OFFICE OF AUDIT
REGION 3
PHILADELPHIA, PA
Madison Park North Apartments
Baltimore, MD
Section 236 Multifamily Program
2013-PH-1003 1 APRIL 19, 2013
Issue Date: April 19, 2013
Audit Report Number: 2013-PH-1003
TO: Mary Ann Henderson, Director, Baltimore Multifamily Hub, 3BHMLAS
//signed//
FROM: John P. Buck, Regional Inspector General for Audit, Philadelphia Region, 3AGA
SUBJECT: Madison Park North Apartments Generally Ensured That Procurement and
Reserve for Replacement Requirements Were Met
Attached is the U.S. Department of Housing and Urban Development (HUD), Office of
Inspector General’s (OIG) final results of our review of Madison Park North Apartments,
Baltimore, MD.
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
215-430-6729.
April 19, 2013
Madison Park North Apartments Generally Ensured
That Procurement and Reserve for Replacement
Requirements Were Met
Highlights
Audit Report 2013-PH-1003
What We Audited and Why What We Found
We audited the procurement process of Madison Park generally ensured that procurement and
Madison Park North Apartments, a reserve for replacement account requirements were
Section 236 property, at the request of met. However, it did not obtain cost estimates from
the Director of the U.S. Department of three contractors, as required, for $168,702 in repairs
Housing and Urban Development’s of housing units.
(HUD) Baltimore Office of Multifamily
Housing Programs. We also reviewed
Madison Park’s use of its reserve for
replacement account. Our objective
was to determine whether Section 236
procurement and reserve for
replacement account requirements were
met.
What We Recommend
We recommend that the Director of
HUD’s Baltimore Office of Multifamily
Housing Programs require Madison
Park to implement and follow adequate
controls to ensure that it obtains three
cost estimates for services that exceed
$10,000 per year.
TABLE OF CONTENTS
Background and Objective 3
Results of Audit
Finding: Madison Park Generally Ensured That Procurement and Reserve for
Replacement Account Requirements Were Met 4
Scope and Methodology 6
Internal Controls 7
Appendix
A. Auditee Comments and OIG’s Evaluation 8
2
BACKGROUND AND OBJECTIVE
The Madison Park North Apartments are located at 738 West North Avenue, Baltimore, MD.
The project is owned by Madison Park North Limited Partnership, and its management agent is
Tricap Management, Incorporated. The apartment complex has 202 housing units.
The U.S. Department of Housing and Urban Development (HUD) entered into a regulatory
agreement with Madison Park in 1985 for its Section 236-insured multifamily program. The
program, established by the Housing and Urban Development Act of 1968, combined Federal
mortgage insurance with interest reduction payments to the lender for the production of low-cost
rental housing. Under this program, HUD provided interest subsidies to lower a project’s
mortgage interest rate to as low as 1 percent. This program no longer provides insurance or
subsidies for new mortgage loans, but existing Section 236 properties continue to operate under
the program. The interest reduction payment results in lower operating costs and, thus, a reduced
rent structure. Additionally, the project executed a housing assistance payments contract with
HUD.
Between fiscal years 2008 and 2012, the project received $1 million in interest reduction
payments and $8.3 million in housing assistance payments.
Our audit objective was to determine whether Section 236 procurement and reserve for
replacement account requirements were met.
3
RESULTS OF AUDIT
Finding: Madison Park Generally Ensured That Procurement and
Reserve for Replacement Account Requirements Were Met
Madison Park generally ensured that procurement and reserve for replacement account
requirements were met; however, it did not obtain written or verbal cost estimates for the repair
of its housing units. It paid one contractor without obtaining written cost estimates from at least
three contractors as required. This condition occurred because Madison Park did not expect to
pay the selected contractor more than $10,000 per year. As a result, the project paid at least
$168,702 without adequate support to show whether the services were provided at a reasonable
cost.
Cost Estimates Were Not
Obtained as Required
Of the $2.9 million paid to nine contractors, Madison Park was unable to provide
documentation showing that it obtained cost estimates for $168,702 paid for the
repair of housing units. It paid one vendor yearly labor costs ranging from
$21,958 to $92,369 for the repair of its housing units. HUD Handbook 4381.5,
paragraph 6.50, states that the owner is to obtain written cost estimates from at
least three contractors for services that exceed $10,000 per year. Although
Madison Park did not obtain cost estimates for services rendered, it did maintain
invoices, work order proposals, and copies of checks that adequately supported
the repair cost paid.
Madison Park Established,
Maintained, and Expended Its
Reserve for Replacement
Account as Required
Madison Park established and maintained a reserve for replacement account as
required. Section 2(a) of its regulatory agreement required that a reserve for
replacement account be established and maintained. Madison Park maintained
documentation to support that it had established a reserve for replacement and
made the monthly deposits as required. The documentation adequately supported
Madison Park’s efforts.
Madison Park also expended reserve for replacement account funds as required.
Section 2(a) of its regulatory agreement and HUD Handbook 4350.1, REV-1,
paragraph 4-15(A), required that the project obtain HUD’s approval to withdraw
4
from the account. Madison Park maintained documentation, such as HUD-
approved funds authorization forms, certifications, and other documentation, to
demonstrate its compliance with this requirement.
Repair Costs Were Paid on a
Case-by-Case Basis
Madison Park stated that it did not obtain cost estimates because it paid the
selected contractor on a case-by-case basis. Although the majority of the repairs
were less than $5,000 each, the yearly costs exceeded $10,000. The yearly costs
paid to the contractor over a 3-year period ranged from $21,958 to $92,369.
Based on the costs paid in 2009, Madison Park should have planned accordingly
to ensure that cost estimates were obtained from three contractors since there was
a pattern established which showed that the repair cost would exceed $10,000 per
year.
When we informed Madison Park about this deficiency, it implemented additional
controls to ensure that it obtains cost estimates from three contractors as required.
Madison Park now obtains three cost estimates for each repair needed for a
housing unit to ensure that the procurement requirements are met.
Conclusion
The project did not always obtain cost estimates as required. As a result, it paid at
least $168,702 to one contractor without adequate support showing that services
were obtained at a reasonable cost. However, since it appeared that the prices
paid were reasonable, we did not recommend that the project be required to
demonstrate the reasonableness of the cost to HUD. However, we do recommend
that the project implement and follow adequate controls to ensure that it obtains
three cost estimates for services that exceed $10,000 per year.
Recommendations
We recommend that the Director of HUD’s Baltimore Office of Multifamily
Housing Programs direct Madison Park to
1A. Implement and follow adequate controls to ensure that it obtains three cost
estimates for goods or services that exceed $10,000 per year.
5
SCOPE AND METHODOLOGY
We conducted the audit from July 2012 to March 2013 at Madison Park’s office located at 738
West North Avenue, Baltimore, MD, and at our offices located in Pittsburgh, PA, and Baltimore,
MD. The audit covered the period April 2008 through September 2012.
To achieve our audit objective, we reviewed
• Applicable HUD guidance at 24 CFR (Code of Federal Regulations) Part 236 and other
directives that govern the program.
• Madison Park’s regulatory agreement, audited financial statements, and other program
records.
• A nonstatistical sample of $2.9 million awarded to nine contractors during the audit
period. We reviewed the procurement files of the costs paid.
• Reserve for replacement account documentation including Madison Park’s requests and
certifications and HUD’s approval to release the funds.
We conducted interviews with responsible employees of Madison Park, its management agent,
and responsible HUD staff. We reviewed the procurement files for goods and services totaling
$2.9 million. We reviewed invoices, checks, and other documentation to determine whether
procurement requirements were followed. We also reviewed documentation related to the use of
the reserve for replacement account.
To achieve our audit objective, we relied in part on computer-processed data. The data included
Madison Park’s expenditures, procurement records, and other computer-generated data.
Although we did not perform a detailed assessment of the reliability of the data, we did perform
a minimal level of testing and found the data to be adequate for our purposes.
We conducted the audit in accordance with generally accepted government auditing standards.
Those standards require that we plan and perform the audit to obtain sufficient, appropriate
evidence to provide a reasonable basis for our findings and conclusions based on our audit
objective. We believe that the evidence obtained provides a reasonable basis for our findings
and conclusions based on our audit objective.
6
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 control was relevant to our audit
objective:
• Compliance with laws and regulations – Policies and procedures that
management has implemented to reasonably ensure that the program meets
its objectives.
We assessed the relevant control identified above.
A deficiency in internal control exists when the design or operation of a control does
not allow management or employees, in the normal course of performing their
assigned functions, the reasonable opportunity to prevent, detect, or correct (1)
impairments to effectiveness or efficiency of operations, (2) misstatements in
financial or performance information, or (3) violations of laws and regulations on a
timely basis.
We evaluated internal controls related to the audit objective in accordance with
generally accepted auditing standards. Our evaluation of internal controls was not
designed to provide assurance regarding the effectiveness of the internal control
structure as a whole. Accordingly, we do not express an opinion on the
effectiveness of Madison Park’s internal control.
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APPENDIX
Appendix A
AUDITEE COMMENTS AND OIG’S EVALUATION
Comment 1
Comment 2
8
Comment 3
Comment 4
Comment 5
Comment 6
9
OIG Evaluation of Auditee Comments
Comment 1 We are pleased that Madison Park generally agrees with the finding and
recommendation in the audit report.
Comment 2 The audit finding is based upon HUD Handbook 4381.5, which states that a
management agent is expected to obtain cost estimates. The guidance in the
handbook applies to management agents of HUD-insured properties.
Additionally, the management agent certified that it would comply with HUD
handbooks and obtain verbal or written cost estimates. Thus, the cost estimates
should have been obtained to ensure compliance with the Section 236 program
requirements.
Comment 3 We agree that obtaining three cost estimates provides a safe harbor for
reasonableness of cost.
Comment 4 Madison Park paid $168,702 to one contractor without obtaining cost estimates as
required. The services were provided over a 3-year period in which yearly cost
ranged from $21,958 to $92,369. Due to the fact that the cost paid for the repair
of its housing units exceeded the previous year’s repair costs, Madison Park
should have obtained costs estimates to ensure compliance with Section 236
requirements. HUD Handbook 4381.5, paragraph 6.50, required that the owner
obtain written cost estimates from at least three contractors for services that
exceed $10,000 per year.
Comment 5 The recommendation to implement and follow controls is appropriate and should
help ensure future compliance.
Comment 6 We revised the internal control section of the report to state that our evaluation of
internal controls was not designed to provide assurance regarding the
effectiveness of the internal control structure as a whole. Accordingly, we do not
express an opinion on the effectiveness of Madison Park’s internal control.
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Madison Park North Apartments Generally Ensured That Procurement and Reserve for Replacement Requirements Were Met
Published by the Department of Housing and Urban Development, Office of Inspector General on 2013-04-19.
Below is a raw (and likely hideous) rendition of the original report. (PDF)