oversight

The Temtor Disbursed Project Funds for Ineligible and Unsupported Expenses

Published by the Department of Housing and Urban Development, Office of Inspector General on 2013-08-08.

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

OFFICE OF AUDIT
REGION 7
KANSAS CITY, KS




                      The Temtor
                     St. Louis, MO


        Section 220 Multifamily Insurance Program




2013-KC-1003                              AUGUST 8, 2013
                                                  U.S. DEPARTMENT OF
                              HOUSING AND URBAN DEVELOPMENT
                                          OFFICE OF INSPECTOR GENERAL



                                                                     Issue Date: August 8, 2013

                                                                     Audit Report Number: 2013-KC-1003


TO:            Timothy J. Ferlin, Supervisory Project Manager, St. Louis Program Center,
               7EHMLAX

               Craig T. Clemmensen, Director of Departmental Enforcement Center, CACB

               //signed//
FROM:          Ronald J. Hosking, Regional Inspector General for Audit, 7AGA

SUBJECT:       The Temtor Disbursed Project Funds for Ineligible and Unsupported
               Expenses


    Attached is the U.S. Department of Housing and Urban Development (HUD), Office of
Inspector General’s (OIG) final results of our review of disbursements made by The Temtor.

    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 7
                                  400 State Avenue, Suite 501, Kansas City, KS 66101
                                      Phone (913) 551-5870, Fax (913) 551-5877
                           Visit the Office of Inspector General Web site at www.hudoig.gov 
                                           August 8, 2013
                                           The Temtor Disbursed Project Funds for Ineligible and
                                           Unsupported Expenses




Highlights
Audit Report 2013-KC-1003


 What We Audited and Why                    What We Found

We selected The Temtor in St. Louis,       The Temtor used project funds for ineligible and
MO, for audit because the project          unsupported expenses. This misuse included payments
quickly defaulted on its mortgage and      of developer fees, unsecured loans, and excessive
requested a partial payment of claim.      funds to the management agent. In addition, Temtor
The project reached final endorsement      transferred funds out of its tenant security deposit
on January 30, 2012, and failed to make    reserve account and submitted incorrect accounting
timely mortgage payments beginning         reports that concealed the transfers.
March 1, 2012. Our audit objective was
to determine whether Temtor’s project
funds were used for ineligible expenses.

 What We Recommend

We recommend that the Director of
HUD’s St. Louis Office of Multifamily
Housing Programs require the project
owners to return $401,705 in ineligible
disbursements to the project operating
account and provide support for
$316,883 disbursed for unsupported
costs or return the funds to the project
operating account.

Additionally, we recommend that the
Departmental Enforcement Center
pursue appropriate administrative
sanctions against the individuals
involved, to include suspension,
debarment, or limited denial of
participation.
                           TABLE OF CONTENTS

Background and Objective                                                         3

Results of Audit
      Finding 1:    The Temtor Disbursed More Than $700,000 in Ineligible and
                    Unsupported Payments From Its Project Accounts              4
      Finding 2:    The Temtor Diverted Tenant Security Deposits                7

Scope and Methodology                                                           10

Internal Controls                                                               11

Appendixes
A.    Schedule of Questioned Costs                                              12
B.    Auditee Comments and OIG’s Evaluation                                     13
C.    Ineligible and Unsupported Costs Detail                                   32
D.    Criteria                                                                  35




                                           2
                      BACKGROUND AND OBJECTIVE

Steins Broadway Management and Rothschild Development collaborated to manage the
renovation of the former Coca-Cola syrup plant, also known as The Temtor. The project also
included a redevelopment of nine scattered sites located in the South Carondelet neighborhood of
St. Louis, MO. The project consists of 109 residential units and 9 commercial units.

To finance the construction, The Temtor project received approximately $14.4 million from a
U.S. Department of Housing and Urban Development (HUD)-insured mortgage. HUD
authorized the mortgage based on Section 220 of the National Housing Act (12 U.S.C. (United
States Code) 1715k). Regulations are in 24 CFR (Code of Federal Regulations) Part 200 and 24
CFR 220.1. This program provides funding for good quality rental housing in urban areas that
have been targeted for overall revitalization. The project also received approval for State and
Federal historic tax credits, Brownfield tax credits, and tax-incremental financing.

The project owners formed a limited liability company, 8000 Michigan, LLC, to administer
project development and operations. The company selected Steins Broadway Management
Company to perform the management duties. Temtor received initial endorsement on April 1,
2010, and final endorsement on January 30, 2012. Following final endorsement, the project
began missing mortgage payments in March 2012. By December 2012, the project reported
$748,517 payable to the HUD-insured mortgage holder.

HUD’s control over the borrower is exercised by a regulatory agreement, form FHA-2466,
signed at initial closing. The agreement outlines terms and conditions for the HUD-insured
mortgage, such as what expenses could be paid with project funds.

Our audit objective was to determine whether the project funds were used for ineligible
expenses.




                                               3
                                RESULTS OF AUDIT


Finding 1: The Temtor Disbursed More Than $700,000 in Ineligible and
Unsupported Payments From Its Project Accounts
Temtor used project funds for ineligible and unsupported expenses. This condition occurred
because Temtor chose to use project funds to benefit the project owners rather than making the
mortgage payment. As a result, the more than $700,000 used to make improper payments was
no longer available to make mortgage payments, contributing to the project’s default.


 Ineligible and Unsupported
 Disbursements

              Temtor used project funds for ineligible and unsupported expenses. These
              expenses included payments of developer fees, unsecured loans, and excessive
              funds to the management agent.

              Paid Developer Fees
              Temtor paid $282,000 in developer fees with project funds. These fees were
              development expenses, not operating expenses. The regulatory agreement
              required that project funds pay only for reasonable operating expenses and
              necessary repairs. Owners could use surplus cash to pay other expenses.

              The operating agreement also restricted the payment of developer fees. The
              agreement required payment of the bridge loans before payment of the developer
              fees with development funds. The Temtor used project funds to pay developer
              fees without paying the bridge loans in their entirety. While The Temtor could
              have paid developer fees with surplus cash, the project did not generate surplus
              cash during our audit period.

              Paid Unsecured Loans
              Temtor paid more than $69,000 on unsecured development or construction loans
              with project funds. These loans were development expenses, not project
              operating expenses.

              Paid Excessive Funds to Management Agent
              Temtor paid more than $50,000 to the management agent above the amount
              allowed by the project owner’s-management agent certification. The additional
              amounts included payments for accounting services, project management, office
              supplies, equipment lease, computer maintenance, phone and Internet services,
              and residential screening. These were either management agent expenses that
              should have been covered by the approved management fee or not related to The
              Temtor project.

                                               4
                                                 
             Made Unsupported Payments
             Temtor made more than $316,000 in payments from project accounts without
             being able to provide invoices and other documentation to demonstrate that these
             payments were allowable. The payments included transfers to other accounts
             owned by the management group, cash withdrawals, and direct payments to third
             parties.

Benefit to the Owners

             Temtor chose to use project funds to benefit the project owners rather than
             making the mortgage payment. The improper payments benefited the project
             owners since they also owned the development and management companies that
             received many of the payments. In addition, the loan repayments relieved
             personal obligations of the ownership group.

More than $700,000 Improperly
Disbursed

             More than $700,000 used to make improper payments was no longer available to
             make mortgage payments, contributing to the project’s default. The improper
             payments included ineligible payments of $401,705 and unsupported payments of
             $316,883. Details are included in appendix C.


             Disbursement Type                                      Amounts
              Developer Fees                    $             282,000
              Unsecured Loans                   $               69,418
              Excessive Funds to Mgmt Agent  $               50,287
                       Ineligible Payments ‐ Sub‐total                 $                 401,705
              Unsupported Payments                                     $                 316,883
              Improper Payments ‐ Total                                $                 718,588

             The project reported $748,517 payable to the holder of the HUD-insured
             mortgage at the end of our audit period.

Conclusion

             Temtor did not have adequate policies and procedures in place to ensure that
             disbursements were only for eligible project expenses. However, this report
             contains no related recommendations because after our audit period, Temtor
             changed management agents and the mortgage was assigned to HUD.

             The project regulatory and operating agreements established that members of the
             ownership group were individually liable to HUD if they received project funds

                                                   5
                                                    
          that they were not entitled to retain. The agreements further state the members
          agree to be liable for their own acts and deeds, or acts and deeds of others which
          they have authorized, in violation of the provisions of the HUD regulatory
          agreement. HUD should require that the project owners return the improper
          payments to the project operating account.

Recommendations

          We recommend that the Director of HUD’s St. Louis Office of Multifamily
          Housing Programs require the project owners to

          1A.     Return the $401,705 in ineligible disbursements to the project operating
                  account.

          1B.     Support the $316,883 disbursed for unsupported costs or return the funds
                  to the project operating account.




                                           6
                                             
                                 RESULTS OF AUDIT


Finding 2: The Temtor Diverted Tenant Security Deposits
Temtor transferred funds out of its tenant security deposit reserve account and submitted
incorrect accounting reports that concealed the transfers. This condition occurred because
Temtor chose to use the security deposits for project expenses rather than following the HUD
requirement to maintain the deposits apart from all other funds of the project. As a result, HUD
was not able to effectively monitor the condition of the project, and the tenants were at risk of
not being able to recover their deposits.


 Security Deposits Used for
 Operating Expenses

               Transferred Funds
               In March 2012, Temtor transferred $70,000 from its security deposit account to its
               operating account. Temtor returned $70,000 to its security deposit account from
               its operating account in April 2012. In May 2012, it transferred $73,000 from its
               security deposit account to its operating account. These transfers supported two
               mortgage payments of $78,419 each from the operating accounts to the holder of
               the HUD-insured mortgage. From March to September 2012, Temtor made
               multiple smaller transfers from its security deposit account to various other
               accounts.

               A member of the ownership group deposited $75,000 into the security deposit
               account in October 2012. Additional deposits made from the project’s rental
               account brought the balance of the security deposit account back to the reported
               level in November 2012.

               HUD Handbook 4370.2, REV-1, CHG-1, Financial Operations and Accounting
               Procedures for Insured Multifamily Projects, requires that all security deposits be
               segregated from other project funds and used only for refunds to tenants and
               payment of appropriate expenses incurred by the tenant.

               Incorrect Reports
               Temtor submitted incorrect accounting reports to HUD. It certified the security
               deposit account balances in the project’s monthly accounting reports. Between
               February and December 2012, Temtor overstated the security deposits in 8 of 11
               months. The average amount of overstatement was $54,631. This overstatement
               effectively concealed the diversion of funds from HUD.




                                                7
                                                  
                                     Security deposits
                                        reported vs. actual
              $100,000.00
                 $80,000.00
                 $60,000.00
                 $40,000.00
                 $20,000.00
                     $0.00




                                            Reported      Actual




Shortages Covered by Owners

             The management agent stated that the project did not have adequate funds to
             cover operating expenses. He was also aware that using security deposits for
             operating expenses was not allowed. However, Temtor chose to use tenant
             security deposits as it preferred rather than following HUD requirements.

Financial Risk

             HUD was not able to effectively monitor the condition of the project. The
             December 2012 project report indicated $748,517 in overdue payments on the
             HUD-insured mortgage. If the Temtor had accurately reported the use of security
             deposit funds to pay the mortgage, HUD would have been better able to take
             prompt corrective action.

             The security deposit account was not properly funded, placing the tenants at risk
             of losing their deposits if the project failed.

Conclusion

             The Temtor placed tenant security deposits into its project operating account and
             filed inaccurate reports concealing the diversion. Because improper payments
             were made from project accounts during the audit period (see finding 1), these
             transfers increased the project’s ability to make the improper payments. HUD can
             impose various administrative sanctions against individuals who have acted
             improperly to protect the public interest. These sanctions include suspension,
             debarment, and limited denial of participation.

                                              8
                                                
Recommendation

          We recommend that the Director of HUD’s Departmental Enforcement Center

          2A.    Pursue appropriate administrative sanctions for both findings against the
                 individuals involved, to include suspension, debarment, or limited denial
                 of participation.




                                          9
                                            
                         SCOPE AND METHODOLOGY

To accomplish our objective, we

      Interviewed HUD and project management,
      Reviewed Federal regulations and HUD handbooks,
      Reviewed independent public accountant reports,
      Reviewed the project operating and regulatory agreements,
      Reviewed the closing documents, and
      Reviewed project bank statements and supporting documentation.

We reviewed monthly financial reports that were submitted to HUD by Steins Broadway
Management Company. The company reported disbursements totaling approximately $4.8
million during our audit period. We selected for review payees that were paid more than
$25,000 during the audit period. By targeting the payees that received the largest disbursements,
our sample included 94.8 percent of the reported funds that were disbursed during our audit
period. We compared the invoices and payment documentation provided by the auditee to the
selected disbursements. We looked for support that the expenses were properly assigned to the
project.

We identified additional disbursements from the project accounts that were not disclosed in the
monthly financial reports; thus, we included an additional sample in our review. We obtained
the project operating and rental accounts’ monthly bank statements and supporting
documentation. Unreported payments totaling approximately $1 million were made from the
project operating or rental accounts during our audit period. We excluded payments that were
less than $1,000 and transfer payments between the project’s rental and operating accounts. By
targeting the payees that received the largest disbursements, our sample included 98.9 percent of
the unreported funds that were paid during our audit period.

We performed audit work from January through June 2013. We conducted audit fieldwork at
The Temtor, 8125 Michigan Avenue, St. Louis, MO. Our review generally covered the period
February 1 through December 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.




                                               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:

                     Policies and procedures to ensure proper oversight of project
                      disbursements.

               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 Temtor did not have adequate policies and procedures in place to
                      ensure that disbursements were only for eligible project expenses.




                                                 11
                                                   
                                   APPENDIXES

Appendix A

                 SCHEDULE OF QUESTIONED COSTS


             Recommendation number           Ineligible 1/     Unsupported 2/


                        1A                         $401,705
                        1B                                            $316,883




1/   Ineligible costs are costs charged to a HUD-financed or HUD-insured program or activity
     that the auditor believes are not allowable by law; contract; or Federal, State, or local
     policies or regulations.

2/   Unsupported costs are those costs charged to a HUD-financed or HUD-insured program
     or activity when we cannot determine eligibility at the time of the audit. Unsupported
     costs require a decision by HUD program officials. This decision, in addition to
     obtaining supporting documentation, might involve a legal interpretation or clarification
     of departmental policies and procedures.




                                             12
                                               
Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation   Auditee Comments




Comment 1




Comment 2



Comment 3




                         13
                           
Ref to OIG Evaluation   Auditee Comments




Comment 4



Comment 5




                         14
                           
Ref to OIG Evaluation   Auditee Comments




Comment 6




Comment 7




Comment 8




                         15
                           
Ref to OIG Evaluation   Auditee Comments




Comment 9

Comment 10



Comment 11




Comment 12




                         16
                           
Ref to OIG Evaluation   Auditee Comments




Comment 13




Comment 14




Comment 15




                         17
                           
Ref to OIG Evaluation   Auditee Comments




Comment 15




Comment 16




Comment 17




                         18
                           
Ref to OIG Evaluation   Auditee Comments




Comment 18




Comment 19




Comment 20




                         19
                           
Ref to OIG Evaluation   Auditee Comments




Comment 20




Comment 21




                         20
                           
Ref to OIG Evaluation   Auditee Comments




Comment 22




Comment 23




Comment 24




Comment 25




                         21
                           
Ref to OIG Evaluation   Auditee Comments




Comment 25




                         22
                           
Ref to OIG Evaluation   Auditee Comments




Comment 25




                         23
                           
Ref to OIG Evaluation   Auditee Comments




Comment 26




Comment 27


Comment 28




                         24
                           
Ref to OIG Evaluation   Auditee Comments




Comment 28




                         25
                           
                         OIG Evaluation of Auditee Comments

Comment 1   In general, the auditee disagreed with our finding that project funds were used for
            ineligible and unsupported expenses. The auditee claims the various project tax
            credits are specifically excluded from the mortgaged property and should be
            excluded from the project. This claim fails to recognize the difference between
            the mortgaged property and the project as defined by the regulatory agreement.

            Mortgaged Property includes all property, real, personal, or mixed covered by the
            mortgage or mortgages securing the note endorsed for insurance or held by the
            Secretary (Regulatory Agreement, Section 13.d).

            The Project includes the mortgaged property and all of its other assets of
            whatsoever nature or wheresoever situate, used in or owned by the business
            conducted on said mortgaged property, which business is providing housing and
            other activities as are incidental thereto (Regulatory Agreement, Section 13.e)

            The various tax credits were excluded as collateral from the FHA-insured
            Construction loan but remain collateral for the $6 million bridge loan with Excel
            Bank (Loan Document Section I, Para. 1.1). Furthermore, HUD is not the lender
            and the relationship between the owner and HUD is governed solely by the terms
            of the Regulatory Agreement and cannot be modified, altered or changed by any
            other agreement. Under the Regulatory Agreement, all rents and other receipts of
            the project shall be deposited in a financial institution in the name of the project
            (Regulatory Agreement, Section 9.g). Such funds shall be withdrawn only in
            accordance with the provisions of the Agreement for expenses of the project or
            for distributions of surplus cash as permitted by Para. 6(e). Since the tax credit
            proceeds were deposited into the project bank accounts, as other receipts of the
            project, such funds may only be disbursed for reasonable operating expenses and
            necessary repairs. Moreover, such funds were pledged by the Owner to HUD as
            security under the Regulatory Agreement (Regulatory Agreement, Para. 12).

            We recognized the various tax credits were collateral for the bridge loan and the
            proceeds of their sale were to be paid to the lender. Where documentation
            supported tax credits being used to make bridge loan payments, we did not
            consider the payments to be ineligible payments.

            In addition, HUD form 92580, Maximum Insurable Mortgage, establishes the
            Mortgagors Equity Investment (tax credits) as essential to the project. HUD form
            92580 documents project "Actual Costs" of $19.1 million. The form also
            documents a requirement of $4.7 million in Mortgagors Equity Investment in
            addition to the $14.4 million HUD insured loan to fund the project costs. Finally,
            the Owners warranted that they would not execute any other agreement with
            provisions contradictory of, or in opposition to, the provisions of the Regulatory
            Agreement; and, in any event the requirements of the Regulatory Agreement are



                                             26
                                               
            paramount and controlling as to their rights and obligations and supersede any
            other requirements in conflict (Regulatory Agreement, para. 15).

Comment 2   We reviewed The Temtor Rental Account and The Temtor Operating Account. In
            general, the rent receipts were deposited into the rental account and the project
            expenses were paid out of the operating account. Funds were also transferred to
            the management agent (Steins Broadway Management) to pay project expenses.
            In addition, we found tax credits were deposited into the rental account and the
            operating account. The documentation did not support the auditee claim that
            accounts were segregated. See comment 1.

Comment 3   See comment 1.

Comment 4   Our audit found false reports were filed by the auditee. In addition, payments
            were made from project accounts that were not disclosed on the monthly reports
            provided to HUD. Therefore, HUD was not able to effectively monitor the
            condition of the project.

            We did not rely on the work of other non-HUD OIG auditors and experts to
            satisfy any of our audit objectives. The information obtained from these sources
            was used for background purposes only. Therefore we did not assess the validity
            of their findings.

Comment 5   See comment 1.

Comment 6   Section 6(b) of the Regulatory Agreement states, “Owners shall not without the
            prior written approval of the Secretary: Assign, transfer, dispose of , or encumber
            any personal property of the project, including rents, or pay out any funds except
            from surplus cash, except for reasonable operating expenses and necessary
            repairs.”

Comment 7   The Request for Final Endorsement of Credit Instrument was signed by the
            Managing Member of the project on January 26, 2012. The managing member
            certified in this document that the construction of project is complete and all
            outstanding unpaid obligations were disclosed. After certification of completion,
            additional development costs cannot be charged to the project. Post final
            endorsement the only project expenses are operating expenses and necessary
            repairs. As noted in comment 2, the owner deposited the tax credit proceeds into
            the project’s rental and operating accounts.

Comment 8   The excerpt from Department of Economic Development publication provided by
            the auditee caps the Developer Fee at 20% of the qualified rehabilitation
            expenditures. HUD form 92580 recognized $19,123,667 in total land and
            improvements for the project. To comply with the requirements of the
            publication, payments equal to 10% of the maximum allowable developer fee
            would be required. This would be ($19,123,667 * 20% * 10%) = $382,473. The

                                             27
                                               
              excerpt from the audited financial statements provided by the auditee indicates
              development fees of $2,623,640 had been paid to 8000 Developer LLC, (a related
              party) and $17,000,000 had been earned as of December 31, 2011. These
              amounts greatly exceed the amount required by the Department of Economic
              Development. The documentation provided does not support the auditee’s claim
              that additional payments to 8000 Developer LLC were required. In addition, we
              were not provided with documentation to support the auditee’s claim that the
              developer fees were returned to the project accounts.

              The restrictions regarding payment of the developer fees were included in The
              Temtor closing file. The Notes to Financial Statements included in the closing
              file stated "Unpaid developer fees of $9,162,670, do not accrue interest and,
              pursuant to the agreement, the fee shall be paid from development sources or net
              cash flow, but only after payment of all bridge loans and of excess development
              costs."

Comment 9     It was certified on January 30, 2012 that all required Escrow Accounts and
              Reserves for the Project were fully funded. Construction and development
              reserves would not be used for project expenses.

Comment 10 The response confirms our finding that $69,418 was paid for unsecured
           development or construction loans. As noted earlier, the managing member
           certified that the construction of the project is complete and all outstanding unpaid
           obligations were disclosed (see comment 7). The tax credits remain part of the
           project (see comment 1), and were not maintained in separate accounts (see
           comment 2). In addition, the Request for Final Endorsement of Credit Instrument
           did not list any HUD-approved notes.

Comment 11 Project construction was outside the scope of our audit. The subject of increased
           development costs paid to the contractor were noted and resolved prior to closing.

Comment 12 See comment 10

Comment 13 Steins Broadway Management president’s identity of interest relationship with the
           project was disclosed and documented on the Project Owner's/Management Agent
           Certification. We reviewed the payments for legal fees without considering the
           dual role of the Management Agent and revised our report accordingly. The
           auditee claimed legal expenses that exceeded the documented project legal
           expenses by $18,102. This will be included in the reported unsupported expenses.

Comment 14 The auditee did not provide invoices or bills to support the reimbursements paid
           to the management agent/owner. During our audit, the management agent said he
           considered the reimbursements to be owner repayments for previous
           contributions, and could not be tied to specific expenses. The three payments
           totaling $11,840 will be included in the reported unsupported expenses.



                                              28
                                                 
Comment 15 We changed the heading in the table to read “excessive funds to management
           agent” to match up with the terminology in the body of the finding and to make it
           clear that we were not referring to the management fee itself. The $9,244 in
           ineligible costs included $5,452 for the lease of a copier that was not a project
           expense. Invoices show the copier was located at 7525 South Broadway. Steins
           Broadway Management, the management agent, was based at the project, 8125
           Michigan Avenue. Therefore, the equipment lease was not a direct project
           expense.

              The management company paid a total of $2,743 for phone and Internet services.
              We determined the phone number was registered to Steins Broadway
              Condominiums, LLC which is located at 7525 S. Broadway St. Steins Broadway
              Condominiums, LLC is a separate entity organized by the management agent.

              HUD Handbook 4381.5 allows reimbursement for project related expenses such
              as bookkeeping and associated expenses, project checks, envelopes, postage, and
              air express delivery charges. From the description of the invoices, we determined
              that $565 was disbursed for office supplies that were not eligible project
              expenses.

              The management company paid for residential screening services for various
              addresses. We matched the addresses listed in the invoice against the project rent
              roll and determined that only 15 of the billed units were located in Temtor
              buildings. The amount billed for the remaining addresses, $483, was not a project
              expense.

              The audit reviewed the eligibility of actual expenses. We did not compare actual
              expenses to budgeted.

Comment 16 HUD allows for payments of special management fees if a project has special
           needs or problems. As documented on the Management Agents Certification, this
           project did not seek nor receive approval for payment of special fees. In addition,
           HUD Handbook 4381.5 provides that salaries for preparing budgets required by
           the owner or HUD and analyzing and solving project problems must be paid out
           of the management fee funds rather than by the project. Accordingly, the
           financial analyst’s salary for preparing documents for the Partial Payment of
           Claim was not chargeable to the project. This would be an expense of the owner.

Comment 17 As noted earlier, the managing member certified the construction of the project is
           complete and all outstanding unpaid obligations were disclosed. After
           certification of completion additional development costs cannot be charged to the
           project (See comment 7).

Comment 18 We agree that repayment of the $10,000 would be a correct resolution of this
           improper payment. We removed the statement regarding direct payment to the



                                              29
                                                
              vendor on February 14, 2013. HUD will follow up to ensure collection and
              closing of the recommendation.

Comment 19 8000 Michigan (The Temtor), 8000 Manager, and 8000 Developer are distinct
           entities. The claimed accounting and tax services for the latter two entities are not
           project expenses.

Comment 20 The auditee provided documents to support the $234,551.75 wire made from the
           project operating account on February 2, 2012 was returned. The unsupported
           amount included in our finding was reduced based on this information.

Comment 21 The Carpenter’s Union was restricted from releasing funds to the project until the
           HUD loan closed. The auditee did not document receipt of the loan proceeds
           from the Carpenter's District Council. Therefore, we were not able to tie the
           payment made on February 3, 2012 to the loan proceeds.

Comment 22 The auditee provided additional documents to support the bridge loan payments
           made from the project operating account were funded by tax credits. The amount
           of unsupported payments included in our findings was reduced by $75,077.16
           based on this information.

Comment 23 We compared the invoices provided by the management agent to the
           disbursements reported in the monthly financial reports. The total disbursements
           exceeded the invoices by $5,763.70. We were not provided any additional
           documentation to describe these payments.

Comment 24 The auditee did not provide any documentation in their response to support that
           these payments were made for eligible project expenses.

Comment 25 The auditee agrees the security deposits were inappropriately used to fund project
           operations. However, the auditee added why they believe the project was
           underfunded.

              The following statements indicate the project was financially sound at closing.
              The managing member certified at closing the construction of project is complete
              and all outstanding unpaid obligations were disclosed (comment 7). The subject
              of increased development costs paid to the contractor were noted and resolved
              prior to closing (comment 11). It was certified on January 30, 2012 that all
              required Escrow Accounts and Reserves for the Project were fully funded
              (comment 9).

              This audit reviewed operations and did not include the development phase or final
              closing of the project. The project reached final endorsement on January 30,
              2012. Our review generally covered February 1 through December 31, 2012.

Comment 26 The auditee does not claim the charges have any connection to this project.

                                              30
                                                 
Comment 27 As stated in the auditee's response to the diversion of the tenant security deposits,
           the former management agent twice inappropriately and without authorization
           from the company or the knowledge of the managing member, used security
           deposits on an interim basis to fund operations. The members’ of the ownership
           group responsibility for these actions is established by the regulatory and
           operating agreements. In these documents the members, agree to be liable for
           their own acts and deeds, or acts and deeds of others which they have authorized.
           We modified the report to state this requirement.

Comment 28 We reduced the amount of unsupported and ineligible payments based on the
           additional documents the auditee provided. This reduced the total amount of
           improper payments to $718,588.

              The more than $700,000 used to make improper payments was no longer
              available to make mortgage payments, contributing to the project's default. The
              report does not conclude this is the sole cause of the default.




                                               31
                                                 
Appendix C

         INELIGIBLE AND UNSUPPORTED COSTS DETAIL

                                                          Inel i gi bl e
                                                                      Excessive 
                                                                       funds to 
                                          Developer       Unsecured  management 
  Account        Date       Check #            fees         loans       agent                Unsupported
 Operating     2/7/2012      EFT*            15,000.00
 Operating    2/10/2102       EFT            10,000.00
 Operating    2/15/2012       EFT              4,000.00
 Operating    2/15/2012       EFT            20,000.00
 Operating    2/17/2012       EFT            10,000.00
 Operating    2/28/2012       EFT              1,000.00
 Operating    2/29/2012       EFT              1,000.00
 Operating    4/17/2012       EFT         106,000.00
 Operating    4/18/2012       EFT            40,000.00
 Operating    4/23/2012       EFT            48,000.00
 Operating    4/24/2012       EFT            12,000.00
 Operating     4/25/2012     EFT             15,000.00
 Operating     2/3/2012      Wire                         25,376.00
                                                           
 Operating     8/17/2012     175                             2,042.00
 Operating    10/10/2012     188                             1,000.00
 Operating     2/3/2012      Wire                         21,000.00
                                                           
 Operating    4/26/2012      Wire                         20,000.00
                                                           
 See Note A    Various     See note A                                             9,244.06
 See Note B   6/13/2012    See Note B                                             5,503.58
 See Note B   7/20/2012    See Note B                                             5,503.58
 See Note B   8/21/2012    See Note B                                             5,503.58
 See Note B   9/21/2012    See Note B                                             5,503.58
 See Note B   10/18/2012   See Note B                                             5,503.58
 See Note C   4/24/2012    See Note C                                             3,525.00
 See Note C   11/8/2012    See Note C                                           10,000.00


* EFT = electronic funds transfer




                                                   32
                                                      
                                                        Inel i gi bl e
                                                                    Excessive 
                                                                     funds to 
                                          Developer     Unsecured  management 
 Account         Date        Check #        fees          loans       agent                Unsupported
See Note D    12/26/2012    See note D                                                             18,102.07
See Note E     8/6/2012     See Note E                                                               4,848.67
See Note E    10/25/2012    See Note E                                                               3,395.53
See Note E    11/27/2012    See Note E                                                               3,595.91
See Note A      Various     See Note A                                                               5,763.70
See Note F    9/18/2012     See Note F                                                               1,000.00
 Rental       5/14/2012      Transfer                                                                1,000.00
 Rental        9/6/2012      Transfer                                                                5,000.00
 Rental        3/8/2012    Withdrawal                                                                3,000.00
 Rental        3/8/2012    Withdrawal                                                                3,500.00
 Rental        4/4/2012    Withdrawal                                                              10,000.00
 Rental       9/6/2012     Withdrawal                                                                2,000.00
Operating     7/18/2012        EFT                                                                   2,550.00
 Rental       9/10/2012        EFT                                                                   5,500.00
 Rental       12/21/2012       EFT                                                                   1,000.00
 Rental       12/24/2012      EFT                                                                    1,500.00
Operating      4/5/2012       130                                                                    3,100.00
  Excel        2/28/2012    DBT CRD                                                                  2,250.00
Operating      2/3/2012      Wire                                                                234,601.75
Operating      5/10/2012      144                                                                    1,800.00
Operating      5/11/2012      143                                                                    1,630.00
Operating      5/16/2012      146                                                                    1,745.00
             Unsupported payment total                                                           316,882.63

               Ineligible payment totals   282,000.00    69,418.00            50,286.96          401,704.96

                                                        Improper payment total            $    718,587.59




                                               33
                                                 
Notes of Explanation

A. The management company reported a total of $20,611.45 in office administration fees for the
   months from June through December 2012. The office administration fees included
   reimbursements for the office supplies, equipment lease, computer maintenance, phone and
   Internet services, and residential screening; $9,244.06 in office administration fees was
   ineligible overhead expenses or not related to Temtor project. Additional administration fees
   of $5,763.70 were not properly supported.

                      Date              Description              Amount
                     06/15/12       Office administration       $   4,418.80
                     07/31/12       Office administration       $   1,544.76
                     08/24/12       Office administration       $   3,160.28
                     11/07/12       Office admin – Sept.        $   1,822.06
                     11/07/12       Office admin – Oct.         $   3,046.91
                     11/07/12       Office admin – Nov.         $   2,914.98
                     12/24/12       Office administration       $   3,703.66
                     Total                                      $ 20,611.45

B. Steins Broadway Management received transfer payments for extra management activities.
   HUD guidance, the regulatory agreement, and the project owner’s-management agent
   certification established criteria for project management activities. The project management
   services were included in Steins Broadway Management Company’s standard management
   duties. The extra project management fees, $27,517.90, constituted ineligible expenses.

C. We determined that the $10,000 disbursement reported by the management company on
   November 8, 2012, was ineligible. It was ineligible since it was transferred to the
   management agent’s bank account but not paid to the accounting company. Included with
   the $42,165 disbursement made on April 20, 2012, Temtor paid $3,525 for services not
   related to project operations.

D. We reviewed the reimbursements to the management agent for legal fees without considering
   the dual role of the identity of interest management agent and revised our report accordingly.
   The auditee claimed legal expenses that exceeded the documented project legal expenses by
   $18,102.07.

E. According to the monthly financial reports, three disbursements totaling $11,840 were
   transferred to Steins Broadway Management Company in August, October, and November
   2012, notated as “invoice for May bills,” “reimbursement to owner,” and “owner
   reimbursement.”

F. After the $1,500 transfer on September 18, 2012, $500 was transferred to the project
   operating account. Management withdrew the remaining $1,000 transferred to account 6177.
   The managing agent did not provide documentation supporting the eligibility of the payment.

                                                34
                                                  
Appendix D
                                        CRITERIA

Excerpts From HUD Handbook 4370.2, REV-1, CHG-1, Financial Operations and Accounting
Procedures for Insured Multifamily Projects

2-3 MAINTENANCE OF BOOKS AND ACCOUNTS
C. In establishing a financial accounting system, auditing problems can be avoided by keeping
operating funds separate from other project funds. Particularly when occupancy occurs prior to
final closing, care must be taken to segregate construction and operating funds.
Accounting of any construction expenses shall be in accordance with HUD Handbook 4470.1,
Mortgage Credit Analysis for Project Mortgage Insurance, Section 207.

2-6 REGULAR OPERATING ACCOUNT
E. All disbursements from the Regular Operating Account (including checks, wire transfers and
computer generated disbursements) must be supported by approved invoices/bills or other
supporting documentation. The request for project funds should only be used to make mortgage
payments, make required deposits to the Reserve for Replacements, pay reasonable expenses
necessary for the operation and maintenance of the project, pay distributions of surplus cash
permitted and repay owner advances authorized by HUD.

2-8 SURPLUS CASH AND RESIDUAL RECEIPTS
A. Basically, surplus cash is the cash remaining after all necessary and reasonable expenses of
the project have been paid or funds have been set-aside for such payment. Specifically, the
regulatory agreement defines surplus cash as any cash remaining after:

   1. The payment of all sums due under the terms of any mortgage, all amounts required for
      funded reserve accounts, and all obligations of the project, and
   2. The segregation of an amount equal to the aggregate of all special funds required to be
      maintained by the project and the segregation of all tenant security deposits held.

2-9 SECURITY DEPOSIT ACCOUNT
A. In instances where the Regulatory Agreement allows the receipt of security deposits from
project tenants, a separate bank account should be established to maintain these funds. In
addition, individual states have specific regulations governing the handling of tenant security
deposits and these regulations should be complied with. There shall be one Security Deposit
Account per project. Funds in the single Security Deposit Account must not be commingled
with any other funds, e.g., security deposit funds of other projects, operating accounts, managing
agent accounts, etc. In cases where the funds in the project’s Security Deposit bank account
exceed the amount that may be insured by the federal government ($100,000/bank), the project
may open another bank account for the excess amounts.

B. All disbursements from the Security Deposit account must be supported by approved
invoices/bills or other documentation. Disbursements must be only for refunds to tenants and for
payment of appropriate expenses incurred by the tenant.

                                                35
                                                  
2-10 DISTRIBUTIONS TO OWNERS
A. Surplus cash distributions may not be paid from borrowed funds, prior to the completion of
the project or when a project is in default or under a forbearance agreement. If the owner takes
distributions when the project is in default or when the project is in a non-surplus cash position,
the owner is subject to criminal and/or civil penalties. (See Appendix 1 - Criminal Statutes for a
listing of civil and criminal statutes). The first year's distribution may not be paid until all
required cost certification submissions have been made. Distributions are earned beginning with
the day following the cut-off date for cost certification. Distributions to owners are not permitted
on nonprofit (NP) projects. On limited dividend (LD) or profit-motivated (PM) projects, the
regulatory agreement provides that distributions can be paid without prior HUD approval only:

   o if paid from surplus cash,
   o if paid as of and after the end of an annual or, if specified in the regulatory agreement,
     semiannual fiscal period.

In effect, surplus cash generated at the end of one fiscal period is not available for distribution
until the next fiscal period. Stated differently, distributions paid out early in fiscal year 1991, for
example, may not exceed surplus cash available as of the end of fiscal year 1990.

2-11 REPAYMENT OF OWNER ADVANCES
A. Advances made for reasonable and necessary operating expenses may be paid from surplus
cash at the end of the annual or semi-annual period. Such repayment is not considered an owner
distribution. It is considered a repayment of advances. Repayment of owner advances when the
project is in a nonsurplus cash position will subject the owner to criminal and civil monetary
penalties. (See Appendix 1, Criminal Statutes.)

2-12 CASH MANAGEMENT CONTROLS
B. DISBURSEMENT CONTROLS
   1. A request for a check must have supporting documentation (i.e., invoice itemizing
      amount requested with an authorized signature) in order for approval to be obtained to
      make the disbursement.
   2. Checks must be approved by an individual authorized to approve checks.
   3. The authorized check signer shall review supporting documentation before signing the
      check.
   4. Supporting vouchers shall be marked canceled to prevent resubmission.
   5. A monthly reconciliation shall be performed to ensure that all checks disbursed are
      accounted for (i.e., cashed, outstanding, or void).
   6. Invoices should be marked “paid” and the check number and date should be posted to the
      invoice. Supporting vouchers shall also be marked “paid” to prevent resubmission.

Excerpts From HUD Handbook 4381.5, REV 2, The Management Agent Handbook

6.39: MANAGEMENT COSTS PAID FROM THE MANAGEMENT FEE
a. Expenses for services that are not front-line activities must be paid out of management fee
funds, except for centralized accounting and computer services.

                                                  36
                                                    
b. Salaries, fringe benefits, office expenses, fees, and contract costs for the following activities
must be paid out of management fee funds. These costs include:
(1) Designing procedures/systems to keep the project running smoothly and in conformity with
HUD requirements.
(2) Preparing budgets required by the owner or HUD, exclusive of rent increase requests and
MIO Plans.
(3) Recruiting, hiring, and supervising project personnel.
(4) Training for project personnel that exceeds the line item budget for training expenses.
(5) Monitoring project operations by visiting the project or analyzing project performance
reports.
(6) Analyzing and solving project problems.
(7) Keeping the owner abreast of project operations.
(8) Overseeing investment of project funds.
(9) Ensuring that project positions are covered during vacations, sickness, and vacancies.

Excerpts From HUD Handbook 4555.1, Section 220, Rental Housing in Urban Renewal
Areas

1-7. ANNUAL FINANCIAL STATEMENTS.
Mortgagors must keep their books and accounts according to Handbook 4370.2 Financial
Operations and Accounting Procedures for Insured Multifamily Projects. They must also
provide annual financial reports meeting the requirements in reference (7) of the Foreword.

1-8. REGULATORY AGREEMENT.
The Secretary’s control over the mortgagor is exercised by a Regulatory Agreement, Form FHA
2466, which is signed at initial closing.

Excerpts From First Amendment to the Second Amended and Restated Operating
Agreement of 8000 Michigan, LLC, A Missouri Limited Liability Company
Amendment to Section 4.16. Development Fees
Development Fees. The Company has entered into Development Agreements with the
Developer for its services in connection with each of the Company’s ten historic rehabilitation
projects. In accordance with such Development Agreements, the Company shall pay the
Developer the respective Developer Fees (including overhead) as set forth in Schedule D. The
Developer Fees with respect to each property shall each be earned in full upon substantial
completion of the respective rehabilitation project, in each case as evidenced by a Certificate of
Substantial Completion executed by the project architect. The Developer shall be paid such
portion of the Developer Fee as is available from Development Sources or Net Cash Flow but
only after payment of all Bridge Loans in their entirety and the payment of Excess Development
Costs. In all events the Developer Fee shall be paid in full by December 31, 2019 and, to the
extent Cash Flow and other sources are insufficient to pay such fee in full, the Managing
Member shall make a Capital Contribution to the Company in the amount necessary to pay the
balance of the Development Fee. (page 65)

“Article XI” HUD Requirements
g. The Members, and any assignee of a Member, agree to be liable in their individual capacities
to HUD with respect to the following matters:

                                                 37
                                                    
(1) For funds or property of the Project coming into their hands, which by the provisions of the
HUD Regulatory Agreement, they are not entitled to retain;
(2) For their own acts and deeds, or acts and deeds of others which they have authorized, in
violation of the provisions of the HUD Regulatory Agreement.
(3) The acts and deed of affiliates, as defined in the HUD Regulatory Agreement, which the
person or entity has authorized in violation of the provisions of the HUD Regulatory Agreement;
and
(4) As otherwise provided by law. (page 68)

Excerpts From the Regulatory Agreement for Multifamily Housing Projects

6. Owners shall not without the prior approval of the Secretary:
(b) Assign, transfer, dispose of, or encumber any personal property of the project, including
rents, or pay out any funds except from surplus cash, except for reasonable operating expenses
and necessary repairs.
(e) Make, or receive and retain, any distribution of assets or any income of any kind of the
project except surplus cash and except on the following conditions:
            1) All distributions shall be made only as of and after the end of a semiannual or
                annual fiscal period, and only as permitted by the law of the applicable
                jurisdiction;
            2) No distribution shall be made from borrowed funds, prior to the completion of the
                project or when there is any default under this Agreement or under the note or
                mortgage;
(g) Require, as a condition of the occupancy or leasing of any unit in the project, any
consideration or deposit other than the prepayment of the first month’s rent plus a security
deposit in an amount not in excess of one month’s rent to guarantee the performance of the
covenants of the lease. Any funds collected as security deposits shall be kept separate and apart
from all other funds of the project in a trust account the amount of which shall at all times equal
or exceed the aggregate of all outstanding obligations under said account.
9. (g) All rents and other receipts of the project shall be deposited in the name of the project in a
financial institution, whose deposits are insured by an agency of the Federal Government. Such
funds shall be withdrawn only in accordance with the provisions of this Agreement for expenses
of the project or for distributions of surplus cash as permitted by paragraph 6(e) above. Any
Owner receiving funds of the project other than by such distribution of surplus cash shall
immediately deposit such funds in the project bank account and failing so to do in violation of
this Agreement shall hold such funds in trust. Any Owner receiving property of the project in
violation of this Agreement shall hold such funds in trust. At such time as the Owners shall have
lost control and/or possession of the project, all funds held in trust shall be delivered to the
mortgagee to the extent that the mortgage indebtedness has not been satisfied. (b) for their own
acts and deeds or acts and deeds of others which they have authorized in violation of the
provisions hereof.




                                                 38