oversight

The Community Builders Expected To Expend Funding Within the Deadline and Meet Its Goals for the Neighborhood Stabilization Program 2

Published by the Department of Housing and Urban Development, Office of Inspector General on 2011-03-21.

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

                                                                Issue Date
                                                                March 21, 2011
                                                                
                                                                Audit Report Number
                                                                2011-BO-1007




TO:        Yolanda Chávez, Deputy Assistant Secretary for Grant Programs, DG


FROM:      John A. Dvorak, Regional Inspector General for Audit, Boston Region,
              1AGA

SUBJECT: The Community Builders Is Expected To Expend Funding Within the Deadline
         and Meet Its Goals for the Neighborhood Stabilization Program 2

                                   HIGHLIGHTS

 What We Audited and Why

             We reviewed The Community Builders, a nonprofit development and asset
             management firm that received a $78.6 million grant from the U.S. Department of
             Housing and Urban Development (HUD). Through the American Recovery and
             Reinvestment Act of 2009, Congress established the Neighborhood Stabilization
             Program 2 to grant funds to States, local governments, nonprofits, and a
             consortium of nonprofit entities for the purpose of stabilizing communities that
             have suffered from property foreclosures and abandonment. The goals of this
             program are realized through the purchase and redevelopment of foreclosed-upon
             and abandoned homes and residential properties.

             The objectives of our review were to determine whether (1) the grantee was on
             track to expend Neighborhood Stabilization Program 2 funds within the statutory
             deadline, (2) Neighborhood Stabilization Program 2 funds were used for eligible
             and appropriate expenditures, and (3) the grantee can meet its program goals. We
             selected The Community Builders due to the size of its grant, its status as a
             nonprofit in a program typically used by units of local government, and its
           operations in multiple States. The audit was initiated by the Office of Inspector
           General (OIG) as part of its annual audit plan activities.


What We Found


           The Community Builders (1) was on track to expend the funding within the
           statutory deadline; (2) used Neighborhood Stabilization Program 2 funds for
           eligible and appropriate expenditures; and (3) with continued diligence, can meet
           its program goals.

What We Recommend


           This report does not contain recommendations, and no further action is necessary
           with respect to our report.

Auditee’s Response


           We provided The Community Builders a draft report on March, 8, 2011, but did
           not hold an exit conference with officials because The Community Builders did
           not request an exit conference. Also, The Community builder did not provide any
           formal comments regarding this report




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                          TABLE OF CONTENTS

Background and Objectives                                                      4

Results of Audit
      Finding 1: With Continued Diligence, The Community Builders Can Expend   5
      the Funding Within the Statutory Deadline and Meet Its Goals for the
      Neighborhood Stabilization Program 2

Scope and Methodology                                                          9

Internal Controls                                                              11




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                      BACKGROUND AND OBJECTIVES

The Community Builders is a nonprofit development and asset management firm that received a
$78.6 million Neighborhood Stabilization Program 2 grant from the U.S. Department of Housing
and Urban Development (HUD). We selected The Community Builders due to the size of its
grant, its status as a nonprofit in a program typically used by units of local government, and its
operations in multiple States. The Community Builders is using these funds to

   1. Acquire or assemble vacant property to develop affordable housing in locally determined
      development initiatives.
   2. Redevelop projects with vulnerable populations who are low and moderate income.
   3. Acquire occupied projects facing foreclosure which house low- or moderate-income
      tenants.

The Community Builders has 10 satellite offices, four of which handle operations under the
Neighborhood Stabilization Program 2. These four offices are Northeast (Boston, MA), Atlantic
(Washington, DC), Midwest (Chicago, IL), and its construction office in Kentucky. Its corporate
offices are located at 95 Berkeley Street, Boston, MA. The Neighborhood Stabilization Program
2 grant between HUD and The Community Builders allocated funds to projects for the District of
Columbia, Illinois, Indiana, Massachusetts, New York, North Carolina, Ohio, Pennsylvania, and
Virginia.

In 2008, Congress established the Neighborhood Stabilization Program to help stabilize
communities that have suffered from foreclosures and abandonment. The American Recovery
and Reinvestment Act of 2009 updated this legislation to create the Neighborhood Stabilization
Program 2 to add a competitive grant open to States, units of general local government, and
nonprofit entities or consortia of nonprofit entities. The goals of both programs are substantially
similar. Grantees can realize the goals of these programs through the purchase and
redevelopment of foreclosed-upon and abandoned homes and residential properties.

The objectives of our review were threefold: (1) determine whether the grantee was on track to
expend Neighborhood Stabilization Program 2 funds within the statutory deadline, (2) determine
whether Neighborhood Stabilization Program 2 funds were used for eligible and appropriate
expenditures, and (3) determine whether the grantees can meet the goals laid out in their grant
agreement.




                                                 4
                                RESULTS OF AUDIT

Finding 1: With Continued Diligence, The Community Builders Can
Expend the Funding Within the Statutory Deadline and Meet Its Goals
for the Neighborhood Stabilization Program 2
The Community Builders appeared to be on track to expend its funding within the statutory
deadline. Also, it used Neighborhood Stabilization Program 2 funds for eligible and appropriate
expenditures. The Community Builders had expended $5,202,245 of its grant through
December 31, 2010. These funds were used for eligible and appropriate expenditures. While
this is small amount of the $78.6 million grant, the rate of expenditures was impacted by the
seasonal slowdown due to adverse winter weather conditions in the Northeast and Midwest.
More importantly, The Community Builders had commitments for another $42 million at six
multifamily projects going forward. In addition, our detailed review of two random projects
found that progress was appropriately documented and these projects were scheduled for
completion before the statutory deadline of February 11, 2013. With continued diligence, The
Community Builders should meet its program goals.



 The Grantee Was on Track To
 Expend the Funding Within the
 Statutory Deadline


              Unlike some other grants, the statutory deadlines for expenditures under the
              Neighborhood Stabilization Program 2 were written into the grant agreement
              between HUD and The Community Builders. The law establishing the
              Neighborhood Stabilization Program 2 requires grantees to expend at least 50
              percent of allocated funds within 2 years of the date funds become available to the
              grantee for obligation and 100 percent of such funds within 3 years of that date .
              For The Community Builders, the 2-year deadline is February 11, 2012, and the
              3-year deadline is February 11, 2013. The Community Builders had spent
              $5,202,245 of its grant as of December 31, 2010, a small amount of the $78.6
              million grant.

              In the Northeast and Midwest, where The Community Builders operates, there is a
              seasonal slowdown in building and renovating properties during the winter
              months due to adverse weather conditions. However, The Community Builders
              had commitments of $42 million at six multifamily projects going forward, which
              is a substantial amount of its grant that was identified after the first amendment to
              the grant. The first amendment revised the grant agreement to add additional
              census tracts and the mix of projects to be funded. Regarding the deadline, The
              Community Builders was tracking each project to ensure that it met scheduled

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           timelines. Specifically, we randomly selected and examined two of six projects in
           detail: Province Landing in Provincetown, MA, and University Park Apartments,
           in University Park, IL. These two projects were approved by HUD, properly
           qualified for the program, had appropriate use restrictions on the land, and had
           appropriate plans to expend the funding before the deadline.

           Finally, The Community Builders had proposed a second amendment to add more
           census tracts, which should expand its ability to use its remaining funding within the
           program deadlines for projects in the added new census tracts.


Program Funds Were Used for
eee
Eligible and Appropriate
Expenditures


           To examine the eligibility and propriety of expenditures, we selected a
           nonstatistical sample of 24 journal entries with a net value of approximately $2
           million and an absolute value of more than $3.3 million. We used a journal entry
           as our sample item and randomly selected specific large entries. Some of these
           entries were reversed during the course of operations and before our audit. The
           sample contained expenses, receipts, and corrections.

           The expenses were eligible; were properly documented; were properly valued;
           occurred in the proper timeframe; and, when applicable, were properly allocated.
           The receipts were authorized, deposited into the appropriate account, and
           documented. Each receipt of grant funds must have an associated expenditure.
           These associated expenditures occurred in a timely fashion. The corrections
           linked to original expenses that were eligible; were properly documented; were
           properly valued; occurred in the proper timeframe; and, when applicable, were
           properly allocated. These corrections were properly authorized and made in a
           timely fashion. Our sample included some duplicate entries which could have led
           to duplicate payments. However, there were no duplicate payments because the
           duplication was noticed and corrected before the start of our review, apparently as
           part of a review process.

           Several of our sample items addressed salaries and indirect overhead charged to
           the program. We traced the salary expenses to the payroll report showing the
           related project, the project identification code, the billing code, the billing
           descriptions, and the work description. The payroll report also calculated the
           salaries and benefits, the facilities charge, and the indirect overhead charge. To
           test the accuracy of the calculations and the system used for the calculations, we
           reperformed the calculations. Our calculations matched the methodology in the
           cost allocation plan. The indirect costs had a number of correction entries
           because the indirect cost allocation plan was approved after the start of the grant.
           These corrections were properly authorized and made in a timely fashion.

                                             6
The Grantees Should Meet the
Goals as Amended

           The grant agreement was revised between the original application and the grant
           agreement signed between The Community Builders and HUD. The Community
           Builders submitted a substantial amendment on September 29, 2010, to revise the
           grant agreement; specifically, to approve 11 additional census tracts, two of which
           are adjacent to already approved census tracts. This amendment did not change
           the amount of funding or the amount by eligible activity. Instead, it changed the
           mix of projects to be funded with the Neighborhood Stabilization Program 2 grant
           by adding new census tracts and projects in those census tracts. The Community
           Builders stated that the projects in the original applications were no longer
           feasible due to the sale of the projects to other developers. HUD approved the
           substantial amendment on October 29, 2010.

           The Community Builders drafted a second substantial amendment that was added
           to its Web site for public comment on January 26, 2011. This amendment added
           new census tracts and requested the addition of “financing mechanisms for
           foreclosed homes” to eligible activities. This activity would allow The
           Community Builders to make a short-term loan to stabilize an eligible project
           while it worked to create a longer term strategy. The proposed projects would use
           the Neighborhood Stabilization Program 2 funds for predevelopment, acquisition,
           and construction during a bridge period as the end financing is being assembled.
           As the end financing closes, the Neighborhood Stabilization Program 2 funds
           would come back as program income to be lent to additional projects. The
           Community Builders hoped to use low-income housing tax credits, tax-exempt
           bonds, Federal Home Loan Board Affordable Housing Preservation funds, soft
           second mortgages, and/or private debt/equity as end financing sources. Before
           HUD will evaluate the second substantial amendment, The Community Builders
           must make the amendment available to the public for comment for 30 days and
           compile the public comments, if any.

           We inquired whether the second substantial amendment would cause delays in
           meeting program goals. The Community Builders stated that the second
           amendment would have the opposite effect. By increasing the number of census
           tracts, the amendment would increase the flexibility of the program. For example,
           University Park Apartments is located in one of the census tracts added by the
           first amendment approved by HUD. The Community Builders moved this project
           forward because the owner was committed to selling and there was a defined
           need. Without the addition of the census tracts, this action would not be feasible.
           University Park Apartments was one of two randomly selected projects that we
           examined in detail. For both projects (University Park Apartments and Province
           Landing), we found that the progress through February 9, 2011, was consistent
           with the scheduled progress with appropriate supporting documentation in the
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             files. The projected completion dates were before the statutory deadline of
             February 11, 2013.

Conclusion


             With continued diligence, The Community Builders should be able to expend the
             funding within the statutory deadline and meet its goals for the Neighborhood
             Stabilization Program 2.


Recommendations



             Based on the results of this review, the report contains no recommendations, and no
             further action is necessary with respect to our report.




                                              8
                         SCOPE AND METHODOLOGY

We conducted the audit from January to February 2011. Our fieldwork was conducted at The
Community Builders’ office located at 95 Berkeley Street, Boston, MA. Our audit covered the
period February to December 2010 and was extended when necessary to meet our objectives. To
accomplish our audit objectives, we

      Reviewed the enabling legislation, regulations, handbooks, and notices on the
       Neighborhood Stabilization 2 program.

      Identified the awards of Neighborhood Stabilization Program 2 funds and other HUD
       grant awards to The Community Builders and used these awards to identify the statutory
       deadlines for the Neighborhood Stabilization Program 2.

      Conducted interviews with officials at HUD and The Community Builders to learn about
       HUD’s concerns, monitoring of the properties, operational controls, financial controls,
       and computerized data.

      Obtained and reviewed independent auditors’ reports for the previous 3 years to identify
       problem areas and any corrective actions taken.

      Identified the organizational structure of the entity and its key staff.

      Reviewed the Web site for The Community Builders for background information and to
       learn about its operations.

      Obtained and reviewed the grant agreement, including any amendments, and identified
       the goals of the agreement.

      Selected a nonstatistical, representative sample of properties and reviewed the property
       progress reports to compare the progress made with the goals planned. We did not use a
       100 percent selection because of the limited review and time consumption due to the
       complexity of the item reviews. Our sample of two projects was randomly drawn from a
       universe of six projects.

      Obtained a listing of all expenditures categorized by type of expenditure. We relied on
       information from the accounting system for a universe of journal entries. To test the
       reliability of this information, we selected a sample of transactions and traced the data to
       third-party supporting documentation on file at The Community Builders. We also
       tested this sample of expenditures for eligibility, proper evaluation, allocation (if
       applicable) and propriety. Our sample was drawn using a random number generator to
       generate 20 random numbers between 1 and 130. There were 130 entries in the universe
       of expenditures. We selected four additional units because we were interested in the
       repetition of items, the nature of the items, or the amount of the items. Our sample had a

                                                  9
       value of more than $2 million in a universe of more than $5.2 million. We used an entry
       as our sample item and randomly selected specific large entries. Some entries were
       reversed during the course of operations and before our audit.

      Selected a nonstatistical, representative sample of projects and compared the timetables
       for the project to be completed with that project’s goals to identify any omissions or
       mismatched data and whether the completion of tasks to meet these goals would occur
       before the statutory deadlines. We did not use a 100 percent selection because of the
       limited review and time consumption due to the complexity of the item reviews. Our
       sample of two projects was randomly drawn from a universe of six projects.

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.




                                               10
                              INTERNAL CONTROLS

Internal control is a process adopted by those charged with governance and management,
designed to provide reasonable assurance about the achievement of the organization’s mission,
goals, and objectives with regard to

      Effectiveness and efficiency of operations,
      Reliability of financial reporting, and
      Compliance with applicable laws and regulations.

Internal controls comprise the plans, policies, methods, and procedures used to meet the
organization’s mission, goals, and objectives. Internal controls 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:

                     A control system to recognize the program deadlines and track the
                      progress of properties toward that goal;
                     Controls to ensure that expenditures are eligible, are properly valued,
                      occur in the proper timeframe, and are authorized and allocated when
                      applicable;
                     A monitoring system to ensure that projects will be completed before the
                      statutory deadline;
                     An annual independent audit; and
                     Controls to ensure that use restrictions are added to the properties.

               We assessed the relevant controls identified above.

               A deficiency in internal control exists when the design or operation of a control does
               not allow management or employees, in the normal course of performing their
               assigned functions, the reasonable opportunity to prevent, detect, or correct (1)
               impairments to effectiveness or efficiency of operations, (2) misstatements in
               financial or performance information, or (3) violations of laws and regulations on a
               timely basis.




                                                 11
Significant Deficiency


            We evaluated the internal controls related to our audit objectives in accordance with
            generally accepted government auditing standards. We found no reportable
            deficiencies with these controls. Our evaluation of internal controls was not
            designed to provide assurance regarding the effectiveness of the internal controls
            structure as a whole. Accordingly, we do not express an opinion on the
            effectiveness of The Community Builders’ internal controls.




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