Issue Date December 18, 2009 Audit Report Number 2010-DE-1001 TO: Marcie D. LaPorte, Director, HUD Denver Multifamily Hub, 8AHML //signed// FROM: Ronald J. Hosking, Regional Inspector General for Audit, 8AGA SUBJECT: Kier Paid or Recorded Ineligible Costs and Did Not Properly Compute Subsidies HIGHLIGHTS What We Audited and Why We audited Kier Property Management and Real Estate, LLC (Kier), because it took over as the management agent for 17 multifamily properties in Colorado and one in Wyoming in July 2008. Kier had not managed properties in Colorado before, so there were concerns about Kier’s administrative capacity to properly manage all of the properties. Our audit objective was to determine whether Kier properly accounted for property and management agent costs and properly accomplished its occupancy functions. What We Found Kier recorded more than $2 million in notes payable in the properties’ books for notes that did not properly restrict repayment of the principal to surplus cash. Kier also used property funds for $64,800 in ineligible setup fees. Additionally, Kier did not always correctly compute subsidies or determine tenant eligibility. What We Recommend We recommend that HUD require Kier to work with the owner to ensure that the notes restrict principal payments to surplus cash and to repay the $64,800 in setup fees from nonfederal funds. We also recommend that HUD require Kier to (1) work with HUD to recover identified overpayments of Section 8 housing assistance subsidies, (2) correct the rent miscalculations identified in the report, and (3) develop procedures to consistently communicate changes to the policies and procedures to ensure accurate and consistent rent calculations and related occupancy procedures. For each recommendation without a management decision, please respond and provide status reports in accordance with HUD Handbook 2000.06, REV-3. Please furnish us copies of any correspondence or directives issued because of the audit. Auditee’s Response We provided the discussion draft of the audit report to Kier on September 16, 2009, and requested comments by September 26, 2009. After the exit conference on September 23, 2009, Kier officials provided additional documentation that we reviewed, and changed the audit report accordingly. We provided the final draft of the audit report to Kier on November 20, 2009, and requested comments by November 30, 2009. Kier requested an extension to December 2, 2009. Kier provided the written response on December 2, 2009. Kier officials generally disagreed with the findings because they did not think Kier should be responsible for the identified deficiencies. However, Kier officials basically agreed to cooperate with HUD in resolving the recommendations. The complete text of the auditee’s response, along with our evaluation of that response, can be found in appendix B of this report. 2 TABLE OF CONTENTS Background and Objective 4 Results of Audit Finding 1: Kier Recorded Notes Payable Based on Notes That Did Not Properly 5 Restrict Principal Payments Finding 2: Kier Used Property Funds for Ineligible Costs 7 Finding 3: Kier Did Not Accurately or Consistently Complete Occupancy 8 Functions Scope and Methodology 12 Internal Controls 13 Appendixes A. Schedule of Questioned Costs and Funds to Be Put to Better Use 15 B. Auditee Comments and OIG’s Evaluation 16 C. Schedule of Occupancy Deficiencies 21 3 BACKGROUND AND OBJECTIVE The Kier family founded the Kier Company in 1957 as a single-family home construction company. In 2005, the family established Kier Property Management and Real Estate, LLC (Kier), to manage multifamily properties and to conduct real estate business. The owner for each of the 18 properties managed by Kier is a partnership consisting of a general partner and two limited partners. For all of the properties, the general partner is American Housing Preservation Corporation, and one of the limited partners is Boston Capital Tax Credit Fund XVIII, LP. The second limited partner is a unique entity for each of the properties. The name of each entity is based on the initials of the property name. For example, the partnership entity for Halcyon House Apartments is HH Housing, LP. This term is used as the owner name on the contracts with the U.S. Department of Housing and Urban Development (HUD) and Kier. On July 1, 2008, Kier contracted with the owner to be the management agent for the 18 properties included in this audit. The owner of the properties dismissed the prior management agent, which was responsible for the properties for the first year and a half of the audit period. Kier had direct responsibility for only the last six months. However, as the management agent, Kier is responsible for correcting existing problems with the occupancy and accounting functions. Kier and the owner signed form HUD-9839-B, “Project Owner’s/Management Agent’s Certification for Multifamily Housing Projects for Identity-of-Interest or Independent Management Agents” (agreement), for each of the properties. The effective date of each agreement was July 1, 2008, and the term of each agreement was five years. All of the Colorado properties’ mortgages are insured under Section 542(c) of the Housing and Community Development Act of 1992, which established a program of risk-sharing with qualified state and local housing finance agencies, and receive HUD Section 8 housing assistance. Kier’s mission is to enhance the economic value of client assets through efficient and compliant operational processes; careful cost management control; and quality customer service to residents, tenants, and owners. The objective of our audit was to determine whether Kier properly accounted for property and management agent costs and properly accomplished its occupancy functions. 4 RESULTS OF AUDIT Finding 1: Kier Recorded Notes Payable Based on Notes That Did Not Properly Restrict Principal Payments Kier recorded notes payable in the properties’ books for notes that did not properly restrict payment of the principal to surplus cash. This condition occurred because Kier was required by the owner to record the notes payable in the properties' books even though the notes did not contain needed restrictions. As a result, the properties could lose the benefit of more than $2 million. Kier Recorded Notes Payable in the Books of Account for Notes That Did Not Properly Restrict Principal Payments Kier management recorded notes payable in the books of 18 properties to reflect the amount of fees paid by the owner for terminating the management agreements with the previous management agent. The owner of the 18 properties entered into secondary management agreements with the prior management agent but terminated the agreements effective June 30, 2008. The agreements required the owner to pay buyout fees for early termination of each agreement. HUD requirements do not allow for buyout fees; therefore, HUD funds cannot be used for these amounts. The general partner of the owner entity paid the fees, and then the owner instructed Kier to record “notes payable – general partner” in the books of account for each property for the amount of the buyout fee. The owner established promissory notes and allonges that restricted the payment of the interest accrued on the notes to surplus cash. However, these documents did not similarly restrict the payment of principal. These actions increased the potential of improper use of HUD funds to pay the principal amounts. The total amount of these notes payable for the 18 properties was more than $2 million. Property Note payable Property Note payable Aspen Meadows $206,092 Helios Station $63,632 Halcyon House $400,313 Asbury Park $92,124 Park Terrace $101,621 Squire Village $104,946 Hilltop Apartments $61,733 Tamarin Apartments $127,264 Kearney Plaza $112,069 Clifton Family Housing $100,672 Tiffany Square $66,956 Meadows Townhouses $99,247 Sheridan Gardens $75,029 Dawson Square $90,225 Courthouse Square $136,287 Sunrise Manor $78,828 Cheyenne Station $94,973 Canon Club $37,989 Total $2,050,000 5 The Owner Required Kier to Record Notes Payable Based on Inadequate Promissory Notes Kier followed the owner’s instructions to record the notes payable in the books of account for each of the properties. The promissory notes were inadequate because they did not restrict the payment of principal to surplus cash. The owner had the right to establish secondary agreements but had to pay unallowable costs from surplus cash or ownership funds. The Properties May Lose the Full Benefit of the HUD Funds The 18 properties could lose the benefit of more than $2 million if the agent pays off the notes payable with funds restricted by HUD. The funds should be used to make improvements on the properties and for other items that would improve the residents’ living environment. Recommendation We recommend that the Director of HUD’s Denver Office of Multifamily Housing 1A. Require Kier to work with the owner to ensure that the promissory notes restrict principal payments to surplus cash. 6 Finding 2: Kier Used Property Funds for Ineligible Costs Kier used property funds for ineligible setup fees. Kier officials mistakenly believed that HUD had approved the fees. As a result, the properties lost the benefit of more than $64,000. Kier Incurred Ineligible Setup Fees Kier and the owner of the properties negotiated, for each property, a management agreement in addition to the management agreement required by HUD. This agreement provided for a setup fee of $50 per unit for all of the properties. HUD Handbook 4381.5, REV-2, The Management Agent Handbook, does not allow for setup fees. It allows for special management fees if a project has special needs or problems. The functions listed for the setup fee in Kier’s management agreement do not meet the special fee requirements and are regular management activities that should be paid from the management fee. The owner had the right to establish secondary agreements but should have paid the setup fees from ownership funds. For the 1,296 units included in the management agreements, Kier paid itself $64,800 from property funds for the ineligible setup fees. Kier Believed That HUD Had Approved the Setup Fees Kier believed that HUD had approved the secondary management agreements that contained the setup fees. However, a multifamily official stated that HUD was not a party to the additional management agreements and did not approve the fees. The Properties Lost the Full Benefit of the HUD Funds The 18 properties lost the benefit of $64,800 paid for the ineligible setup fees. The funds should have been available to make improvements on the properties and for other items that would improve the residents’ living environment. Recommendation We recommend that the Director of HUD’s Denver Office of Multifamily Housing 2A. Require Kier to repay the $64,800 in setup fees from nonfederal funds. 7 Finding 3: Kier Did Not Accurately or Consistently Complete Occupancy Functions Kier did not always correctly compute subsidies, determine tenant eligibility, or correct deficiencies that existed when it became management agent. This condition occurred because Kier did not effectively communicate its policies and procedures to its site staff. Consequently, HUD paid excess subsidies on at least 13 units. Kier Did Not Properly Complete Occupancy Procedures Kier did not always correctly compute subsidies or determine tenant eligibility as required by HUD Handbook 4350.3, Occupancy Requirements of Subsidized Multifamily Housing Programs. It also did not always correct deficiencies existing when it became the management agent. We reviewed five tenant files for each of the eight properties reviewed. Of the 40 files reviewed, we identified 15 deficiencies in 13 tenant files. The problems identified included the following: Deficiency Number of Impact occurrences Cotenant counted as live- 1 Potential of at least 11 in aide years of unreported income Income reported but not 5 Overpayment of subsidies included in rent calculation Indications of unreported 5 Overpayment of subsidies income Tenant eligibility not 3 Possibility of subsidies properly determined paid for ineligible tenants Allowance given for which 1 Overpayment of subsidies the tenant was not eligible (see appendix C for additional information) Of the 13 tenant files • three were for tenants that had moved in after Kier became management agent; • three were existing tenants, but the deficiency occurred in a recertification done during Kier’s management; 8 • six were for existing tenants for which a recertification was done during Kier’s management, but the deficiency was not identified; and • one was an existing tenant for which a recertification was not required between the time Kier became management agent and the end of our audit period. The most significant deficiency was that a cotenant was inappropriately considered a live-in aide, resulting in the potential of at least 11 years of unreported income for this person and the corresponding overpayment of subsidies. For five of the tenant files reviewed, we identified reported income that the site manager did not use in the rent calculations. For example, one resident’s verification showed wages and tips. The site manager used both for the June 2008 interim recertification. However, for the September 2008 annual recertification, the site manager used only the wages. This error resulted in overpaid subsidies of $326 per month. Five tenant files contained indications of unreported income. For example, for the July 2008 move-in, one tenant reported only state assistance. For the 2009 interim recertification, the resident reported only Social Security income. The Social Security verification showed a payment summary for January 2007 through January 2009. There was no verification that the state assistance had been terminated. Therefore, there was the possibility of unreported income for two rent calculations. Three tenant files contained indications that the residents may have been ineligible for Section 8 assistance. For example, one resident was determined to be ineligible but was allowed to move into the property. This error resulted in an overpayment of more than $18,000 in subsidies from the August 2006 move-in until the end of our audit period in December 2008. One resident was given an elderly/disabled allowance although he was 48 years old with no reported disability. This error resulted in a $10 per month overpayment of subsidies since the October 2008 move-in. Kier Did Not Consistently Communicate Changes to Policies and Procedures Kier corporate officials maintained one set of policies for all of their properties, which they posted on their Web site. They frequently made changes to these policies but did not effectively communicate the changes to the site staff. Additionally, Kier Denver regional office employees did not always provide consistent information to site employees. This condition led to site managers at 9 various properties using different procedures. Site managers said that they were not certain about the policies and procedures, which were constantly changing. HUD Paid Excess Rent Subsidies HUD paid excess subsidies for at least 13 units. For some of the units, we were unable to compute the amounts of the overpayments because the tenant files did not contain sufficient information. For example, for one unit, the tenant file did not contain verifications of employment for the cotenant, which was inappropriately considered a live-in aide for at least 11 years. Evaluation of Additional Documents After the September 23, 2009, exit conference with Kier officials, they provided a written response and documentation addressing the reported deficiencies. In their written response, Kier officials disagreed with 10 of the 13 units questioned in the report. Their main argument was that they should not be accountable for what happened under the prior management. However, we believe that while they were not responsible for the processes by which the prior recertifications were done, they were responsible for correcting deficiencies existing when Kier became the management agent. We added clarifying information to the finding. The response to the deficiency noted for one unit was sufficient to resolve the deficiency and we have adjusted the report accordingly. Responses to two other deficiencies indicated they were taking corrective actions. Finally, the responses to the remaining deficiencies did not sufficiently address the issues and we continue to question those deficiencies. Recommendations We recommend that the Director of HUD’s Denver Office of Multifamily Housing 3A. Require Kier to work with HUD to recover the $19,710 identified above for overpayment of Section 8 housing assistance subsidies. 3B. Require Kier to correct the other rent miscalculations identified in the report and recover any additional overpayment of Section 8 housing assistance subsidies that cannot be supported. 10 3C. Require Kier to develop procedures to consistently communicate changes to the policies and procedures to ensure accurate and consistent rent calculations and related occupancy procedures. 3D. Provide technical assistance to Kier to ensure that its management and staff comply with the occupancy requirements. 11 SCOPE AND METHODOLOGY Our review period covered January 1, 2007, through December 31, 2008. We expanded this period as necessary. We performed our on-site review at the Kier regional and corporate offices from February through June 2009. To accomplish our audit objective, we reviewed Kier and HUD criteria. We selected 8 of 18 properties for review. We selected properties throughout the Denver area that provided a cross- section of property sizes and locations. We reviewed five tenant files from each of eight properties to establish the effectiveness of the occupancy procedures. We selected tenant files that provided a cross-section of the units in each property. The selected sample was not intended to be representative of all properties’ units. We visited the eight properties to gain an understanding of the occupancy operations and general physical condition. We reviewed accounting records for all 18 properties maintained by Kier to gain an understanding of the control structure and for indications of inappropriate costs. We interviewed Kier and HUD personnel. We used computer-generated data and lists only to obtain background information on the entity and the HUD-assisted multifamily properties but did not rely on the data. The Kier corporate headquarters is located at 3710 Quincy Avenue, Ogden, Utah. The Kier Denver regional office is located at 7950 East Prentice Avenue, Suite 102, Greenwood Village, Colorado. 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. 12 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 objectives: • Controls over recording of property financial transactions. • Controls over the disbursement of property funds. • Controls over the occupancy functions. 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: • Kier did not have adequate controls to ensure that only eligible notes payable were recorded in the properties’ books (finding 1). • Kier did not have adequate controls to ensure that property funds were used only for eligible expenses (finding 2). • Kier did not have adequate controls to ensure correct computations of subsidies or determination of tenant eligibility (finding 3). 13 Separate Communication of Minor Deficiencies Minor internal control and compliance issues were reported to the auditee in a separate memorandum, dated December 18, 2009. 14 APPENDIXES Appendix A SCHEDULE OF QUESTIONED COSTS AND FUNDS TO BE PUT TO BETTER USE Recommendation Ineligible 1/ Funds to be put number to better use 2/ 1A $2,050,000 2A $64,800 3A $19,710 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. In this instance, Kier received $64,800 in ineligible setup fees and $19,710 in overpayment of Section 8 housing assistance subsidies. 2/ Recommendations that funds be put to better use are estimates of amounts that could be used more efficiently if an Office of Inspector General (OIG) recommendation is implemented. These amounts include reductions in outlays, deobligation of funds, withdrawal of interest, costs not incurred by implementing recommended improvements, avoidance of unnecessary expenditures noted in preaward reviews, and any other savings that are specifically identified. In this instance, the owner paid $2,050,000 to buy out the prior management agent’s contracts. The owner then required Kier to record these costs as notes payable. The buyouts were ineligible costs. The notes payable need to be removed from the books of account to ensure that the properties’ funds are not used for ineligible costs and to ensure that the residents realize the benefits that can be provided with these funds. 15 Appendix B AUDITEE COMMENTS AND OIG’S EVALUATION Ref to OIG Evaluation Auditee Comments Comment 1 16 Comment 2 17 Comment 3 Comment 4 18 19 OIG Evaluation of Auditee Comments Comment 1 The audit report does not hold Kier responsible for the acts of the prior management agent, but it does assert that Kier should have corrected problems created by the prior management agent. In the Property Management Agreement between Kier and the owner for each property, Kier’s obligations include renting, leasing, operating, and managing the project in compliance with HUD requirements. Nothing in the Agreement absolved Kier from the responsibility of correcting existing problems. Therefore, it remains our position that Kier should have resolved all existing problems. Comment 2 In the Property Management Agreement between Kier and the owner for each property, Kier’s obligations included collecting and disbursing all funds and maintaining accurate accounting records in compliance with HUD requirements. The owner gave Kier full authority over the control of funds. Therefore, Kier is responsible to ensure that all disbursements, including the disbursements to the owner to clear notes payable, are in compliance with HUD requirements. Comment 3 As stated in Finding 2, the set up fee, as defined in the Property Management Agreement between the Kier and the owner for each property, does not meet the HUD Handbook requirements for special or add on fees. Therefore, the set up fee is not an eligible HUD expense and consequently should not have been included on the form HUD-9839-B Project Owner’s/Management Agent’s Certification for Multifamily Housing Projects for Identity-of-Interest or Independent Management Agents. The accounting records clearly show that Kier received $64,800 in ineligible fees, so these funds were not available to the properties for operating expenses. Comment 4 Finding 3 addresses 13 deficiencies we found in the 40 tenant files we reviewed. We reviewed the additional documentation provided by Kier and still consider these to be valid deficiencies. Kier recognized that site employees were resistant and frustrated, and therefore, should have made more efforts to ensure that all tenant certifications were accurate. 20 Appendix C SCHEDULE OF OCCUPANCY DEFICIENCIES Unit Determined Property number Deficiency Impact amount Halcyon House 1508 Cotenant as live-in aide. The Potential of at least 11 years of cotenant was listed as a live-in aide unreported income and overpaid for at least 11 years. He did not subsidies. His 1999 income was meet the live-in aide requirement $12,000. Annual income data were that he would not live in the unit if not obtained. he did not provide care. (1) Hilltop Apts. L-105 Ineligible tenant. The tenant Inappropriate subsidy payments of selection criteria form indicated that more than $18,119 from Sept. 2006 the applicant did not have enough through Dec. 2008. points to be eligible. Someone other than the site manager decided that she could move in. $18,199 Hilltop Apts. L-203 Indications of unreported income. Possible unreported income with Some Feb. 2008 interim the corresponding subsidy recertification documents showed overpayments. employment, but others showed zero income. Documents showed change of employment, but employment termination was not verified. (1) Tiffany Square 4 Indications of unreported income Overpayment of subsidies. and ineligible tenant. Family composition changed several times with no indication that eligibility was determined when the head of household changed. Income changed from one recertification to the next without adequate documentation of the various changes. (1) Tiffany Square 7 Income reported but not used. At Overpayment of subsidy of $39 per the Aug. 15, 2008, move-in, child month. First month prorated support was reported by the resident overpayment $21, plus 4 months at but was not included in the income $39 per month = $177 calculation. $177 Tiffany Square 19 Income reported but not used. Overpaid subsidies were $1,304 for Income verification included tips, Sept. 2008 through Dec. 2008. which were not used in the rent calculation. $1,304 (1) File data insufficient to determine amount 21 Unit Determined Property number Deficiency Impact amount Tiffany Square 43 Income reported but not used. Overpayment of subsidies. Different income was reported in each certification/recertification packet. Income termination was not verified. Documentation was insufficient to determine what income should be included in each rent calculation. (1) Tiffany Square 51 Income reported but not used. Child Overpayment of subsidies. support was reported by the resident at move-in, but a dollar amount was not given, and it was not included in the income calculation. One document showed employment income, but there was no documentation to verify this. (1) Sheridan A206 Indications of unreported income. Overpayment of subsidies. Gardens Supplemental Security Income was deleted from the Sept. 2008 recertification, but there was no explanation for the deletion or verification that the income source had been discontinued. Therefore, there was not sufficient documentation to determine whether the income source had been terminated. (1) Park Terrace A101 Indications of unreported income. Potential overpayment of subsidies. At the July 2008 move-in, state assistance was the only income reported. At the Feb. 2009 interim recertification, Social Security was reported. The Social Security statement showed a total for Jan. 2007 through Jan. 2009 but lacked sufficient information to determine how much applied to the occupancy period. The Social Security was used as income but not the state assistance. There was no verification that the state assistance had been terminated. (1) (1) File data insufficient to determine amount 22 Unit Determined Property number Deficiency Impact amount Park Terrace B203 Indications of unreported income. Potential overpayment for A tenant file document showed subsidies for income reported but $12,000 in income, but it was not not included in the rent calculation shown in any rent calculation or and possible overstatement of explained. Another document stated family members. that a family member was also listed as a family member for an Adams County Housing Authority unit but did not determine where the family member actually resided. (1) Park Terrace DG04 Income reported but not used and Potential overpayment for potential ineligible resident. The subsidies for income reported but head of household changed without not used, potential unreported evidence of eligibility determination income, and possible ineligible on new head. Divorce documents family members. showed that the first head started employment in May 2007, but move-in documents showed the head unemployed as of June 2007. Employment termination was not verified. The July 2008 recertification did not include the $800 per month child support used in other recertifications but did not include verification that the payments had been terminated. (1) Park Terrace E102 Inappropriate allowance. An Overpayment of subsidies of $10 elderly/disabled allowance was per month since Oct. 2008 for the given, but the resident was 48 years amount of the allowance. old and not disabled. $30 Total $19,710 (1) File data insufficient to determine amount 23
Kier Paid or Recorded Ineligible Costs and Did Not Properly Compute Subsidies
Published by the Department of Housing and Urban Development, Office of Inspector General on 2009-12-18.
Below is a raw (and likely hideous) rendition of the original report. (PDF)