvement programs. Our fieldwork was completed at the City’s Office
of Community Development located at City Hall Annex, 20 Korean Veterans Plaza, Holyoke,
Massachusetts, and the offices of Olde Holyoke, 70 Lyman Street, Holyoke, Massachusetts, from
March to August 2009. Olde Holyoke is colocated with its related nonprofit, Contemporary
Apartments. Our audit generally covered the period July 2006 to June 2009 and was extended
when necessary to meet our objective. This extension included a review of the Rental
Neighborhood Improvement program for the 10-year period from 1999 to 2009 and a HOME
Development project, J. Albert Homes II, completed in 2003.

To accomplish our audit objective, we

   •   Reviewed applicable CFR sources, Office of Management and Budget circulars, HUD
       handbooks/guidebooks, and HUD notices pertaining to the HOME and CDBG programs.
   •   Reviewed the City’s draft policies and procedures and held discussions with City officials to
       gain an understanding of the City’s accounting controls, procurement practices, and
       monitoring policies.
   •   Reviewed independent public audit reports as well as HUD monitoring reviews.
   •   Evaluated the internal controls and conducted sufficient tests to determine whether
       controls were functioning as intended.
   •   Reviewed the annual action plans and consolidated annual performance and evaluation
       reports submitted to HUD to identify activities, programs, and procedures that were
       inaccurately described in the plans and reports.
   •   Evaluated the City’s HOME procurement practices through a review of procurements
       under the HOME Development program. The population is one new project per year,
       totaling three projects in our three-year audit period. These three projects funded eight
       duplexes. As of June 2009, five duplexes were complete, and three duplexes were being
       built. We opted to use a 100 percent selection because the universe is small and the
       impact of each unit is large. We also decided to add J. Albert Homes II, a 2002 project,
       because of its inherent relationship with the demolition activities funded under the Rental
       Neighborhood Improvement program. J. Albert Homes II consisted of two completed
       duplexes.
   •   Evaluated loans and grants funded by the Rental Neighborhood Improvement program.
       Based on our initial testing, we decided to review 100 percent of the activities. This
       change meant that we reviewed three additional loans not previously selected. These
       three loans were made to nonrelated projects.
   •   Obtained and reviewed project files maintained by Olde Holyoke, including applications,
       cost support files, invoices and contracts, general ledgers for July 1999 to June 2009,
       funding activity notification letters, Olde Holyoke board minutes for the period January

                                                25
       2000 to February 2009, and Contemporary Apartments board minutes for the period
       January 2000 to February 2009.
   •   Reviewed applicable land records from Hampden County Registry of Deeds.
   •   Tested disbursements for each activity by (1) reviewing lists of disbursements that made
       up the loan amount; (2) reviewing land records; (3) reviewing Olde Holyoke Rental
       Neighborhood Renewal program project files to determine work performed; (4)
       reviewing Olde Holyoke Rental Neighborhood Improvement program files to determine
       whether files met federal requirement for record keeping, Davis-Bacon compliance,
       procurement, and permits; (5) reviewing City building department records to gain
       information for comparison purposes; (6) reviewing borrower funding notification letters
       from Olde Holyoke to the City for accuracy; (7) reviewing whether disbursements were
       supported by invoices, contracts, and proposals; and (8) identifying the existence of rental
       rehabilitation loan agreements and whether the agreements contained time completion
       provisions. We also reviewed the three grants.
   •   Examined the various initial Rental Neighborhood Improvement program agreements,
       amendments, and scopes of services as executed between the City and Olde Holyoke
       from the initial contract in 1977 to the present contract in 2009.

We conducted the audit in accordance with generally accepted government auditing standards.
Those standards require that we plan and perform the audit to obtain sufficient, appropriate
evidence to provide a reasonable basis for our findings and conclusions based on our audit
objective. We believe that the evidence obtained provides a reasonable basis for our findings
and conclusions based on our audit objective.




                                               26
                              INTERNAL CONTROLS

Internal control is an integral component of an organization’s management that provides
reasonable assurance that the following controls are achieved:

   •   Program operations,
   •   Relevance and reliability of information,
   •   Compliance with applicable laws and regulations, and
   •   Safeguarding of assets and resources.

Internal controls relate to management’s plans, methods, and procedures used to meet its
mission, goals, and objectives. They include the processes and procedures for planning,
organizing, directing, and controlling program operations as well as the systems for measuring,
reporting, and monitoring program performance.



 Relevant Internal Controls


       We determined that the following internal controls were relevant to our audit objective:

           •   Internal controls with regard to the HOME Development program procurement
               process
           •   City oversight and management of the Rental Neighborhood Improvement program

       We assessed the relevant controls identified above.

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


 Significant Weaknesses

       Based on our review, we believe that the following items are significant weaknesses:

           •   Internal controls with regard to the HOME Development program procurement
               process
           •   City monitoring and management of the Rental Neighborhood Improvement
               program.




                                                27
                                       APPENDIXES


Appendix A

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

The audit identified questioned costs totaling $3,872,876 as follows:

             Recommendation           Ineligible 1/        Unreasonable        Funds to be put to
                    number                             or unnecessary 2/            better use 3/
                   1C
                   1D                                          $288,933
                   1E                                                                   146,145
                   1H                    $974,453
                   1J                                                                 $344,178
                   2A                                                                $1,764,540
                   2B                                                                   $22,522
                   2D                    $332,105

                 Totals                $1,306,558             $288,933               $2,277,385

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/      Unnecessary/unreasonable costs are those that are not generally recognized as ordinary,
prudent, relevant, and/or necessary within established practices. Unreasonable costs exceed the
costs that would be incurred by a prudent person in conducting a competitive business. A legal
opinion or administrative determination may be needed on these costs.

3/      Recommendations that funds be put to better use are estimates of amounts that could be
used more efficiently if an 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, and any
other savings that are specifically identified. In this case, (1) the potentially unreasonable costs
of $146,145 for the ongoing duplex homeownership activity will be better spent for reasonable
costs, (2) the $344,178 in unsecured/unrecognized HOME investments subject to recapture
contingency will be appropriately funded, (3) $1,764,540 will be expended in accordance with
CDBG regulations, and appropriate project performance will be achieved. Lastly, interest of
$22,522 due to the program will be used to further the program objectives.


                                                 28
Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation   Auditee Comments




Comment 1




                               29
Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation   Auditee Comments




Comment 2

Comment 3




Comment 4

Comment 5

Comment 6



Comment 7




                               30
Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation   Auditee Comments




Comment 8



Comment 9




Comment 10
Comment 11




                               31
Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation   Auditee Comments




Comment 12




Comment 13




Comment 14




                               32
Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation   Auditee Comments




Comment 14




Comment 15




Comment 16




                               33
Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation   Auditee Comments




                               34
Appendix B

       AUDITEE COMMENTS AND OIG’S EVALUATION


                         OIG Evaluation of Auditee Comments


Comment 1   The completive proposal RFP referred by the City did not contain cost estimates.
            The City did not complete or have the required estimates. Regulations at 24 CFR
            85.36(d) and (f) require grantees, such as the City, to complete cost estimates to
            ensure that it obtains the best value for its funds. What the City refers to as
            "estimates" are standard and the City’s Local Cost Guidelines that are required
            under the HOME program (24 CFR 92.250(b)). These guidelines provide
            standards related to total development cost caps and maximum subsidies for all
            activities funded under the HOME Development program. Program activities
            include new construction and rehabilitation of single and multi-family units to be
            purchased and owned by low-income families. The total development cost caps
            are not the necessary cost estimates required for the activity of new construction
            of modular duplex housing units.

            The analyses performed by the City for the proposed projects were limited, and
            they were not sufficient to ensure that the City received the best possible prices.
            Also, based on what was found a detailed description of the steps taken in the
            City’s analysis would show that the cost analyses were insufficient. Specifically,
            the City must perform a cost analysis that verifies the proposed cost data and
            projections of the data and that evaluates specific elements of costs and profits.
            The analyses performed by the City did not include any of this type of
            information. Lastly the audit report did not cite a requirement that cost estimates
            and analyses be performed by a "third party” and we agree that these estimates
            may be done my completed by City officials as long as they are done sufficiently.

Comment 2   The $2.6 million in noncompetitive contracts was not awarded in accordance with
            federal requirements, and therefore was not properly awarded. Specifically, the
            City did not follow the Regulations at 24 CFR 85.36(d) and (f), and as such the
            award of these funds were improper. Further, we noted in Comment 1 why the
            award was improper, or specifically the required cost estimates and cost analyses
            were not properly prepared as required by the Regulations at 24 CFR 85.36(d) and
            (f) thus making this an improper award.

Comment 3   In the response to this recommendation, the City failed to provide any
            documentation for us to evaluate or in support of its statements that the cost of
            home construction in the area or the unit cost of constructing these duplex homes
            in Holyoke was below the average for the Springfield-Holyoke-Chicopee


                                             35
Appendix B

       AUDITEE COMMENTS AND OIG’S EVALUATION

            metropolitan area. Based on what we found, the City needs to repay the
            unreasonable costs because it did not put forth sufficient effort to ensure that the
            costs were reasonable. With regard to the quality of the estimate, the cost
            estimates developed by the independent appraiser were based on the Marshall and
            Swift universal standards and included the maximum allowed for energy
            adjustments. This adjustment addresses items such as extra insulation, thermal
            pane windows, and heavier doors, etc. According to the Marshall and Swift
            standards, this energy adjustment is calculated based on a determination of the
            local climate being mild, moderate, or extreme. The appraiser was very diligent
            and used the extreme designation, which is the highest adjustment factor allowed.
            Using this designation, the appraiser estimated the energy adjustment to range
            from $1.36 extra per sq. foot for the Albert II project to $1.83 extra per sq. foot
            for the Dwight Homes project.

            The City failed to provide any documentation to support its statements that the
            cost of home construction in the area or the unit cost of constructing these duplex
            homes in Holyoke. The appraisal shows that the cost paid were not reasonable,
            and thus, if the City had made this effort to ensure that the cost were reasonable,
            the City would have produced more housing.

Comment 4   In the response to this recommendation, the City failed to provide any
            documentation for us to evaluate or in support of its statements that the cost of
            analyses were done. The City did not complete or have the required estimates.
            Based on what documentation we found during the audit, City needs to repay the
            unreasonable costs because it did not put forth sufficient effort to ensure that the
            costs were reasonable. Also see comments 1 and 3.

Comment 5   The procurement facts warranted the completion of a cost analyses because there
            was no competition. Also, a detailed cost analyses would not be not required
            where adequate competition exists (i.e. where there is more than one respondent).
            However, as noted in the finding there was only one respondent, and therefore,
            the detailed cost analyses were required. The City did not complete or have the
            required estimates.

Comment 6   To ensure compliance with HUD requirements in the City’s administration of its
            HOME program, the City needs to establish new protocols for routinely preparing
            detailed cost analyses when needed for future homeownership projects. It is the
            City’s responsibility to ensure the costs paid are reasonable, and thus, the City
            needs to have policies and procedures in place to ensure that the costs are
            reasonable.


                                             36
Appendix B

       AUDITEE COMMENTS AND OIG’S EVALUATION

Comment 7   Our review found that regulatory maximum subsidy limits were breached, in at
            least one instance. Using the HUD guidelines, we determined that one project, 45
            Ely Street, was over-subsidized by $62,250. The City’s established local cost
            guidelines provide that HUD funds, in combination with all other government
            assistance, shall not exceed the lesser of (1) the difference between the amounts
            borrowed by the buyer as a first mortgage and the lesser of the actual total
            development cost, (2) the total development cost cap, or (3) 210 percent of the
            amount borrowed by the buyer as a first mortgage. The City allowed the
            developer to exceed the local guidelines by $974,453, a significant amount that
            represents the amount of subsidies in excess of the local guidelines. This
            occurred because the City did not include all HUD funding in its calculations for
            subsidy layering, and it did not recognize demolition expenditures as part of the
            total development cost of the projects.

Comment 8   As noted in the finding, the City included the local guidelines in its RFPs for new
            projects funded by the homeownership program. Because the City allowed one
            developer to exceed the local guidelines by almost $1 million (see Comment 7),
            this developer understood that the guidelines could be exceeded, and this
            knowledge gave that developer an unfair competitive advantage. HUD needs to
            ensure that the City used appropriate maximum subsidy guidelines in its 2008 and
            2009 contracts and require changes as needed

Comment 9   The City's practice of identifying an optional amount that was less then "the
            difference between fair market value and the affordable sales price" and offering
            this option to only one developer does not conform to the applicable regulations,
            nor was this practice approved by HUD. The regulations provide that the HOME
            investment that is subject to recapture is based on the amount of HOME
            assistance that enabled the homebuyer to buy the dwelling unit. This includes any
            HOME assistance that reduced the purchase price from fair market value to an
            affordable price. The City should submit to HUD for review and approval the
            optional recapture methodology it used. If approved, this optional (modified)
            recapture option should be offered to all participants of the HOME program and
            included in the RFPs to ensure competition is fair.

            Allowing one developer to use an optional and nonstandard recapture provision
            may be considered an arbitrary action in the procurement process. Arbitrary
            actions in the procurement process are considered to be restrictive of competition.
            Had the optional (modified) provision been included in the request for proposal,
            other potential bidders would have been aware of this recapture option. The
            actions by the City may have affected the proposal process by discouraging
            additional proposals.

                                            37
Appendix B

         AUDITEE COMMENTS AND OIG’S EVALUATION


              HUD regulations allowed the City to recoup a portion of the HOME assistance.
              However, this may only be accomplished using recapture options that are
              acceptable to (approved by) HUD as provided in the HOME regulations at 24
              CFR 92.254. In the instances cited in the finding, the recapture option used was
              not one of the four options accepted by HUD and included in the regulations.

Comment 10 The City is not using recapture options that are acceptable to (approved by) HUD
           as provided in the HOME regulations at 24 CFR 92.254. The City allowed its
           developer to use a different recapture methodology than the one approved by
           HUD. The City must use the correct recapture amount which should be
           proportionally reduced over the life of the affordability period. The incorrect
           unrecognized recapture amount subjects the HOME program to a potential loss of
           $344,178 as of June 30, 2009. (Also see Comment 9).

Comment 11 The wording in the Consolidated Plan has been changed, as noted. However, as
           noted in Comment 9 and 10, the City cannot use this modified recapture option
           without HUD approval, and it cannot use this option exclusively with OHDC.
           This practice of limiting this option to only one developer does not foster fair
           competition. The City must offer this modified recapture, once approved by HUD,
           to all potential respondents of the City’s HOME development program RFPs.

Comment 12 The City has been working to increase timely project completion, make related
           party loans more transparent, and insure file completeness. However, we reiterate
           that demolition expenses do not represent eligible RNIP program costs as further
           explained in Comments 15 and 16.

Comment 13 The City is willing to implement this recommendation. However, since the
           1970’s the contractor (OHDC) has not assumed RNIP program duties for little or
           no cost. As part of its review of the revised RNIP agreement, HUD should ensure
           that the agreement contains appropriate compensation to the contractor(s) as
           explained further in Comment 14.

Comment 14 The City's description of the RNIP policy on charging interest is not contained in
           any records or other documents provided during the audit, and it was never
           provided in any discussion with the auditors during the assignment. The City’s
           description is also not consistent with information provided by the OHDC staff
           during the audit regarding interest accruals prior to project completion.
           According to City officials and as recorded in the financial records provided by
           OHDC, upon project completion, OHDC receives a developer fee totaling 10% of
           the final loan amounts. The 10% developer fee “compensation provision” was

                                              38
Appendix B

         AUDITEE COMMENTS AND OIG’S EVALUATION

             also not provided in writing or in any contracts, or records provided during the
             audit. This developer fee was applied to both unrelated and related party loans.
             We note that payment of 10% developer fees for related party loans was contrary
             to information provided by City officials about such developer fees.

             Also, as noted in the OHDC board minutes dated August 11, 2000, an RNIP loan
             provided to an OHDC related entity (Contemporary Apartments) totaling
             $145,000 was forgiven for reasons that were sufficiently documented. However,
             in retaining the proceeds of the loan, OHDC (through Contemporary Apartments)
             effectively received additional compensation that could be used for administrative
             matters, such as monitoring existing loans, in addition to the developer fees that
             were paid.

             During the period 1999 to 2009, there were 10 loans for related parties and five
             loans for nonrelated parties; our audit reviewed all 15 loans. The loans made to
             nonrelated parties were required to adhere to contracts, meet timetables for
             completion, and accrue interest on advances. For loans to related parties, interest
             did not begin until project completion, which for some situations, was up to eight
             years. If the related-party loans had been treated in the same manner as loans to
             nonrelated parties, the program would have earned an additional $22,522 in
             interest.

             We calculated the interest forgone using the same methodology that the
             subrecipient (OHDC) used for its nonrelated loans. Each time funds are drawn
             down from the loan, interest is accrued on the expenditures to date, multiplied by
             3% annual interest for the days elapsed since the last advance. For these
             nonrelated loans, the calculation occurred over the life of the loan from first
             advance to the first payment. For those related loans that had not made a first
             payment, we used a default date of June 30, 2009. We then subtotaled all of the
             interest foregone. The amount calculated as foregone interest should be returned
             to the RNIP program.

Comment 15 Demolition expenses are allowable costs but only when carried out in compliance
           with specific CDBG program rules regardless of whether or not the City’s RNIP
           agreement contained provisions for demolition that were included in the
           governing contracts.

             In addition, the finding notes that the City spent $332,105 on ineligible activities
             that did not meet the RNIP program objectives, and were not carried out in
             compliance with CDBG program requirements. "The RNIP program objective
             was to finance eligible improvements, repairs, and rehabilitation of rental

                                              39
       Appendix B

         AUDITEE COMMENTS AND OIG’S EVALUATION

              properties. Demolition is neither repair nor rehabilitation of a rental property. In
              addition, the demolition activities were not carried out in compliance with the
              CDBG program rules governing: 1) public participation, 2) accurate and
              transparent reporting, 3) environmental reviews, 4) displacement and relocation of
              tenants, and 5) conflicts of interest.

Comment 16 Demolition expenses are allowable costs under the CDBG program, but only
           when carried out in compliance with specific CDBG program rules. In the
           instances cited in the finding, the demolition activities were not carried out in
           compliance with the CDBG program rules governing: 1) public participation, 2)
           accurate and transparent reporting, 3) environmental reviews, 4) displacement and
           relocation of tenants, and 5) conflicts of interest as explained in Comment 15.




                                               40
Appendix C
              RENTAL NEIGHBORHOOD
     IMPROVEMENT LOANS WERE MODIFIED AND FUNDS
           WERE OUTSTANDING (FOR SAMPLE)
                 AS OF JUNE 30, 2009


 RNIP*                     Initial funding   Date of last                      Amount outstanding
           Setup date                                        Funds committed
  no.                          amount        modification                       as of June 30, 2009

 R128      Mar. 3, 1993       $50,000        May 18, 2005       $ 144,000            $21,958
 R138      May 1, 1999        $70,000        Aug. 1, 2000       $ 70,000             $36,752
 R139       Oct. 8, 1999      $90,000        Oct. 1, 2001       $ 103,800              $-
              Dec. 12,
 R140                        $ 105,000             n/a          $ 105,000            $73,163
                1999
 R141       July 1, 2000      $52,000        Nov. 13, 2007      $ 86,000             $80,507
 R142      Jan. 10, 2001      $40,000             n/a           $ 40,000             $26,962
              Feb. 28,
 R143                        $ 115,000       Dec. 11, 2001      $ 115,000               $-
                2001
              Aug. 21,
 R144                        $ 260,000       Jan. 31, 2002      $ 341,000           $262,903
                2002
 R147      Apr. 1, 2003      $ 165,000       Nov. 14, 2008      $ 300,000           $272,800
             May 10,
 R150                         $40,000        Apr. 30. 2007      $ 40,000             $22,420
              2006
             Aug. 28,
 R152                         $45,000              n/a          $ 45,000             $34,765
              2006
             Aug. 28,
 R153                         $80,000              n/a          $ 80,000             $54,334
              2006
             Aug. 28,
 R154                         $35,000        Aug. 24, 2008      $ 150,000           $144,150
              2006
 R155      Oct. 1, 2008       $50,000              n/a          $ 50,000             $37,883
 R156      Jan. 1, 2009       $60,000              n/a          $ 60,000             $47,860
              Totals         $1,257,000                        $ 1,729,800         $1,116,457




* RNIP = Rental Neighborhood Improvement program




                                                    41
Appendix D
                FOR RENTAL NEIGHBORHOOD
         IMPROVEMENT LOANS, UNFINISHED WORK LED TO
                    INTEREST FORGONE

                                                                      Date of first
                                                                      payment or
            Is work                      Number of         First                      Elapsed    Interest
RNIP No.               Last advance                                   default date
           complete?                    amendments        advance                      days      forgone
                                                                      of June 30,
                                                                         2009
 R128         No       Mar. 31, 2009        3                n/a          n/a           n/a        n/a
                                                          June 30,      Oct. 31,
 R138        Yes       Aug. 15, 2000        0                                          489         n/a
                                                            1999         2000
                                                          Dec. 17,      Jan. 31,
 R139        Yes            n/a             1                                          776         n/a
                                                            1999         2002
                                                          Mar. 31,
 R140        Yes       Feb. 12, 2002        0                         Dec. 2, 2002     246         n/a
                                                            2002
                                                                       June 30,
 R141        Yes       Jan. 29, 2008        2         July 1, 2000                     2921      $9,682
                                                                         2008
                                                          Jan. 19,     Aug. 31,
 R142        Yes       June 26, 2001        0                                          224         n/a
                                                           2001          2001
                                                          Apr. 30,     Apr. 30,
 R143        Yes       Apr. 18, 2002        1                                          365         n/a
                                                           2001          2002
                                                          Mar. 18,     Oct. 31,
 R144        Yes       Sept. 1, 2003        1                                          592         n/a
                                                           2002          2003
                                                          Apr. 30,     Oct. 31,                     Not
 R147        Yes       Feb. 12, 2009        3                                          1280
                                                           2003          2006                   determined
                                                          Apr. 27,     June 30,
 R150         No       June 29, 2006        1                                          1160       $763
                                                           2006          2009
                                                          Sept. 14,    June 30,
 R152         No       May 21, 2009         0                                          1020      $1,796
                                                           2006          2009
                                                          Sept. 28,    June 30,
 R153         No       Sept. 6, 2007        0                                          1006      $3,937
                                                           2006          2009
                                                                       June 30,
 R154         No       Sept. 17, 2008       5         Feb. 8, 2007                     873       $5,399
                                                                         2009
                                                          Oct. 31,     June 30,
 R155         No       June 30, 2009        0                                          242        $945
                                                           2008          2009
                                                          Jan. 29,     June 30,
 R156         No       Apr. 30, 2009        0                                          152         n/a
                                                           2009          2009
 Total        7                                                                                  $22,522




                                                     42
Appendix E
 FOR RENTAL NEIGHBORHOOD IMPROVEMENT LOANS,
      RELATED AND UNRELATED LOANS RECEIVED
            INCONSISTENT TREATMENT

RNIP     Amount        Is Work      Is it a   Is there a Is there Are all Cost Are all Are there RentalAre there Work Is there
                                                                                                                             Documentation of   Are there
 No    Outstanding
                 at   Complete?                                                                                                                 building
         6/30/09                   Related Mortgage Board         Supported? costs       Rehab
                                                                                             ilitation
                                                                                                     /  Write Ups? Compliance with Federal      permits?
                                  party Loan?            Approval              Eligible?  Regulatory                 ProcurementRegulations
                                                                                                                                        ?
                                                                                         Agreements?
R128     $21,958        No           Yes         No        Yes       No          No         No             Yes                 No                 n/a

R138    $36,752         Yes          No        Yes        Yes        Yes         Yes         Yes            Yes               No                  Yes
R139      $-            Yes          Yes       No         Yes        Yes         No          No             Yes               No                  Yes
R140    $73,163         Yes          No        Yes        Yes        Yes         Yes         Yes            Yes               No                  Yes
R141    $80,507         Yes          Yes       Yes        Yes        Yes         Yes         No             No                No                  Yes
R142    $26,962         Yes          Yes       Yes        No         Yes         Yes         No             No                No                  No
R143      $-            Yes          No        Yes        Yes        Yes         Yes         Yes            Yes               No                  Yes
R144    $262,903        Yes          No        Yes        Yes        Yes         Yes         Yes            Yes               No                  Yes
R147    $272,800        Yes          Yes       Yes        Yes        Yes         Yes         No             No                No                  No

R150    $22,420         No           Yes       Yes        No         Yes         Yes         No             No                No                  Yes
R152    $34,765         No           Yes       No         Yes        Yes         Yes         No             No                No                  Yes
R153    $54,334         No           Yes       No         Yes        Yes         Yes         No             No                No                  Yes
R154    $144,150        No           Yes       Yes        No         Yes         Yes         No             No                No                  No
R155    $37,883         No           Yes       Yes        No         Yes         Yes         No             No                No                  Yes
R156    $47,860         No           No        Yes        No         Yes         Yes         Yes            Yes               No                  Yes
       $1,116,457       7

 




                                                                            43
Appendix F

                                          CRITERIA

Finding 1

24 CFR 85.36 - Procurement (d) Methods of procurement to be followed.

       (4) Procurement by noncompetitive proposals is procurement through solicitation of a
       proposal from only one source, or after solicitation of a number of sources, competition is
       determined inadequate.

               (i) Procurement by noncompetitive proposals may be used only when the award
               of a contract is infeasible under small purchase procedures, sealed bids or
               competitive proposals and one of the following circumstances applies:
                       (A) The item is available only from a single source;
                       (B) The public exigency or emergency for the requirement will not permit
                       a delay resulting from competitive solicitation.
                       (C) The awarding agency authorizes noncompetitive proposals; or
                       (D) After solicitation of a number of sources, competition is determined
                       inadequate.
               (ii) Cost analysis, i.e., verifying the proposed cost data, the projections of the data,
               and the evaluation of the specific elements of costs and profit, is required.

24 CFR 85.36 - Procurement (f) Contract cost and price.

       (1) Grantees and subgrantees must perform a cost or price analysis in connection with
       every procurement action including contract modifications. The method and degree of
       analysis is dependent on the facts surrounding the particular procurement situation, but as
       a starting point, grantees must make independent estimates before receiving bids or
       proposals. A cost analysis must be performed when the offerer is required to submit the
       elements of his estimated cost, e.g., under professional, consulting, and architectural
       engineering services contracts. A cost analysis will be necessary when adequate price
       competition is lacking, and for sole source procurements, including contract
       modifications or change orders, unless price reasonableness can be established on the
       basis of a catalog or market price of a commercial product sold in substantial quantities to
       the general public or based on prices set by law or regulation. A price analysis will be
       used in all other instances to determine the reasonableness of the proposed contract price.

§ 92.250 Maximum per-unit subsidy amount and subsidy layering.

(b) Subsidy layering. Before committing funds to a project, the participating jurisdiction must
evaluate the project in accordance with guidelines that it has adopted for this purpose and will
not invest any more HOME funds, in combination with other governmental assistance, than is
necessary to provide affordable housing.

                                                 44
HUD Notice: CPD 98-1 - Layering Guidance for HOME Participating Jurisdictions When
Combining HOME Funds with Other Governmental Subsidies.

       III. DEFINITIONS

       Governmental Assistance - Governmental assistance includes any loan, grant, (including
       Community Development Block Grant), guarantee, insurance, payment, rebate, subsidy,
       credit, tax benefit, or any other form of direct or indirect assistance from the Federal,
       State or local government for use in, or in connection with, a specific housing project.

       IV. USE OF THE GUIDELINES

       Based on the certification contained in the annual submission of the consolidated plan
       and the subsidy layering provisions of §92.250(b) of the HOME final rule, a PJ
       [participating jurisdiction] must use the guidelines it has adopted to document that when
       HOME funds are used in combination with other governmental assistance, no more
       subsidy is invested than is necessary. The project file should contain the required
       evaluation. For example, if a project is using HOME funds in combination with local tax
       increment financing, the PJ would use the guidelines, evaluate the project, and document
       the evaluation.

       V. PROJECT EVALUATION

       Before a PJ invests HOME funds in a project, it must assess if other governmental
       assistance has been, or is expected to be, made available to that project.
City’s Local Guidelines:

       1. Total Development Cost Limits Definition: Total Development Cost is defined as the
       sum of all allowable project costs necessary for the development of the housing.

       3. Maximum Public Subsidy - Homeowner units Local CDBG/HOME funds, in
       combination with all other government assistance, shall not exceed the lesser of: a. The
       difference between the amount borrowed by the buyer as a first mortgage and the lesser
       of the actual Total Development Cost or the Total Development Cost cap, or b. 210% of
       the amount borrowed by the buyer as a first mortgage.




                                               45
24 CFR 92.254, Qualification as Affordable Housing: Homeownership, 5. Resale and recapture.
To ensure affordability, the participating jurisdiction must impose either resale or recapture
requirements, at its option. The participating jurisdiction must establish the resale or recapture
requirements that comply with the standards of this section and set forth the requirements in its
consolidated plan. HUD must determine that they are appropriate.

       ii. Recapture. Recapture provisions must ensure that the participating jurisdiction
       recoups all or a portion of the HOME assistance to the homebuyers, if the housing does
       not continue to be the principal residence of the family for the duration of the period of
       affordability. The participating jurisdiction may structure its recapture provisions based
       on its program design and market conditions. The period of affordability is based upon
       the total amount of HOME funds subject to recapture described in paragraph
       (a)(5)(ii)(A)(5) of this section.

               A. The following options for recapture requirements are acceptable to HUD. The
                  participating jurisdiction may adopt, modify or develop its own recapture
                  requirements for HUD approval. In establishing its recapture requirements,
                  the participating jurisdiction is subject to the limitation that when the
                  recapture requirement is triggered by a sale (voluntary or involuntary) of the
                  housing unit, and there are no net proceeds or the net proceeds are insufficient
                  to repay the HOME investment due, the participating jurisdiction can only
                  recapture the net proceeds, if any. The net proceeds are the sales price minus
                  superior loan repayment (other than HOME funds) and any closing costs.

                      1. Recapture entire amount. The participating jurisdiction may recapture
                      the entire amount of the HOME investment from the homeowner.

                      2. Reduction during affordability period. The participating jurisdiction
                      may reduce the HOME investment amount to be recaptured on a prorata
                      basis for the time the homeowner has owned and occupied the housing
                      measured against the required affordability period.

                      3. Shared net proceeds. If the net proceeds are not sufficient to recapture
                      the full HOME investment (or a reduced amount as provided for in
                      paragraph (a)(5)(ii)(A)(2) of this section) plus enable the homeowner to
                      recover the amount of the homeowner’s downpayment and any capital
                      improvement investment made by the owner since purchase, the
                      participating jurisdiction may share the net proceeds. The net proceeds are
                      the sales price minus loan repayment (other than HOME funds) and
                      closing costs.

                      4. Owner investment returned first. The participating jurisdiction may
                      permit the homebuyer to recover the homebuyer’s entire investment
                      (downpayment and capital improvements made by the owner since
                      purchase) before recapturing the HOME investment.



                                                46
5. Amount subject to recapture. The HOME investment that is subject to
recapture is based on the amount of HOME assistance that enabled the
homebuyer to buy the dwelling unit. This includes any HOME assistance
that reduced the purchase price from fair market value to an affordable
price, but excludes the amount between the cost of producing the unit and
the market value of the property (i.e., the development subsidy). The
recaptured funds must be used to carry out HOME-eligible activities in
accordance with the requirements of this part. If the HOME assistance is
only used for the development subsidy and therefore not subject to
recapture, the resale option must be used.

6. Special considerations for single-family properties with more than one
unit. If the HOME funds are only used to assist a low-income homebuyer
to acquire one unit in single-family housing containing more than one unit
and the assisted unit will be the principal residence of the homebuyer, the
affordability requirements of this section apply only to the assisted unit. If
HOME funds are also used to assist the low-income homebuyer to acquire
one or more of the rental units in the single-family housing, the
affordability requirements of § 92.252 apply to assisted rental units, except
that the participating jurisdiction may impose resale or recapture
restrictions on all assisted units (owner-occupied and rental units) in the
single family housing. If resale restrictions are used, the affordability
requirements on all assisted units continue for the period of affordability.
If recapture restrictions are used, the affordability requirements on the
assisted rental units may be terminated, at the discretion of the
participating jurisdiction, upon recapture of the HOME investment. (If
HOME funds are used to assist only the rental units in such a property
then the requirements of § 92.252 would apply and the owner-occupied
unit would not be subject to the income targeting or affordability
provisions of § 92.254.)




                          47
24 CFR 85.36 - Procurement (c) Competition.

       (1) All procurement transactions will be conducted in a manner providing full and open
       competition consistent with the standards of §85.36. Some of the situations considered to
       be restrictive of competition include but are not limited to:

                (i)    Placing unreasonable requirements on firms in order for them to qualify to
                       do business,
                (ii)   Requiring unnecessary experience and excessive bonding,
               (iii)   Noncompetitive pricing practices between firms or between affiliated
                       companies,
               (iv)    Noncompetitive awards to consultants that are on retainer contracts,
                (v)    Organizational conflicts of interest,
               (vi)    Specifying only a brand name product instead of allowing an equal
                       product to be offered and describing the performance of other relevant
                       requirements of the procurement, and
              (vii)    Any arbitrary action in the procurement process.

Finding 2

24 CFR 570.501 - Responsibility for grant administration. (b) The recipient is responsible for
ensuring that CDBG funds are used in accordance with all program requirements. The use of
designated public agencies, subrecipient, or contractors does not relieve the recipient of this
responsibility. The recipient is also responsible for determining the adequacy of performance
under subrecipient agreements and procurement contracts, and for taking appropriate action
when performance problems arise, such as the actions described in §570.910.

24 CFR 570.611 - Conflict of interest.

(a) Applicability. (1) In the procurement of supplies, equipment, construction, and services by
recipients and by subrecipients, the conflict of interest provisions in 24 CFR 85.36 and 24 CFR
84.42, respectively, shall apply.

       (2) In all cases not governed by 24 CFR 85.36 and 84.42, the provisions of this section
       shall apply. Such cases include the acquisition and disposition of real property and the
       provision of assistance by the recipient or by its subrecipient to individuals, businesses,
       and other private entities under eligible activities that authorize such assistance (e.g.,
       rehabilitation, preservation, and other improvements of private properties or facilities
       pursuant to §570.202.

(b) Conflicts prohibited. The general rule is that no persons described in paragraph (c) of this
section who exercise or have exercised any functions or responsibilities with respect to CDBG
activities assisted under this part, or who are in a position to participate in a decision-making
process or gain inside information with regard to such activities, may obtain a financial interest
or benefit from a CDBG-assisted activity, or have a financial interest in any contract,
subcontract, or agreement with respect to a CDBG-assisted activity, or with respect to the

                                                48
proceeds of the CDBG-assisted activity, either for themselves or those with whom they have
business or immediate family ties, during their tenure or for one year thereafter.

(c) Persons covered. The conflict of interest provisions of paragraph (b) of this section apply to
any person who is an employee, agent, consultant, officer, or elected official or appointed official
of the recipient, or of any designated public agencies, or of subrecipient that are receiving funds
under this part.

24 CFR 570.606 - Displacement, relocation, acquisition, and replacement of housing.

(a) General policy for minimizing displacement. Consistent with the other goals and objectives
of this part, grantees (or States or state recipients, as applicable) shall assure that they have taken
all reasonable steps to minimize the displacement of persons (families, individuals, businesses,
nonprofit organizations, and farms) as a result of activities assisted under this part. (b)
Relocation assistance for displaced persons at URA [Uniform Relocation Assistance and Real
Property Acquisition Policies Act of 1970] levels. (1) A displaced person shall be provided with
relocation assistance at the levels described in, and in accordance with the requirements of 49
CFR part 24, which contains the government-wide regulations implementing the Uniform
Relocation Assistance and Real Property Acquisition Policies Act of 1970 (URA) (42 U.S.C.
[United States Code] 4601–4655).

24 CFR 570.200 - General policies.

(a) Determination of eligibility. An activity may be assisted in whole or in part with CDBG
funds only if all of the following requirements are met: (4) Compliance with environmental
review procedures. The environmental review procedures set forth at 24 CFR part 58 must be
completed for each activity (or project as defined in 24 CFR part 58), as applicable.

24 CFR 570.302 - Submission requirements.

In order to receive its annual CDBG entitlement grant, a grantee must submit a consolidated plan
in accordance with 24 CFR part 91. That part includes requirements for the content of the
consolidated plan, for the process of developing the consolidated plan, including citizen
participation provisions, for the submission date, for HUD approval, and for the amendment
process.

24 CFR 91.220 - Action plan.

The action plan must include the following: (c) Activities to be undertaken. A description of the
activities the jurisdiction will undertake during the next year to address priority needs in terms of
local objectives that were identified in § 91.215. This description of activities shall estimate the
number and type of families that will benefit from the proposed activities, the specific local
objectives and priority needs (identified in accordance with § 91.215) that will be addressed by
the activities using formula grant funds and program income the jurisdiction expects to receive
during the program year, proposed accomplishments, and a target date for completion of the
activity.

                                                  49
Performance reporting meets three basic purposes: 1) it provides HUD with necessary
information for the Department to meet its statutory requirement to assess each grantee’s ability
to carry out relevant CPD programs in compliance with all applicable rules and regulations; 2) it
provides information necessary for HUD’s Annual Report to Congress, also statutory mandated;
and 3) it provides grantees an opportunity to describe to citizens their successes in revitalizing
deteriorated neighborhoods and meeting objectives stipulated in their Consolidated Plan.

24 CFR 92.250 - Maximum per-unit subsidy amount and subsidy layering.

(b) Subsidy layering. Before committing funds to a project, the participating jurisdiction must
evaluate the project in accordance with guidelines that it has adopted for this purpose and will
not invest any more HOME funds, in combination with other governmental assistance, than is
necessary to provide affordable housing.

City’s Local Guidelines:

3. Maximum Public Subsidy - Homeowner units Local CDBG/HOME funds, in combination
with all other government assistance, shall not exceed the lesser of: a. The difference between
the amount borrowed by the buyer as a first mortgage and the lesser of the actual Total
Development Cost or the Total Development Cost cap, or b. 210% of the amount borrowed by
the buyer as a first mortgage.




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