oversight

Oregon Housing and Community Services Did Not Always Disburse Its Tax Credit Assistance Program Funds in Accordance With Program Requirements

Published by the Department of Housing and Urban Development, Office of Inspector General on 2011-04-28.

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

                                                              Issue Date
                                                                       April 28, 2011
                                                              
                                                              Audit Report Number
                                                                           2011-SE-1005




TO:        Virginia Sardone, Acting Director, Office of Affordable Housing, DGH

           //signed//
FROM:      Ronald J. Hosking, Regional Inspector General for Audit, 0AGA


SUBJECT: Oregon Housing and Community Services, Salem, OR, Did Not Always
           Disburse Its Tax Credit Assistance Program Funds in Accordance With
           Program Requirements


                                  HIGHLIGHTS

 What We Audited and Why

             We audited Oregon Housing and Community Services (Oregon Housing) because
             it received the only Tax Credit Assistance Program (TCAP) grant in Oregon and
             the second largest grant in the U.S. Department of Housing and Urban
             Development’s (HUD) Region 10, which includes Alaska, Idaho, Oregon, and
             Washington. Oregon Housing received more than $27 million in TCAP funds
             under the American Recovery and Reinvestment Act of 2009 (Recovery Act).
             We also suspected that TCAP information entered into FederalReporting.gov was
             incorrect because the reported grant amount was greater than the actual grant
             awarded. Our objectives were to determine whether Oregon Housing selected
             eligible TCAP projects in accordance with the applicable HUD notice, entered
             TCAP information into FederalReporting.gov correctly, and paid only eligible
             TCAP expenditures in accordance with the HUD notice.
What We Found


           Oregon Housing complied with the applicable Recovery Act and HUD rules and
           regulations in selecting eligible grant projects and in the entering of TCAP
           information into FederalReporting.gov. However, it did not always disburse
           TCAP funds in accordance with program requirements. Oregon Housing
           disbursed TCAP funds to two project owners for unsupported legal fees and
           ineligible appraisal, market study, project compliance, and legal fees. It paid
           these fees because it did not have adequate procedures in its application review
           process.

What We Recommend


           We recommend that the Director of HUD’s Office of Affordable Housing require
           Oregon Housing to provide supporting documentation for the $80,098 in
           unsupported costs or reimburse its U.S. Treasury line of credit from non-Federal
           funds for any costs that remain unsupported. We also recommend that the
           Director require Oregon Housing to reimburse $20,334 to its U.S. Treasury line of
           credit from non-Federal funds for the ineligible expenditures. As a result of our
           audit, on March 17, 2011, Oregon Housing reimbursed its U.S. Treasury line of
           credit for the unsupported and ineligible costs. Further, we recommend that the
           Director require Oregon Housing review the other TCAP projects to ensure that
           there are no ineligible costs.

           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 Oregon Housing on
           April 15, 2011, and requested its comments by April 22, 2011. Oregon Housing
           provided its written comments on April 22, 2011. It generally agreed with the
           finding and recommendations.

           The complete text of Oregon Housing’s response can be found in appendix B of
           this report.




                                            2
                              TABLE OF CONTENTS

Background and Objectives                                                       4

Results of Audit
        Finding 1: Oregon Housing Reimbursed Unsupported and Ineligible Costs   6

Scope and Methodology                                                           9

Internal Controls                                                               11

Appendixes
   A.   Schedule of Questioned Costs                                            12
   B.   Auditee Comments                                                        13
   C.   Criteria                                                                15
   D.   Table of Deficiencies for Finding 1
                                                                                16




                                              3
                     BACKGROUND AND OBJECTIVES

On February 17, 2009, President Obama signed the American Recovery and Reinvestment Act
of 2009 (Recovery Act) into law. The purpose of the Recovery Act was to jump-start the
Nation’s economy, with a primary focus on creating and saving jobs in the near term, and to
invest in infrastructure that would provide long-term economic benefits. The Recovery Act
appropriated $2.25 billion under the HOME Investment Partnerships Program (HOME) heading
for a Tax Credit Assistance Program (TCAP) grant to provide funds for capital investments in
low-income housing tax credit projects. The U.S. Department of Housing and Urban
Development (HUD) awarded TCAP grants to the 52 State housing credit agencies. On June 24,
2009, HUD awarded Oregon Housing and Community Services (Oregon Housing) more than
$27 million in TCAP funds to be used on qualified low-income buildings that were awarded low-
income housing tax credits under section 42 of the Internal Revenue Code (IRC).

Although these funds were appropriated under the HOME heading, TCAP funds are not subject
to any HOME requirements other than the environmental review and can only be used in low-
income housing tax credit projects, which are administered through the U.S. Department of the
Treasury. HUD awarded TCAP grants to facilitate development of projects that received low-
income housing tax credit awards between October 1, 2006, and September 30, 2009. Since a
major purpose of these funds was to immediately create new jobs or save jobs at risk of being
lost due to the current economic crisis, the Recovery Act established deadlines for the
commitment and expenditure of grant funds and required State housing credit agencies to give
preference to projects that would be completed by February 16, 2012. The grantee was required
to distribute the TCAP funds competitively under the requirements of the Recovery Act and
pursuant to its existing qualified allocation plan.

Oregon Housing acts as Oregon’s housing finance agency and works to create and preserve
opportunities for quality, affordable housing for low- and moderate-income families. It promotes
affordable housing through grants and tax credits, the construction or rehabilitation of
multifamily developments, and the financing of single-family homes. Additionally, Oregon
Housing manages Federal and State funds for antipoverty, homelessness, energy assistance, and
community service programs. It also assists in the financing of single-family homes and the new
construction or rehabilitation of multifamily affordable housing developments, as well as
providing grants and tax credits to promote affordable housing.

Oregon Housing finances a spectrum of affordable multifamily housing statewide by means of
allocating Federal low-income housing tax credits and issuing tax-exempt bonds. As of February
4, 2011, it had awarded all of its TCAP funds to 15 low-income housing tax credit projects and
had disbursed more than $21.5 million in TCAP funds. The 15 projects are multifamily projects
which will create or rehabilitate 611 low-income housing units for large families, the elderly,
disabled individuals, and homeless individuals.

The use of TCAP funds had resulted in the creation of more than 115 full-time-equivalent jobs as
of December 31, 2010.



                                               4
Our objectives were to determine whether OHCS

   1. Selected eligible TCAP projects in accordance with the applicable HUD notice,
   2. Entered TCAP information into FederalReporting.gov correctly, and
   3. Paid only eligible TCAP expenditures in accordance with the HUD notice.




                                             5
                                 RESULTS OF AUDIT

Finding 1: Oregon Housing Reimbursed Unsupported and Ineligible
Costs
Oregon Housing disbursed TCAP funds to two project owners for unsupported legal fees and
ineligible appraisal, market study, project compliance, and legal fees. The payment of
unsupported and ineligible costs occurred because Oregon Housing did not have adequate
procedures in its application review process. Consequently, it spent more than $80,000 on
unsupported costs and more than $20,000 on ineligible fees (see appendix D). Since reimbursed,
these funds will be available for other eligible TCAP expenses.


 Oregon Housing Used TCAP
 Funds To Pay for Unsupported
 Legal Fees

              Most of the unsupported legal fees were identified as “land use” on the invoices
              with no explanation as to what specific services were provided by the attorney.
              As a result, we could not determine whether these costs were for services relating
              to partnership formation, organizational costs, the syndication or selling of
              partnership interests, permanent financing, or eligible costs.

              According to the Low-Income Housing Tax Credit Handbook published by
              Novogradac & Company, which the industry refers to for best practices, the
              services mentioned above are ineligible basis costs.

 Oregon Housing Paid an
 Ineligible Appraisal Fee

              The appraisal was commissioned to obtain permanent financing. According to the
              Internal Revenue Service (IRS), an appraisal performed to determine the value of
              the building for purchase is includable in the eligible basis. However, an
              appraisal to secure financing is treated in accordance with the type of financing
              obtained. For permanent financing, the fee would be amortized under IRC 263A
              and not depreciated. Consequently, the cost would not be includable in the
              eligible basis.




                                               6
Oregon Housing Paid an
Ineligible Market Study Fee

            The market study was conducted for the tax credit application. According to IRC
            42(m)(1)(A)(iii), a comprehensive market study is conducted before credit
            allocation is made and is at the developer’s expense. The IRS determined that
            market study fees are not includable in eligible basis because the market study is
            associated with receiving the allocation of tax credits and is, therefore, an
            intangible asset, not depreciable residential property.

Oregon Housing Paid Ineligible
Project Compliance Fees

            The project compliance fees were for a third party retained by the owner to review
            compliance with Davis-Bacon Wages and Recovery Act-related requirements.
            HUD’s TCAP Guidance on Fees and Asset Management states that while the
            costs to carry out compliance monitoring fall solely on Oregon Housing, the
            project owner is solely responsible for the costs of making the project compliant
            with all applicable TCAP program requirements during the development of the
            project as well as during the TCAP grant period. The project owner is responsible
            for the costs of providing the information or documentation to the grantee about
            such compliance. Therefore, project compliance fees incurred by the project
            owner are ineligible for TCAP funding.

Oregon Housing Paid Ineligible
Legal Fees

            These legal fees were for review of fair housing laws and TCAP documents,
            organizational costs, and permanent financing. Fair housing laws and TCAP
            document reviews are related to program compliance, which must be borne by the
            project owner. These costs are ineligible in accordance with HUD’s TCAP
            Guidance on Fees and Asset Management. Organizational costs consisted of
            filing strategy, entity formation and structuring, and researching to trademark the
            project name. Organizational costs are ineligible basis costs in accordance with
            the Novogradac Low-Income Tax Credit Handbook, 2010 Edition, section 3:59,
            because they are amortizable costs. Legal fees related to permanent financing are
            not includable in eligible basis. According to the IRC, all costs incurred to secure
            permanent financing are ineligible because they are capitalized and amortized
            over the life of the loan. Only depreciable costs are includable in eligible basis.




                                             7
Oregon Housing Did Not Have
Adequate Procedures in Its
Review Process


             Oregon Housing’s application review procedures did not include a process for
             determining whether costs on the uses of funding schedule were eligible basis
             costs. The loan officers used the uses of funding schedules, which were approved
             by the former low-income housing tax credit program manger during the
             application process, as a guideline to reimburse project owners for eligible
             program costs. However, the uses of funding schedule identified ineligible basis
             costs as eligible. As a result, neither the loan officers nor the supervisor
             questioned the ineligible costs. Therefore, Oregon Housing spent more than
             $80,000 on unsupported legal fees and more than $20,000 on an ineligible
             appraisal fee, market study fee, project compliance review, and legal fees. These
             funds could have been made available for other eligible TCAP expenses.

             Oregon Housing decided to reimburse its U.S. Treasury line of credit for the
             unsupported expenses instead of obtaining additional information to support
             eligibility of the costs. It believed that this process would be more efficient since
             there were plenty of construction costs left to offset future draws of TCAP funds.

Conclusion


             On March 17, 2011, Oregon Housing reimbursed its U.S. Treasury line of credit
             for the unsupported and ineligible costs cited in this finding. In addition, Oregon
             Housing has initiated processes to improve its control weakness by reorganizing
             the work unit and amending its application review process to ensure that it does
             not allow ineligible costs.

Recommendations


             We recommend that the Director of HUD’s Office of Affordable Housing require
             Oregon Housing to

             1A.    Provide supporting documentation for the $80,098 in unsupported costs or
                    reimburse its U.S. Treasury line of credit from non-Federal funds for any
                    costs that remain unsupported.

             1B.    Reimburse its U.S. Treasury line of credit $20,334 from non-Federal funds
                    for the ineligible fees.

             1C.    Review the other TCAP projects to ensure that there are no ineligible
                    costs.



                                               8
                         SCOPE AND METHODOLOGY

Oregon Housing was awarded more than $27 million in TCAP funds and had expended more
than $21 million at the time of our review. We reviewed its project selection process, reported
TCAP information, and TCAP expenditures to ensure that it selected eligible grant projects,
entered TCAP information into FederalReporting.gov accurately and in a timely manner, and
paid eligible TCAP expenditures in accordance with the applicable Recovery Act and HUD rules
and regulations.

To accomplish our objectives, we

      Reviewed applicable laws; regulations; HUD requirements; Oregon Housing
       requirements, including its policies and procedures; IRC section 42 eligible basis cost
       requirements; and the Low-Income Housing Tax Credit Handbook published by
       Novogradac & Company. 
        
      Interviewed HUD and Oregon Housing staff and communicated with IRS staff to obtain
       further knowledge of program requirements.  


For the eligible grant project selection objective, we reviewed all 15 of the projects that were
awarded TCAP funding to determine whether the projects had been awarded low-income
housing tax credits between October 1, 2006, and September 30, 2009, under section 42(h) of the
IRC of 1986 and that those projects were expected to be completed by February 16, 2012.

For the reporting objective, we selected 3 of the 15 projects to review for the full-time
equivalency reported. We selected one project with the highest full-time equivalency reported in
FederalReporting.gov for the quarter ending June 30, 2010, and two projects with the highest
full-time equivalency reported in FederalReporting.gov for the quarter ending December 31,
2010. We also reviewed the expenditures reported in FederalReporting.gov for the seven
projects selected for the TCAP-eligible activities review (as described below) because we had
already reviewed the source documentation for accuracy.

For the eligible TCAP expenditures objective, we selected the six projects that were awarded
more than $2 million each and had drawn at least 90 percent of their available TCAP funds. We
also selected one project awarded less than $2 million because construction had been completed
and its final certification was provided to us by Oregon Housing as an example of eligible costs.
We reviewed all the draws of each of the seven projects selected to determine whether TCAP
funds were spent on eligible activities, whether those funds were expended within 3 days of
being drawn from HUD’s account, and that no advances were made to the project owners.

We did not rely on automated data for our analysis because Oregon Housing did not have an
automated database system for TCAP reimbursements.




                                                9
The audit generally covered the period February 2009 through January 31, 2011. We performed
our audit at Oregon Housing, 725 Summer Street, NE., Suite B, Salem, OR, from January 24 to
March 11, 2011.

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:

                     Controls to ensure that Oregon Housing followed applicable laws and
                      regulations with respect to the eligibility of TCAP projects.
                     Controls to ensure that Oregon Housing followed applicable laws and
                      regulations with respect to the reporting of TCAP information in
                      FederalReporting.gov.
                     Controls to ensure that Oregon Housing paid only for eligible costs under
                      TCAP.

               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.

 Significant Deficiency
               Based on our review, we believe that the following item is a significant deficiency:

                     Oregon Housing did not have adequate controls in place to ensure that
                      reimbursements were only for eligible expenditures for TCAP (finding 1).


                                                 11
                                     APPENDIXES

Appendix A

                 SCHEDULE OF QUESTIONED COSTS

                  Recommendation            Ineligible 1/   Unsupported 2/
                         number

                                1A                $20,334
                                1B                                   80,098



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.

2/   Unsupported costs are those costs charged to a HUD-financed or HUD-insured program
     or activity when we cannot determine eligibility at the time of the audit. Unsupported
     costs require a decision by HUD program officials. This decision, in addition to
     obtaining supporting documentation, might involve a legal interpretation or clarification
     of departmental policies and procedures.




                                             12
Appendix B

                          AUDITEE COMMENTS


        Auditee Comments




         April 22, 2011

         Ronald J. Hosking
         Regional Inspector General for Audit
         U.S. Department of Housing and Urban Development
         Regional Office of Inspector General for Audit
         909 1st Ave, Suite 126
         Seattle, Washington 98104

         Re: HUD TCAP Audit

         Dear Mr. Hosking:

         Oregon Housing and Community Services (OHCS) received the OIG Audit draft
         report issued on April 15, 2011. The report stated there were occasions where TCAP
         funds were disbursed not within program requirements.

         Specifically, the report cited three areas of concern with recommendations:

            1(a) Provide additional documentation for $80,098 in unsupported costs or
             reimburse its U.S. Treasury line of credit from non-Federal funds for any costs
             that remain unsupported.

            1(b) Reimburse $20,334 to its U.S. Treasury line of credit from non-Federal
             funds for ineligible expenditures.

         To expedite the process, funds from 1(a) and 1(b) above have been reimbursed as
         recommended.




                                           13
   1(c) Provide internal review of the remaining TCAP projects to assure no
    additional ineligible cost expenditures.

To correct issue 1(c) we shall conduct the following activities.

   Within 120-days of the issuance date of the report, re-evaluate the process for
    expenditure oversight and make improvements as deemed necessary. OHCS will
    utilize the improved process to review the remaining TCAP projects to ensure that
    all expenditures charged to TCAP are eligible.

If you have any questions, please contact Dave Summers at (503) 986-2073, or
dave.summers@hcs.state.or.us.

Sincerely,




Rick Crager
Acting Director

c: Lana Monfort, Auditor in Charge




                                    14
Appendix C
                                          CRITERIA

HUD allows costs for TCAP that are eligible basis costs under section 42 of the IRC. The IRS
does not have specific eligible and ineligible basis costs outlined in the IRC. The industry uses
section 42(d)(3) of the IRC, which states that eligible basis items are a project’s depreciable
costs. Specifically it states that eligible basis is the project’s adjustable basis as of the close of
the first taxable year of the credit period. Oregon Housing refers to the best practices provided
by the National Council of State Housing Agencies, the Low-Income Housing Tax Credit
Handbook published by Novogradac & Company, and specific guidance and letter rulings from
the IRS. From these resources, Oregon Housing derived a uses of funding schedule that
identified eligible and ineligible basis costs under section 42 of the IRC for low-income housing
tax credit.




                                                  15
Appendix D
         TABLE OF DEFICIENCIES FOR FINDING 1

          Ineligible/unsupported cost              Project A   Project B      Total
Ineligible costs:
    Appraisal fee                                  $ 5,250                   $5,250
    Market study fee                                  6,750                   6,750
    Project compliance review fee                      657                      657
    Legal fee                                         6,717      960          7,677
Subtotal ineligible fees                             19,374       960        20,334
Unsupported legal fees                               80,098                  80,098
Total ineligible fees and unsupported costs    $ 99,472         $960       $100,432




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