Review of Lutheran Gardens Corporation Trust Fund Account Compton, California

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)

                                                     U.S. Department of Housing and Urban Development
                                                                   Office of Inspector General
                                                                                                Region IX
                                                                        611 West Sixth Street, Suite 1160
                                                                      Los Angeles, California 90017-3101
                                                                                    Voice (213) 894-8016
                                                                                     Fax (213) 894-8115

                                                                 Issue Date

                                                                        December 18, 2009
                                                                 Audit Report Number


MEMORANDUM FOR:             Kelly S. Boyer, Multifamily Housing Director, 9DHML

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

SUBJECT:                    Review of Lutheran Gardens Corporation Trust Fund Account
                            Compton, California


We performed a review of the Lutheran Gardens Corporation (Corporation) trust fund account in
response to a U.S. Department of Housing and Urban Development (HUD) request, dated March
30, 2009. HUD believed that as much as $2.72 million was withdrawn from a trust account in
violation of a trust agreement (agreement) with HUD, dated April 22, 2005, and questioned
certain disbursements. Our objective was to determine whether the Corporation withdrew and
expended trust funds in accordance with the agreement with HUD.

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 review.

                             SCOPE AND METHODOLOGY

The scope of our review was limited to addressing HUD’s request by determining whether the
Corporation withdrew and expended trust funds in accordance with the agreement with HUD.
To accomplish our objective, we

       Interviewed the HUD multifamily project manager, the president of the Corporation, and
       the project development manager of Barker Management, Inc. (management company for
       the Corporation);
       Obtained an understanding of the agreement and the applicable laws and HUD guidance,
       including HUD’s regulations at 24 CFR [Code of Federal Regulations] Part 265 (4-1-95
       edition, reinstated by section 236.1.c); and

       Examined documents related to the agreement and financial records supporting the
       expenditures that were provided by the Los Angeles Office of Multifamily Housing, the
       Corporation, and Barker Management, Inc.

Our review covered the period April 2005 through June 2009. We performed our review from
July through September 2009. This was a limited scope review; therefore, our work was not
performed in accordance with generally accepted government auditing standards.


Lutheran Gardens Apartments is a 76-unit multifamily project located in Compton, California. It
was financed in 1974 by a Section 236 National Housing Act-insured mortgage. The
Corporation (a nonprofit corporation) sold the project to Lutheran Gardens LP (a profit-
motivated corporation) in 2005. The sale involved the prepayment of a HUD-insured mortgage,
continuation of the interest reduction payments, and preservation of the project as a low-income
housing resource. On April 22, 2005, HUD and the Corporation entered into an agreement.

The sale of a multifamily property with a HUD-insured mortgage from a nonprofit to a for-profit
entity is governed by 24 CFR Part 265 (appendix C, paragraph 3) to ensure that the needs of the
project are met and that the nonprofit owners selling the project do not receive remuneration.
HUD incorporated the CFR requirements in its Handbook 4350.1 (appendix C, paragraph 2),
which requires that net proceeds from sale be placed in a trust with a third-party trustee and the
funds be used to promote the expansion of low- and moderate-income housing. HUD entered
into the agreement with the Corporation so that the more than $2.8 million in net proceeds from
the sale and replacement reserves of $461,325 would be placed in a trust fund with HUD as the
trustee and, therefore, controlled and expended according to the regulatory requirements.

                                   RESULTS OF REVIEW

Our review found that the Corporation expended the trust funds according to the eligible uses
described in the agreement. However, it did not comply with the agreement when depositing and
withdrawing trust funds. This condition occurred because the Corporation did not set up a trust
account with HUD as the trustee nor did it obtain HUD’s approval to use the funds. With
$918,307 in trust funds still subject to the agreement as of June 17, 2009, HUD and the
Corporation were at risk of not complying with the regulatory requirements to ensure that the
trust funds were used to promote the expansion of the supply of low- and moderate-income

To comply with the HUD and regulatory requirements, the agreement requires the Corporation to
(1) deposit the sale proceeds and replacement reserves into a trust account with HUD named as
the trustee and provide signature cards for a HUD representative to sign, (2) obtain HUD
approval before withdrawing trust funds, and (3) use the trust funds to promote the expansion of
the supply of low- and moderate-income housing (appendix C, paragraph 1).

Although the Corporation set up a separate account for depositing and withdrawing the trust
funds, it did not

       Establish the account with HUD named as the trustee with appropriate signature cards,
       Obtain HUD authorization to withdraw subject funds, and
       Deposit $87,076 of the replacement reserves into the separate account.

Trust Account Not Established

The Corporation did not set up the trust account with HUD as the trustee according to the
agreement. We reviewed bank statements and signature cards for the account the Corporation
used for depositing the trust funds and found that the Corporation set up a bank account under
the name “Lutheran Gardens Corp. Trust Account,” not “Secretary of Housing and Urban
Development, U.S. Department of Housing and Urban Development, as Trustee for the Lutheran
Gardens Corp.” as required (appendix C, paragraph 1.b). In addition, the Corporation did not
provide HUD the signature cards for a HUD representative to sign. The signature cards showed
only the signatures of officers/employees of Barker Management, Inc.

Unauthorized Withdrawal of Trust Funds

The Corporation used trust funds without obtaining withdrawal approval from HUD as required
by the agreement. We examined all nine trust fund authorizations totaling more than $2.7
million and found that none was signed by a HUD representative as required. Two of the nine
authorizations were stipulated in the agreement: one for nearly $1.2 million that was to be
deposited into a construction escrow with the new lender and another for $350,000 for a loan to
the Corporation from Lutheran Gardens LP. The escrow settlement statement showed that the
amounts were paid out of escrow and disbursed without using trust fund authorization forms
signed by a HUD official as required. We also examined the expenditures of the trust funds and
found, along with the trust authorization amounts, other withdrawals not approved by HUD.

Replacement Reserves Still Owed the Trust Fund

The Corporation did not deposit $87,076 in replacement reserves required by the agreement.
The agreement required the Corporation to deposit the existing replacement reserves of $461,325
into the required trust account (appendix C, paragraph 1.a). Our review of the bank statements
and deposit documents showed that the Corporation deposited only $374,249 of the required


We recommend that the Director of the Los Angeles Office of Multifamily Housing ensure that
the Corporation

   1A. Establishes the required trust account with HUD named as the trustee and provide
       signature cards for a HUD representative to sign.

   1B. Deposits the balance of the trust funds subject to the agreement held in a Wells Fargo
       Bank account, along with $87,076 in replacement reserves due the trust.

   1C. Submits trust fund authorization forms to HUD for signature and approval before
       withdrawing trust funds from the trust account.

                                  AUDITEE’S RESPONSE

We provided a discussion draft report to your office on November 25, 2009, and held an exit
conference with the Corporation on December 2, 2009. The Corporation provided its written
comments on December 11, 2009. The Corporation agreed with the results and had already
started implementing corrective action.

The complete text of the Corporation’s response, along with our evaluation of that response, can
be found in appendix B of this report. We did not include the enclosures to the Corporation’s
response because it included sensitive bank account information.


Appendix A

         Recommendation                         Funds to be put
             number                             to better use 1/

                1B                                     $87,076

1/   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.

Appendix B


Comment 1

Comment 2

                          OIG Evaluation of Auditee Comments

Ref to OIG Evaluation                     Auditee Comments

Comment 1    Contrary to the Corporation’s claim, we do not agree that sufficient evidence was
             provided to support that the existing trust account was renamed and the signature
             card was changed to reflect HUD as the trustee. The Lutheran Gardens
             Corporation should provide the required documentation to HUD during the
             review resolution process.

Comment 2    We concur that recommendations 1B and 1C have been satisfactorily
             implemented and we will close the recommendations upon issuance of the report.

Appendix C

1. Housing Trust Fund Agreement:

   a. “Recital of Facts,” paragraph I: “As a condition of the HUD Secretary’s prepayment
   approval, the Owner has agreed to deposit (i) one hundred percent (100%) of the net
   proceeds of the sale, approximately $2,816,902 and (ii) $461,325 of the Property’s existing
   replacement reserves (collectively, the “Trust Amount”) into a housing trust fund (the “Trust
   Account”) to be used in accordance with the terms of this Agreement.”

   b. Paragraph B.2: “The Owner shall open the Trust Account with the Depository Bank in
   the name of the “Secretary of Housing and Urban Development, U.S. Department of Housing
   and Urban Development, as Trustee for the Lutheran Gardens Corp.” The Owner shall
   deliver to the Los Angeles Multifamily Hub Director, evidence of the deposit of the Trust
   Amount with the Depository Bank, together with authorized signature(s) withdrawal cards
   for the HUD Secretary, acting by and through his authorized agent, to complete and return to
   the Depository Bank.”

   c. Paragraph E.2: “Using the Trust funds Authorization Form…or similar form approved
   by the parties to this Agreement, the HUD Secretary shall instruct the Depository Bank to
   disburse funds from the Trust Account only upon and in accordance with a written request
   from the Owner, which has been approved by the HUD, Los Angeles Director of Multifamily

   d. Paragraph C.4: “The Owner may use the Trust Account for any expenses related to the
   predevelopment, acquisition, development, preservation, construction and/or rehabilitation of
   units intended to be developed as Affordable Housing Units, which may include, but shall
   not be limited to the following:

          Predevelopment and development costs
          Application fees, loan fees and discounts
          Appraisal, consultant, legal, architectural and engineering fees
          Rental subsidies
          Reasonable administrative and office overhead and expenses
          Reasonable insurance costs
          Fees for consultants assisting in evaluating affordable housing opportunities,
          including investment proposals and administering loans and grants
          Corporate filing fees and other fees related to administration of the Trust Account,
          including the fees described in Section G.2”

2. HUD Handbook 4350.1, REV-1:

   a. Paragraph 13-2: “The Regional Office must approve, prior to the Field Office granting
   preliminary approval, any proposal exhibiting the following characteristics:” Par. 13-2-F:
   “The transaction involves a transfer from nonprofit to profit motivated or limited distribution
   ownership and calls for remuneration to the seller.”

   b. Paragraph 13-19.C: “Any remuneration accruing to the nonprofit seller must be placed in
   a trust with a third party trustee. The trust funds must be disbursed in accordance with the
   terms of a trust agreement which has been approved by the HUD Field Office, for a public
   purpose approved by the HUD field Office that promotes the expansion of the supply of low
   and moderate income housing.”

   c. Paragraph 13-19.D: “No remuneration may pass to any individuals connected with the
   nonprofit seller.”

3. 24 CFR Part 265 (4-1-95 edition, reinstated by reference in 24 CFR 236.1.c):

   a. Section 265.1: “This part governs the transfer of physical assets from nonprofit to profit-
   motivated ownership of certain multifamily housing projects with HUD-insured or HUD-
   held mortgages. It provides for the orderly processing and approval of these transfers and
   assures HUD that the physical, financial and management needs of the projects are met
   through the change in ownership.”

   b. Section 265.2: “These regulations apply to each nonprofit owned multifamily housing
   project with a finally endorsed HUD-insured or HUD-held mortgage which is assisted
   under…(a) Section 236 of the National Housing Act.”

   c. Section 13: “The nonprofit owner selling the project shall not receive any remuneration
   in any form.”