oversight

Bay Vista Methodist Heights, San Diego, CA, Violated Its Agreement With HUD When Administering Its Trust Funds

Published by the Department of Housing and Urban Development, Office of Inspector General on 2013-03-14.

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

OFFICE OF AUDIT
REGION 9
LOS ANGELES, CA




       Bay Vista Methodist Heights, San Diego, CA

               Multifamily Trust Fund Agreement




2013-LA-1003                                  MARCH 14, 2013
                                                        Issue Date: March 14, 2013

                                                        Audit Report Number: 2013-LA-1003




TO:            Thomas W. Azumbrado, Acting Director, Los Angeles Multifamily Hub,
               9AHMLAP



FROM:          Tanya E. Schulze, Regional Inspector General for Audit, Los Angeles Region,
               9DGA


SUBJECT:       Bay Vista Methodist Heights, San Diego, CA, Violated Its Agreement With HUD
               When Administering Its Trust Funds

    Attached is the U.S. Department of Housing and Urban Development (HUD), Office of
Inspector General (OIG), final results of our review of the Bay Vista Methodist Heights
multifamily trust fund agreement.

    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
213-534-2471.
                                             March 14, 2013
                                             Bay Vista Methodist Heights, San Diego, CA, Violated Its
                                             Agreement With HUD When Administering Its Trust
                                             Funds



Highlights
Audit Report 2013-LA-1003


 What We Audited and Why                      What We Found

We audited Bay Vista Methodist               Bay Vista violated its trust fund agreement with HUD.
Heights, San Diego, CA, to determine         Specifically, it used more than $5 million in trust funds
the full extent of the misuse of its trust   without HUD’s approval for ineligible operating
funds. We selected Bay Vista for             expenses. In addition, Bay Vista could not support
review based on a referral from the          more than $1 million in expenditures on draw requests
Office of Multifamily Housing, stating       that were approved by HUD.
that Bay Vista violated its trust fund
agreement with the U.S. Department of
Housing and Urban Development
(HUD) because the former chief
financial officer transferred more than
$3 million in restricted funds into Bay
Vista’s operating account to meet
general operating expenses rather than
to develop, purchase, construct,
preserve, and rehabilitate affordable
housing.

 What We Recommend

We recommend that the Acting Director
of HUD’s Los Angeles Office of
Multifamily Housing require Bay Vista
to (1) repay more than $5 million to the
trust fund from non-Federal funds; (2)
support an additional $1 million or
repay the trust; (3) replace the
management agent with a non-identity-
of-interest agent; and (4) implement
policies, procedures, and controls to
restrict the use of trust funds to only
allowable expenses and ensure that the
trust funds are not commingled with
other funds.
                          TABLE OF CONTENTS

Background and Objective                                                      3

Results of Audit
      Finding: Bay Vista Violated Its Agreement With HUD When Administering
               Its Trust Funds                                                5

Scope and Methodology                                                         9

Internal Controls                                                             11

Appendixes
A.    Schedule of Questioned Costs                                            13
B.    Auditee Comments and OIG’s Evaluation                                   14
C.    Criteria                                                                22
D.    Summary of Payments From Bay Vista Operating Account                    24




                                          2
                       BACKGROUND AND OBJECTIVE

Bay Vista Methodist Heights is a nonprofit organization that purchased and developed a 268-unit
apartment complex located in San Diego, CA, in 1969. The apartment complex was subject to a
deed of trust note insured under section 221(d)(3) of the National Housing Act, with a principal
amount of more than $3.6 million and maturity date of January 1, 2010. Bay Vista sold the
apartment complex to the Amerland Group, LLC, a California limited liability company, in July
2007. The sale involved a prepayment request to the U.S. Department of Housing and Urban
Development (HUD), and as a condition of approval, HUD and Bay Vista entered into an
agreement in February 2008, which required Bay Vista to deposit 75 percent of the net proceeds
of the sale into a housing trust fund to be used to develop, preserve, construct, or rehabilitate
affordable housing units with a production goal of 675 units. The property sold for $21.4
million, and approximately $14.8 million was deposited into the housing trust fund.

Bay Vista purchased two properties with the trust funds: Hillside Park Apartments, located in
Hemet, CA; and Estancia, located in Desert Hot Springs, CA. It also purchased Tierra del Rey
using the non-trust-fund portion of the apartment complex proceeds but rehabilitated the property
using trust funds. In addition, Bay Vista used trust funds for the predevelopment cost of Lisbon
Road, a 3.7-acre plot of land it owns.

Bay Vista’s management agent is GMP Development Group, a limited liability and identity-of-
interest company that was established and owned by the four Bay Vista managers. Three of the
managers were also a part of the Bay Vista board. Since its inception, GMP has had no
management clients except Bay Vista.

In July 2011, Bay Vista’s general counsel, current chief executive officer, and owner of GMP
identified irregularities concerning the balance in the trust fund. The chief financial officer was
asked to provide accurate reports of trust fund withdrawals; however, questions were not
adequately answered, and inaccurate reports were provided to the officers of Bay Vista. The
chief financial officer was placed on administrative leave in September 2011 and later dismissed
from Bay Vista. In August 2011, Bay Vista’s independent auditor, who prepared the fiscal year
end 2008 to 2010 financial statements, was hired as chief financial officer. He began to
reconcile the balance of the trust fund and discovered unauthorized transfers to the Bay Vista
operating account as well as unauthorized expenditures. He also determined that Bay Vista,
Lisbon Road, and the Estancia properties were operating at a net loss and could not be sustained
by the net operating profits at Hillside Park and Tierra del Rey, resulting in a significant cash
shortfall of approximately $2.7 million. His audit results were shared with an independent
accounting firm that Bay Vista retained to determine the application of withdrawals from the
trust account between February 2008 and August 2011. The firm determined that more than $3.3
million was withdrawn from the trust account and used toward operating expenses and not for
the requested purpose. Shortly thereafter, the chief executive officer and treasurer resigned.

The HUD Los Angeles Office of Multifamily Housing was notified of these deficiencies. Bay
Vista volunteered to recapitalize $3.3 million to the trust fund. It also referred the matter to the



                                                  3
Office of Audit for review. Bay Vista plans to recover the unauthorized trust fund withdrawals
and recapitalize the trust account by pursuing its insurance policies.

During our review, Bay Vista’s Estancia property fell under a receivership and is in foreclosure
status. In addition, its Lisbon Road property is still raw land, and Bay Vista is attempting to sell
it or locate a joint contributor to assist in developing the land due to the lack of excess cash to
develop the property. As of the most recent HUD approved draw request, dated June 2012, the
trust account had a remaining balance of $316,404 of the original $14.8 million, despite the
acquisition of only 432 affordable housing units including the Estancia’s 120 units and the
Lisbon Road property. With the absence of the Estancia units, Bay Vista was able to meet only
312 of its 675-unit good faith production goal, or 46 percent.

The objective of this review was to determine the full extent of the misuse of its trust funds.




                                                 4
                                       RESULTS OF AUDIT


Finding: Bay Vista Violated Its Agreement With HUD When
         Administering Its Trust Funds
Bay Vista violated its agreement with HUD when administering its trust funds. It used more
than $5 million in trust funds without HUD’s approval for ineligible operating expenses. In
addition, it could not support more than $1 million in expenditures and spent $14,250 on
ineligible items included on draw requests that were approved by HUD. This condition occurred
because Bay Vista failed to exercise proper supervision and oversight of its trust accounts and
lacked adequate policies, procedures, and controls to monitor and limit the use of its trust funds.
As a result, funds were not disbursed and used to promote the development of additional
affordable housing for qualified, low-income persons.


    Trust Funds Were
    Inappropriately Used for
    Operating Expenses

                  Bay Vista inappropriately transferred more than $5 million of its trust funds into
                  an operating account to be used for operating expenses that were not originally
                  approved by HUD. Paragraph E, section 2, of the trust fund agreement required
                  HUD approval before Bay Vista withdrew trust funds (see appendix C).
                  Although Bay Vista did request and obtain HUD’s approval to draw $11.3 million
                  in trust funds for the intended acquisition of Devonshire, Casa del Sol, Vista
                  Gardens, the Palms of La Mesa, and Plaza del Sol Apartments, it did not
                  ultimately acquire these properties. Instead, it withdrew and transferred more
                  than $5 million1 of these funds to its Bay Vista operating account through
                  multiple fund transfers. Bay Vista spent its trust funds on inappropriate operating
                  expenses without HUD’s knowledge or approval. Therefore, more than $5 million
                  in expenses are ineligible and should be repaid.

    Trust Fund Submission
    Requests Were Unsupported
    and Ineligible

                  When Bay Vista submitted its trust fund submission requests to HUD, it only
                  provided a spreadsheet with descriptions of expenses. Some of the descriptions
                  listed were not detailed enough or appeared misleading, resulting in HUD
                  believing that the expenses were trust fund eligible and approving the requests.

1
 Because Bay Vista did not provide the accounting firm it hired with a complete set of records, it identified only
$3.3 million in inappropriate transfers (see Background and Objective), an understatement of almost $2 million.


                                                          5
           However, after reviewing the source documentation, we determined that of the
           eight HUD-approved trust fund draw requests sampled, five included more than
           $1 million in unsupported and $14,250 in ineligible expenses (see chart below for
           details). Four of the eight requests were prepared when the former chief financial
           officer was still employed at Bay Vista and responsible for managing financial
           transactions, while one request was prepared after the former chief financial
           officer was dismissed. Of the more than $1 million in unsupported expenses,
           $18,599 was requested after the former chief financial officer was dismissed from
           Bay Vista. This amount represented the salaries of the managers that were not
           supported by timesheets or other documentation and was based on an estimate
           rather than the actual number of hours worked. The other unsupported amounts
           were related to legal and consulting, management and development costs, senior
           housing project development, payroll personnel, and other unsupported expenses
           such as payments to the former treasurer. We requested the backup
           documentation for these items from the chief executive officer; however, she was
           unable to provide them due to a lack of documentation or lack of knowledge of
           where the documentation might be located. The ineligible expenses charged were
           operating in nature and should not have been charged to the trust. They consisted
           of time spent studying for a broker’s exam, preparing and revising a conflict-of-
           interest policy, and drafting the property management agreement between GMP
           and Bay Vista (see paragraph C, Section 4 of the trust fund agreement in appendix
           C).

                                           Ineligible and unsupported expenses from drawn requests
                            Type of Expense                 Request #4 & #7 Request #11 Request #14   Request #17       Total
           Ineligible expenses                              $       11,550 $      2,700 $         -   $       -     $    14,250
           Ineligible Total                                 $       11,550 $      2,700 $         -   $       -     $    14,250

           Unsupported legal/consulting                     $       -     $    77,571   $   396,000   $    18,599   $ 492,170
           Unsupported management/ development costs        $    42,000   $    66,000   $       -     $       -     $ 108,000
           Unsupported senior housing project development   $       -     $       -     $   113,069   $       -     $ 113,069
           Unsupported payroll personnel                    $       -     $       -     $   233,013   $       -     $ 233,013
           Unsupported other                                $       -     $   108,500   $     1,500   $       -     $ 110,000
           Unsupported Totals                               $    42,000   $   252,071   $   743,582   $    18,599   $ 1,056,252


Bay Vista Lacked Proper
Policies, Procedures, and
Supervision To Prevent
Overspending of Trust Funds

           The profits earned from Hillside Park and Tierra del Rey Apartments were not
           sufficient to independently maintain the operations at the Estancia and Lisbon
           Road properties, which were operating at a net deficit. In addition, Bay Vista was
           unable to financially support excessive GMP and Bay Vista managers’ salaries,
           GMP owner distributions, GMP’s management fees, unreimbursed personnel
           expenses on Bay Vista credit cards, its administrative office costs, and other
           operating related costs without drawing money from the trust funds (see appendix
           D).


                                                            6
             This occurred because Bay Vista did not have proper policies and procedures in
             place to monitor and limit the use of its trust funds. Since then and as part of its
             plan to recapitalize the HUD trust account, Bay Vista had drafted procedures to
             prevent the recurrence of unauthorized trust fund withdrawals; however, the
             procedures had not been fully implemented. Further, Bay Vista did not exercise
             proper supervision and oversight of the uses of its trust accounts, which according
             to the three managers, was largely the responsibility of the former chief financial
             officer. The former chief executive officer admitted that he was lax in
             supervising the former chief financial officer because he “trusted the guy.” The
             current chief executive officer stated that she and the former chief financial
             officer were basically running Bay Vista and that the former chief executive
             officer and treasurer were not always in the office and relied heavily on the two
             managers to acquire properties and handle the financial aspects of the
             organization.

Conclusion

             Bay Vista did not fully comply with the terms of its trust fund agreement with
             HUD and was unable to meet its production goal of 675 units. It misused more
             than $5 million in trust funds without HUD’s approval for ineligible operating
             expenses. In addition, it could not support more than $1 million in expenditures
             and spent $14,250 on ineligible items that were included on draw requests
             approved by HUD. As a result, funds were not disbursed and used to promote the
             development of additional affordable housing for qualified, low-income persons.

Recommendations

             We recommend that the Acting Director of HUD’s Los Angeles Office of
             Multifamily Housing require Bay Vista to

             1A.    Repay the $5,178,293, transferred without proper HUD approval and used
                    for ineligible expenses, to the trust fund from non-Federal funds.

             1B.    Provide support showing the eligibility and reasonableness of the
                    $1,056,252 in trust funds disbursed or repay the trust fund from non-
                    Federal funds.

             1C.    Repay $14,250 in ineligible expenses to the trust fund from non-Federal
                    funds.

             1D.    Replace GMP Development Group as Bay Vista’s management agent with
                    a non-identity-of-interest agent.




                                              7
1E.   Implement proper policies, procedures, and controls to restrict the use of
      trust funds to only allowable non-operating-type expenses and ensure that
      the trust funds are not commingled with Bay Vista’s and its properties’
      operating funds.




                               8
                        SCOPE AND METHODOLOGY

We conducted our onsite work at the Bay Vista administrative office located in San Diego, CA,
between May and December 2012. Our audit period generally covered the period July 2009 to
August 2011. We expanded our scope as necessary.

To accomplish our objective, we

       •   Reviewed the HUD and Bay Vista trust agreement.

       •   Reviewed the GMP and Bay Vista administrative management agreement.

       •   Reviewed Bay Vista’s trust, operating, and property operating bank accounts and
           corresponding general ledger entries.

       •   Reviewed GMP’s payroll and members’ distribution accounts.

       •   Reviewed Paychex reports, internally maintained reports, and contract labor charges
           to Bay Vista.

       •   Reviewed management and administrative fee charges to Bay Vista.

       •   Interviewed current and former managers and staff.

       •   Interviewed the independent accounting firm that performed a review of the trust
           accounts.

       •   Interviewed HUD staff.

       •   Reviewed Bay Vista’s fiscal yearend 2008 through 2010 financial statement audit
           reports.

       •   Reviewed trust fund submission requests, expenses, and supporting documentation.

       •   Reviewed board meeting minutes, resolutions, and the list of Bay Vista’s board
           members.

From a universe of 19 trust fund submission requests, we reviewed a nonstatistical sample of 8
requests totaling more than $3.5 million. HUD approved the drawdowns, which included
expenses related to the administration of various properties, rehabilitation of Tierra del Rey,
legal expenses for Estancia, and a loan modification bid to preserve the Lisbon Road property.
Of the eight requests, five were selected because they occurred when the former chief financial
officer was still heavily involved in managing the financial transactions at Bay Vista. We
selected three additional requests that occurred after the former chief financial officer was


                                                9
dismissed to determine whether changes were made in retaining supporting documentation for
expenses after the former chief financial officer’s dismissal. We chose this approach since
testing 100 percent of the population would not have been feasible. Therefore, the sampling
results apply only to the items tested and cannot be projected to the universe or population.

We performed an extensive analysis of the trust fund deposits into the Bay Vista operating
account since the trust funds were commingled with other sources of funds. We reviewed more
than $11 million by tracing the deposits from Bay Vista’s various trust accounts, property
operating accounts, other Bay Vista accounts, reimbursement for credit card charges, refund of
escrow fees for properties not purchased, and nontrust proceeds from the sale of the Bay Vista
apartments, as well as other deposits from which the sources of funds were not identifiable. Due
to the number and complexity of transactions between the Bay Vista and GMP accounts, we
were able to review only $6.9 million of the $11 million in payments from the Bay Vista
operating account. We targeted larger payments made to one source.

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:

                  •   Effectiveness and efficiency of program operations – Policies and
                      procedures intended to ensure that trust funds are used for eligible
                      purposes.

                  •   Reliability of financial information – Implementation of policies and
                      procedures to reasonably ensure that relevant and reliable information is
                      obtained to adequately support program expenditures.

                  •   Compliance with applicable laws and regulations – Implementation of
                      policies and procedures to ensure that trust fund activities comply with
                      applicable HUD rules and requirements.

               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.




                                                 11
Significant Deficiency

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

            •   Bay Vista did not have adequate controls and proper oversight to reasonably
                ensure that its trust funds were used for eligible purposes (finding).




                                             12
                                APPENDIXES

Appendix A

             SCHEDULE OF QUESTIONED COSTS

              Recommendation
                                     Ineligible 1/      Unsupported 2/
                  number
                    1A                $5,178,293
                    1B                                    $1,056,252
                    1C                 $14,250
                   Total              $5,192,543          $1,056,252

    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.




                                         13
Appendix B

              AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation                                     Auditee Comments 2




Comment 1




                                       * Names redacted for privacy reasons

2
    The auditee provided a cover letter to its response (page 1) that it requested not be included as part of its response.


                                                             14
Comment 2




            * Names redacted for privacy reasons




                            15
Comment 2




Comment 3




Comment 4




            * Names redacted for privacy reasons




                            16
Comment 5




Comment 5



Comment 6




            * Names redacted for privacy reasons




                            17
Comment 6




Comment 7




            18
Comment 8




            19
                         OIG Evaluation of Auditee Comments

Comment 1   We agree that Bay Vista attempted to meet its “good faith” 675 unit production
            goal. However, only 432 affordable housing units were purchased by June of
            2012, and due to the sale of Estancia (December 2012), Bay Vista’s production
            goal decreased to 312 since it was unable to maintain such units. To add
            clarification, we added “good faith” to the Background and Objectives section of
            our report.

Comment 2   Although we cannot speak for the HUD LA Multifamily HUB office, we did note
            that paragraph E, section 2 of the trust fund agreement outlines procedures HUD
            intended to implement to aid in the disbursement of trust funds. Please see
            Appendix C of the audit report for details.

Comment 3   Although we cannot speak for the HUD LA Multifamily HUB office, it is our
            understanding that Bay Vista previously had a contentious relationship with
            HUD. However, Bay Vista could still have developed internal procedures and
            controls even if there were issues dealing with HUD. In addition, when the new
            director was installed in January of 2009 and problems with the HUD LA
            Multifamily HUB office were alleviated, Bay Vista still did not establish adequate
            operating procedures and controls to prevent further misspending of trust fund
            monies. Bay Vista cited the former chief financial officer as the cause for all the
            inappropriate transfers; however, he was not put on administrative leave until
            September 2011. Bay Vista had ample time to establish operating procedures
            prior to September 2011 to address its internal control weaknesses.

Comment 4   Our report cited that Bay Vista lacked proper policies, procedures, and
            supervision to prevent overspending of its trust accounts. We did not state that
            Bay Vista had no policies, procedures, and supervision. We agree that Bay Vista
            had procedures to prepare its trust fund submissions and internal procedures to
            draw down the funds; however, it lacked the policies, procedures, and supervision
            to control how the funds were spent once they have been drawn down from the
            trust account – as noted by Bay Vista’s acknowledgement in the breakdown of
            procedures.

Comment 5   We acknowledge Bay Vista’s assertion that the withdrawals were not authorized
            by Bay Vista but were completed by the former chief financial officer. However,
            it was Bay Vista’s responsibility to ensure the trust funds were used in accordance
            with the agreement, including ensuring appropriate procedures and controls were
            in place to prevent misuse of the funds.

Comment 6   We agree that Bay Vista attempted to purchase Devonshire, Casa del Sol, Vista
            Gardens, the Palms of La Mesa, and Plaza del Sol apartments and have stated in
            the report that Bay Vista intended to purchase such properties. Our report did not




                                            20
            question the fact that Bay Vista attempted to purchase these properties but did
            question how the funds were actually used.

Comment 7   We disagree. Five of the eight requests that we selected and reviewed were
            prepared when the former chief financial officer was employed at Bay Vista and
            the remaining three requests reviewed were prepared after the former chief
            financial officer was dismissed. We did not review all of the submission requests
            from when the former chief financial officer was employed at Bay Vista.

Comment 8   We amended our report to state that Bay Vista volunteered to recapitalize its trust.




                                             21
Appendix C

                                       CRITERIA

1. Housing Trust Fund Agreement
   Paragraph C, Section 4

   Use of Trust Account for Affordable Housing Units: The owner may use the trust account
   for any expenses related to the predevelopment, acquisition, development, preservation,
   construction and/or rehabilitation of units intended to be developed as Affordable Housing
   Units, regardless of whether such Affordable Housing Units are developed or the related
   transactions closes so long as the owner has proceeded in good faith. Such expenses may
   include, but shall not be limited to the following:

      a) Predevelopment and development costs
      b) Application fees, loan fees and discounts
      c) Appraisal, consultant, legal, architectural, and engineering fees
      d) Reasonable administrative and office overhead and expenses
      e) Reasonable insurance costs
      f) Fees for consultants assisting in evaluating affordable housing opportunities
      g) Corporate filing fees, franchise, business, and other related taxes
      h) Trustee fees and other fees related to administration of the Trust Account
      i) Costs associated with investigations of the owner and/or the property being conducted
      by HUD’s Office of Inspector General

2. Housing Trust Fund Agreement
   Paragraph E, Section 2

   Disbursement of funds - Using the trust fund authorization form or similar form approved
   by the parties to this agreement, HUD shall instruct the Depository Bank to disburse funds
   from the Trust Account only upon and in accordance with a written request, along with
   supporting documentation, from the owner, which has been approved by HUD, Los Angeles
   Hub Director. The owner shall make such a request at least 30 days prior to the date such
   disbursement is desired.

3. Housing Trust Fund Agreement
   Paragraph F, Section 1

   Default -
   a) The owner’s failure to use the trust account in accordance with the terms of this agreement
   or to make materially false statements to HUD concerning the use of the trust amount, shall
   constitute a default under this agreement. HUD shall provide the owner with written notice
   of any default under this agreement and a reasonable opportunity of not less than 30 days to
   cure or explain the alleged default.



                                               22
   b) On the termination of this agreement, HUD Secretary’s finding that the owner did not act
   in good faith.

4. Housing Trust Fund Agreement
   Paragraph F, Section 2

   Remedies - If the owner fails to cure any default of the trust agreement occurring during the
   term of the agreement, the trust agreement may be terminated by HUD. Upon termination or
   expiration of this trust, any funds remaining shall be disbursed to a tax exempt corporation
   selected by the owner and approved by HUD, to be used to acquire, develop, preserve,
   construct, and or rehabilitation affordable housing units.

5. Use Agreement
   Paragraph 9, Section c

    The books and records, documents and other papers relating to the financial condition of the
    project shall at all times be maintained in accordance with Generally Accepted Accounting
    Principles which can be subjected to an audit performed in accordance with Generally
    Accepted Auditing Standards and shall be subject to examination and inspection at any
    reasonable time by the Secretary or his duly authorized agents. The Owner shall keep
    copies of all written contracts or other instruments that affect the Project, all or any of which
    may be subject to inspection and examination by the Secretary or his agents.




                                                23
Appendix D

    SUMMARY OF PAYMENTS FROM BAY VISTA OPERATING
                     ACCOUNT

                                        Type of expense                                                   Amount
Deposited into payroll account but no supporting documentation explaining the transfer of
                                                                                                      $ 1,609,500
funds
Managers’ (including three managers who received double pay) and office staff’s salaries and
                                                                                                      $ 915,611
health benefits for the period June 20, 2010, to July 16, 2011
Trust fund LLC deposits – used to pay for operating expenses of properties, salaries, and
                                                                                                      $ 608,000
management fees to GMP
Paychex – salaries for three managers between February 1, 2009, and July 31, 2011                     $ 461,756
Union Bank 4355 – payroll and management distributions                                                $ 50,000
Chase 6708 – deposited into payroll account                                                           $ 50,000
TDR 7412 (operating fund) – GMP’s management fees, contract labor, other operating
                                                                                                      $ 440,318
expenses, and manager distributions (including additional transfers to payroll account)
HSP 7180 (operating fund) – GMP’s management fees, contract labor, other operating
                                                                                                      $ 650,915
expenses, and manager distributions (including additional transfers to payroll account)
Estancia 8315 (petty cash fund) – GMP’s management fees, contract labor, other operating
                                                                                                      $ 777,928
expenses, and manager distributions (including additional transfers to payroll account)
Estancia 8505 (operating fund) – GMP’s management fees, contract labor, other operating
                                                                                                      $     53,290
expenses (includes transfers to payroll account), and manager distributions
Union Bank 8414 – Management fees charged for period July 2009 to February 2010 and
                                                                                                      $ 345,447
management distributions
Management fees charged directly to Bay Vista operating account                                       $ 132,778
                    Management fees, distributions, and salaries subtotal                             $ 6,095,545
                                        Type of expense
Bay Vista credit card 6902 – Bay Vista-issued credit card used for personal and business
                                                                                                      $ 100,060
expenses and not reimbursed
                                        Type of expense
Security Business Bank – Lisbon property’s mortgage and interest                                      $ 117,647
First Republic Bank – Hillside Park’s interest and mortgage payments                                  $ 285,000
North Island Credit Union – Tierra del Rey’s interest and mortgage payments                           $ 135,303
54th Street LLC and PS Business Park – for lease on administrative building previously and
                                                                                                      $     53,767
currently occupied by GMP and Bay Vista
Lisbon 8612                                                                                           $     4,000
Orion – consulting payment of former chief financial officer’s assistant                              $ 115,595
Donations to St. Paul’s United Methodist Church and Summerbridge Charitable Donation                  $ 34,700
Deposited into 7701 for Internet, supplies, cable, phone charges, etc.                                $ 34,116
Stipends for board members                                                                            $     7,700
                                Other operating costs subtotal                                        $ 787,828
                                             Total                                                    $6,983,433 3




3
    The total payments out of the Bay Vista operating account is not all inclusive of its expenses.


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