oversight

Lighthouse Inn, Pompano Beach, FL, an Assisted Living Facility Insured Under Section 232, Violated Its Executed Regulatory Agreement

Published by the Department of Housing and Urban Development, Office of Inspector General on 2013-09-13.

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

OFFICE OF AUDIT
REGION 4
ATLANTA, GA




               Lighthouse Inn in Pompano Beach, FL

               Assisted Living Facility Insured Under
                        Section 232 Program




2013-AT-1007                                   SEPTEMBER 13, 2013
                                                       Issue Date: September 13, 2013

                                                       Audit Report Number: 2013-AT-1007




TO:           Kelly M. Haines, Director, Office of Residential Care Facilities, HI
              Craig Clemmensen, Director, Departmental Enforcement Center, CACB



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

SUBJECT:      Lighthouse Inn, Pompano Beach, FL, an Assisted Living Facility Insured Under
              Section 232, Violated Its Executed Regulatory Agreement

         Attached is the U.S. Department of Housing and Urban Development (HUD), Office of
Inspector General’s (OIG) final results of our review of Lighthouse Inn, an assisted living
facility insured under Section 232 of the National Housing Act.

        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.
                                           Date of Issuance: September 13, 2013
                                           Lighthouse Inn, Pompano Beach, FL, an Assisted Living
                                           Facility Insured Under Section 232, Violated Its Executed
                                           Regulatory Agreement



Highlights
Audit Report 2013-AT-1007


 What We Audited and Why                    What We Found

We audited Lighthouse Inn, an assisted     The owner of Lighthouse Inn did not comply with the
living facility located in Pompano         regulatory agreement and HUD requirements.
Beach, FL. In April 2008, the U.S.         Specifically, it did not ensure (1) that all disbursements
Department of Housing and Urban            were eligible and supported, (2) that all receipts from
Development (HUD) insured the $5.1         tenants were eligible, (3) prompt mortgage payments,
million mortgage on the property under     (4) the annual submission of audited financial reports,
Section 232 of the National Housing        (5) proper maintenance of the tenant security deposit
Act. In September 2010, the facility       account, (6) the accuracy of books and accounts, and
defaulted on the mortgage loan. Our        (7) that the facility was in good repair and condition.
overall audit objective was to determine   These conditions occurred because the owner
whether the owner of Lighthouse Inn        disregarded the stipulations in the executed regulatory
complied with the executed regulatory      agreement. Consequently, Lighthouse Inn disbursed
agreement and HUD requirements.            approximately $147,000 in ineligible costs and
                                           $208,000 in unsupported costs and collected $10,950
                                           in ineligible fees. In addition, HUD paid a claim of
                                           nearly $5.8 million to the lender on February 20, 2013.
                                           Then, on August 20, 2013, HUD sold the note on the
                                           facility for a little over $1 million.
 What We Recommend

We recommend that the Director of the
Office of Residential Care Facilities
require the owner of Lighthouse Inn
reimburse HUD’s Federal Housing
Administration fund $146,983 in
ineligible costs and $208,154 in
unsupported costs if it cannot provide
documentation to support that they are
eligible and return the $10,950 in
collected fees to tenants. Also, we
recommend that the Director of the
Departmental Enforcement Center
pursue civil money penalties and
administrative sanctions against the
owner for regulatory agreement
violations.
                           TABLE OF CONTENTS

Background and Objective                                                         3

Results of Audit
      Finding: The Owner of Lighthouse Inn Did Not Comply With Its Regulatory
      Agreement                                                                  4

Scope and Methodology                                                           13

Internal Controls                                                               16

Follow-up on Prior Audits                                                       18

Appendixes
A.    Schedule of Questioned Costs                                              19
B.    Auditee Comments and OIG’s Evaluation                                     20
C.    List of Ineligible Disbursements                                          28
D.    List of Ineligible Fees Collected                                         29




                                           2
                      BACKGROUND AND OBJECTIVE

Lighthouse Inn is an assisted living facility located in Pompano Beach, FL. The U.S.
Department of Housing and Urban Development (HUD) insured the $5.1 million mortgage on
the facility under the Section 232 program. Section 232 of the National Housing Act authorizes
the Federal Housing Administration (FHA) to insure mortgages made by private lenders to
finance the development of nursing homes, intermediate care facilities, board and care homes,
and assisted living facilities. The Office of Residential Care Facilities, under HUD’s Office of
Healthcare Programs, manages the Section 232 program. Federal regulations at 24 CFR (Code
of Federal Regulations) 200.105(a) state that as long as HUD is the insurer or holder of the
mortgage, HUD shall regulate the borrower by means of a regulatory agreement providing terms,
conditions, and standards established by HUD, or by other prescribed means.

On August 1, 2007, Smith Health Care Properties, LLC, purchased Lighthouse Inn with a bridge
loan of $4.85 million. Lighthouse Inn, consisting of two facilities approximately 1.6 miles apart,
operated as assisted living facilities before their purchase. Lighthouse Inn North contains 42
beds within 2 separate buildings, and Lighthouse Inn South contains 33 beds within 1 building.

On August 23, 2007, Smith Health Care Properties submitted an application to HUD for a first
mortgage loan to be insured under the Section 232 program. On April 22, 2008, HUD insured
the mortgage on the Lighthouse Inn properties and executed a regulatory agreement with Smith
Health Care Properties. The $5.1 million mortgage paid off the $4.85 million bridge loan.

Lighthouse Inn was managed by an onsite administrator at the North and South facilities.
Included among the staff were the marketing director; certified nursing assistants; and
housekeeping, maintenance, and food preparation staff. Lighthouse Inn’s financial operations
were performed from the owner’s office in Aurora, IL. The financial records were located at the
Aurora, IL office.

Smith Health Care Properties, established in April 2007, was managed by a father and son who
each held a 50 percent ownership in the corporation. In April 2011, the son became the sole
managing member. Smith Health Care – Clearwater, LLC, managed by the son, also purchased
an assisted living facility in Clearwater, FL, on February 25, 2008. The mortgage note on this
facility is not insured by HUD.

We performed our audit fieldwork from December 2012 to June 2013. On June 10, 2013, HUD
indicated that it would offer the note on the facility for sale on July 31, 2013. On August 20,
2013, HUD sold the note. By final report issuance, the facility is no longer in HUD’s portfolio.
The report documents what we found while the facility was insured by HUD and the owner was
still obligated by the regulatory agreement.

Our overall audit objective was to determine whether the owner of Lighthouse Inn complied with
the executed regulatory agreement and HUD requirements.



                                                3
                                       RESULTS OF AUDIT


Finding: The Owner of Lighthouse Inn Did Not Comply With Its
Regulatory Agreement
The owner of Lighthouse Inn did not comply with its regulatory agreement and HUD
requirements. It did not ensure (1) that all disbursements were eligible and supported, (2) that all
receipts from tenants were eligible, (3) that mortgage payments were prompt, (4) the annual
submission of audited financial reports, (5) proper maintenance of the tenant security deposit
account, (6) the accuracy of books and accounts, and (7) that the facility was in good repair and
condition. These conditions occurred because the owner disregarded the stipulations in the
executed regulatory agreement. Consequently, Lighthouse Inn disbursed approximately
$147,000 in ineligible costs and $208,000 in unsupported costs and collected $10,950 in
ineligible fees.


    Ineligible and Unsupported
    Disbursements

                  The owner of Lighthouse Inn did not ensure that all disbursements were for
                  reasonable operating expenses and distributions to the owner were made only
                  from surplus cash. Twenty-four of the thirty-five disbursements reviewed for the
                  period January 1, 2010, through October 31, 2012, violated the regulatory
                  agreement and HUD regulations.

                  Paragraph 6(b) of the regulatory agreement stated that the owners could not,
                  without HUD’s prior written approval, assign, transfer, dispose of, or encumber
                  any personal property or pay out funds for other than reasonable operating
                  expenses and necessary repairs except from surplus cash. 1 However, questioned
                  disbursements included

                      •    Six disbursements to the owner’s non-HUD-insured assisted living facility
                           to help pay for costs such as its mortgage and payroll expenses,
                      •    Five disbursements made on behalf of the other assisted living facility to
                           pay for costs including the mortgage and water bills, and
                      •    Three disbursements to payees for other than reasonable operating
                           expenses. For example, one of the disbursements was to pay for legal


1
  Paragraph 13(f) of the regulatory agreement defined surplus cash as any cash remaining after (1) the payment of all
sums due or required to be paid under the terms of the mortgage or note, all amounts required to be deposited in the
reserve fund for replacements, and all obligations of the project other than the insured mortgage and (2) the
segregation of an amount equal to all special funds required to be maintained by the project and all tenant security
deposits held.

                                                         4
                          services to negotiate the settlement of the State agency’s revocation of
                          Lighthouse Inn’s assisted living facility license.

                 Additionally, paragraph 6(e) of the regulatory agreement stated that the owners
                 could not, without HUD’s prior written approval, make, receive, and retain any
                 distribution2 of assets or income of the project except from surplus cash so long as
                 there was no default under the agreement or mortgage. Specifically, the
                 questioned disbursements included

                     •    Five distributions to the owner to repay funds he contributed to the
                          facility, and
                     •    Five distributions to the owner’s other companies to repay funds he or the
                          other company contributed.

                 Lighthouse Inn was not in a surplus cash position to make any distributions to or
                 on behalf of the owner or for unreasonable operating expenses. The owner stated
                 that Lighthouse Inn had not computed surplus cash and that it did not generate
                 surplus cash. The 2010 and 2011 financial information provided indicated that
                 the facility generated a cash deficiency for both years. Additionally, HUD did not
                 authorize Lighthouse Inn to make such disbursements. Thus, the 24 unauthorized
                 disbursements, totaling $146,983, were ineligible (see appendix C).

                 The check detail report showed that there were additional disbursements, totaling
                 $208,154, to some of the same payees with questioned ineligible costs. Because
                 the description and amount of the additional disbursements to these same payees
                 were similar to those questioned as ineligible, and explanations from the owner or
                 staff indicated that they were for the same purpose for which we questioned the
                 ineligible costs, we assessed these other disbursements as unsupported costs.
                 Therefore, Lighthouse Inn must support that these additional costs comply with
                 the regulatory agreement. The table below summarizes the questioned ineligible
                 and unsupported costs.




2
  Section 2-10 of HUD Handbook 4370.2 defined distributions as any withdrawal or taking of cash or any assets of
the project other than for the payment of reasonable expenses necessary to the operation and maintenance of the
project.

                                                        5
                                                                                           Total
                                                          Ineligible     Unsupported     questioned
                         Disbursements to:                  cost             cost          costs
                 Owner                                       $ 42,042         $ 23,868      $ 65,910

                 Non-HUD-insured assisted living            $ 43,314          $ 89,989      $ 133,303
                 facility
                 Payees on behalf of the noninsured         $ 28,140          $ 41,422      $ 69,562
                 assisted living facility
                 Owner’s other companies                    $ 27,500          $ 23,900      $ 51,400

                 Payees for unreasonable operating           $   5,987        $ 28,975      $ 34,962
                 expenses

                                Total                       $146,983         $ 208,154      $ 355,137

             Similarly, a previous Office of Inspector General audit report, issued on April 26,
             2011, questioned unsupported costs of $386,562 for potential ineligible transfers,
             unauthorized owner distributions, and unsupported payments to the owner and
             affiliated entities (see Follow-up on Prior Audit section). Costs questioned in the
             previous report are not included in the costs questioned in this report.

Ineligible Fee

             The owner of Lighthouse Inn charged some of its tenants an ineligible fee.
             Paragraph 6(g) of the regulatory agreement stated that the owners could not,
             without HUD’s prior written approval, require, as a condition of the occupancy or
             leasing of any unit in the project, any consideration or deposit other than the
             prepayment of the first month’s rent plus a security deposit in an amount not to
             exceed 1 month’s rent to guarantee the performance of the covenants of the lease.

             In 2010, Lighthouse Inn stopped collecting tenant security deposits and instead
             collected a nonrefundable fee to pay for any repairs or damages caused by the
             tenant after the tenant vacated the unit. The amount the tenant paid ranged from
             $0 to $500 and depended on the tenant’s economic condition. According to
             Lighthouse Inn’s general ledger, for the period January 1, 2010, through
             September 30, 2012, it collected such fees from 22 tenants totaling $10,950 (see
             appendix D). However, HUD did not approve the collection of the fee.
             Therefore, the practice violated the regulatory agreement, and the fees were
             inappropriately collected.

Late Mortgage Payments

             The owner of Lighthouse Inn did not make prompt mortgage payments and
             defaulted on its HUD-insured loan. It also did not continue to maintain a reserve
             fund for replacements. Paragraphs 1 and 2(a) of the regulatory agreement

                                                      6
required the owner to promptly make all payments due under the note and
mortgage and establish or continue to maintain a reserve fund for replacements
monthly. Lighthouse Inn made its first mortgage payment in June 2008.
Beginning with the August 2009 payment, it was consistently late in making its
mortgage payments. The August 2010 mortgage payment was the last payment
made on the loan, resulting in a default of the loan as of September 1, 2010. The
table below details the delinquent payments made on the mortgage.

         Mortgage          Mortgage            Payment              Days
         due date          paid date           amount            delinquent
                                                                     (a)
         08/01/2009         08/17/2009              $43,132            2
         09/01/2009         09/16/2009              $43,132            1
         10/01/2009         10/16/2009              $43,132            1
         11/01/2009         12/22/2009          $44,041 (b)           37
         12/01/2009         12/22/2009          $44,041 (b)            7
         01/01/2010         02/17/2010              $46,541           33
         02/01/2010         03/17/2010              $44,041           30
         03/01/2010         04/13/2010              $46,541           29
         04/01/2010         05/13/2010              $48,296           28
         05/01/2010         07/06/2010              $48,296           52
         06/01/2010         08/11/2010              $43,041           57
         07/01/2010         09/17/2010           $43,000 (c)          64
         07/01/2010         10/19/2010           $ 2,765 (c)          96
         08/01/2010         01/24/2011          $10,000 (d)          162
         08/01/2010         04/13/2011          $15,000 (d)          241
         08/01/2010       06/14/2011 (e)        $20,765 (d)          303
       Notes:
       (a) The loan became delinquent when the mortgage payment was not
            received by the 15-day grace period, or on the 16th of the month.
       (b) The funds to pay the mortgage came from the reserve fund for
            replacements.
       (c) The two payments comprised the July 2010 mortgage payment.
       (d) The three payments comprised the August 2010 mortgage
            payment.
       (e) This was the last mortgage payment made on the insured loan.

The lender assigned the insured loan to HUD on August 15, 2012. On February
20, 2013, HUD paid a final settlement claim to the lender for approximately $5.8
million.

The owner explained that Lighthouse Inn experienced a decline in revenue
because of the slumping economy, which decreased the ability of many tenants to
pay the full rent. He also stated that there was a decrease in the State’s financial
assistance provided to the facility’s tenants. Due to the shortfall in income, the
owner helped subsidize Lighthouse Inn’s operations. Lighthouse Inn’s 2011 year-
end financial information showed that the facility owed the owner more than
$349,000.



                                     7
                 The decrease in revenue may have contributed to the delinquent mortgage
                 payments and subsequent default. Yet, the bank statements of Lighthouse Inn’s
                 operating accounts support that it had the funds to pay some or the entire monthly
                 mortgage amount for several of the months after it made its last payment. The
                 July 2011 to August 2012 bank statements showed that the facility had daily
                 balances that exceeded the mortgage amount for 10 of the 14 months.

    Audited Financial Statements
    Not Submitted

                 The owner of Lighthouse Inn did not submit annual audited financial reports that
                 complied with HUD requirements. Paragraph 9(e) of the regulatory agreement
                 required the owner to furnish HUD with a complete annual financial report based
                 upon an examination of the books and records of the borrower prepared in
                 accordance with HUD requirements. In November 2010, Lighthouse Inn engaged
                 an independent auditor to perform an audit of its financial statements. Although
                 Lighthouse Inn submitted its 2008 audited financial statements on April 4, 2012,
                 the report was several years past the due date, and the independent auditor did not
                 express an opinion on the financial statements because the facility provided
                 insufficient records. Lighthouse Inn did not submit audited financial statements
                 for other years. The owner stated that the facility did not have the financial
                 resources to continue to hire an independent auditor to complete the audited
                 financial statements for later years. The effective monitoring of a facility’s
                 financial performance and implementation of prompt corrective actions by HUD
                 to protect the solvency of the FHA fund is dependent on the provision of accurate
                 audited financial reports to HUD in a timely manner.

    Tenant Security Deposits
    Improperly Maintained


                 The owner of Lighthouse Inn improperly maintained its tenant security deposits.
                 Sections 2-9A and 2-9B of HUD Handbook 4370.2 3 required that funds in the
                 security deposit account not be commingled with other funds, and that
                 disbursements be only for refunds to tenants and for payment of appropriate
                 expenses incurred by the tenant. Lighthouse Inn commingled funds collected
                 from tenant security deposits with other funds and allowed their use for
                 unauthorized purposes. Specifically, for three of four transactions reviewed,

                     •   Two were transfers of security deposit funds to the operating and payroll
                         accounts and used for operating and payroll costs; and
                     •   One was disbursed as a loan to the owner’s other assisted living facility.

3
 HUD Handbook 4370.2, Financial Operations and Accounting Procedures for Insured Multifamily Projects,
applies to HUD-insured, coinsured, and HUD-held multifamily rental projects under a charter or regulatory
agreement permitting HUD to exercise control over project administration and operation.

                                                       8
           Additionally, paragraph 6(g) of the regulatory agreement required that funds
           collected as security deposits be kept separate and apart from all other funds in the
           project in a trust account that must at all times equal or exceed the sum of all
           outstanding obligations of the account. Our reconciliation indicated that although
           the security deposit bank account had a zero balance, the general ledger showed
           that Lighthouse Inn owed tenants security deposits totaling more than $65,000.
           Our review of five other security deposit disbursements showed that Lighthouse
           Inn had to return the tenants’ security deposits from its operating account rather
           than the security deposit account because the latter account did not contain
           sufficient funds to make the payments.

           When Lighthouse Inn allowed the use of the tenant security deposit funds for
           unauthorized purposes, the result was insufficient funds in the security deposit
           account to cover the obligations due to tenants. Consequently, by not maintaining
           the funds separately and using them for authorized purposes, the facility did not
           ensure that funds were available.

           In response to our request for information, Lighthouse Inn indicated that there
           were five tenants still due security deposits totaling $9,875 as of February 11,
           2013. After our inquiry, Lighthouse Inn started the process of removing the
           liability from its books by applying the security deposit to future rent payments
           for four tenants and by requesting and obtaining an agreement with one tenant to
           not increase the rent in exchange for the security deposit.

Inaccurate Books and Accounts

           The owner of Lighthouse Inn did not accurately maintain its books and accounts.
           Paragraph 9(c) of the regulatory agreement required that the mortgaged property,
           equipment, books, contracts, and records be maintained at all times in reasonable
           condition for proper audit. The audit of the 2008 financial statements evidenced
           that the facility’s records were not in reasonable condition for audit. The audit
           was substantially delayed due to difficulties in obtaining financial data, the
           inability of the owner to recall the reason for certain disbursements, and the need
           to rebuild the financial history and an accounting system. Although it took 16
           months to complete the audit, the independent auditor could not express an
           opinion because insufficient records were provided.

           In addition, paragraph 9(d) of the regulatory agreement required that the books
           and accounts of the operations of the mortgaged property be kept in accordance
           with HUD requirements. Specifically, section 2-3B of HUD Handbook 4370.2
           required books and accounts of the project to be accurate. Our reconciliations of
           the tenant security deposit bank accounts and general ledger accounts showed that
           the general ledger did not accurately reflect what was in the security deposit bank
           accounts, and the balance on the general ledger security deposit asset accounts did
           not agree with the contra liability accounts.


                                             9
               The owner stated that staff turnover in accountants and the lack of a skilled
               accountant contributed to the poor conditions of the books and records. By not
               maintaining its books and accounts accurately and in a reasonable condition,
               Lighthouse Inn could not assure HUD of its true financial condition and may have
               made management decisions based on faulty financial information.

Physical Condition Not Up To
Standards

               The owner of Lighthouse Inn did not maintain the facility to HUD standards.
               Paragraph 7 of the regulatory agreement required the owner to maintain the
               mortgaged premises, accommodations, and the grounds and appurtenant
               equipment in good repair and condition. Owners of HUD housing must maintain
               the housing in a manner that meets the physical condition standards to be
               considered decent, safe, sanitary, and in good repair as stipulated in 24 CFR
               5.703. HUD’s Real Estate Assessment Center conducts physical inspections on
               HUD-owned, -insured, or -subsidized rental housing to assess the condition of its
               properties and ensure they are maintained in safe and sanitary conditions. The
               Real Estate Assessment Center stated that a score of below 60 may indicate that
               the tenants are not receiving the quality of housing to which they are entitled.

               Lighthouse Inn received a score of 63 in 2010, 45 in 2011, and 39 in 2012. In
               each year, the inspector cited one or more exigent or fire, health, and safety
               deficiencies. The decrease in scores stemmed from an increase in the number of
               deficiencies cited over the years. If tenants are not living in decent, safe, and
               sanitary conditions, it may lead to financial and legal risks to the facility and the
               FHA fund. Additionally, some tenants residing in the facility were subject to
               exigent health and safety risks.

Other Issues


               Lighthouse Inn was in jeopardy of losing its assisted living facility license with
               the State. Lighthouse Inn has operated under conditional licensure since October
               2011. In March 2013, the State agency overseeing the licensing indicated its
               plans to proceed in revoking Lighthouse Inn’s license based on 11 deficiencies
               cited during agency inspections. On June 3, 2013, the agency amended its intent
               to deny the facility’s license on the basis of a demonstrated pattern of deficient
               performance, not meeting licensure requirements, and not paying an outstanding
               fine.

               In addition, on June 10, 2013, HUD advised the owner that HUD will be offering
               the mortgage loan on the Lighthouse Inn property in a competitive note sale,
               scheduled for July 31, 2013. On August 6, 2013, HUD accepted a bid to purchase
               the note on the facility for $1,046,000 and on August 20, 2013, HUD sold the
               note. Given the sale, the owner is no longer under the obligations of the

                                                 10
             regulatory agreement. We adjusted the recommendations to reflect this change;
             however, the owner will remain liable for actions taken while the facility was
             insured by HUD.

Conclusion

             The owner of Lighthouse Inn did not comply with its regulatory agreement and
             HUD requirements. Specifically, it did not (1) ensure that all disbursements were
             eligible and supported, (2) ensure that all receipts from tenants were eligible, (3)
             make prompt mortgage payments, (4) submit the annual audited financial reports,
             (5) properly maintain the tenant security deposit account, (6) ensure the accuracy
             of books and accounts, and (7) maintain the facility in good repair and condition.

             Consequently, the facility disbursed $146,983 in ineligible costs and $208,154 in
             unsupported costs, collected $10,950 in ineligible fees from tenants, and had
             inaccurate books and accounts.

             No distributions to the owner are allowed if the owner cannot show that the
             project generated surplus cash. Although the economy or reduction in State
             funding caused Lighthouse Inn’s revenue to decrease, distributions to the owner
             and his other companies also contributed to the facility’s poor financial condition.

             When HUD insured the mortgage under the Section 232 program, the owner
             executed a regulatory agreement with HUD, agreeing to the stipulations stated
             within. In violating these requirements in the regulatory agreement, the owner
             chose to disregard such stipulations. The owner’s disregard of the regulatory
             agreement provisions to ensure the proper management of the facility increased
             HUD’s risk.

             On February 20, 2013, HUD paid a claim to the lender for nearly $5.8 million.
             Subsequently, on August 20, 2013, HUD sold the note on the facility whereby the
             owner is no longer under the obligations of the regulatory agreement. The
             recommendations reflect this change.

Recommendations

             We recommend that the Director of the Office of Residential Care Facilities

             1A. Require the owner of Lighthouse Inn to reimburse HUD’s Federal Housing
                 Administration insurance fund $146,983 for the ineligible disbursements
                 cited in this report.

             1B. Require the owner of Lighthouse Inn to provide documentation to support the
                 $208,154 in unsupported disbursements cited in this report or reimburse


                                              11
     HUD’s Federal Housing Administration insurance fund for the applicable
     portion.

1C. Require the owner of Lighthouse Inn to reimburse the 22 tenants for ineligible
    fees collected totaling $10,950, from non-project funds.

We also recommend that the Director of the Departmental Enforcement Center

1D. Pursue civil money penalties and administrative sanctions, as appropriate,
    against the owner or their principal for their part in the regulatory agreement
    violations cited in this report.




                                 12
                         SCOPE AND METHODOLOGY

Our objective was to determine whether the owner of Lighthouse Inn complied with the executed
regulatory agreement and HUD requirements. Specifically, our scope focused on Lighthouse
Inn’s (1) promptness in making its mortgage payments, (2) submission of annual audited
financial reports, (3) recording and depositing of receipts, (4) eligibility of disbursements, (5)
maintenance of a separate tenant security deposit account, (6) continuance of an active assisted
living facility license, and (7) physical condition.

Our review generally covered the period January 1, 2010, through October 31, 2012, and was
extended as necessary. We performed the work from December 2012 to June 2013, at the Miami
HUD audit office and at Lighthouse Inn. To accomplish our objective, we reviewed the
executed regulatory agreement, relevant Federal regulations, and HUD guidance; performed
Internet research; interviewed HUD officials to obtain information about Lighthouse Inn and
discuss areas of concern; and interviewed the owner and staff of Lighthouse Inn to understand
the operational and financial procedures and to obtain clarifications during the fieldwork. More
specifically,

   •   To determine Lighthouse Inn’s promptness in making its mortgage payments, we
       analyzed the loan and escrow activity reports, for the period April 22, 2008 through
       October 30, 2012, and April 1, 2008 through November 20, 2012, respectively, and
       communicated with lender officials to obtain clarification about the reports.

   •   To determine whether Lighthouse Inn submitted its audited financial reports, we accessed
       HUD’s integrated Real Estate Management system to obtain relevant reports and
       reviewed written comments made by HUD officials. We also reviewed Lighthouse Inn’s
       2008 audited financial statements.

   •   To test the eligibility of disbursements, we selected our sample using Lighthouse Inn’s
       “check detail” report for the period January 1, 2010, to October 31, 2012. We selected
       our sample by first focusing on certain payees. The payees selected were (1) the owner
       and any affiliated entities; (2) those payees that appeared not to have been paid for an
       ordinary expense of the project or that appeared questionable; and (3) individuals who
       were regularly paid over time. We identified 20 payees for further review based on the
       above factors. Disbursements to the 20 payees totaled $778,649, which comprised 16.2
       percent of the total disbursements for the audit period. From the 20 payees, we selected
       35 disbursements based on a combination of the dollar amount, the date, and the
       comments or descriptions indicated in the check detail report. For example, a
       disbursement with a lower dollar amount was selected because of what was stated in the
       check detail description or because the disbursement was more recent. The 35
       disbursements totaled $174,310, or 29 percent of the total disbursements to the 20




                                               13
        payees. 4 We reviewed printouts from Lighthouse Inn’s accounting system, copies of
        invoices, and written explanations to support the disbursements.

        We found that 24 of the 35 disbursements were ineligible. The 24 disbursements were
        made out to 11 payees. The check detail report listed other disbursements to eight of the
        payees. We questioned the additional disbursements as unsupported costs because (1) the
        descriptions and disbursement amounts in the check detail report are similar to the
        purpose and amounts for those we questioned as ineligible costs, and (2) the explanation
        provided by the owner or staff indicated that disbursements made to some of the payees
        were for the same purpose for which we questioned the ineligible cost. The additional
        disbursements to the eight payees totaled $208,154.

    •   To determine whether Lighthouse Inn properly maintained its tenant security deposits, we
        reconciled the general ledger security deposit asset accounts with the contra liability
        accounts and the general ledger security deposit asset accounts with the amounts in the
        bank statements. The general ledger covered the period January 1, 2010 through
        September 30, 2012, and the security deposit bank statements covered the period January
        1, 2010 through March 31, 2011, with the account closing on March 4, 2011. We also
        selected for review transactions from the five general ledger security deposit accounts
        with disbursements for the period, for a total of nine transactions. The nine transactions
        total $118,956, or 65 percent of the total dollar amount. For four security deposit
        accounts, two transactions with the largest dollar amount were selected and for one
        security deposit account, the single transaction was selected. We reviewed printouts from
        Lighthouse Inn’s accounting system, tenant rent contract, and written explanation to
        support the transactions.

    •   To determine whether Lighthouse Inn operated under an active license, we performed
        research on Florida’s Agency for Health Care Administration Web site and also obtained
        information from Lighthouse Inn’s attorney.

    •   To determine the physical condition of Lighthouse Inn, we reviewed the inspection
        reports prepared by HUD’s Real Estate Assessment Center. We also performed onsite
        visits of Lighthouse Inn North and Lighthouse Inn South to observe the deficiencies cited
        by the 2012 Real Estate Assessment Center inspection report.

Given our methodology, the results of our review apply only to the receipts, disbursements, and
security deposits selected for review and cannot be projected to the universe of the receipts
received, disbursements made, or security deposits recorded during the period.

We assessed whether disbursed and receipt amounts were accurately recorded in the financial
system by tracing them to the bank statements to ensure that the disbursed amount entered into
the financial system was the actual amount paid out and that the receipt amount entered into the

4
 The disbursements to the 20 payees totaling $778,649 included those disbursements that were questioned in the
prior Office of Inspector General (OIG) audit noted in the Follow-up on Prior Audits section of the report.
Subtracting the costs questioned in the prior audit, the disbursements to the 20 payees totaled $599,065. The 35
disbursements selected did not include any of the costs questioned in the prior audit.

                                                        14
financial system was the actual amount deposited. Our review showed that the disbursed and
receipt amounts recorded in Lighthouse Inn’s financial system matched the amounts contained in
the bank statements and, thus, could be relied upon to support the unsupported and ineligible
costs questioned in the audit report.

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




                                              15
                              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 laws and regulations - Policies and procedures that
                   management has implemented to reasonably ensure that program
                   implementation is consistent with laws and regulations.
               •   Relevance and reliability of information - Policies and procedures that
                   management has implemented to reasonably ensure that operational and
                   financial information used for decision making and reporting externally is
                   relevant, reliable, and fairly disclosed in reports.
               •   Safeguarding of assets - Policies and procedures that management has
                   implemented to reasonably prevent and promptly detect unauthorized
                   acquisition, use, or disposition of assets and resources.

               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.




                                                 16
Significant Deficiencies

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

             •   The owner of Lighthouse Inn lacked the financial and operational controls to
                 ensure that the facility complied with its regulatory agreement and HUD
                 requirements.




                                              17
                   FOLLOW-UP ON PRIOR AUDITS

The Office of Healthcare
Programs’ Monitoring of the
Section 232 Program
2011-FW-0002

           On April 26, 2011, the Office of Inspector General (OIG) issued a report based on
           its audit of HUD’s Office of Healthcare Programs. The audit was conducted to
           determine whether the Office of Healthcare Programs had implemented adequate
           controls to properly monitor Section 232-insured mortgages. OIG cited the Office
           of Healthcare Programs for being unaware of important ongoing regulatory
           violations and used the financial review of Lighthouse Inn and other facilities to
           support its assessment. The review of Lighthouse Inn’s financial records from
           January 2009 to September 2010 revealed potential ineligible transfers,
           unauthorized owner distributions, ineligible owner health insurance payments,
           and unsupported payments for or on behalf of the owner and other entities that
           may have been affiliated with the owner, resulting in unsupported costs of
           $386,562.

           As a result of the audit, OIG recommended that the Office of Healthcare
           Programs review the $386,562 in unsupported costs identified for Lighthouse Inn,
           determine the costs’ validity, and take appropriate action.

           On May 10, 2013, the Office of Residential Care Facilities issued a letter to the
           owner of Lighthouse Inn demanding the repayment of these unsupported costs.
           The final action target date to resolve the recommendation was revised to June 30,
           2013.

           As of August 27, 2013, the management decision on the recommendation was
           overdue and the recommendation remained open.




                                           18
                                   APPENDIXES

Appendix A

                 SCHEDULE OF QUESTIONED COSTS


                  Recommendation
                         number          Ineligible 1/    Unsupported 2/
                       1A                  $ 146,983
                       1B                                       $ 208,154
                       1D                  $ 10,950             ________

                        Total              $ 157,933            $ 208,154


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.




                                             19
Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION

Ref to OIG Evaluation   Auditee Comments




Comment 1




                         20
Comment 2




            21
Comment 3




Comment 4




Comment 4




Comment 5




            22
Comment 6




Comment 7




Comment 8




Comment 9




            23
Comment 9

            OIG Evaluation of Auditee Comments




                           24
                          OIG Evaluation of Auditee Comments

Comment 1   The auditee did not agree with OIG’s assessment of the reviewed disbursements,
            such as the disbursements to the owner’s non-HUD-insured assisted living facility
            and his other companies, an attorney, an entertainment company, and the fire
            marshal.

            The owner made ineligible disbursements totaling $146,983. Paragraph 6(e) of
            the regulatory agreement states that owners shall not without the prior written
            approval of HUD make, or receive and retain, any distribution of assets or any
            income of any kind of the project except surplus cash and except under certain
            conditions. Since the owner did not receive written approval from HUD and the
            distribution to the owner and his other companies did not come from surplus cash,
            these disbursements violated the stipulations of the regulatory agreement and thus
            are ineligible.

            The OIG assessed that the attorney’s fees incurred on contesting the State
            agency’s determination to deny Lighthouse Inn’s license, based on the facility’s
            failure to pass inspections and numerous license violations, to be ineligible. The
            billing statement showed that the attorney worked on settlement negotiations to
            retain Lighthouse Inn North’s license and preparing drafts for continuances. In
            addition, OIG questioned a portion of the disbursement to the fire marshal
            because the charge related to the owner’s Illinois office which, according to a
            Lighthouse Inn staff, operated three of the owner’s other companies. OIG
            determined that Lighthouse Inn should have only paid a portion of the cost.
            Further, OIG did not question the disbursement to the entertainment company.

Comment 2   The auditee did not agree with OIG’s assessment that the fees collected from
            tenants are ineligible. It stated the fee was charged in lieu of a security deposit
            and was used to enhance the value of the property to the respective tenant.

            The owner was not allowed to collect a fee in lieu of a security deposit without
            written approval from HUD. Paragraph 6(g) of the regulatory agreement states
            that owners shall not without the prior written approval of HUD require, as a
            condition of the occupancy or leasing of any unit in the project, any consideration
            or deposit other than the prepayment of the first month's rent plus a security
            deposit in an amount not in excess of one month's rent. Since the owner did not
            receive written approval from HUD, the $10,950 in fees collected from the 22
            tenants was not an eligible receipt.

Comment 3   The auditee did not disagree that it made late mortgage payments and defaulted on
            its loan. It reasoned that because HUD did not allow a loan modification to the
            owner, the owner was forced to default.

            It is indeterminate whether a modification of the HUD loan would have prevented
            the late mortgage payments and subsequent default of the loan. Additionally, had

                                              25
            the facility made consistent partial payments, at an amount that would have
            resulted if the desired loan modification occurred, it could have shown HUD that
            Lighthouse Inn can remain solvent if HUD approved the loan modification.
            Lighthouse Inn’s bank statements, for the months after it stopped making
            mortgage payments, showed that there were funds available to make, at least,
            partial mortgage payments. However, the owner stopped making payments
            toward the mortgage in July 2011, allowing the loan to go into default and
            eventually be assigned to HUD for claim.

Comment 4   The auditee refuted that financial statements were not submitted and reasoned that
            the owner did not know at the time that the information submitted did not comply
            with HUD requirements.

            Paragraph 9(e) of the regulatory agreement requires the mortgagor to provide
            HUD with a complete annual financial report based upon an examination of its
            books and records in accordance with HUD requirements. Although the auditee
            provided financials, they were not audited as required. In October 2010, the
            owner was made aware that he had not provided HUD with compliant audited
            financial statements. In November 2010, the owner engaged an independent
            auditor to perform an audit of the facility’s financial statements for the period
            ending December 31, 2008. The 2008 audited financial statements were
            submitted on April 4, 2012, but the independent auditor did not express an
            opinion on the financial statements because the facility provided insufficient
            records. Audited financial statements for later years were not submitted.

Comment 5   The auditee disputed that security deposit funds were commingled and stated that
            the owner maintained sufficient records.

            Sections 2-9A and 2-9B of HUD Handbook 4370.2 require that funds in the
            security deposit account not be commingled with other funds and that
            disbursements be only for refunds to tenants. OIG’s review of three transactions
            supports the violation of this requirement. In addition, the OIG report did not
            state that the owner did not maintain sufficient records on tenants’ security
            deposit amounts. The report indicates that the owner allowed the use of operating
            funds to return tenants’ security deposits in violation of paragraph 6(g) of the
            regulatory agreement, which requires any funds collected as security deposits be
            kept separate and apart from all other project funds.

Comment 6   The auditee disagreed with OIG’s assessment that books and accounts were
            inaccurate.

            The OIG report states that the owner violated paragraphs 9(c) and 9(d) of the
            regulatory agreement and supported the violations with the audit of the 2008
            financial statements performed by the independent auditor who could not express
            an opinion on them because of the condition of the records; and the inaccurate
            recording of tenants’ security deposits in the general ledger. Because Lighthouse

                                            26
            Inn did not provide sufficient records, the independent auditor could not express
            an opinion on the financial statements. In addition, the reconciliation of the
            tenant security deposit bank accounts and general ledger accounts showed that the
            general ledger did not accurately reflect what was in the security deposit bank
            accounts, and the balance on the general ledger security deposit asset accounts did
            not agree with the contra liability accounts. Therefore, the books and accounts for
            Lighthouse Inn were inaccurate.

Comment 7   The auditee disagreed with OIG’s assessment that the facility was not maintained
            to HUD standards.

            OIG based its assessment on the 2010 through 2012 reports prepared by HUD’s
            Real Estate Assessment Center on physical inspections performed on the facility.
            Lighthouse Inn received decreasing scores of 63 in 2010, 45 in 2011, and 39 in
            2012. In each year, the inspector cited one or more exigent or fire, health, and
            safety deficiencies.

Comment 8   The auditee disputed that Lighthouse Inn’s license is in jeopardy.

            The OIG report states that Lighthouse Inn was in jeopardy of losing its license
            based on the June 3, 2013, letter from the State agency which amended its intent
            to deny the facility’s license, not based on the 11 deficiencies, but on a
            demonstrated pattern of deficient performance, not meeting licensure
            requirements, and not paying an outstanding fine. The auditee provided no
            evidence that the State agency retracted its intent or that the violations supporting
            its basis were cleared.

Comment 9   The auditee disagreed with OIG’s methodology in obtaining the review sample
            and thus contested the results from the sample. The auditee stated a full audit of
            the books was not conducted and a small sample set is insufficient.

            One of the areas reviewed to determine whether the owner complied with the
            regulatory agreement was to test the eligibility of Lighthouse Inn’s disbursements.
            We did not look at 100 percent of the disbursements but selected a sample for
            review (see the Scope and Methodology section for further detail). Government
            auditing standards state that when sampling, the method of selection depends on
            the audit objective. Specifically, a targeted selection may be most effective when
            auditors have isolated risk factors or other criteria to target the selection. We
            conducted this audit in accordance with generally accepted government auditing
            standards and believe that the evidence obtained provides a reasonable basis for
            our findings and conclusions.




                                             27
Appendix C

             LIST OF INELIGIBLE DISBURSEMENTS

                               Disbursement
                                     to            Disbursed           Ineligible
              #     Date         (see note)         amount              amount
              1   11/01/2010        E              $    4,200.00   $        4,200.00
              2   02/24/2011        B              $   10,000.00   $      10,000.00
              3   05/19/2011        B              $   13,556.02   $      13,556.02
              4   07/05/2011        A              $    9,000.00   $        9,000.00
              5   09/09/2011        A              $   12,500.00   $      12,500.00
              6   01/23/2012        D              $    2,500.00   $        2,500.00
              7   02/17/2012        C              $    2,080.00   $        2,080.00
              8   03/08/2012        A              $    5,737.00   $        5,737.00
              9   04/09/2012        C              $   11,452.24   $      11,452.24
             10   06/11/2012        E              $     100.00    $           75.00
             11   06/18/2012        B              $    1,440.00   $        1,440.00
             12   06/18/2012        B              $    1,000.00   $        1,000.00
             13   07/20/2012        C              $    1,813.00   $        1,813.00
             14   08/05/2012        C              $    1,342.23   $        1,342.23
             15   08/06/2012        D              $    5,000.00   $        5,000.00
             16   08/17/2012        D              $   10,000.00   $      10,000.00
             17   10/09/2012        E              $    3,607.50   $        1,712.50
             18   12/14/2010        A              $    7,555.00   $        7,555.00
             19   12/22/2010        A              $    7,250.00   $        7,250.00
             20   01/27/2011        B              $   10,000.00   $      10,000.00
             21   03/24/2011        B              $    7,317.58   $        7,317.58
             22   12/09/2011        C              $   11,452.24   $      11,452.24
             23   05/08/2012        D              $    5,000.00   $        5,000.00
             24   10/25/2012        D              $    5,000.00   $        5,000.00
                                    Total                          $     146,982.81

       Note:
       A = Disbursement made to owner (total = $42,042)
       B = Disbursement made to the non-HUD-insured assisted living facility (total =
           $43,313.60)
       C = Disbursement made on behalf of the non-HUD-insured assisted living facility
           (total = $28,139.71)
       D = Disbursement made to owner’s other companies (total = $27,500)
       E = Disbursement for unreasonable operating expense (total = $5,987.50)


                                              28
Appendix D

         LIST OF INELIGIBLE FEES COLLECTED

             #    General
                   ledger
                  account       Date        Invoice #   Amount
             1     532       09/01/2010         2708    $   500
             2     603       02/10/2011         2772    $   500
             3     603       02/12/2011         2837    $   500
             4     603       03/02/2011         2840    $   500
             5     603       04/14/2011         2951    $   500
             6     603       05/01/2011         3034    $   500
             7     603       05/25/2011         3094    $   500
             8     603       06/07/2011         3108    $   500
             9     603       06/08/2011         3107    $   500
             10    603       06/30/2011         3177    $   500
             11    603       07/08/2011         3209    $   500
             12    603       08/10/2011         3249    $   500
             13    603       09/13/2011         3318    $   500
             14    603       10/21/2011         3444    $   500
             15    603       11/18/2011         3510    $   500
             16    603       01/19/2012         3660    $   450
             17    603       03/05/2012         3734    $   500
             18    603       04/30/2012         3968    $   500
             19    603       07/01/2012         4051    $   500
             20    532       09/10/2012         4189    $   500
             21    531       09/26/2012         4252    $   500
             22    532       09/27/2012         4249    $   500
                         Total fees collected           $10,950




                                       29