OFFICE OF AUDIT DRAFT REGION 8 For Discussion and Comment Only - Subject to Review and Revision DENVER, CO Jefferson County Housing Authority Wheat Ridge, CO Disposition of Low-Income Public Housing Units 2013-DE-1005 SEPTEMBER 30, 2013 Issue Date: September 30, 2013 Audit Report Number: 2013-DE-1005 TO: Carol Ann Roman, Director, Denver Office of Public Housing, 8APH Craig Clemmensen, Departmental Enforcement Center, CACB //signed// FROM: Ronald J. Hosking, Regional Inspector General for Audit, 8AGA SUBJECT: The Jefferson County Housing Authority, Wheat Ridge, 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 Jefferson County Housing Authority’s 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 30, 2013 The Jefferson County Housing Authority, Wheat Ridge, CO, Did Not Properly Use Its Disposition Sales Proceeds Highlights Audit Report 2013-DE-1005 What We Audited and Why What We Found We audited the Jefferson County The Authority did not follow required disposition Housing Authority based on concerns procedures and did not use its sales proceeds properly. that there were irregularities in its It did not follow HUD procedures regarding sales disposition process. The objective of requirements, the use of sales proceeds, distribution of our audit was to determine whether the the remaining project reserves, the placement of Authority followed U.S. Department of Section 8 tenants, reporting its use of sales proceeds, Housing and Urban Development and the sale of units to an affiliated nonprofit entity. (HUD) disposition procedures and used its sales proceeds properly. What We Recommend We recommend that HUD require the Authority to (1) recover more than $6.4 million in ineligible costs associated with its disposition process from non- Federal sources, (2) place the correct number of Section 8 tenants into units purchased, (3) submit required reports, and (4) implement conflict-of-interest restrictions. In addition, we recommend that HUD refer the Authority to the Departmental Enforcement Center for appropriate administrative and civil actions if necessary. TABLE OF CONTENTS Background and Objective 3 Results of Audit Finding: The Authority Did Not Comply With Its Disposition Agreement 4 Scope and Methodology 10 Internal Controls 11 Appendixes A. Schedule of Questioned Costs and Funds To Be Put to Better Use 12 B. Auditee Comments and OIG’s Evaluation 13 2 BACKGROUND AND OBJECTIVE The Jefferson 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 based on the U.S. Housing Act of 1937 for the purpose of providing low-rent housing for qualified individuals. The Authority is responsible for its Section 8 program, governed by the U.S. Department of Housing and Urban Development (HUD), which allows it to provide rental assistance to eligible individuals and families who rent units in the private rental housing market. The Authority entered into annual contributions contracts with HUD continuously from April 12, 1979, until the disposition of its low-income public housing units on November 29, 2007. The mission of the Authority is to provide affordable housing throughout Jefferson County to the greatest number of eligible people in the most efficient and cost-effective manner. The executive offices of the Authority are located at 7490 West 45th Avenue, Wheat Ridge, CO. As of November 29, 2007, the date of disposition, the Authority administered 65 low-income public housing units. According to its 2006 and 2007 audited financial statements, HUD awarded the Authority more than $22,000 and $337,000, respectively, for its public housing program. As of November 18, 2011, the Authority administered 1,532 Section 8 units. According to its 2006 and 2007 audited financial statements, HUD awarded the Authority more than $11 million in each of those years for its Section 8 Housing Choice Voucher program. The HUD Special Applications Center received the Authority’s disposition application through the HUD Public and Indian Housing Information Center on September 11, 2006. The Authority provided HUD supplemental information related to the disposition through January 30, 2007. HUD approved the Authority’s disposition request on March 7, 2007. The Authority requested permission to modify the disposition on August 28, 2007, allowing it to sell all 65 units to a nonprofit corporation at the fair market value. HUD approved the Authority’s request to modify the disposition on September 20, 2007. The agreement approved the Authority to sell all 65 low- income public housing units for an estimated fair market value of more than $10.5 million. HUD completed its release of the declaration of trust for the 65 units on November 13, 2007. The objective of our audit was to determine whether the Authority followed HUD disposition procedures and used its sales proceeds properly. 3 RESULTS OF AUDIT Finding: The Authority Did Not Comply With Its Disposition Agreement The Authority did not dispose of its public housing units in accordance with the terms and conditions of its disposition agreement or HUD regulations. This condition occurred because the Authority chose not to follow the terms of its disposition agreement and misinterpreted guidance it received from HUD. As a result, more than $6.4 million was not available to acquire and rehabilitate low-income units or build new low-income housing as defined by HUD. The Authority Did Not Comply With Its Disposition Agreement The Authority did not comply with the terms of its disposition agreement with HUD. Specifically, it (1) inappropriately accepted a promissory note as payment from the buyer of its 65 low-income public housing units, (2) inappropriately sold its low-income public housing units to an affiliated nonprofit entity, (3) spent more than $975,000 in disposition sales proceeds on ineligible expenses, (4) did not return its remaining operating fund reserves as directed by HUD, (5) did not place the required number of Section 8 voucher holders into units it purchased using disposition sales proceeds, and (6) did not accurately report to HUD its use of disposition sales proceeds. The Authority Violated Its Method of Sale Requirements The Authority inappropriately accepted a promissory note as payment from the buyer of its 65 low-income public housing units. The Authority sold all 65 units in bulk to one buyer for the established fair market value of more than $10.5 million. It accepted a promissory note from the buyer for that amount. The buyer paid off approximately $5.1 million of the note, which represented the proceeds the buyer received from reselling 47 of the 65 units. By investing the proceeds in a note, the Authority violated section 18(a)(5) of the U.S. Housing Act of 1937; regulatory requirements (24 CFR (Code of Federal Regulations) Part 970); and part A, section 9, of its annual contributions contract. Therefore, the uncollected amount of nearly $5.5 million was not a permissible use of disposition proceeds. 4 The Authority Made an Inappropriate Sale to an Affiliated Non-Profit Entity The Authority inappropriately sold its low-income public housing units to an affiliated nonprofit entity. In a letter from the Authority to HUD, dated August 24, 2007, the Authority requested permission to modify its initial disposition application, allowing it to sell all 65 units to Jeffco Housing Corporation. In its letter to HUD, the Authority stated that the Corporation was a separate and independent legal entity that was not owned or controlled by the Authority in any regard. The Authority also stated that the Corporation had its own board of directors, which was not linked to the Authority. Part A, section 19, of the Authority’s annual contributions contract prohibits it from entering into any contract or arrangement in connection with projects governed by the annual contributions contract in which the Authority has an interest, either direct or indirect. However, at the time of the disposition, the Authority’s board appointed all members of the Corporation’s board. In addition, the Authority’s executive director served as the executive director of the Corporation. Several closing documents related to the sale of the units showed the Authority’s executive director signing as the executive director of both the Authority and the Corporation. The Authority Spent Disposition Proceeds on Ineligible Expenses The Authority spent more than $975,000 in disposition sales proceeds on ineligible expenses when it purchased a vacant lot and paid the operating expenses of its other non-annual contributions contract (non-public housing) units. This was not an approved use of funds in its disposition agreement with HUD. The Authority was approved to use its disposition sales proceeds for the acquisition, development, or rehabilitation of other properties that would more efficiently or effectively operate as low-income housing. HUD regulations (24 CFR Part 941) require HUD to approve the acquisition of land for development before the acquisition. However, the Authority did not receive HUD approval before acquiring the vacant lot. In addition, the Authority constructed a storage building on the vacant lot with no plans for future use of the lot. Therefore, the more than $362,000 spent on the lot was an ineligible use of disposition proceeds. Below is a picture of the vacant lot purchased by the Authority and the storage unit built on the lot. 5 The Authority also spent more than $612,000 of its disposition sales proceeds for operating and other expenses of its other non-annual contributions contract units. However, the use of these funds was limited to public housing units under an annual contributions contract or housing assisted by the Section 8 Housing Choice Voucher program by section 18(a)(5) of the Act . The following table lists the disposition sales proceeds used to pay the operating and other expenses of the Authority’s other non-annual contributions contract units. Use of Disposition Sales Proceeds for Operating and Other Expenses Property Type Expense Amount JCHA New Development Flood Insurance $10,279.00 Caesar Square Apartments Operating $428,396.74 Parkview Apartments Operating $141,838.80 Glendale Apartments Operating $32,387.19 The Authority Did Not Return Operating Fund Reserves to HUD The Authority did not return to HUD its remaining operating fund reserves totaling more than $150,000. The Authority was directed by HUD on two occasions to identify and return operating fund reserves upon termination of the project. The Authority Did Not Place the Required Number of Section 8 Tenants Into Its Units The Authority did not place the required number of Section 8 voucher holders into units it purchased using its disposition sales proceeds. The U.S. Housing Act 6 of 1937, Section 18, requires these funds be used toward Section 8 or public housing units. The following table lists the total number of units in the properties purchased or rehabilitated using disposition sales proceeds, the required number of units for Section 8 voucher holders based upon a pro rata percentage, and the actual number of units occupied by Section 8 voucher holders of the Authority. Pro rata percentage of Section 8 tenants Property Number of units Required Actual number number of of Section 8 Section 8 tenants tenants Parkview Apartments 96 18 11* Viking Square Apartments 55 6 0* * This number does not include Section 8 voucher holders from other agencies pursuant to Intergovernmental Agreements and from agencies assisted by the State of Colorado Division of Housing The Authority Did Not Submit Required Reports The Authority did not accurately report to HUD its use of disposition sales proceeds by providing a financial statement showing how the funds were expended by item and dollar amount as required by HUD regulations (24 CFR Part 970). In addition, the Authority did not inform HUD about the amount of disposition funds used for the purchase or construction of each new non-annual contributions contract low-income housing project. The Authority Misinterpreted Guidance It Received From HUD The Authority chose not to follow the terms of its disposition agreement and misinterpreted guidance it received from HUD. The Authority believed that it was enough to inform HUD that it was going to sell its units to the Corporation. However, it chose not to inform HUD of the specific terms of the sale. The Authority incorrectly believed that the disposition approval allowed it to use disposition proceeds for any low-income housing. However, HUD later informed the Authority that the approval letter stated that disposition proceeds must be used for housing that benefits low-income residents under the Act, which defines low- income housing as decent, safe, and sanitary dwellings assisted under the Act, and that housing assisted by Section 8 vouchers would also qualify as such housing. In addition, the Authority incorrectly believed that once it sold the units to the Corporation, it was no longer required to report its activities to HUD. However, 7 the disposition had not been completed; therefore, the Authority was required to report its disposition activities to HUD. Funds Were Not Available for Low-Income Housing as Defined by HUD As a result of the conditions described above, more than $6.4 million was not available to acquire and rehabilitate low-income units or build new low-income housing as defined by HUD (the nearly $5.5 million not yet collected by the Authority and the more than $975,000 in ineligible expenditures). In addition, HUD could not adequately monitor the disposition activity and verify whether the Authority properly used its disposition sales proceeds. Recommendations We recommend that the Director of the Denver Office of Public Housing 1A. Ensure that the Authority recovers from non-Federal sources $5,496,367 in disposition sales proceeds that was not received from the sale of its 65 low- income public housing units and use the recovered funds for their intended purposes or return those funds to HUD within a reasonable period. 1B. Require the Authority to repay from non-Federal sources $975,146 in disposition sales proceeds used in violation of its disposition agreement and use the recovered funds for their intended purposes or return those funds to HUD within a reasonable period. 1C. Require the Authority to repay from non-Federal sources $151,828 in project fund reserves to HUD within a reasonable period. 1D. Require the Authority to place a pro rata percentage of Section 8 tenants into its non-annual contributions contract units acquired using its disposition proceeds. 1E. Require the Authority to submit financial statements that show how its disposition funds were expended by item and dollar amount. 1F. Require the Authority to implement management controls to ensure that employees involved in a possible conflict of interest have no direct or indirect participation in the transaction. We also recommend that the Director of HUD’s Departmental Enforcement Center 1G. Pursue all applicable administrative and civil actions if the Authority does not (1) recover the funds and use them for their intended purposes or return those 8 funds to HUD within a reasonable period, (2) place a pro rata percentage of Section 8 participants into its non-annual contributions contract units acquired using its disposition proceeds, (3) follow the reporting requirements, and (4) prevent employees who have a conflict of interest from being involved in decisions associated with the disposition sale. 9 SCOPE AND METHODOLOGY Our audit covered the period November 1, 2007, through October 31, 2011. We performed our onsite work from January 2012 through April 2013 at the Authority’s office located at 7490 West 45th Avenue, Wheat Ridge, CO. To accomplish our objective, we obtained and became familiar with applicable sections of the U.S. Housing Act of 1937, HUD regulations, the Authority’s annual contributions contract with HUD, and Authority policies related to the disposition of its low-income public housing units. To determine whether the Authority followed HUD procedures in the disposition of its low- income public housing units, we examined documentation on the application, environmental, reporting, and HUD approval requirements associated with a public housing agency’s disposition of its low-income public housing units for all units sold. To determine whether the Authority used the disposition sales proceeds properly, we examined bank records, invoices, journal entries, and other documentation on all expenditures made using disposition sales proceeds. We did not use computer-generated data as audit evidence or to support our audit conclusions. We used computer-generated data maintained by the Authority for background information purposes only. 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 objective. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objective. 10 INTERNAL CONTROLS Internal control is a process adopted by those charged with governance and management, designed to provide reasonable assurance about the achievement of the organization’s mission, goals, and objectives with regard to Effectiveness and efficiency of operations, Reliability of financial reporting, and Compliance with applicable laws and regulations. Internal controls comprise the plans, policies, methods, and procedures used to meet the organization’s mission, goals, and objectives. Internal controls include the processes and procedures for planning, organizing, directing, and controlling program operations as well as the systems for measuring, reporting, and monitoring program performance. Relevant Internal Controls We determined that the following internal controls were relevant to our audit objective: Controls to ensure compliance with disposition requirements. Controls to ensure the safeguarding of contractual interests related to 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. Significant Deficiency Based on our review, we believe that the following item is a significant deficiency: The Authority lacked controls to ensure compliance with disposition procedures and instructions received from HUD. 11 APPENDIXES Appendix A SCHEDULE OF QUESTIONED COSTS AND FUNDS TO BE PUT TO BETTER USE Recommendation Funds to be put Ineligible 1/ number to better use 2/ 1A $5,496,367 1B $975,146 1C $151,828 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/ Recommendations that funds be put to better use are estimates of amounts that could be used more efficiently if an Office of Inspector General (OIG) recommendation is implemented. These amounts include reductions in outlays, deobligation of funds, withdrawal of interest, costs not incurred by implementing recommended improvements, avoidance of unnecessary expenditures noted in preaward reviews, and any other savings that are specifically identified. The Authority could have put $5,496,367 to better use for low-income housing as defined by HUD. 12 Appendix B AUDITEE COMMENTS AND OIG’S EVALUATION Ref to OIG Evaluation Auditee Comments 13 Ref to OIG Evaluation Auditee Comments Comment 1 14 Ref to OIG Evaluation Auditee Comments Comment 2 15 Ref to OIG Evaluation Auditee Comments Comment 3 Comment 4 16 Ref to OIG Evaluation Auditee Comments Comment 5 17 Ref to OIG Evaluation Auditee Comments Comment 6 Comment 7 18 OIG Evaluation of Auditee Comments The Authority’s written response along with its verbal response at the exit conference indicates general disagreement with the findings and recommendations. Comment 1 We do not address the Authority’s use of the standard Colorado Real Estate Commission approved form for commercial real estate transactions in the finding. As such, we are not agreeing or disagreeing that this form provides for the customary options for this type of transaction. We agree that the Special Applications Center probably never requested a copy of this contract because our conversations with the Special Applications Center indicated they were not aware that the Authority was carrying the loan on behalf of the buyer. This is supported by our review of the Authority’s request to modify its application for disposition because it did not inform the Special Applications Center of the details of its method of sale. As such, the Special Applications Center proceeded under the belief that the Authority would receive the entire dispositions sales proceeds as a single payment from the buyer. The terms of the Authority’s annual contributions contract states that investments in financial instruments must be approved by HUD. We found no indication that HUD ever gave this approval. The U.S. Housing Act of 1937 and the regulations limit the use of proceeds from the sale low-rent public housing units. The investment of proceeds in a note is not included in permissible uses. In its revised request to sell the 65 low-income public housing units, the Authority stated the “purchase and sale between (the Authority) and (the Corporation) would be accomplished by written contract containing all customary terms, conditions and obligations as in any other commercial real estate transaction.” The request contained no further details about the sale and did not mention the sale would be done in the form of a promissory note. As such, the approval to dispose of these units by the Special Applications Center did not allow for the financing of the sale. Comment 2 The Authority was required to follow the provisions of its annual contributions contract with HUD. These provisions prohibit the Authority from entering into any contract or arrangement in connection with projects governed by the annual contributions contract in which the Authority has an interest, either direct or indirect. This includes any officer of the governing body of the Authority and any employee who formulates policy or who influences decisions. After approval of the revised request to sell its 65 low-income public housing units, at the time of the disposition approval, all Corporation board members were appointed by the Authority’s Board of Commissioners. In addition, the Corporation’s Internal Revenue Service Form 990, Return of Organization Exempt From Income Tax, shows the executive director of the Authority as the executive director of the Corporation and that he was receiving a salary. This form was submitted after approval of the disposition, and contradicts the Authority’s claim that its executive director was simply an agent of the Corporation signing on behalf of the 19 Authority and that he was not an “executive” of the Corporation. In addition, our review of the seller’s settlement statements issued by the title company and the settlement statement (HUD-1) on the sale of the individual units in question shows the executive director of the Authority signing as the executive director of the Corporation. This violated the Authority’s conflict of interest restrictions specified in its annual contributions contract with HUD. The Authority now claims it has resolved any conflict of interest restrictions between itself and the Corporation. The Authority will need to work with HUD to verify if the conflict of interest violations identified in the finding are no longer present. Comment 3 The disposition approval letter from the Special Applications Center clearly identified the legally permissible uses of disposition proceeds under section 18 of the U.S. Housing Act of 1937. Disposition proceeds may only be used for the “provision of low-income housing or to benefit the residents of the public housing agency.” It is important to note that “low-income” housing is limited to housing provided under the U.S. Housing Act of 1937. It is not the same as housing for “low-income families.” As such, housing assisted under the U.S. Housing Act of 1937 is limited to annual contributions contract units and units receiving Section 8 assistance under the Housing Choice Voucher Program. The statute is explicit in prohibiting the use of disposition proceeds for the provisions of housing that is not assisted by the U.S. Housing Act of 1937. The purchase of a vacant lot that cannot be used in accordance with an acceptable use is not a permitted use of the disposition proceeds. The building of a storage unit and the future planned expansion of the Authority’s offices is not an acceptable use of disposition proceeds under the U.S. Housing Act of 1937. The use of disposition proceeds for other than annual contributions contract housing or units receiving Section 8 assistance is not permitted. Therefore, disposition proceeds used to pay the operating expenses of the Authority’s other non-annual contributions contract units also does not qualify under the U.S. Housing Act of 1937. The Authority claims it had repaid a substantial portion of these funds when these properties started receiving a positive cash flow. The Authority will need to work with HUD to verify that these funds have been repaid from non-Federal sources. Comment 4 The Authority asserts that any project reserve funds at the time of the disposition were included as part of the complete portfolio sold to the buyer. However, our review of the seller’s settlement statement between the Authority and the Corporation for the sale of these units did not indicate this. The Authority also asserts that HUD records should reflect the same information as it has, namely that no project reserve funds for its former public housing program are due to HUD. However, HUD’s Financial Assessment Subsystem on the Authority for calendar year ending 12/31/2007 showed there was $151, 828 in project reserve funds remaining after completion of the disposition sale in 2007. Information in this subsystem is placed there by the Authority’s certified public accountant. The 20 Authority will need to work with HUD to verify that these funds have been repaid from non-Federal sources. Comment 5 The Authority asserts that it has placed the required pro rata percentage of Section 8 vouchers into the units in question. The Authority indicates it has met this requirement by placing other Section 8 voucher holders from other agencies pursuant to Intergovernmental Agreements and from agencies assisted by the State of Colorado Division of Housing. These Section 8 vouchers are not issued by the Authority and they are not “port-ins” from other public housing agencies. The Authority will need to work with HUD to determine if this is allowable in order to meet the pro rata percentage requirement. Comment 6 The Authority indicates it has submitted reports and responded to requests for information related to the disposition by HUD in the past. Our review of the Authority’s reporting responsibilities to HUD on its disposition activities did not support this assertion. However, planned actions on the part of the Authority should resolve this issue. Comment 7 The Authority indicates the Office of Inspector General has overlooked the fact that it received approval to use its disposition proceeds for more than just the acquisition and rehabilitation of low-income housing as defined by HUD. The Authority believes it also received approval to use its disposition proceeds for items that “benefit the residents of the public housing agency.” This is incorrect. Although the approval letter contains the language “benefit the residents of the public housing agency,” Section 18 of the Act requires the disposition proceeds to be used only for Section 8 or public housing units. 21
The Jefferson County Housing Authority, Wheat Ridge, CO, Did Not Properly Use Its Disposition Sales Proceeds
Published by the Department of Housing and Urban Development, Office of Inspector General on 2013-09-30.
Below is a raw (and likely hideous) rendition of the original report. (PDF)