oversight

Clark County, NV, Needs to Revise Its Written Procedures and Developer Agreements To Ensure Compliance With Neighborhood Stabilization Program Requirements

Published by the Department of Housing and Urban Development, Office of Inspector General on 2010-06-09.

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

                                                                         Issue Date
                                                                                      June 9, 2010
                                                                         Audit Report Number
                                                                                  2010-LA-1012




TO:               Maria F. Cremer, Acting Director, San Francisco Office of Community Planning
                  and Development, 9AD



FROM:             Joan S. Hobbs, Regional Inspector General for Audit, Region IX, 9DGA


SUBJECT: Clark County, NV, Needs To Revise Its Written Procedures and Developer
         Agreements To Ensure Compliance With Neighborhood Stabilization Program
         Requirements

                                              HIGHLIGHTS

    What We Audited and Why


           We completed a review of Clark County’s (grantee1) Neighborhood Stabilization
           Program (Program). We performed the review because Housing and Economic Recovery
           Act of 2008 (Act) reviews are part of the Office of Inspector General’s (OIG) audit plan
           as of December 1, 2009, and the Program was identified as high risk. In addition, the
           grantee was awarded more than $29.6 million in Program funding.

           Our objectives were to determine whether the grantee (1) had sufficient capacity and
           controls to administer and manage Program funds and (2) had been administering its
           Program in accordance with U.S. Department of Housing and Urban Development
           (HUD) regulations.




1
    The grantee includes Clark County and the City of North Las Vegas.
What We Found

     We found no evidence indicating that the grantee lacked the capacity to adequately
     administer its Program. The grantee generally had been administering its Program in
     accordance with HUD requirements. However, Clark County (County) needs to revise its
     written procedures and developer agreements to ensure that properties to be sold to
     eligible home buyers will be sold at a price permitted by Program requirements.

What We Recommend


     We recommend that the Director of the San Francisco Office of Community Planning
     and Development require the County to revise its written procedures and developer
     agreements to ensure that rehabilitated properties will be sold at no more than the cost of
     acquisition and rehabilitation.

     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 grantee a discussion draft report on May 24, 2010, and held an exit
     conference with grantee officials on May 26, 2010. The grantee provided written
     comments on May 28, 2010, and generally agreed with our findings.

     The complete text of the auditee’s response can be found in appendix A of this report.




                                              2
                            TABLE OF CONTENTS

Background and Objectives                                                             4

Results of Audit
    Finding 1: The County’s Written Procedures and Developer Agreements Were          5
               Not Adequate To Ensure That Sales Prices of Rehabilitated Properties
               Complied With Program Requirements

Scope and Methodology                                                                 7

Internal Controls                                                                     8

Appendixes

    A. Auditee Comments                                                               9
    B. Criteria                                                                       11




                                            3
                     BACKGROUND AND OBJECTIVES

The Neighborhood Stabilization Program (Program) was authorized under Title III of Division B
of the Housing and Economic Recovery Act of 2008 (Act) and provides grants to every State and
certain local communities to purchase foreclosed-upon or abandoned homes and rehabilitate,
resell, or redevelop these homes to stabilize neighborhoods and stem declining values in
neighboring homes. The Act calls for allocating funds “to states and units of general local
government with the greatest need,” and in the first phase of the Program, the U.S. Department
of Housing and Urban Development (HUD) allocated $3.92 billion in Program funds to assist in
the redevelopment of abandoned and foreclosed-upon homes.

The Federal Register, Volume 73, Number 194 (dated October 6, 2008), provided the public a
list of grantees that would receive Program funds. Clark County (County) received more than
$22.8 million in Program funding, and the City of North Las Vegas (City) received more than
$6.8 million. HUD allowed entitlement communities (metropolitan cities or urban counties) to
submit a joint request to implement a joint Program. Under this arrangement, the County
submitted a single action plan substantial amendment on behalf of both jurisdictions. The
County, as the lead agency, receives the funds and administers the combined grant of more than
$29.6 million. HUD executed the County’s Program grant agreement, which included the City’s
allocation, on March 19, 2009; therefore, the grantee has until September 19, 2010 (18 months),
to obligate the Program funds and until March 19, 2013 (4 years), to spend all of the Program
funds. As of March 31, 2010, the grantee had obligated $16.4 million (55 percent) and expended
more than $3.6 million (12 percent) of the Program funds.

Our objectives were to determine whether the grantee (1) had sufficient capacity and controls to
administer and manage Program funds and (2) had been administering its Program in accordance
with HUD regulations.




                                               4
                                RESULTS OF AUDIT

Finding 1: The County’s Written Procedures and Developer
           Agreements Were Not Adequate to Ensure That Sales Prices
           of Rehabilitated Properties Complied With Program
           Requirements
Although both jurisdictions had developed written procedures to support their Program activities,
the County’s written procedures and developer agreements relative to property resale prices were
not adequate to ensure compliance with Program requirements. County officials did not consider
how policies and procedures would be affected when market conditions change. As a result, the
County’s written procedures and developer agreements would not be able to ensure that
rehabilitated properties would be sold at prices permitted by Program requirements.




 The County’s Written
 Procedures and Developer
 Agreements Were Not
 Adequate to Ensure Program
 Compliance

       At the beginning of our audit, we noted that the County’s acquisition, rehabilitation for
       resale procedures, and the signed developer agreements stated that the rehabilitated
       properties would be marketed to eligible home buyers at fair market value. County
       officials explained that under current market conditions in Las Vegas, the fair market
       value of the properties would be lower than the total cost of acquisition and
       rehabilitation. However, the Act limits the sales price of a property to an amount equal to
       or less than the cost of acquisition and rehabilitation. County officials acknowledged that
       “fair market value,” as stated in the written procedures and developer agreements, can
       pose a problem when market conditions change, because the fair market value of a
       rehabilitated property can potentially exceed the total cost of acquisition and
       rehabilitation.

       In May 2010, the County stated it would revise its written procedures by adding language
       stating that the sales price of the home may not be greater than the total amount of
       Program funds expended for acquisition, rehabilitation, and redevelopment (including
       activity delivery costs) of the property. The revised written procedures will comply with
       the Act. In addition, the County is receiving assistance from HUD’s technical assistance
       team to make changes and updates to the developer agreements as needed to ensure full
       compliance.




                                                5
Recommendation


    We recommend that the Director of the San Francisco Office of Community Planning
    and Development require the grantee to

    1A    Revise the County’s written procedures and developer agreements to ensure that
          sales prices of rehabilitated properties will not exceed the cost of acquisition and
          rehabilitation.




                                            6
                            SCOPE AND METHODOLOGY

We performed our onsite audit work at the County’s and City’s offices, located in Las Vegas and
North Las Vegas, NV, respectively, between January and April 2010. Our audit generally
covered the period July 1, 2008, through January 31, 2010. We expanded our scope as
necessary.

To accomplish our objective, we interviewed HUD staff and grantee staff responsible for
Program execution. We also reviewed

        The Act.
        The Program Federal Register notice, dated October 6, 2008.
        The Program Federal Register bridge notice, dated June 19, 2009.
        The grantee’s substantial amendment to its 2008 action plan to include proposed Program
        activities.
        The grantee’s Program grant agreement, dated March 19, 2009.
        HUD’s Disaster Recovery Grant Reporting system financial data and quarterly
        performance reports.
        The grantee’s organizational charts.
        The grantee’s policies and procedures for Program activities.
        Payment vouchers, property files, and supporting documentation for a nonstatistical
        sample2 of 4 of 19 completed drawdown requests, covering $1.02 million of $2.26
        million in Program funds drawn down as of February 8, 2010.

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




2
  Our sample was selected based on the highest dollar amount drawn down for each Program activity for each
jurisdiction and the most recent drawdown request for administrative expense.


                                                       7
                              INTERNAL CONTROLS

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

       Program operations,
       Relevance and reliability of information,
       Compliance with applicable laws and regulations, 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:

                  Policies and procedures that were implemented to reasonably ensure that
                  Program activities comply with applicable laws and regulations.
                  Policies and procedures that were implemented to reasonably ensure that
                  Program funds are safeguarded from unauthorized use.

       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 item is a significant weakness:

                  The County’s written procedures and developer agreements were not adequate
                  to ensure that sales prices of rehabilitated properties would comply with
                  Program requirements.




                                                8
                APPENDIXES

Appendix A

             AUDITEE COMMENTS




                    9
10
Appendix B
                                        CRITERIA

Public Law 110-289 (Housing and Economic Recovery Act of 2008), Division B, Title III,
Section 2301(d)(3)

(d) LIMITATIONS.—

(3) SALE OF HOMES.—If an abandoned or foreclosed upon home or residential property is
purchased, redeveloped, or otherwise sold to an individual as a primary residence, then such sale
shall be in an amount equal to or less than the cost to acquire and redevelop or rehabilitate such
home or property up to a decent, safe, and habitable condition.




                                                11