oversight

Citizen Complaint Against BIONIC Real Estate Services, LLC, St. Joseph, MO, Regarding Its Management of a HUD Section 236-Insured Multifamily Property Cannot Be Supported

Published by the Department of Housing and Urban Development, Office of Inspector General on 2010-11-08.

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

                                                                Issue Date
                                                                      November 08, 2010
                                                                
                                                                Audit Report Number
                                                                       2011-DE-1001




TO:         Brenda L. Waters, Director, Kansas City Multifamily Hub, 7AHML

            //signed//
FROM:       Ronald J. Hosking, Regional Inspector General for Audit, Kansas City Region,
                7AGA


SUBJECT: Citizen Complaint Against BIONIC Real Estate Services, LLC, St. Joseph, MO,
            Regarding Its Management of a HUD Section 236-Insured Multifamily
            Property Cannot Be Supported


                                   HIGHLIGHTS

 What We Audited and Why



             We audited allegations made against BIONIC Real Estate Services, LLC
             (BIONIC), a U.S. Department of Housing and Urban Development (HUD)-
             approved management agent, in a citizen complaint received by our office. The
             allegations related to BIONIC’s management of Powell Apartments, a HUD
             Section 236-insured multifamily property with partial project-based Section 8-
             subsidized units. The objective of our review was to determine whether there was
             evidence to support the allegations made against BIONIC regarding its
             management of Powell Apartments as stated in the citizen’s complaint received
             by our office.
What We Found


           We did not find evidence to support the allegations made against BIONIC related
           to its management of Powell Apartments. In general, we did not find evidence to
           support that BIONIC

               Made intentional misstatements on its annual rental license renewal form,
               Was not current on its rental license fees,
               Conducted itself inappropriately in regard to a potential sale of the property,
               Paid itself more than the agreed-upon rate for management and bookkeeping
                fees,
               Paid related parties or other vendors ineligible or unallowable costs,
               Commingled funds with another HUD property,
               Misspent cash provided by the owner in March 2008 and March 2009,
               Violated HUD regulations when it hired a roofing contractor,
               Kept $10,000 intended for a roofing contractor to cover insufficient funds
                within Powell Apartments’ operating account,
               Made an insurance claim for the roof and received proceeds that were not
                redeposited into Powell Apartments’ reserve for replacement account,
               Intentionally kept $14,400 intended for a roofing contractor for final payment,
                and
               Reported incorrect balances for its tax and insurance escrow accounts in its
                April 2010 balance sheet.


What We Recommend


           This report contains no formal recommendations, and no further action is
           necessary.


Auditee’s Response


           We provided the draft report to BIONIC on October 18, 2010, and BIONIC
           concurred with the report. BIONIC chose not to have an exit conference or
           provide formal written comments.




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                        TABLE OF CONTENTS

Background and Objective                    4

Results of Audit                            6

Scope and Methodology                       9

Internal Controls                           11




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                      BACKGROUND AND OBJECTIVE


BIONIC Real Estate Services, LLC (BIONIC), is a full-service property management company,
serving profit and nonprofit owners and residents in conventional and affordable housing
communities. The management company was founded in June 2005, in part to address and
enhance quality and services to residents in affordable housing communities. BIONIC’s offices
are located in St. Joseph, MO. It manages one U.S. Department of Housing and Urban
Development (HUD)-assisted property in Kansas and two properties in Missouri and serves as a
consultant for another HUD-assisted property in Missouri.

Powell Apartments is a HUD multifamily Section 236-insured property with 22 units. Seven of
the units are subsidized with Section 8 project-based vouchers. Powell Apartments is an elderly
complex that consists of two apartment buildings containing 11 units each. The current owner of
Powell Apartments is Eugene C. Capps (owner). The regulatory agreement under Section 236 of
the National Housing Act provides instructions and requirements that the owner must abide by as
long as the property is insured by HUD. A housing assistance payments contract renewal,
effective February 1, 2008, 2009, and 2010, between HUD and the owner provides the annual
rent rates for the seven Section 8-subsidized units at Powell Apartments. Powell Apartments is
located in Kansas City, KS.

The Owner of Powell Apartments and BIONIC entered into a management agreement that was
effective from September 1, 2005, through April 30, 2007, and automatically renewed for 2 years
through April 30, 2009. In May 2009, the owner of Powell Apartments attempted to replace
BIONIC with a management company that was not approved by HUD. BIONIC continued to
manage the property until it provided HUD notice to terminate its relationship as Powell
Apartments’ management agent. The termination was effective May 31, 2010.

The review of BIONIC resulted from a citizen complaint to our office, which contained several
individual allegations. The individual allegations included that BIONIC

                 Made intentional misstatements on its annual rental license renewal form,
                 Was not current on its rental license fees,
                 Conducted itself inappropriately in regard to a potential sale of the property,
                 Paid itself more than the agreed-upon rate for management and bookkeeping
                  fees,
                 Paid related parties or other vendors ineligible or unallowable costs,
                 Commingled funds with another HUD property,
                 Misspent cash provided by the owner in March 2008 and March 2009,
                 Violated HUD regulations when it hired a roofing contractor,
                 Kept $10,000 intended for a roofing contractor to cover insufficient funds
                  within Powell Apartments’ operating account,
                 Made an insurance claim and received proceeds for the roof that were not
                  redeposited into Powell Apartments’ reserve for replacement account,



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                 Intentionally kept $14,400 intended for a roofing contractor for final payment,
                  and
                 Reported incorrect balances for its tax and insurance escrow accounts in its
                  April 2010 balance sheet.

The objective of our review was to determine whether there was evidence to support the
allegations made against BIONIC.




                                               5
                                RESULTS OF AUDIT

We reviewed the allegations contained in a citizen’s complaint against BIONIC regarding its
management of Powell Apartments in Kansas City, KS. We found no evidence to substantiate
the allegations. The significant allegations made in the complaint and the results of our review
of those allegations are detailed below as follows:

          The complaint alleged that BIONIC intentionally misstated that it owned Powell
           Apartments on its annual rental license renewal form. We found no evidence to
           support this allegation. The renewal form was completed incorrectly, but the error
           likely resulted from an oversight and was, in any event, inconsequential. The renewal
           form is prefilled and sent to BIONIC every year. It requests that any changes be
           reported to the Licensing Division of Wyandotte County/Kansas City, KS. BIONIC’s
           director told us that she overlooked the error. We checked with the Unified
           Government of Wyandotte County/Kansas City, KS, Licensing Division’s program
           coordinator, who informed us that there was no harm in BIONIC’s signing on behalf
           of the owner since the management agent was responsible for paying the fee on
           behalf of the owner. The program coordinator verified that the renewal form did not
           convey ownership and that BIONIC had since updated the form.

          The complaint alleged that BIONIC was not current on Powell Apartments’ rental
           license fees. We found no evidence to support this allegation. We checked with the
           Unified Government of Wyandotte County/Kansas City, KS, Licensing Division’s
           program coordinator, who informed us that Powell Apartments’ rental license fees
           were current.

          The complaint questioned the circumstances surrounding a potential sale of the
           property in April 2008. We found no evidence showing inappropriate conduct by
           BIONIC. We reviewed all available documentation and interviewed the involved
           parties. In April 2008, BIONIC contacted the owner on behalf of a potential buyer.
           Around that time, the potential buyer created a legal entity, Powell Apartments, LP,
           to begin negotiations and acquire ownership of the property, and the owner provided
           a written authorization to HUD to release information to the potential buyer. During
           the ensuing weeks, there were limited conversations among the interested parties. On
           August 12, 2008, BIONIC wrote the owner to recommend that he engage an
           experienced attorney to help with the potential sale. We found no evidence of
           negotiations, conversations, or correspondence related to the potential sale after that
           date. As of September 30, 2010, the owner held title to the property.

          The complaint alleged that BIONIC paid itself more than the agreed-upon rate for
           management and bookkeeping fees. We found no evidence to support this allegation.
           We traced every payment made to BIONIC during our 2-year review period to
           supporting invoices and bank statements. Each invoice included a correct calculation
           of the fees on the invoice with supporting documentation attached. If the expense



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    was for something other than a management or bookkeeping fee, we determined that
    it was also eligible and supported.

   The complaint alleged that BIONIC made questionable payments to a related party.
    We found no evidence to support this allegation. We reviewed each payment made
    from Powell Apartments’ operating account to the related party. The payments were
    for items such as a hot water heater and an air conditioning unit. Each of the four
    disbursements was supported with invoices and receipts. The disbursements were
    allowable.

   The complaint alleged that BIONIC commingled funds with another HUD property.
    We found no evidence to support this allegation. We reviewed bank statements for
    both Powell Apartments and the other property for two separate months. Each
    property had separate accounts as required for its own respective funds. The main
    account for each property was the operating account. There were no transfers
    between the different projects’ accounts, and all disbursements were for the project
    that owned the account in which the transaction occurred.

   The complaint alleged that BIONIC misspent the owner’s money because the owner
    wrote checks for more than $28,000 in March 2009 and $17,000 in March 2008 for
    alleged payable overruns. The complaint’s main concern focused on funds paid to
    BIONIC. We found no evidence to support this allegation. Both payments were
    adequately supported by a payable aging detail report submitted to the owner by
    BIONIC. We verified that both checks were deposited into Powell Apartments’
    operating account and reduced the total amount of outstanding payables. We verified
    that the payables to BIONIC were properly supported by invoices and the portions of
    the fees paid were appropriate. We tested the other payables and verified that they
    were properly paid and supported by invoices.

   The complaint alleged that BIONIC may have violated HUD regulations when it
    entered into a roofing contract. We found no evidence to support this allegation.
    BIONIC notified HUD of the leaking roof at Powell Apartments, collected three bids,
    and submitted the bids to HUD for approval. HUD approved the three bids and told
    BIONIC to choose one. BIONIC chose the lowest bidder, at a contract price of
    $24,400. HUD confirmed that BIONIC took the necessary and correct steps to
    procure the services of the roofing contractor.

   The complaint alleged that BIONIC used $10,000 in reserve for replacement account
    funds to cover expenses in its operating account instead of paying the roofing
    contractor for the downpayment on the roof repairs as intended around October 2008.
    We found no evidence to support this allegation. We reviewed the accounting and
    bank records and found that BIONIC paid the roofing contractor $10,000 at the end
    of September 2008 from the operating account and then received the $10,000 from its
    reserve account in October 2008 to reimburse the operating account.




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     The complaint questioned BIONIC’s use of an insurance refund of $10,431that was
      noted in the balance sheet. We checked with Powell Apartments’ insurance company
      and its independent accountant. The insurance company confirmed that no claims
      had been made for Powell Apartments by BIONIC. Powell Apartments’ independent
      accountant confirmed that the $10,431 was an adjusting entry to properly record
      payments for hazard insurance premiums made throughout the year.

     The complaint questioned whether BIONIC hired an additional roofing contractor for
      $14,400 or intentionally withheld this final payment from the original roofing
      contractor. The original roofing contractor was the only contractor awarded the
      roofing contract for $24,400 in late 2007. BIONIC paid the first payment of $10,000
      on September 29, 2008. The roofing contractor requested its final payment of
      $14,400 on September 20, 2009. To approve the final payment, a HUD construction
      analyst had to inspect the roof. HUD’s analyst performed the roof inspection around
      November 2009. Since he was not familiar with the product used, he asked the
      roofing contractor to provide HUD a manufacturer’s warranty on the product before
      he would approve a release of the final payment. The roofing contractor did not
      provide a manufacturer’s warranty to HUD, so HUD did not approve the release of
      money from Powell Apartments’ reserve for replacement account.

     The complaint alleged that BIONIC reported incorrect balances for Powell
      Apartments’ insurance and tax escrow account amounts in its April 2010 balance
      sheet. We analyzed the escrow activity and consulted with the independent public
      accountant and determined that the differences were due to timing differences.
      Powell Apartments posts the insurance and tax escrow expenses to its financial
      statements once a year at the completion of the audit. Since this year’s audit was late
      due to an outstanding payable to the independent accountant, the balances were off
      but not incorrect. We verified that the tax and insurance escrow account balances,
      once posted, were equal and accurate.

Recommendations


         This report contains no recommendations, and no further action is necessary.




                                           8
                        SCOPE AND METHODOLOGY

Our audit generally covered the period March 2008 through February 2010. We performed
onsite work from March through June 2010 at Bionic’s office located at 300 South 11th Street,
St. Joseph, MO.

To achieve our audit objective, we conducted interviews with the

              Complainant;
              HUD management and staff located at the Kansas City multifamily hub;
              HUD OIG Office of Investigation in Kansas City;
              BIONIC’s management, attorney, and staff;
              Onsite property manager for Powell Apartments;
              External parties and vendors related to Powell Apartments for specific
               allegation(s);
              Attorney representing the owner of Powell Apartments;
              Tenants of Powell Apartments; and
              Independent accountant who prepared Powell Apartments’ 2008 and 2009
               audited financial statements.

We reviewed the following documents

              Federal regulations and HUD requirements,
              Regulatory agreement and amendments and housing assistance payments
               contract and contract renewals between HUD and Powell Apartments,
              Management agreement between BIONIC and Powell Apartments,
              Initial citizen complaint and subsequent allegations,
              HUD and BIONIC records related to Powell Apartments,
              Powell Apartments’ accounting records prepared and maintained by
               BIONIC,
              Powell Apartments’ audited financial statements for both 2008 and 2009,
              Powell Apartments and BIONIC’s history and ownership status,
              Specific Powell Apartments bank statements and cancelled check copies
               obtained directly from the financial institution, and
              HUD Real Estate Assessment Center information related to the most
               current physical inspection assessment and rating of Powell Apartments.

We did not rely on computer-processed data or select samples for our audit purposes. We traced
or verified each allegation to supporting documentation to draw our conclusions.

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



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objective. We believe that the evidence obtained provides a reasonable basis for our findings
and conclusions based on our audit objective.




                                               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
               objective:

                     Controls over segregation of duties of BIONIC employees.
                     Controls over the record keeping for Powell Apartments’ transactions.
                     Controls over disbursements from Powell Apartments’ accounts.

               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.

               We evaluated internal controls related to the audit objective in accordance with
               generally accepted government auditing standards. Our evaluation of internal
               controls was not designed to provide assurance of the effectiveness of the internal
               control structure as a whole. Accordingly, we do not express an opinion on the
               effectiveness of BIONIC’s internal controls.




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