oversight

McClain Barr and Associates, Summerfield, NC Multifamily Housing Management Agent

Published by the Department of Housing and Urban Development, Office of Inspector General on 2013-03-20.

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

OFFICE OF AUDIT
REGION 4
ATLANTA, GA




    McClain Barr and Associates, Summerfield, NC

         Multifamily Housing Management Agent




AUDIT REPORT NUMBER 2013-AT-1002          MARCH 20, 2013
                                                        Issue Date: March 20, 2013

                                                        Audit Report Number: 2013-AT-1002




TO:            Dottie R. Troxler, Director, Greensboro Multifamily Housing Hub, 4FHMLA

               //signed//
FROM:          Nikita N. Irons, Regional Inspector General for Audit, Atlanta Region, 4AGA

SUBJECT:       McClain Barr and Associates, Summerfield, NC, Did Not Properly Charge
               Frontline Costs to Its Properties


    Attached is the U.S. Department of Housing and Urban Development (HUD), Office of
Inspector General’s (OIG) final results of our review of McClain Barr and Associates.

    HUD Handbook 2000.06, REV-4, sets specific timeframes for management decisions on
recommended corrective actions. For each recommendation without a management decision,
please respond and provide status reports in accordance with the HUD Handbook. Please furnish
us copies of any correspondence or directives issued because of the audit.

    The Inspector General Act, Title 5 United States Code, section 8L, requires that OIG post its
publicly available reports on the OIG Web site. Accordingly, this report will be posted at
http://www.hudoig.gov.

   If you have any questions or comments about this report, please do not hesitate to call me at
404-331-3369.
                                           March 20, 2013
                                           McClain Barr and Associates, Summerfield, NC, Did Not
                                           Properly Charge Frontline Costs to Its Properties




Highlights
Audit Report 2013-AT-1002


 What We Audited and Why                    What We Found

We audited McClain Barr and                The management agent did not follow HUD’s
Associates (management agent) based        requirements for charging its properties frontline
on a request from the U.S. Department      expenses. It failed to maintain documentation
of Housing and Urban Development’s         supporting the eligibility of its charges, made charges
(HUD) Greensboro, NC, Office of            based on budgeted amounts, charged management
Multifamily Housing. The request           agent staff costs to properties, and charged some
expressed several concerns regarding       ineligible items. This condition occurred because the
McClain Barr’s management of its           agent disregarded both HUD’s requirements and its
HUD-assisted properties. Our objective     management agreements with the property owners. As
was to determine whether HUD’s             a result, the agent may have deprived the properties of
concerns had merit and whether the         more than $872,000, which could have been used for
frontline costs that the management        project operations, improvements, or other allowable
agent charged its HUD properties           expenditures.
complied with its regulatory and
management agreements or other HUD
requirements.

 What We Recommend

We recommend that HUD’s Greensboro
Office of Multifamily Housing require
that the management agent provide
support that it properly charged its
HUD properties more than $803,000 for
frontline costs and repay more than
$68,000 in ineligible frontline charges.
We also recommend that HUD review
the eligibility of the remaining 2012
frontline costs that occurred after our
audit period and require the
management agent to begin charging its
HUD properties only actual eligible
frontline expenses as outlined in the
requirements.
                           TABLE OF CONTENTS

Background and Objective                                                3

Results of Audit
      Finding: The Management Agent Did Not Follow HUD’s Requirements
               for Frontline Costs                                      5

Scope and Methodology                                                   10

Internal Controls                                                       12

Appendixes
   A. Schedule of Questioned Costs                                      13
   B. Auditee Comments and OIG’s Evaluation                             14
   C. Breakdown of Questioned Costs by Properties                       18




                                           2
                      BACKGROUND AND OBJECTIVE

In 2002, Steve McClain and David Barr founded McClain Barr and Associates (management agent)
to provide property owners with dedicated property management services focused on increasing
property cashflow, improving resident satisfaction, and improving properties’ physical condition.

The management agent managed 17 apartment communities – 14 in North Carolina and 3 in South
Carolina. All but 2 had HUD-insured mortgages, and 12 had U.S. Department of Housing and
Urban Development (HUD)-subsidized rents. The management agent principals owned four of the
properties.

                                 McClain Barr properties
    Property name                      Property type                  Ownership interest    Units
                        Section 221(d)(4) - HUD insured &
Alpha Arms              subsidized                                            No              104
                        Section 202/223(f) - HUD insured &
DeSoto Square           subsidized                                            No               32
                        Section 221(d)(4)/223(f) - HUD insured &
Easley Housing          subsidized                                            No               40
                        Section 202/223(f) - HUD insured &
Gee Corbett             subsidized                                            No               38
The Grand at Day
Point                   Section 221(d)(4) - HUD insured &subsidized          Yes              160
The Grand on Julian     Section 221(d)(4) - HUD insured only                 Yes              240
The Grand in
Kannapolis              Section 221(d)(4) - HUD insured only                 Yes              240
Greenleaf Grace         Section 202 - HUD insured & subsidized               No                41
Lakeview Apartments     HUD subsidized only                                  No                40
                        Section 221(d)(4)/223(a)(7) – HUD insured
Princeton Terrace       only                                                 No               144
Puller Place            Section 221(d)(4)/223(f) - HUD insured only          Yes              240
Saint James Plaza       Section 202 - HUD insured & subsidized               No                40
Saint John Housing      Section 202 - HUD insured & subsidized               No                36
                        Section 221(d)(3) - HUD insured &
Sandy Run               subsidized                                            No              152
Ujima Village           Section 202 - HUD insured & subsidized                No               36
Washington Terrace      Not HUD insured or subsidized                         No              245
Williams DeLashmet      Section 811 - HUD insured & subsidized                No               25

Management agents that operate HUD-insured and HUD-assisted multifamily properties play a
key role in helping HUD provide quality affordable housing.

Property owners contract with a management agent through a management agreement to oversee
the day-to-day operations of the property and maintain the financial and accounting records. The
management agent executes a management certification providing that it will comply with the
property’s regulatory agreement and other HUD requirements.

                                                3
By signing the project owner’s-management agent’s certification, the agent agrees to, among
other things,

      •    Ensure that all expenses of the project are reasonable and necessary;
      •    Exert reasonable effort to maximize project income and take advantage of discounts,
           rebates, and similar money-saving techniques; and
      •    Obtain contracts, materials, supplies, and services, including the preparation of the annual
           audit, on terms most advantageous to the project.

Our objective was to determine whether HUD’s concerns had merit 1 and whether the frontline
costs that the management agent charged its HUD properties complied with its regulatory and
management agreements or other HUD requirements.




1
    See the Scope and Methodology Section for details of HUD’s concerns.
                                                         4
                                      RESULTS OF AUDIT

Finding: The Management Agent Did Not Follow HUD’s Requirements
for Frontline Costs
The management agent did not follow HUD’s requirements for charging its properties frontline 2
expenses. It failed to maintain documentation supporting the eligibility of charges allocated to
properties based on budgets, charged some management agent staff costs directly to properties,
and charged some ineligible items. These conditions occurred because the agent disregarded
both HUD’s requirements and its management agreements with the property owners. As a result,
the agent may have deprived the properties of more than $872,000, which could have been used
for project operations, improvements, or other allowable expenditures.


    The Agent Lacked Support for
    Charges Allocated to the
    Properties

                 The management agent’s documentation did not support the $570,286 that it
                 allocated to the properties through a monthly per unit fee based on budgeted
                 amounts that represented allowable frontline expenses. 3

                 In addition to the general management fees that the management agent charged
                 the property owners under the terms of the management agreements, it charged
                 most properties a monthly per unit fee comprised of several expenses paid by the
                 management agent. 4 The fee included a portion of the salaries that the
                 management agent’s owners paid themselves, a portion of the salary for the
                 management agent’s office manager, phone and Internet charges, postage, office
                 supplies, and copier expenses. The total charges for these items were divided by
                 the number of units in the inventory to determine the per unit frontline charge.
                 The agent charged most properties the same amount each month based on the
                 number of units it contained. 5

                 Although the types of charges that made up the monthly per unit fee were eligible
                 frontline expense items, the management agent made the charges based on

2
  The Management Agent Handbook, HUD Handbook 4381.5, REV-2, paragraph 6.38(a)(1), defines eligible
frontline expenses that management agents may charge HUD properties. Some examples include taking
applications, screening tenants, and accounting for project income and expenses.
3
  See Appendix C for a breakdown of all questioned costs by property.
4
  The management agent did not charge one of the properties frontline fees because of the terms in its management
agreement.
5
  All but two properties were charged the same monthly per unit fee. One property was not charged a fee (see
footnote 4) whereas the other property was charged a reduced rate in accordance with its management agreement
with the agent.
                                                        5
                 budgeted amounts. HUD’s Management Agent Handbook stipulates that only
                 actual costs directly attributable to the performance of frontline duties are eligible
                 frontline expenses. 6 In addition, costs cannot be allocated to properties based on
                 an arbitrary system such as the number of units; any proration of charges must be
                 in proportion to each property’s actual use. 7

                 The management agent’s use of budgeted amounts and arbitrary allocation also
                 violated the properties’ regulatory and management agreements. The regulatory
                 agreements require that any payments from property funds be reasonably
                 necessary for property operations and that any services or materials provided be
                 delivered to the property. 8 The management agreements between the agent and
                 the various property owners stated that the agent would be reimbursed actual
                 expenses for centralized frontline accounting staff. 9

                 Owners Charged Their Salaries to the Properties
                 The owners of the management company charged a portion of their salaries to the
                 properties as frontline expense through the monthly per unit fee. Although some
                 services provided by the owners, such as property accounting, were eligible
                 frontline expense items, they were not properly charged. The charges were not
                 actual expenses but budgeted amounts derived from salary costs that the owners
                 had arbitrarily set for themselves instead of what the services would have cost in
                 the marketplace.

                 The two owners served as chief executive officer and chief operating officer of
                 the management company but also provided some frontline services to the
                 properties. Although the percentages varied over time, during 2012, the chief
                 executive officer charged 55 percent of his salary to the properties, and the chief
                 operating officer charged 75 percent based on an $85 per hour rate that they
                 derived from their total budgeted salary cost. The owners’ timesheets did not
                 specifically identify the frontline duties performed for each project or segregate
                 time spent on management agent functions as required by HUD. 10 Their
                 timesheets showed only general items such as recording rents, payroll, or month
                 end accounting and did not show the specific projects for which the duties had
                 been performed. In addition, their job descriptions did not conform to HUD’s
                 requirement that management agents develop a job description for each position
                 outlining the frontline responsibilities separate from the nonfrontline


6
  HUD Handbook 4381.5, REV-2, paragraph 6.38(a)(2)(a)(ii)
7
  HUD Handbook 4381.5, REV-2, paragraph 6.38(a)(2)(a) - The agent must prorate the total associated costs among
the projects served in proportion to the actual use of services.
8
  Regulatory agreement, section 11(c)
9
  Management agreement, section 22(c) - The project will reimburse the agent monthly actual expenses for
centralized frontline accounting staff. Frontline reimbursement will be reviewed and adjusted annually and is
subject to HUD guidelines in Handbook 4381.5, REV-2.
10
   HUD Handbook 4381.5, REV-2, paragraph 6.38(b)(4), states that a management agent’s generalist staff must
document hours spent and duties performed on frontline activities for each project and those spent on the central
office functions.
                                                        6
                 responsibilities. 11 Finally, the owners did not support that either the $85 per hour
                 rate or the $525,356 that they charged to the properties for their salaries during
                 the audit period was reasonable.

                 HUD requires that management agents perform an annual justification for the cost
                 of providing frontline services directly rather than procuring them from an outside
                 vendor. 12 The management agent did not perform a justification and analysis
                 each year for the accounting services provided by the owners. Instead, during
                 2009, it performed an analysis based on a template from another management
                 company and extended that analysis forward by applying a 5 percent annual
                 inflation rate. That analysis assumed that the agent would need to hire five
                 additional full-time staff members qualified in four disciplines to replace the
                 owners’ part-time frontline work. It used the 2009 Real Estate Compensation
                 Survey to show that the total employment cost for the additional staff members
                 would be prohibitive. However, the survey supported the reasonableness of the
                 management agent’s projected salary cost for only one of the five positions. In
                 addition, the arbitrary 5 percent annual inflation rate used to increase the assumed
                 salaries each year was not comparable to the actual inflation rates, which were
                 considerably lower. 13 Finally, the analysis did not adequately explain why it
                 would take five full-time staff members to perform the tasks that the owners
                 performed part time.

                 The Agent Charged Its Office Manager’s Salary to the Properties
                 The timesheets for the management agent’s office manager, 24 percent of whose
                 salary was allocated to the projects as frontline cost in 2011 and 30 percent in
                 2012 did not specify how he spent his time. The timesheets noted only that he
                 was a salaried employee; they did not show hours or activities. The management
                 agent allocated $8,260 of the office manager’s budgeted salary to frontline cost in
                 2011 and $4,828 in 2012 as part of the monthly per unit fee.

                 The Agent Charged Excessive Office Expenses to the Properties
                 As part of the monthly per unit fee, the agent charged the properties $31,842 for
                 office expenses during the audit period. Instead of charging each property for any
                 actual office expense, as HUD requires, the agent’s documentation showed that it
                 charged the properties for all of its postage and copier expense based on a
                 budgetary estimate. The agent allocated none of these costs to the operation of
                 the management company.




11
   HUD Handbook 4381.5, REV-2, paragraph 6.38(b)(2)
12
   HUD Handbook 4381.5, REV-2, section 6.38, figure 6-2, 1st row
13
   According to the U.S. Department of Labor, Bureau of Labor Statistics, the consumer price index ranged from 1.5
percent to 3.0 percent, with an average of 2.4 percent between 2009-2011.
                                                        7
     The Agent Charged Other Staff
     Salaries to the Properties

                   The management agent charged actual salary costs for three other staff members
                   directly to the properties instead of as a part of the monthly per unit fee. The
                   timesheets for these staff members did not support that they performed eligible
                   frontline activities. Their timesheets specified only that they were salaried
                   employees who worked 8 hours per day. During the 22 months of our audit
                   period, the agent allocated $233,601 in salary costs for these employees to various
                   properties using a percentage basis instead of actual time spent working for the
                   properties.

     The Agent Charged the
     Properties for Ineligible Items

                   The management agent charged its properties $68,570 in frontline expenses for
                   ineligible communication services and car allowances.

                   Between July 2010 and April 2012, the management agent charged the properties
                   $12,165 for phone lines and Internet service provided to the management agent.
                   Phone lines and modems must be dedicated to automation equipment required by
                   HUD to qualify as an eligible frontline expense. 14

                   The management agent charged its properties at least $56,405 for the cost of car
                   allowances for management agent employees. According to HUD’s
                   requirements, an agent’s travel expenses to visit properties and meet with owners
                   should be paid from the agent’s general management fees. 15

     Conclusion

                   The management agent did not properly charge frontline expenses to its
                   properties. It charged properties based on budgeted amounts, did not maintain
                   adequate documentation for supporting its charges, and charged some ineligible
                   items. This condition occurred because the management agent disregarded both
                   HUD requirements and its management agreements with the properties’ owners.
                   As a result, the agent may have deprived the properties of more than $872,000
                   that could have been used for property operations, improvements, or other needs
                   permissible under HUD’s requirements.




14
     HUD Handbook 4381.5, REV-2, section 6.38, figure 6-2, 6th row
15
     HUD Handbook 4381.5, REV-2, section 6.38, figure 6-2, 5th row
                                                         8
Recommendations

          We recommend that the Director of the Greensboro Office of Multifamily Housing

          1A.     Require the management agent to provide support that $570,286 that it
                  charged the properties using a monthly per unit fee represented actual
                  eligible frontline costs or repay each affected property from non-Federal
                  funds.

          1B      Require the management agent to provide support that $233,601 in staff
                  salaries that it directly charged the properties represented actual eligible
                  frontline costs or repay each affected property from non-Federal funds.

          1C.     Require the management agent to repay each affected property its portion of
                  the $68, 570 that it charged for ineligible items.

          1D.     Review the remaining 2012 frontline expenses charged to the properties
                  after our audit period and require the management agent to repay each
                  affected property any ineligible charges.

          1E.     Require the management agent to begin charging properties actual eligible
                  frontline expenses as outlined in HUD’s requirements.




                                             9
                        SCOPE AND METHODOLOGY

The HUD Greensboro, NC, Office of Multifamily Housing requested that we review McClain
Barr’s management of its HUD-assisted properties. That request expressed both general and
property-specific concerns regarding the agent’s management of HUD-assisted properties. The
overall concerns included frontline charges to the properties as well as low management scores
for some properties. We began our review by looking at the agent’s management of Williams
DeLashmet Crossing since HUD expressed several specific concerns regarding that property.
Some of those concerns included whether (1) the property manager worked full time and whether
his salary increase was justified, (2) whether the property’s board was providing sufficient
oversight, and (3) whether some residents’ claims that their utilities had been cut off for non-
payment were valid.

A review of Williams DeLashmet Crossing confirmed that the property’s board was providing
little oversight; however, we were able to resolve most of HUD’s other concerns with that
property. We also found that the agent’s accounting for cash receipts and the reserve for
replacement account met HUD’s requirements and the property appeared to be in satisfactory
physical condition. However, we found some questionable frontline charges to the property and
expanded our scope to include the frontline costs for all of the agent’s properties.

We performed our onsite work from May 31 through September 17, 2012, at the management
agent’s administrative offices located at 6353 Poplar Forest Road, Summerfield, NC. We also
conducted a site visit at the Williams DeLashmet Crossing property at 2102 Aileen Court, High
Point, NC. The review generally covered the period July 2010 through April 2012 and was
expanded as determined necessary.

To accomplish our objective,

   •   We reviewed the HUD Handbooks 4370.2, REV-1 (Financial Operations and Accounting
       Procedures for Insured Multifamily Projects); 4350.1 (Multifamily Asset Management
       Project Servicing); 4381.5 (Management Agent Handbook); and HUD-9839-B (Project
       Owner’s and Management Agent’s Certification for Multifamily Housing Projects for
       Identity-of-Interest of Independent Management Agents).

   •   We reviewed the management agent’s accounting records; audited financial statements
       for 2010 and 2011; the management agent’s general ledgers and bank statements; Real
       Estate Assessment Center property inspection reports; HUD management reviews; cash
       receipts and disbursements; invoices; and employee listings.

   •   We interviewed the management agent chief executive officer, chief operating officer,
       and employees and the HUD Greensboro Office of Multifamily Housing staff members
       involved with oversight of the management agent’s properties.



                                              10
For the Williams DeLashmet Crossing property,

   •   We reviewed the regulatory agreement between HUD and the property’s owner; the
       property’s general ledgers, bank statements, and tenant listings; and the audited financial
       statements for 2010 and 2011.

   •   We interviewed the board chairwoman, management agent chief executive officer, chief
       operating officer, and employees and the HUD Greensboro Office of Multifamily
       Housing staff members involved with oversight of the management agent’s properties.

   •   We selected several nonstatistical samples as described below. The results from these
       samples apply only to the sampled items and were not projected to the universe as a
       whole.

           •   We reviewed a random sample of the property’s cash disbursements for 5 of the
               22 (23 percent) months in our review scope to determine whether the
               disbursements were reasonable and necessary for the operations of the property.

           •   We reviewed a random sample of the property’s cash receipts for 5 of the 22 (23
               percent) months in our review scope to determine whether the receipts were
               supported and properly accounted for.

           •   We reviewed a random sample of 4 of the 7 (57 percent) reserve for replacement
               disbursements to determine whether the funds were used as authorized by HUD.

We expanded our review to include the agent’s calculation of total frontline expenses that it used
to determine the frontline costs charged to all fifteen of its properties. We also reviewed other
frontline activities and car allowances that were charged directly to the properties. No additional
samples were taken.

We tested electronic data relied upon during the performance of the various review steps. We
conducted tests and procedures to ensure the integrity of computer-processed data that were
relevant to our audit objective. The tests included, but were not limited to, comparisons of
computer-processed data to invoices and other supporting documentation. We found the data to
be generally reliable.

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




                                                11
                              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:

               •   Compliance with applicable laws and regulations – Policies and procedures to
                   ensure that resource use is consistent with laws and regulations.

               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:

               •   The management agent failed to comply with HUD’s requirements for frontline
                   costs (see finding).




                                                 12
                                   APPENDIXES

Appendix A

                 SCHEDULE OF QUESTIONED COSTS


                 Recommendation
                         number          Ineligible 1/       Unsupported 2/
                      1A                                          $570,286
                      1B                                            233,601
                      1C                   $68,570                 _______
                     Total                 $68,570                $803,887

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.




                                             13
Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation   Auditee Comments




Comment 1

Comment 2


Comment 3


Comment 4




                         14
Comment 5



Comment 3

Comment 6

Comment 7
Comment 8

Comment 3


Comment 9



Comment 10




Comment 11




             15
                         OIG Evaluation of Auditee Comments

Comment 1   The most recent management review conducted by the local field office was
            completed during 2008 while our review period began with July 2010. HUD’s
            management reviews are often more broad than in-depth because they need to
            cover multiple areas of management agent operations in a short amount of time.
            The frontline charges portion of the 2008 management review consisted of only
            one three-part question on a standardized checklist. HUD completed the entire
            management review in only two days. Our in-depth review concluded that the
            management agent did not follow HUD’s requirements for charging the properties
            frontline expenses and failed to maintain supporting documentation. See also,
            Comment 10.

Comment 2   We agree that many of the types of charges made by the management agent are
            allowable. However, we disagree with the reasonableness of the amounts charged
            to the individual properties. We are unable to comment regarding the work of any
            3rd party auditing firms since we do not have information regarding the scope of
            their reviews and have not reviewed their work.

Comment 3   The management agent’s justification and analysis for providing frontline services
            directly, rather than procuring them from an outside vendor, did not adequately
            support the charges. The management agent provided no explanation as to why it
            would take five additional full-time staff members to perform the tasks that the
            owners performed part time.

Comment 4   While we agree that most of the types of frontline charges made by the
            management agent fall within the types of charges the handbook cites as being
            allowable, we do not agree with the agent’s methodology for computing the
            charges or the total amounts charged to the HUD properties for frontline
            expenses.

Comment 5   We reviewed approximately a thousand pages of documentation the management
            agent provided in response to the draft report. We had already reviewed most of
            the documentation during our on-site work, and, in our opinion, the material was
            not sufficient to establish eligibility for the questioned costs in the draft report.
            We will provide the documents to the Greensboro Multifamily Hub for
            consideration during the management decision process.

Comment 6   HUD Handbook 4381.5 REV-2, Figure 6-2 states that eligible travel expenses
            incurred by frontline staff include making bank deposits, meeting with
            contractors, and attending training. The handbook specifically states that the
            management agent’s travel expenses to visit the project are costs that should be
            paid from the management fee.

Comment 7   HUD Handbook 4381.5 REV-2, Section 6.38(b)(3) further states that a
            reasonable hourly rate includes the hourly salary for the position and an
                                             16
              allocation for overhead expenses, and should not exceed the amount that would be
              paid to an on-site staff with similar experience [emphasis added]. The
              management agent has not supported that the $85 per hour salary rate was
              reasonable, i.e., that it did not exceed an amount that would be paid to someone
              with the appropriate bookkeeping and accounting experience.

Comment 8     The management agent is correct in stating that handbook 4381.5 REV-2 Section
              6.39(c)(1)(a) allows prorated charges for supervisory personnel providing
              oversight of centralized accounting and computer services for a project.
              However, the management agent has not provided acceptable support for the
              reasonableness of the charges made to the projects in accordance with Section
              6.39 (c)(1)(b).

Comment 9     Although the actual per unit charge was less than what the management agent
              claimed it could have charged with the phone and Internet included, we still
              consider the per unit charges ineligible. The phone and internet charges are
              ineligible and should be returned to each affected property.

Comment 10 HUD requested our office conduct a more in-depth review of the management
           agent’s supervision of its HUD assisted properties. That request expressed
           concern regarding whether the management agent’s charges were reasonable and
           necessary as required by HUD. The conclusions in this report are based solely on
           our audit work including our interpretation of the applicable HUD requirements;
           they are not dependent on any prior HUD or independent auditor reviews.

Comment 11 We thank the management agent for responding to the draft report and providing
           the additional documentation for our consideration. Based on our review of the
           documents, we did not find that it was necessary to revise the report.




                                             17
Appendix C

   BREAKDOWN OF QUESTIONED COSTS BY PROPERTIES

                                     Unsupported costs                         Ineligible costs

                                                       Charges
                              Charges based on        directly to                         Phone and
    Property name                 budgets             properties        Car allowance      internet            Totals
Alpha Arms                $            40,163     $        20,616       $       5,213    $           857   $       66,848
DeSoto Square             $            12,164     $        11,700       $       4,367    $           259   $       28,490
Easley Housing            $            15,205     $        13,041       $       4,553    $           324   $       33,124
Gee Corbett               $            14,870     $        23,942       $       5,570    $           317   $       44,699
The Grand at Day Point    $            60,774     $        22,253       $       4,396    $         1,296   $       88,720
The Grand on Julian       $            75,473     $                 -   $           -    $         1,610   $       77,083
The Grand in Kannapolis   $            95,485     $                 -   $           -    $         2,037   $       97,522
Greenleaf Grace           $            15,585     $                 -   $           -    $           332   $       15,918
Lakeview Apartments       $            15,205     $        12,986       $       4,540    $           324   $       33,056
Princeton Terrace         $            22,453     $                 -   $           -    $           479   $       22,932
Puller Place              $            91,232     $                 -   $           -    $         1,946   $       93,178
Saint James Plaza         $            14,779     $        23,947       $       5,573    $           315   $       44,614
Saint John Housing        $            13,685     $        23,202       $       5,491    $           292   $       42,670
Sandy Run                 $            58,700     $        52,648       $       8,732    $         1,252   $      121,332
Ujima Village             $            14,858     $        12,986       $       4,540    $           317   $       32,702
Washington Terrace        $                 -     $                 -   $           -    $             -   $            -
Williams DeLashmet        $             9,655     $        16,280       $       3,430    $           206   $       29,570
                          $           570,286     $       233,601       $      56,405    $        12,165   $      872,457




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