oversight

The Adams County Housing Authority, Commerce City, CO, Did Not Properly Use Its Disposition Sales Proceeds

Published by the Department of Housing and Urban Development, Office of Inspector General on 2013-09-26.

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

OFFICE OF AUDIT                                      DRAFT
REGION   8
   For Discussion and Comment Only - Subject to Review and Revision
DENVER, CO




                    Adams County Housing Authority,
                         Commerce City, CO


      Disposition of Low-Income Public Housing Units




2013-DE-1004                                                          September 26, 2013
                                                                    Issue Date: September 26, 2013

                                                                    Audit Report Number: 2013-DE-1004




TO:            Carol Ann Roman, Director, Denver Office of Public Housing, 8APH

               //signed//
FROM:          Ronald J. Hosking, Regional Inspector General for Audit, 8AGA

SUBJECT:       The Adams County Housing Authority, Commerce City, CO Did Not Properly
               Use its Disposition Sales Proceeds


    Attached is the U.S. Department of Housing and Urban Development (HUD), Office of
Inspector General’s (OIG) final results of our review of the Adams County Housing Authority
disposition process.

    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
913-551-5870.




                                                Office of Audit Region 8
                                    1670 Broadway, 24th Floor, Denver, CO 80202
                                      Phone (303) 672-5452, Fax (303) 672-5006
                          Visit the Office of Inspector General Web site at www.hudoig.gov.
                                            September 26, 2013
                                            The Adams County Housing Authority, Commerce City,
                                            CO, Did Not Properly Use Its Disposition Sales Proceeds




Highlights
Audit Report 2013-DE-1004



 What We Audited and Why                     What We Found

We audited the Adams County Housing         The Authority did not place the required number of
Authority based on concerns that the        Section 8 voucher holders into its Terrace Gardens
Authority did not follow U.S.               units. The Authority was required to make at least 20
Department of Housing and Urban             percent, or 36, of its units available to Section 8
Development (HUD) regulations in the        families. However, it placed only 15 Section 8
use of its disposition sales proceeds.      families into Terrace Gardens.
The objectives of our audit were to
determine whether the Authority placed      In addition, the Authority inappropriately purchased
the required number of Section 8            four vacant lots using its disposition sales proceeds.
voucher holders into its Terrace            During 2008 and 2009, the Authority purchased four
Gardens units and appropriately spent       vacant lots located in Westminster, CO totaling more
its disposition sales proceeds.             than $1.2 million. However, it did not receive HUD
                                            approval before acquiring the lots.
 What We Recommend

We recommend that HUD require the
Authority to (1) place a pro rata
percentage of Section 8 families into its
Terrace Gardens project within a
reasonable period, (2) seek a legal
opinion on the applicability of 24 CFR
(Code of Federal Regulations) Part 941
to disposition proceeds used to purchase
vacant land, and (3) ensure that the
Authority complies with its regulatory
and contractual land acquisition
requirements associated with the
purchase of the four vacant lots.
                            TABLE OF CONTENTS


Background and Objectives                                                           3

Results of Audit
      Finding 1: The Authority Did Not Make the Required Number of Units            4
                   Available to Section 8 Families in its Terrace Gardens Project
      Finding 2: The Authority Did Not Obtain Approval From HUD Before              6
                    Purchasing Vacant Lots

Scope and Methodology                                                               8

Internal Controls                                                                   9

Appendixes
A.    Auditee Comments and OIG’s Evaluation                                         10




                                              2
                    BACKGROUND AND OBJECTIVES

The Adams County Housing Authority is a public corporation created and organized under the
provisions of the laws of the State of Colorado and the United States of America. The
Authority is responsible for its low-income public housing program governed by the U.S.
Department of Housing and Urban Development (HUD), which allows it to provide housing
assistance to eligible low-income individuals and families. In addition, the Authority is
responsible for its Section 8 Housing Choice Voucher program, also governed by HUD, which
allows it to provide rental assistance to eligible individuals and families who rent units in the
private rental housing market. The Authority has continually entered into annual contributions
contracts with HUD since December 10, 1981, to provide low-rent housing to qualified
individuals and families.

The Authority’s mission is to work in partnership with diverse communities, to promote
economic self-sufficiency, preserve and expand affordable housing opportunities, and enhance
the livability of neighborhoods in Adams County. The executive offices of the Authority are
located at 7190 Colorado Boulevard, 6th Floor, Commerce City, CO.

The Authority had 42 low-income public housing units and 1,460 Section 8 units as of March
22, 2013. The following table lists the amount of funding awarded by HUD for fiscal years
2007, 2008, 2009, 2010, and 2011.

        Year                Public housing           Public Housing          Section 8 Housing
                              program                 Capital Fund            Choice Voucher
                                                       program                    program
        2007                   $165,538                  $49,509                $10,664,751
        2008                   $103,990                 $437,446                $10,725,910
        2009                    $48,338                 $106,781                $10,995,685
        2010                   $279,090                 $329,003                $11,479,171
        2011                   $164,606                 $222,222                $11,532,230

On September 20, 2007, the HUD Special Applications Center approved the Authority’s
disposition application to dispose of 35 of its low-income public housing units at fair market
value. The Authority later requested approval from HUD for revised fair market values. HUD
approved the Authority’s request to modify the disposition on September 11, 2008. The
Authority sold its 35 low-income units for more than $3.6 million in net proceeds, with its final
unit selling on September 14, 2009.

The objectives of our audit were to determine whether the Authority placed the required
number of Section 8 voucher holders into its Terrace Gardens units and appropriately spent its
disposition sales proceeds.




                                               3
                                 RESULTS OF AUDIT


Finding 1:        The Authority Did Not Make the Required Number of
                  Units Available to Section 8 Families in its Terrace
                  Gardens Project.
The Authority did not place the required number of Section 8 voucher holders into its Terrace
Gardens units. This occurred because the Authority did not correctly interpret HUD
regulations. As a result, eligible low-income families were not afforded the opportunity to
participate in housing assisted by the Section 8 program.




The Authority Did Not Follow
HUD Regulations


             The Authority did not place the required number of Section 8 voucher holders
             into its Terrace Gardens units. The U.S. Housing Act of 1937, Section 18
             requires these funds be used towards Section 8 or public housing units. If
             disposition funds are used to acquire or develop low-income units, HUD has
             taken the position that the percentage of units reserved for Section 8 families to
             total units must be at least equal to the percentage of disposition-assisted project
             costs to total costs.

             In 2008, the Authority acquired Terrace Gardens, a 180-unit residential project,
             for a total cost of more than $7.3 million. The Authority used more than $1.4
             million of its disposition sales proceeds, or approximately 20 percent of the total
             acquisition cost, to fund the purchase of Terrace Gardens.

             Therefore, the Authority was required to make at least 20 percent, or 36, of its
             units available to Section 8 families. However, as of May 5, 2013, the Authority
             placed only 15 Section 8 families and no public housing units in Terrace Gardens.

             The following tables show cost and unit information for Terrace Gardens.

                         Pro rata percentage of disposition assisted project costs
                                                                            Percentage of
               Total project costs      Disposition assisted costs       disposition assisted
                                                                         costs to total costs
                    $7,350,558                  $1,476,412                       20.7%



                                               4
                                                 
                            Pro rata percentage of Section 8 families
                                    Required number of          Actual number of
              Number of units         Section 8 assisted         Section 8 assisted
                                            units                      units
                     180                         36                            15



The Authority Did Not
Correctly Interpret HUD
Regulations

           The Authority did not correctly interpret HUD regulations before using its
           disposition proceeds. In 2007, the Authority received guidance from HUD that
           did not clearly reflect HUD regulations on the use of disposition sales proceeds.
           Authority officials noted that they could have researched HUD regulations more
           thoroughly to ensure the correct use of its funds.

The Authority Planned To Add
More Section 8 Units


           Twenty-one eligible low-income families were not afforded the opportunity to
           participate in housing assisted by the Section 8 program. In 2012, the Authority
           informed HUD of its plans to construct more units at Terrace Gardens that would
           contain a sufficient number of units for Section 8 families. The Authority plans to
           complete these additions by 2016.

Recommendations


           We recommend that the Director of the Denver Office of Public Housing

           1A. Require the Authority to place a pro rata percentage of Section 8 families into
               its Terrace Gardens project within a reasonable period.




                                            5
                                              
                                RESULTS OF AUDIT


Finding 2: The Authority Did Not Obtain Approval From HUD Before
           Purchasing Vacant Lots
The Authority inappropriately purchased four vacant lots using its disposition sales proceeds.
This occurred because the Authority was not aware of its regulatory and contractual land
acquisition requirements associated with the purchase of the four vacant lots. As a result, HUD
lacked assurance that more than $1.2 million in disposition sales proceeds would benefit low-
income residents in accordance with the U.S. Housing Act of 1937, Section 18.



 The Authority Purchased Land
 Without HUD Approval

              The Authority inappropriately purchased four vacant lots using its disposition
              sales proceeds. During 2008 and 2009, the Authority purchased four vacant lots
              located in Westminster, CO totaling more than $1.2 million. However, it did not
              receive HUD approval before acquiring the lots.

              The following table shows location and cost information for the vacant lots.

                            Properties purchased with disposition sales proceeds
                                    Property location                               Cost
                  7117 Federal Boulevard, Westminster, Colorado 80030           $443,562.60
                  7115 Federal Boulevard, Westminster, Colorado 80030           $262,008.22
                  7101 Federal Boulevard, Westminster, Colorado 80030           $427,054.66
                     7140 Grove Street, Westminster, Colorado 80030             $151,209.33
                                           Total                               $1,283,834.81


              Regulations at 24 CFR (Code of Federal Regulations) Part 941 require HUD to
              approve the acquisition of land for development before the acquisition. Part B,
              Section 1 of the Authority’s annual contributions contract with HUD also contains
              the above requirement. A public housing agency must provide information such
              as the planned site development, appraisal(s), instituting condemnation
              proceedings, acquiring title, and options for HUD to consider before the land


                                               6
                                                 
           acquisition. These measures ensure that the Government’s interests are protected
           during the acquisition process.

The Authority Was Not Aware
of Land Acquisition
Requirements

           The Authority was not aware of its regulatory and contractual land acquisition
           requirements associated with the purchase of the four vacant lots. Authority
           officials stated that they were not aware that this regulation applied to their use of
           disposition proceeds.

Disposition Sales Proceeds
Were Not Available for Their
Intended Purposes

           As a result, HUD lacked assurance that more than $1.2 million in disposition sales
           proceeds would benefit low-income residents in accordance with the Act. If the
           Authority were to change the intended use of the land, HUD’s interest would not
           be protected.

 Recommendations


           We recommend that the Director of the Denver Office of Public Housing

            2A. Seek a legal opinion on the applicability of 24 CFR Part 941 to disposition
                proceeds used to purchase vacant land, regardless of the intended use.

            2B. If HUD determines that 24 CFR Part 941 applies, ensure that the Authority
                complies with its regulatory and contractual land acquisition requirements
                associated with the purchase of the four vacant lots to help protect HUD’s
                interest in the more than $1.2 million in disposition proceeds used to
                purchase the lots.




                                             7
                                               
                         SCOPE AND METHODOLOGY

Our audit covered the period January 1, 2007, through March 31, 2013. We performed our
onsite work during April and May of 2013 at the Authority's office located at 7190 Colorado
Boulevard, 6th Floor, Commerce City, CO.

We interviewed HUD and Authority staff and reviewed pertinent documentation to obtain an
understanding of the program and the auditee. This documentation included applicable sections
of the U.S. Housing Act of 1937, HUD regulations, the Annual Contributions Contract, the
disposition application, the HUD approval letter, official correspondence, and Authority policies
related to the disposition of its low-income public housing units.

We selected a sample of 10 of the 34 sales transactions totaling more than $1.2 of the $3.6
million in net sales proceeds. We selected the 10 sales transactions with the largest difference
between the gross sales price and the net sales proceeds to verify that commissions and other
transaction costs were properly associated with the sales as represented by the Authority to
HUD. We reviewed all relevant sales documentation to verify that sale transpired as directed by
HUD and in accordance with regulations. We confirmed the parties to the sales transactions
with public records. We found no indication that the Authority did not follow HUD regulations
in the sale of its 10 low-income units in our sample. We did not test the remaining 24 sales
transactions (The Authority sold its 35 low-income units in 34 transactions).

We reviewed Authority accounting records, supporting documentation, and project files for the
two housing developments assisted by disposition sales proceeds to determine whether the
Authority followed HUD regulations in the use of its disposition sales proceeds. We did not
select a sample. We reviewed supporting documentation for all relevant legal, consulting, land
acquisition, engineering, architectural, materials, financing, and construction costs paid with
disposition sales proceeds.

We reviewed the Authority’s schedule of work performed on its low-income units that HUD
approved to be sold and their associated invoices to determine whether the Authority followed
HUD regulations in the use of its capital funds before disposition. We did not select a sample.
We reviewed all work performed on these units.

We did not use computer-generated data as audit evidence or to support our audit conclusions.
We used source documentation maintained by the Authority in its management and accounting
files for background information purposes. All conclusions were based on source
documentation reviewed during the audit.

We conducted the audit in accordance with generally accepted government auditing standards.
Those standards require that we plan and perform the audit to obtain sufficient, appropriate
evidence to provide a reasonable basis for our findings and conclusions based on our audit
objectives. We believe that the evidence obtained provides a reasonable basis for our findings
and conclusions based on our audit objectives.


                                                8
                                                  
                              INTERNAL CONTROLS

Internal control is a process adopted by those charged with governance and management,
designed to provide reasonable assurance about the achievement of the organization’s mission,
goals, and objectives with regard to

      Effectiveness and efficiency of operations,
      Reliability of financial reporting, and
      Compliance with applicable laws and regulations.

Internal controls comprise the plans, policies, methods, and procedures used to meet the
organization’s mission, goals, and objectives. Internal controls include the processes and
procedures for planning, organizing, directing, and controlling program operations as well as the
systems for measuring, reporting, and monitoring program performance.


 Relevant Internal Controls

               We determined that the following internal controls were relevant to our audit
               objectives:

                     Controls to ensure compliance with disposition requirements.
                     Controls to ensure compliance with regulatory requirements regarding the
                      use of capital funds before the disposition.

               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.

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




                                                 9
                                                   
Appendix A

        AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation   Auditee Comments




Comment 1




                         10
                           
Ref to OIG Evaluation                Auditee Comments




                        OIG Evaluation of Auditee Comments




                                       11
                                         
                            OIG Evaluation of Auditee Comments

The Authority’s written response along with its verbal response at the exit conference indicates
general agreement with the findings and recommendations.

Comment 1      As stated on page 5 of this report, “In 2007, the Authority received guidance from
               HUD that did not clearly reflect HUD regulations on the use of disposition sales
               proceeds.” However, in HUD’s September 20, 2007 approval letter to the
               Authority, HUD informed the Authority to contact its local HUD Regional Office
               for “any technical assistance necessary for your agency to proceed with the
               disposition”. As stated on page 5 of this report, “Authority officials noted that
               they could have researched HUD regulations more thoroughly to ensure the
               correct use of its funds.” On January 3, 2013, HUD informed the Authority of the
               Authority’s responsibility to follow statutory program requirements set forth by
               the U.S. Housing Act of 1937, Section 18. The Authority has since indicated its
               willingness to work with HUD to address these issues.




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