oversight

HUD Did Not Always Provide Adequate Oversight of Its Assisted Living Conversion Program

Published by the Department of Housing and Urban Development, Office of Inspector General on 2013-01-04.

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

OFFICE OF AUDIT
REGION 5
CHICAGO, IL




      HUD’s Office of Housing Assistance and Grant
           Administration, Washington, DC


               Assisted Living Conversion Program




2013-CH-0001                                   JANUARY 4, 2013
                                                        Issue Date: January 4, 2013

                                                        Audit Report Number: 2013-CH-0001




TO: Catherine Brennan, Director, Office of Housing Assistance and Grant Administration, HTH



FROM:          Kelly Anderson, Regional Inspector General for Audit, 5AGA


SUBJECT: HUD Did Not Always Provide Adequate Oversight of Its Assisted Living
           Conversion Program


    Enclosed is the U.S. Department of Housing and Urban Development (HUD), Office of
Inspector General (OIG), final report of our audit of HUD’s oversight of the Assisted Living
Conversion Program.

    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
(312) 353-7832.
                                            January 4, 2013
                                            HUD Did Not Always Provide Adequate Oversight of Its
                                            Assisted Living Conversion Program




Highlights
Audit Report 2013-CH-0001


 What We Audited and Why                     What We Found

We audited the U.S. Department of           HUD did not always ensure that grant applications
Housing and Urban Development’s             contained eligible work items or construction
(HUD) oversight of the Assisted Living      activities. Specifically, 9 of the 19 grant applications
Conversion Program. We initiated the        reviewed contained items or construction activities that
audit as part of the activities in our      were not directly related to the conversion of units and
fiscal year 2012 annual audit plan,         common space for assisted living. Further, HUD did
which included contributing to the          not ensure that the performance period for six grants
improvement of HUD’s execution of           did not exceed 18 months. These weaknesses occurred
and accountability for fiscal               because HUD lacked procedures and controls for
responsibilities. Our audit objective       identifying ineligible activities and ensuring that grants
was to determine whether HUD had            were executed within 18 months according to HUD
adequate oversight of its Assisted          requirements. Additionally, the field offices lacked
Living Conversion Program.                  sufficient understanding of the program’s
                                            requirements. As a result, HUD lacked assurance that
 What We Recommend                          grant funds were solely used for eligible activities as
                                            prescribed by the program requirements and guidance.
                                            Further, HUD lacked assurance that projects will be
We recommend that the Director of
                                            completed in a timely manner and without unnecessary
HUD’s Office of Housing Assistance
                                            waste to meet the special needs of the elderly and
and Grant Administration (1) identify
                                            disabled persons.
the ineligible items and seek
reimbursement from grantees from
                                            HUD did not always ensure that grantees submitted
nonfederal funds for completed projects
                                            required biannual progress reports before it released
or adjust grant amounts accordingly for
                                            payments. Further, it did not ensure that it conducted
active projects, and consult with HUD’s
                                            bimonthly onsite inspections of the construction
Office of General Counsel on the
                                            activities as required. These conditions occurred
eligibility of items or activities, where
                                            because the field offices disregarded or lacked
necessary; and (2) implement adequate
                                            knowledge of the program requirements for progress
policies, procedures, and controls to
                                            reporting and inspections. Consequently, HUD lacked
address the deficiencies cited in this
                                            assurance that funds were properly used to meet the
audit report.
                                            program objectives, and did not effectively protect its
                                            interest.
                           TABLE OF CONTENTS

Background and Objective                                                                 3

Results of Audit
      Finding 1: HUD Did Not Always Ensure That Grant Applications Contained Eligible
                 Work Items or Construction Activities                                   5

      Finding 2: HUD Did Not Always Adequately Monitor Its Program Grantees              9

Scope and Methodology                                                                   12

Internal Controls                                                                       13

Appendixes
   A. Auditee Comments and OIG’s Evaluation                                             15
   B. Federal Requirements                                                              23




                                           2
                      BACKGROUND AND OBJECTIVE

The Assisted Living Conversion Program was authorized under section 202b of the Housing Act
of 1959 and section 522(c) of the Appropriations Act of 2000. The grants funded under this
program were designed to enable our Nation’s elderly to live in familiar surroundings, as they
age and need more specialized features and support services to remain independent, and provide
an affordable option to nursing homes. This is part of the U.S. Department of Housing and
Urban Development’s (HUD) Housing Security Plan for Older Americans, an initiative to
expand the housing options of low-income seniors. The purpose of the program is to provide
private, nonprofit owners of eligible developments with grants to convert some or all of the
dwelling units in the project into an assisted living facility.

Assisted living facilities are designed to accommodate the frail elderly and people with
disabilities who can live independently but need assistance with activities of daily living (for
example, assistance with eating, bathing, grooming, dressing, and home management activities).
Assisted living facilities must provide support services such as personal care, transportation,
meals, housekeeping, and laundry. The program provides funding for the physical costs of
converting some or all of the units of an eligible multifamily development into an assisted living
facility, including the unit configuration, common and services space, and any necessary
remodeling, consistent with HUD’s or the State’s regulations, whichever is more stringent.
Support services are funded by a number of State and local agencies, private grants, and
donations.

The program grants are awarded competitively on the basis of the extent to which the proposed
conversion serves the needs of the frail elderly, quality and effectiveness of the conversion in
planning and managing meals and supportive services, the ability of the project owner to secure
community resources to help achieve the program’s purposes, and the ability of the project
owner to complete the conversion on time. The owners are responsible for ensuring that
converted units comply with all local standards, codes, and regulations governing assisted living
facilities. The projects must also be licensed and regulated by the appropriate governing body.

HUD’s Office of Multifamily Housing, Office of Housing Assistance and Grant Administration,
is responsible for administering the Assisted Living Conversion Program, and the day-to-day
oversight of the program is managed by HUD’s field offices. The Notice of Funding
Availability (NOFA) and Technical Processing Memorandum, issued annually by the Office of
Housing Assistance and Grant Administration, provide guidance to HUD’s field offices for the
oversight of the program. For the program administration and oversight, HUD is responsible for
reviewing the applications; awarding the grants; and ensuring that (1) the grant progress
reporting by the projects is received, (2) bimonthly inspections are conducted in accordance with
HUD Handbook 4460.1, (3) change orders are approved and supported appropriately by HUD,
(4) vouchers submitted for payment through the Line of Credit Control System are reviewed to
ensure that appropriate support for the payments was presented, (5) the work is progressing
within appropriate timeframes, (6) appropriate licensing of the project is approved by the local
authorities, (7) the grant is closed after processing the final voucher, (8) funds not used have
been deobligated, (9) an independent auditor’s report is completed, and (10) the Assisted Living

                                                3
Conversion Program declaration of restrictive covenants and extension of regulatory agreement
is executed.

For fiscal years 2008 through 2010, the total funds available and funded for the Assisted Living
Conversion Program grants were as follows:

                                                                          Number of
                        Grant funding              Total grants             units             Total grant
   Fiscal year            available                  issued               converted            funding
      2008                  $24,750,000                 7                    195               $27,394,747
      2009                   20,000,000                 5                    104                18,773,800
      2010                   30,000,000                 7                    183                23,690,096
     Totals                 $74,750,000                19                    482               $69,858,643
        Note: If funding was not used within a fiscal year, it was rolled over to the next fiscal year.

Our audit objective was to determine whether HUD had adequate oversight of its Assisted Living
Conversion Program to ensure that program funds were properly used to convert units for
eligible multifamily housing projects. Specifically, we wanted to determine whether HUD (1)
appropriately approved grant applications and executed grant agreements, (2) ensured that
progress reports were submitted by grantees in a timely manner, and (3) conducted inspections in
accordance with its requirements.




                                                       4
                                      RESULTS OF AUDIT

Finding 1: HUD Did Not Always Ensure That Grant Applications
Contained Eligible Work Items or Construction Activities
HUD did not always ensure that grant applications contained eligible work items. For the 19
grant applications reviewed, 9 contained items or construction activities that were not directly
related to the conversion of units and common space for assisted living. Further, HUD did not
ensure that the period of performance for six grants did not exceed 18 months. These
weaknesses occurred because HUD lacked procedures and controls for identifying ineligible
activities and ensuring that grants were executed within 18 months according to HUD
requirements. In addition, the field offices lacked sufficient understanding of the program’s
requirements. As a result, HUD lacked assurance that grant funds were solely used for eligible
activities as prescribed by the program requirements and guidance. Further, HUD lacked
assurance that projects will be completed in a timely manner and without unnecessary waste to
meet the special needs of the elderly and disabled persons.


    Approved Applications
    Contained Ineligible
    Construction Items or Activities

                   We reviewed 100 percent of the program grants awarded from 2008 through
                   2010. Of the 19 approved grants, 9 (47 percent) applications contained ineligible
                   construction items or work activities, such as parking lot repairs, roofing, siding,
                   entryway canopies, and building signage. The NOFA specified that the program
                   funds would be used for converting existing units and common areas within the
                   multifamily project or the entire project into assisted living units. Any costs that
                   were not directly related to the conversion of units and common space for assisted
                   living were not eligible. 1

                   The items or construction activities identified as not being directly associated with
                   the conversion were

                       •   Entrance canopies;
                       •   Sidewalks and curbing not directly associated with the conversion;
                       •   Resurfacing of pavement;
                       •   Restriping in parking lots;
                       •   Landscape work to include benches, shrubs, and planters;
                       •   Signage for parking lots;
                       •   A corridor not directly associated with the conversion;


1
    NOFA, paragraphs I(A) and IV(E) (see appendix B)

                                                       5
                       •   Roof coping and flashing (the building had seven floors, and the
                           conversion was for the first, second, and third floors);
                       •   Generator replacement for the building;
                       •   Fencing not directly associated with the conversion;
                       •   Correction of poor drainage from a previous program grant;
                       •   Light for the exterior of the building; and
                       •   A video surveillance system for the exterior of the building.

                   HUD stated that the above-mentioned items or activities were either eligible or to
                   be determined for seven of the nine grant applications. Further, for one of the
                   remaining two grant applications, HUD changed the grant to exclude work items
                   before it was executed. However, it did not specifically indicate that the excluded
                   items were ineligible. The grant’s funding was reduced for the project; however,
                   the work items removed were identified as being funded through the low-income
                   housing tax credit program. For the last grant application, HUD agreed that it
                   contained an ineligible activity.

                   The funding amounts for each of the ineligible activities could not be completely
                   identified since HUD requires the construction costs to be submitted on form
                   HUD-2328, Contractor’s and/or Mortgagor’s Cost Breakdown, which identifies
                   budget costs by sections, such as concrete, masonry, and other general areas.

    HUD Failed To Execute Six
    Grants for a Prescribed
    Timeframe

                   HUD failed to ensure that the performance period for six grants did not exceed 18
                   months. HUD’s NOFA states that a fully executed program grant agreement
                   obligates the funds and establishes the legal relationship between HUD and the
                   award recipient. Additionally, HUD will base the period of performance on the
                   scope of work, which should not exceed 18 months. 2 However, contrary to its
                   requirements, HUD executed five grants for 24 months and one grant without a
                   grant term or effective dates.

    HUD Lacked Knowledge and
    Understanding of Its Own
    Requirements

                   HUD’s Office of Housing Assistance and Grant Administration lacked adequate
                   procedures and controls for addressing the identification of ineligible activities
                   during the application review. Even though HUD identified ineligible activities in
                   the NOFA, it did not ensure that applications were reviewed for ineligible
                   activities. The Office of Housing Assistance and Grant Administration assumed

2
    NOFA, paragraph II – Award Information (see appendix B)

                                                       6
             that the field offices would identify ineligible activities and ensure necessary
             corrections were made before the execution of the grant agreements. In addition,
             it did not ensure that its reviewing officials in the field offices fully understood
             the program’s requirements when reviewing and approving grant applications.
             For instance, one reviewing official explained that if an activity or item was part
             of the multifamily project and used by the residents in the assisted living units,
             that activity or item would be eligible.

             HUD’s reviewing officials in the field offices generally said that they did not
             receive appropriate guidance for the program. Therefore, they developed their
             own procedures for oversight and application processing, which varied among the
             field offices.

             HUD field offices did not ensure that the terms of executed grant agreements did
             not exceed 18 months. The reviewing officials in the field offices were not
             familiar with the NOFA requirements when executing the grant agreements. One
             reviewing official stated that there was not enough guidance for the program,
             although this requirement was included in the NOFA. Another reviewing official
             stated that a staff in another field office prepared and executed one of the grant
             agreements, knowing that the grant could not exceed 18 months.

Conclusion

             HUD did not always ensure that grant applications contained eligible work items.
             For the 19 grant applications reviewed, 9 contained items or construction
             activities that were not directly related to the conversion of units and common
             space for assisted living. Further, HUD did not ensure that the period of
             performance for six grants did not exceed 18 months. These weaknesses occurred
             because HUD lacked procedures and controls for identifying ineligible activities
             and ensuring that grants were executed within 18 months according to HUD
             requirements. In addition, the field offices lacked sufficient understanding of the
             program’s requirements. As a result, HUD lacked assurance that grant funds were
             solely used for eligible activities as prescribed by the program requirements and
             guidance. Further, HUD lacked assurance that projects will be completed in a
             timely manner and without unnecessary waste to meet the special needs of the
             elderly and disabled persons.

Recommendations

             We recommend that the Director of HUD’s Office of Housing Assistance and
             Grant Administration

             1A. Identify the ineligible items or activities and seek reimbursement from the
                 grantees from nonfederal funds for completed projects, or adjust the grant
                 amounts accordingly for active projects, and where necessary, consult with

                                               7
     HUD’s Office of General Counsel on the eligibility of construction items or
     activities.

1B. Implement adequate procedures and controls regarding the application
    review and grant execution process to ensure that program funds are used
    for eligible activities and grants are executed for a period not exceeding 18
    months. These procedures and controls should include, but not limited to,
    providing clear guidance to field offices regarding the grant application
    review and execution process to ensure compliance with requirements.




                                 8
Finding 2: HUD Did Not Always Adequately Monitor Its Program
Grantees
HUD did not always adequately monitor its program grantees. Specifically, it did not ensure that
(1) grantees submitted required biannual progress reports before payments were released and (2)
it conducted bimonthly onsite inspections of construction activities. These conditions occurred
because HUD’s Office of Housing Assistance and Grant Administration was not aware that the
field offices were not following the program requirements and guidance. Further, its field offices
disregarded or lacked knowledge of the program requirements for progress reporting and
inspections. Consequently, HUD lacked assurance that funds were properly used to meet the
program objectives, and did not effectively protect its interest.


    HUD Did Not Ensure That
    Progress Reports Were
    Submitted and Inspections
    Were Conducted Within
    Required Timeframes

                According to HUD requirements, grantees must submit a progress report every 6
                months after the effective date of the grant agreement. 3 Progress reports should
                include reports on both performance (logic models) and financial progress.
                Financial reports should be submitted on Standard Form 269, Financial Status
                Report. No grant payments will be approved for projects with overdue progress
                reports. Further, HUD requires that inspections be conducted in accordance with
                HUD Handbook 4460.1, which requires a minimum of bimonthly inspections. 4

                We reviewed 100 percent of the program grants for fiscal years 2008 through
                2010 and determined that the biannual progress reporting requirement applied to
                14 of the 19 grants reviewed. Of the remaining five grants, two had not received
                payments as of July 2012, and three had not reached the 6-month point; therefore,
                the progress reports were not available. Based on our review, we have identified
                the following:

                        •   Payments were released to the grantee without the timely submission
                            of the required progress reports for 14 grants,

                        •   The logic model was not submitted biannually for 14 grants,

                        •   A logic model was not submitted as required in the grant application
                            for 1 grant,


3
 Program grant agreement, article VI (see appendix B)
4
 Technical Processing Memorandum, paragraph IV, and HUD Handbook 4460.1, paragraph 3-4(c) (see appendix
B)

                                                    9
                           •    A financial report was not submitted biannually for 10 of 14 grants,

                           •    Inspections were not conducted bimonthly for 5 grants, and

                           •    Inspections were not conducted for 1 grant.

    HUD Lacked Knowledge of Its
    Own Requirements


                   The weaknesses discussed above occurred because HUD’s Office of Housing
                   Assistance and Grant Administration was not aware that the field offices were not
                   following the program requirements and guidance. HUD’s program staff lacked
                   knowledge of the progress reporting and inspection requirements. For instance,
                   the staff in the field offices stated that they were unaware that grantees had to
                   submit required financial reports and logic models before they could release the
                   grant payments. 5 The reviewing officials responsible for monitoring 10 of the 14
                   grants stated that they were not aware of the progress reporting requirements, and
                   the officials for 3 of those 10 grants explained that they had not read all the
                   program guidance and regulations. Further, the reviewing officials for 7 of 14
                   grants stated that the logic model was difficult to work with.

                   Regarding the inspections, the reviewing officials for four grants stated that they
                   were aware of the requirement but due to a lack of resources or other work
                   obligations, they did not comply with the requirement for bimonthly inspections.
                   However, these reviewing officials did not notify HUD headquarters’ Office of
                   Housing Assistance and Grant Administration that the field offices lacked
                   sufficient resources to conduct the inspections. Further, one field office did not
                   conduct any inspections for one grant, and did not agree it was required to
                   conduct bimonthly inspections for projects under the Assisted Living Conversion
                   Program. Conversely, HUD’s Office of Housing Assistance and Grant
                   Administration stated the field offices were required to conduct bimonthly
                   inspections of the grant-funded projects in accordance with the program
                   requirements and guidance. Another reviewing official did not provide an
                   explanation for not complying with the inspection requirement.

    Conclusion

                   HUD did not always adequately monitor its program grantees. Specifically, it did
                   not ensure that (1) grantees submitted required biannual progress reports before
                   payments were released and (2) it conducted bimonthly onsite inspections of
                   construction activities. As a result, HUD lacked assurance that funds were
                   properly used to meet the program objectives, and did not effectively protect its
                   interest.
5
    Program grant agreement, paragraph VI(D) (see appendix B)

                                                       10
Recommendations

          We recommend that the Director of HUD’s Office of Housing Assistance and
          Grant Administration

          2A. Implement adequate policies, procedures, and controls to ensure that
              program staff complies with requirements concerning progress reporting and
              construction inspections. These controls should include, but not limited to,
              taking steps to ensure that field staff responsible for monitoring program
              grantees are adequately trained and familiar with the program requirements.
              HUD should also consider accumulating best practices and the field offices’
              input for improvements in the oversight of the program.




                                         11
                               SCOPE AND METHODOLOGY
To accomplish our objective, we reviewed

      •    Applicable laws; regulations; NOFAs for fiscal years 2008 through 2010; HUD
           Handbook 4460.1; HUD’s Technical Processing Memorandums – Guidance for Fiscal
           Years 2008 Through 2010 Application Review; HUD’s program requirements at 24 CFR
           (Code of Federal Regulations) Parts 84 and 891; the Housing Act of 1959, section 202(b),
           as amended; the Consolidated Appropriations Acts for fiscal years 2008 through 2010;
           form HUD-50080 (08/2000); form HUD-2328 (05/1995); and form HUD-92045
           (03/2002).

      •    Applications requesting assistance; application review checklists; grant agreements;
           drawdown requisition forms; contractors’ invoices and change orders; architectural
           specifications and drawings; and grantee by-laws and articles of incorporation, budgets,
           and progress reports.

      •    Line of Credit Control System (LOCCS) data, HUD inspection reports, and HUD’s
           organizational list.

We also interviewed HUD’s staff.

We reviewed 100 percent of the 19 grants funded for fiscal years 2008 through 2010 to ensure
that grant applications and agreements were approved and executed according to HUD
requirements and progress reports were submitted by grantees according to HUD requirements
and to determine whether HUD conducted inspections of the construction process according to
its requirements.

We did not use computer-generated data to support our audit conclusions. We compared the
source documentation maintained by HUD to data reported in LOCCS. 6 All conclusions were
based on source documentation reviewed during the audit.

We performed onsite audit work between February and April 2012 at HUD’s offices located in
Washington, DC, Buffalo, NY, and Columbus, OH. The remaining audit work was completed
between May and September 2012 at HUD OIG’s offices in Chicago, IL, and Columbus, OH.
The audit covered the period July 1, 2008, through July 31, 2012.

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.



6
    LOCCS is the HUD system used to disburse and track the payment of grant funds to grant recipients.

                                                         12
                              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:

               •      Effectiveness and efficiency of operations – Policies and procedures that
                      management has implemented to reasonably ensure that a program meets
                      its objectives.

               •      Reliability of financial reporting – Policies and procedures that
                      management has implemented to reasonably ensure that valid and reliable
                      data are obtained, maintained, and fairly disclosed in reports.

               •      Compliance with applicable laws and regulations – Policies and
                      procedures that management has implemented to reasonably 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.




                                                 13
Significant Deficiency

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

            •   HUD lacked adequate procedures and controls to ensure that (1) grant
                applications contained eligible work items, (2) the performance period for
                grants met requirements, and (3) progress reports were submitted and
                inspections were conducted in accordance with requirements (see findings 1
                and 2).




                                            14
                                            APPENDIXES

Appendix A

           AUDITEE COMMENTS AND OIG’S EVALUATION

Ref to OIG Evaluation                               Auditee Comments 7




7
 This excludes a three-page spreadsheet and 64 pages of other documentation that were not necessary for
understanding HUD’s comments.

                                                       15
Ref to OIG Evaluation   Auditee Comments




Comment 1




Comment 1


Comment 2




                         16
Ref to OIG Evaluation   Auditee Comments




Comment 2




Comment 3




                         17
Ref to OIG Evaluation   Auditee Comments




Comment 3




Comment 4




Comment 5




Comment 6




                         18
Ref to OIG Evaluation   Auditee Comments




Comment 7




                         19
Ref to OIG Evaluation   Auditee Comments




Comment 7




                         20
                       OIG’s Evaluation of Auditee Comments

Comment 1   OIG originally identified 10 of 19 grant applications reviewed contained
            ineligible items. However, HUD’s Office of Housing Assistance and Grant
            Administration stated it found that eight grant applications contained ineligible
            items, and of those grants, the grantees for five grants spent program funds on
            the ineligible activities. Based on the documentation provided by HUD, we
            agree that the installation of a sprinkler system for the Peter Sanborn Place
            project is an eligible activity. OIG adjusted finding 1 for the project
            accordingly, thereby reducing the number of grant applications containing
            ineligible items from 10 to 9. However, for the remaining grants, HUD did not
            provide sufficient documentation to support its determination of the eligibility
            of the construction activities or items that the audit team identified as ineligible.

Comment 2   HUD stated that these applications were approved in accordance with the
            NOFA, and did not agree that the program lacked the necessary procedures for
            specifically identifying ineligible activities in the application review process.
            Although HUD had procedures such as the NOFA and the technical processing
            memorandum in place, they were not adequate for ensuring that applications
            were properly reviewed for ineligible activities during the application review
            and ranking process. The NOFA provides funding restrictions and lists the
            ineligible activities. However, for instance, one reviewing official revealed
            there was a lack of understanding on how to identify whether an activity or item
            would be eligible for a program project. Further, the Office of Housing
            Assistance and Grant Administration assumed that the field offices would
            identify ineligible activities and ensure necessary corrections were made before
            the execution of the grant agreements. However, if the ineligible activities are
            not addressed during the application review process, HUD lacks assurance that
            those ineligible activities would later be identified before funds are disbursed to
            the grantees because HUD did not always ensure that progress reports were
            submitted by the grantees as required, which we identified in finding 2.
            Therefore, the grants were not approved in accordance with the NOFA since the
            applications did not identify ineligible items. Approved applications’ funding
            was not reduced nor was ineligible activities identified during the review and
            ranking process.

            HUD agreed additional procedures and adequate controls are needed to
            establish better quality assurance and consistency among application reviewers,
            specifically when identifying ineligible conversion activities. We commend
            HUD for implementing additional quality assurance procedures and controls
            concerning the application review process.

Comment 3   HUD stated that any modification to the grant agreement is at the discretion of
            the grant officer. The Technical Processing Memorandum, which serves as
            instructions to HUD staff for processing the program grant applications, also
            provides that if any parts of the application were to be modified based on the

                                            21
            results of the application review, the amended documents as well as any
            conditions for approval should be attached. Although the grant officer has the
            discretion to adjust the performance period of the grant agreement, no adequate
            supporting documentation or explanation was provided for why the grant terms
            exceeded the timeframe of 18 months prescribed by the NOFA, other than that
            the grants were executed according to prior practices. We noted one exception
            for the grant terms for the Peter Sanborn Place project, for which the field office
            was aware of the grant term limit but extended the term to complete the
            relocation of tenants. We revised finding 1 for the one project accordingly.

            For grant performance period, HUD agreed a standardized procedure needs to
            be implemented to ensure that the project conversion is completed in a timely
            manner. Further, HUD concurred with our recommendation concerning
            additional training for the field offices as well as better communication between
            Headquarters and the field offices.

Comment 4   HUD takes Recommendation 1A of the audit report under advisement, and
            stated that the program office establishes the eligible construction activities.
            The NOFA provides funding restrictions and lists the ineligible activities the
            program funds are not to be used for. For example, the program funds should
            not be used to cover the cost of activities not directly related to the conversion
            of the units and common space. Based on the definition of ineligible activities
            presented in the NOFA, we disagree with HUD’s explanation for activities it
            has identified as eligible. However, we agree that the program office has the
            responsibility for establishing the eligible construction activities or items, and
            where necessary, HUD should consult with its Office of General Counsel on the
            eligibility of the cited construction items or activities. We revised our
            recommendations for finding 1 accordingly.

Comment 5   HUD agreed to implement Recommendation 1B of the discussion draft audit
            report which is Recommendation 1A of this audit report.

Comment 6   We acknowledge the changes HUD is currently making to its procedures and
            controls to address Recommendation 1C of the discussion draft audit report,
            which is Recommendation 1B of this audit report.

Comment 7   HUD agreed that grants were not always adequately monitored due to
            inadequate oversight and monitoring of the program. Additionally, HUD is in
            the process of revising its program guide for the field offices to further address
            program requirements and post-award activities. We commend HUD on its
            plan to implement additional procedures and controls to ensure its staff
            complies with program requirements.




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Appendix B

                            FEDERAL REQUIREMENTS

Finding 1

NOFA 2008-2010, Assisted Living Conversion Program For Eligible Multifamily Housing
Projects, I. Funding Opportunity Description, A. Program Description, state that the Assisted
Living Conversion Program provides funding for the physical costs of converting some or all of
the units of an eligible multifamily development into an assisted living facility, including unit
configuration and related common and services space and any necessary remodeling, consistent
with HUD or the state’s statutes/regulations (whichever is more stringent). Typical funding will
cover basic physical conversion of existing project units, as well as related common and services
space.

NOFAs 2008-2010, Assisted Living Conversion Program For Eligible Multifamily Housing
Projects, III. Eligibility Information, Eligibility Requirements, state:

1. Eligible conversion activities are:

a. Retrofitting to meet Section 504 accessibility requirements, minimum property standards for
accessibility and/or building codes and health and safety standards for Assisted Living Facilities
(ALF) in that jurisdiction. Meeting Section 504 regulations require compliance with the
Uniformed Federal Accessibility Standards (UFAS). Examples are items such as:

   1. Upgrading to accessible units for the Assisted Living Facility with moveable cabinetry,
      accessible appliances, sinks, bathroom and kitchen fixtures, closets, hardware and grab
      bars, widening doors, etc.;
   2. An elevator or upgrades thereto;
   3. Lighting upgrades;
   4. Major physical or mechanical systems of projects necessary to meeting local code or
      assisted living requirements;
   5. Sprinkler systems;
   6. Upgrades to safety and emergency alert systems;
   7. Addition of hallway railings; and
   8. Medication storage and workstations.

b. Retrofitting to add, modify and/or outfit common space, office or related space for Assisted
Living Facility staff including a service coordinator and file security, and/or a central
kitchen/dining facility to support the Assisted Living Facility function (e.g., outfit lounge,
common space/dining furniture, kitchen equipment for cooking/serving and dishware).

c. Retrofitting to upgrade a regular unit to an accessible unit for a person/family with disabilities
who is being displaced from an accessible unit in the portion of the project that is being
converted to the Assisted Living Facility, where another accessible unit is not available;

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d. Temporary relocation;

e. Consultant, architectural, and legal fees;

f. Vacancy payments limited to 30 days after conversion to an Assisted Living Facility; and

g. Any excess Residual Receipts (over$500/unit) and Reserve for Replacement funds (over
$1,000/unit) in Project Accounts that are not approved for another use at the time of application
to HUD under this Notice of Funding Availability are considered available funds and must be
applied toward the cost of conversion activities. Before making this determination, however,
HUD staff will consider the extent of repair/replacement needs indicated in the most recent Real
Estate Assessment Center (REAC) physical inspection and not yet approved and any ongoing
commitments such as non-grant-based service coordinator or other funding, where existing,
deduct the estimated costs of such items from the reserve for replacement and residual receipts
balances to determine the extent of available residual receipts and reserve for replacement funds
for the Assisted Living Conversion Program.

NOFAs 2008-2010, Assisted Living Conversion Program For Eligible Multifamily Housing
Projects, IV (E) Funding Restrictions, Ineligible Activities, state that funds available through the
NOFAs may not be used for the following:

   a. Adding additional dwelling units to the existing project;

   b. Paying the costs of any of the necessary direct supportive services needed to operate the
      assisted living facility;

   c. Purchasing or leasing additional land;

   d. Rehabilitating (see definition at 24 CFR 891.105) the project for needs unrelated directly
      to the conversion of units and common space for assisted living;

   e. Using the ALCP [program] to reduce the number of accessible units in the project that
      are not part of the ALF;

   f. Permanently displacing any resident out of the project (permanent relocation is prohibited
      under this program);

   g. Paying management fees;

   h. Covering the cost of activities not directly related to the conversion of the units and
      common space. (i.e., if an applicant is applying to convert 24 units on 2 floors of a 5-
      story elderly housing development and the inspection by the Fire Marshal reveals that
      sprinklers must be installed in the entire building, ALCP funds will be used only to install
      sprinklers for the 24 units on the 2 floors requested in the application. The cost to install
      sprinklers in the remaining units must be paid for out of other resources).



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Regulations at 24 CFR 891.105, Definitions, states: “Rehabilitation means the improvement of
the condition of a property from deterioration or substandard to good condition. Rehabilitation
may vary in degree from gutting and extensive reconstruction to the cure of substantial
accumulation of deferred maintenance. Cosmetic improvements alone do not qualify as
rehabilitation under this definition. Rehabilitation may also include renovation, alteration, or
remodeling for the conversion or adaptation of structurally sound property to the design and
condition required for use under this part, or the repair or replacement of major building systems
or components in danger of failure. Improvement of an existing structure must require 15
percent or more of the estimated development cost to rehabilitate the project to a life of 55
years.”

Technical Processing Memorandums, fiscal years 2008-2010 – Application Review Process,
Rating and Ranking of Applications, state: “HUD may reduce the amount requested in the
application if any proposed components are ineligible or if the cost of any item is deemed
unreasonable.”

NOFAs 2008-2010, Assisted Living Conversion Program For Eligible Multifamily Housing
Projects, II. Award Information, state that the program grant agreement, when fully executed,
obligates the HUD funds. This agreement establishes the legal relationship between HUD and
the program award recipient. HUD will base the period of performance on the scope of work,
but it must not exceed 18 months.

Finding 2

NOFAs 2008-2010 – Assisted Living Conversion Program For Eligible Multifamily Housing
Projects, VI. Award Administration Information, (C), Reporting, state: “Recipients of funding
under this program Notice of Funding Availability must submit a progress report every six
months after the effective date of the grant agreement. Each semi-annual report must identify
any deviations from outputs and outcomes proposed and approved by HUD, by providing the
information in the reporting TAB of the approved Logic Model.”

The Assisted Living Conversion Program grant agreement, article VI, Progress Reports, states:
“(A.) Grantee must submit a progress report every six months after the effective date of the grant
agreement. Progress reports should include reports on both performance and financial progress.
(C.) Financial reports should be submitted on Standard Form (SF) 269. (D.) No grant payments
will be approved for projects with overdue progress reports.”

Technical Processing Memorandum, III. Financial Procedures and Reporting Requirements for
Fiscal Years 2008-2010, Semi-annual Financial Status Report (SF-269) (1), states “Grantees
must complete this form for each six-month period of the program activity. If the SF-269 is not
received when due, the Line of Credit Control System (LOCCS) will not allow grantees to draw
additional funds.”

Technical Processing Memorandum, III. Financial Procedures and Reporting Requirements for
Fiscal Years 2008-2010, Logic Model, states: “Grantees must submit a progress report every six
months after the effective date of the grant agreement. Grantees must report progress in attaining

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the goals and objectives proposed in their Program Logic model that was included in the
application.”

Technical Processing Memorandum, IV. Review/Monitoring the Assisted Living Conversion
Grant for Fiscal Years 2008-2010, states: “During the conversion process, the Hub/Point of
Contact Director is responsible for scheduling reviews in accordance with HUD Handbook
4460.1, Architectural Analysis and Inspections. Reviews and inspections are made to ensure
conformance to HUD regulations.”

HUD Handbook 4460.1, Architectural Analysis and Inspections for Project Mortgage Insurance,
chapter 3, Architectural Inspections, paragraph 3-4(c), states: “The inspector must make at least
two job site visits each month. The major functions during inspections are to: evaluate the
construction supervision of the contractor and contract administration of the architect; report on
occupancy, delays disputes, and changes; report non-compliance with the contract documents
observed by the inspector and/or the supervisory architect; determine that amounts requested by
the contractor and recommended by the architect for payment are reasonable; conduct employee
wage interviews; and report on labor and Equal Employment Opportunity (EEO) compliance.”




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