oversight

The City of Huntsville Community Planning and Development Community Development Block Grant and HOME Investment Partnerships Program

Published by the Department of Housing and Urban Development, Office of Inspector General on 2014-05-29.

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

OFFICE OF AUDIT
REGION 4
ATLANTA, GA




                  The City of Huntsville, AL

          Community Planning and Development
         Community Development Block Grant and
         HOME Investment Partnerships Program




2014-AT-1005                                   MAY 29, 2014
                                                        Issue Date: May 29, 2014

                                                        Audit Report Number: 2014-AT-1005




TO:            Charles Franklin, Director, Community Planning and Development Division,
               4CD


               //signed//
FROM:          Nikita N. Irons, Regional Inspector General for Audit, Atlanta Region, 4AGA

SUBJECT:       The City of Huntsville, AL, Community Development Department, Did Not
               Adequately Account for and Administer the Mirabeau Apartments Project


       Attached is the U.S. Department of Housing and Urban Development (HUD), Office of
Inspector General’s (OIG) final results of our review of the City of Huntsville’s Community
Development Block Grant and HOME Investment Partnerships Program.

        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 8M, 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 404-331-3369.
                                             Date of Issuance: May 29, 2014
                                             The City of Huntsville, AL, Community Development
                                             Department, Did Not Adequately Account for and
                                             Administer the Mirabeau Apartments Project



Highlights
Audit Report 2014-AT-1005


 What We Audited and Why                      What We Found

We audited the City of Huntsville’s          The Department did not have adequate controls and
Community Development Department,            procedures to ensure (1) appropriate accountability for
which administers the Community              and administration of the Mirabeau project and (2) that
Development Block Grant (CDBG) and           it used its HOME and CDBG funds for eligible
HOME Investment Partnerships                 activities. Specifically, the Department (1)
Program, at the request of the U.S.          inappropriately loaned more than $932,000 in HOME
Department of Housing and Urban              funds, and more than $250,000 in community housing
Development’s (HUD) Alabama Office           development organization (CHDO) funds to a
of Community Planning and                    developer; (2) did not fully document the use of more
Development. Our objectives were to          than $1 million in CDBG funds for five loans; (3) did
determine whether the Department’s           not use $772,000 in HOME funds as intended; and (4)
commitment to use CDBG and HOME              did not recover collateral of more than $323,000 in
funds for the acquisition and                CDBG funds from its bank and $100,000 in HOME
rehabilitation of the Mirabeau               funds from its CHDO.
Apartments was an eligible activity and
whether the Department had adequate          In addition, the Department did not (1) realize potential
controls and procedures to ensure            income because 60 units were offline, (2) include all of
appropriate accountability for and           the elements required by HUD regulations in its
administration of the project.               participation agreement with the developer of the
                                             Mirabeau Apartments, and (3) prepare a cost allocation
                                             plan to allocate the unit costs or identify the number of
 What We Recommend
                                             HOME-assisted units to support the HOME-assisted
                                             units in the project.
We recommend that HUD require the
City to (1) reimburse nearly $2.4
million in ineligible costs and support
more than $1 million or reimburse
unsupported amounts to the
Department’s CDBG and HOME
program accounts from non-Federal
funds, (2) inspect the project and correct
all deficiencies, (3) review all
participation agreements, and (4)
prepare a cost allocation plan for HUD’s
review.
                          TABLE OF CONTENTS

Background and Objectives                                                       3
Results of Audit
       Finding 1: The Department Made Inappropriate and Unsupported Loans to
                   the Developer                                                4
       Finding 2: HOME and CDBG Funds Were Not Used as Intended and Recovered
                  When Required                                                  8
       Finding 3: The Mirabeau Apartments Were Not Properly Maintained          12
       Finding 4: The Department’s Participation Agreement Did Not Include
                   Required Elements                                            14
       Finding 5: A Cost Allocation Plan Was Not Developed for the Mirabeau
                  Apartments                                                    15

Scope and Methodology                                                           17

Internal Controls                                                               18

Appendixes
A.    Schedule of Questioned Costs                                              20
B.    Auditee Comments and OIG’s Evaluation                                     21
C.    The Mirabeau Apartment Loans                                              34




                                         2
                      BACKGROUND AND OBJECTIVES

The City of Huntsville’s Community Development Department is responsible for administering
several programs, including the Community Development Block Grant (CDBG) and the HOME
Investment Partnerships Program. The mission of the Department is threefold: (1) stabilization
of lower income neighborhoods, (2) economic empowerment of lower income persons and
persons living in lower income neighborhoods, and (3) providing assistance to the special needs
population.

The Department is governed by the mayor and a five-member city council. The mayor serves as
the City’s chief executive officer and is responsible for providing professional leadership in the
administration and implementation of all City operations and the policies, goals, and vision set
forth by the Office of the Mayor and the city council. The mayor appoints all City department
heads and enforces all City operations, resolutions, and orders.

The Department received more than $6.4 million in CDBG funds and more than $3.5 million in
HOME funds from 2007 to 2011 for the Mirabeau Apartments. The apartments were built
between 1962 and 1967 and consisted of 39 individually owned buildings containing 4 to 8 units
each. The various buildings were purchased in 1992 by a developer consisting of a partnership
named Westland and were financed as one project with a $3.1 million loan from a local bank.
The Department invested $1.8 million in CDBG and Urban Development Action Grant funds
and pledged $1.6 million of its own income-producing assets to guarantee the loan.

The bank foreclosed on the property on November 21, 2001. To protect its assets, the
Department deposited CDBG funds of $1 million with the bank to release the assets and renamed
the project Mirabeau. The $1 million included a portion of a $1.2 million first acquisition loan
and a portion of a $950,000 bridge loan made to the developer. The deposit would be released if
the project was redeemed. The project was redeemed by the owners on March 14, 2002, and
financed with funds from a private bank loan, the CDBG deposit of $1 million, and an additional
$130,000 in CDBG funds. The Department agreed to this arrangement, although it gave up its
rights to the $1.8 million owed to it by the developer.

The audit objectives were to determine whether the Department’s commitment to use CDBG and
HOME funds for the acquisition and rehabilitation of the Mirabeau Apartments was an eligible
activity and whether the Department had adequate controls and procedures to ensure appropriate
accountability for and administration of the project in accordance with HUD’s policies and
guidelines.




                                                3
                                     RESULTS OF AUDIT


Finding 1: The Department Made Inappropriate and Unsupported Loans
to the Developer
The Department inappropriately loaned nearly $1.2 million in HOME and community housing
development organization (CHDO) 1 funds to the developer to refinance the balance owed on the
Mirabeau Apartments’ mortgage. In addition, the Department could not provide documentation
to support the use of more than $1 million in CDBG funds it loaned to the developer. These
conditions occurred because the City’s former mayor and staff allowed the former community
development director to approve all transactions without obtaining further approval. Also, the
Department did not review and document the developer’s use of the funds. As a result, it was
not able to use nearly $1.2 million for other eligible community activities when it used nearly
$1.2 million in HOME, and CHDO funds for ineligible activities, and neither the Department nor
HUD had assurance that more than $1 million in CDBG funds was expended for eligible
activities.


    Inappropriate Refinance Loans
    Were Made From HOME and
    CHDO Funds

                 The Department inappropriately used nearly $1.2 million of its HOME and
                 CHDO funds to pay on the mortgage debt for the Mirabeau Apartments. From
                 these funds, the Department loaned $932,831 in HOME funds (see appendix C) to
                 the developer that was unallowable because Mirabeau did not meet HOME
                 requirements necessary to constitute the project as an eligible HOME activity.

                     •   Mirabeau’s ongoing property condition did not meet the requirements of
                         24 CFR 92.251(c)(3), which require the owner of rental housing to
                         maintain the property in compliance with all applicable State and local
                         housing quality standards and codes, or if there are no such standards, with
                         HUD’s Housing Quality Standards (see discussion in Finding 3).

                     •   The project’s property standards did not meet all applicable local codes,
                         rehabilitation standards, ordinances, and zoning ordinances at the time of
                         project completion as required by 24 CFR 92.251(a)(1). The City lacked
                         documentation to support that Mirabeau met these standards and the
                         condition of the property did not support that adequate rehabilitation was


1
 CHDO is a special status defined by the HOME program for an organization, the primary purpose of which is to
provide and develop affordable housing for the community it serves.


                                                       4
                  performed to bring the property into compliance with the applicable codes
                  and standards (see discussion in Finding 4).

              •   Mirabeau did not qualify as affordable housing because the City did not
                  impose the HOME affordability restrictions (rents and income targeting)
                  on the project by deed restrictions or covenants running with the land as
                  required in 24 CFR 92.252(e)(1)(ii). Also, City did not determine the
                  minimum number of HOME units that had to be designated as HOME
                  units and meet affordability requirements (see discussion in Finding 5).

           The Department used $250,811 of its CHDO set-aside funds (see appendix C) to
           refinance the developer’s mortgage. It made the payment to the CHDO on
           October 29, 2004, and documented the payment as acquisition of real property.
           The CHDO, however, did not purchase property with the funds. Instead, it loaned
           the funds to the developer, who used the funds to refinance the Mirabeau
           Apartments’ mortgage on November 4, 2004. The loan was identified in a
           promissory note, also dated November 4, 2004, among the developer, the
           Department, and the CHDO.

           The CHDO’s use of the funds either to make a loan to refinance the developer’s
           mortgage or to purchase property was not an eligible activity. Regulations at 24
           CFR 92.300(a)(1) stipulate that the funds must be provided to a CHDO, its
           subsidiary, or a partnership of which it or its wholly owned subsidiary is a
           managing general partner. If acting in any of these capacities, the CHDO must
           have effective project control. However, the CHDO was not a managing general
           partner of Mirabeau Apartments, nor did it have effective project control.

           The City’s former mayor allowed its former community development director to
           approve all transactions without obtaining its approval. There was no contract
           agreement to loan the developer funds, and as of July 2011, the developer owed
           the Department more than $3.4 million with little prospect that the loans would be
           repaid. The use of the funds to pay on the debt was ineligible, and it was not
           reasonable or necessary.

$300,000 in Bridge Loan Funds
Was Paid to the Developer

           The Department provided a $950,000 bridge loan (see appendix C) to the
           developer. The bridge loan agreement stated that $950,000 in CDBG funds was
           for the redemption of the project from the bank. However, only $650,000 was
           used for redemption; the remaining $300,000 was paid directly to the developer.
           The agreement was not amended to reflect the change in the use of the funds. The
           Department’s staff could not explain how the developer used the $300,000; thus,
           the $300,000 was unsupported and failed to meet OMB Circular A-87
           requirements that costs be fully documented.


                                            5
$200,000 of a First Acquisition
Loan Was Not Used as Intended

            A first acquisition loan agreement provided a $1.2 million CDBG loan (see
            appendix C) for the redemption of the project from the bank. However, only $1
            million was used for that purpose. The developer used the remaining $200,000 to
            repay a portion of the $950,000 bridge loan that that was paid directly to the
            developer. Consequently, this $200,000 remained unsupported.

$41,000 of a Mezzanine Loan
Was Not Used as Intended

            A mezzanine loan agreement stated that $171,000 in CDBG loan funds (see
            appendix C) was to acquire the project after foreclosure and fund financing costs,
            such as appraisals, environmental studies, and fees and legal costs associated with
            the closing. The developer used $130,000 of the loan at closing, which was held
            on March 14, 2002. The remaining $41,000 was paid directly to the developer on
            March 20, 2002. The Department did not provide documentation to show that the
            developer used the $41,000 as required by the loan agreement and failed to meet
            OMB A-87 requirements that costs be fully documented.

A $390,000 Second Acquisition
Loan Was Not Used as Intended

            A second acquisition loan agreement provided that a $390,000 CDBG loan (see
            appendix C) was for acquisition. However, the Department made the loan on
            May 6, 2002, 2 months after the project loan was closed. Since there was no
            acquisition made at the time of the loan, the $390,000 was not needed. The
            Department did not provide documentation to support how the developer used the
            funds as required by OMB A-87, which provides that costs must be fully
            documented.

A $100,000 Third Acquisition
Loan Was Not Used as Intended

            The second amendment to a third acquisition loan agreement stated that a
            $100,000 CDBG loan (see appendix C) was to reduce the principal of the
            project’s debt. The funds were used to pay off the balance of the bridge loan that
            the developer owed the Department. There was no documentation showing that
            the Department amended the agreement to allow the developer to use the funds to
            pay off the bridge loan. As a result, the $100,000 loan was unsupported.




                                             6
Conclusion

             Overall, more than $2.2 million in CDBG, HOME, and CHDO loan funds did not
             meet OMB Circular A-87 requirements, which provide that for costs to be
             eligible, they must be fully documented, reasonable, and necessary. The
             Department inappropriately loaned nearly $1.2 million in HOME and CHDO
             funds to the developer to refinance the balance owed on the Mirabeau
             Apartments’ mortgage. Also, more than $1 million in CDBG loans was
             unsupported because the Department could not provide documentation to support
             the developer’s use of the CDBG funds.

Recommendations

             We recommend that the Director of HUD’s Alabama Office of Community
             Planning and Development require the City to

             1A. Reimburse $1,183,642 in HOME and CHDO funds to the HOME Investment
                 Trust Fund treasury account from non-Federal funds.

             1B. Provide documentation to support the $1,031,000 in CDBG loans or
                 reimburse the CDBG program from non-Federal funds.

             1C. Establish and implement policies to strengthen oversight of its Community
                 Development Department to ensure that an individual cannot approve
                 transactions without approval from the City to ensure that activities are eligible
                 and properly supported.




                                               7
Finding 2: HOME and CDBG Funds Were Not Used as Intended and
Recovered When Required
The Department loaned the developer $772,000 in HOME funds that was not used as intended to
increase the scope of the project rehabilitation work. Also, the Department did not recover
$323,720 in CDBG funds it had deposited into a local bank to secure a project loan after that
loan was redeemed and $100,000 provided to a CHDO for a terminated project. These
conditions occurred because the former City officials did not provide adequate review and
oversight of the Department and its former director. As a result, $772,000 in ineligible
expenditures reduced the Department’s ability to provide additional services to the community,
and $423,720 in development funds was owed to the program.



 HOME and CDBG Funds Were
 Used Improperly

              The Department loaned the developer $772,000 in HOME funds that the
              developer used improperly (see appendix C). It loaned the developer $348,500 in
              HOME funds for rehabilitation work on the Mirabeau Apartments on November
              26, 2003. Then on May 18, 2004, the developer requested an increase in the
              original $348,500 loan amount to $772,000 to increase the scope of the
              rehabilitation work. The rehabilitation work associated with the loans totaled
              $144,664, of which $123,501 was spent before the increase in scope request. The
              developer spent only $21,163 for rehabilitation after he received the loans to
              increase the scope of work.

              Of the $772,000 loan, the developer used $627,336 in HOME funds to pay
              himself a $200,775 developer’s fee, $68,537 to pay the principal and interest on
              the project mortgage, $18,557 to pay operating expenses, $4,467 for legal fees,
              $60,000 to pay a portion of the fourth acquisition loan, and $275,000 to pay a
              portion of a $750,000 project loan. However, the entire $772,000 in HOME
              funds expended on the project was unallowable, since the Mirabeau project did
              not constitute an eligible HOME activity because the housing did not meet
              HOME requirements.

              Mirabeau’s ongoing property condition did not meet the requirements of 24 CFR
              92.251(c)(3), which require the owner of rental housing to maintain the property
              in compliance with all applicable State and local housing quality standards and
              codes, or if there are no such standards, with HUD’s Housing Quality Standards
              (see discussion in Finding 3).

              Also, the housing’s property standards did not meet all applicable local codes,
              rehabilitation standards, ordinances, and zoning ordinances at the time of project
              completion as required by 24 CFR 92.251(a)(1). The City lacked documentation

                                               8
           to support that Mirabeau met these standards and the condition of the property did
           not support that adequate rehabilitation was performed to bring the property into
           compliance with the applicable codes and standards (see discussion in Finding 4).
           Mirabeau did not qualify as affordable housing because the City did not impose
           the HOME affordability restrictions (rents and income targeting) on the project by
           deed restrictions or covenants running with the land as required in 24 CFR
           92.252(e)(1)(ii). The City did not determine the minimum number of HOME
           units that had to be designated as HOME units and meet affordability
           requirements (see discussion in Finding 5).

           The Department, under its former director, did not monitor the project activities as
           required by 24 CFR 85.40, which states that grantees must monitor grant- and
           subgrant-supported activities to ensure compliance with applicable Federal
           requirements. The Department, under its former director, did not properly
           document that it reviewed the Mirabeau Apartments as rehabilitation work was
           completed or reviewed the developer’s expenditures. The housing manager stated
           that he was told by the former director that there was no need for documentation
           since the improvements were only cosmetic and there were no substantial
           structural repairs. The housing manager stated that he checked the rehabilitation
           work before the developer was paid but could not provide supporting
           documentation.

CDBG Funds Used as
Collateral Were Not Returned

           The Department entered into an agreement on October 29, 1999, with a local bank
           to make monthly deposits. The deposits were to maintain the value of the
           mortgages that it pledged to secure a $3.5 million loan for the developer to
           purchase the Westland Apartments, the predecessor to the Mirabeau Apartments.
           The monthly deposits were based on the amortization of the $1.6 million value of
           the pledged mortgages. The deposits were initially $12,884 per month and later
           increased to $13,000 per month. The Department used CDBG funds totaling
           $323,720 to make deposits from November 16, 1999, through December 5, 2001
           (see appendix C).

           The bank foreclosed on the loan on November 21, 2001. To protect its income-
           producing mortgages, the Department entered into a collateral substitution
           agreement on January 3, 2002. According to the agreement, the Department was
           required to make a $1 million bank deposit as collateral to obtain the release of
           the pledged mortgages. It used CDBG funds to make the deposit on January 4,
           2002. The apartments were redeemed on March 14, 2002, and the bank released
           the $1 million deposit. The deposit was used at closing. However, there was no
           documentation to support that the bank released the $323,720 in collateral.

           We requested an explanation for the disposition of the funds; however, the
           Department did not provide an explanation. Regulations at 24 CFR 570.202(b)

                                            9
             provide that the use of CDBG funds to guarantee a loan is an eligible expenditure.
             Once the loan is settled, the collateral must be returned.

HOME Funds Were Not
Returned When the Project
Was Terminated

             The Department provided $100,000 in HOME funds (see appendix C) to its
             CHDO to invest in a proposed condominium development involving units in the
             Mirabeau Apartments project. The Department’s CHDO entered into a purchase
             and sale agreement on January 8, 2007, to purchase one tenth of one percent
             partnership interest in the Mirabeau Apartments for a $100,000 investment. The
             Department provided $100,000 in HOME funds to its CHDO on January 10,
             2007. The CHDO wired the funds to the developer’s bank account on January 16,
             2007.

             The agreement stated that the CHDO would own two units to initially rent to
             HOME-eligible tenants. The units would eventually be converted to
             condominiums and sold. The CHDO would receive a profit equal to 10 percent of
             its investment. Then the investment would roll over to another condominium unit
             for sale, and that process would continue.

             The Department later determined that the conversion of project units to
             condominiums for sale was not viable and terminated the project. Regulations at
             24 CFR 92.205(e) state that a HOME-assisted project that is terminated before
             completion, either voluntarily or otherwise, constitutes an ineligible activity and
             any HOME funds invested in the project must be repaid to the participating
             jurisdiction’s HOME Investment Trust Fund, a set-aside account established by
             HUD at the U.S. Treasury for allocated HOME funds. However, the $100,000 in
             HOME funds was not returned by the CHDO.

             The original CHDO merged with another CHDO in May 2009. Staff of the
             current CHDO stated that it was not aware of the agreement or the $100,000
             investment and did not receive rent from the units. Staff also stated that the
             records received from the original CHDO were not complete and contained little
             information about transactions with the Mirabeau Apartments. As a result, the
             Department’s failure to monitor the use of the $100,000 allowed the developer
             unrestricted use of the HOME funds for several years.

Conclusion

             Overall, nearly $ 1.2 million in HOME and CDBG funds was owed to the
             program because former City officials failed to review and monitor the activities
             of the Department and its former director. The Department used $772,000 in
             HOME funds for unintended purposes. It also failed to recover more than

                                              10
         $323,000 in CDBG funds it had deposited into a local bank to secure a project
         loan after that loan was redeemed. In addition, $100,000 in HOME funds was not
         recovered when the project was terminated.
Recommendations

            We recommend that the Director of HUD’s Alabama Office of Community
            Planning and Development require the City to

            2A. Reimburse $772,000 in HOME funds used to pay ineligible expenses to the
                HOME Investment Trust Fund treasury account from non-Federal funds.

            2B. Seek recovery of the $323, 720 in CDBG funds from the bank with interest
                from March 14, 2002, to the present. Reimburse $323,720 in CDBG funds to
                the CDBG program from non-federal funds and reimburse the interest to the
                U.S. Treasury.

            2C. Reimburse $100,000 in HOME funds to the HOME Investment Trust Fund
                Treasury account from non-Federal funds.

            2D. Ensure that its Community Development Department establishes and
                implements procedures to monitor and review project activities and
                developer expenditures to ensure that costs are eligible.

            2E. Establish and implement procedures to review and oversee the agreements of
                its Community Development Department and recover CDBG and HOME
                funds when required.




                                           11
Finding 3: The Mirabeau Apartments Were Not Properly Maintained
The Mirabeau Apartments were deteriorating, and no work was being performed to correct the
deterioration. Of the 229 project units, 60 were offline and needed major rehabilitation to make
the units livable. Although the interior of the occupied units appeared acceptable, the exterior of
the buildings needed significant repair and correction of safety issues. These conditions existed
because the Department’s inspections during and after rehabilitation were not properly
documented and did not report all deficiencies for the necessary corrective action. As a result,
income was lost for 60 offline units.



 Offline Units’ Interiors Needed
 Repair

               We performed two inspections of the project in February and May 2011. During
               a cursory inspection of the overall project and two occupied units, we noted that
               the interior of the two occupied units was in good condition and did not display
               safety or health issues. However, the offline units were in significant disrepair.
               Most of the units had been gutted. The appliances were missing; sheetrock on the
               walls and ceiling was stripped, exposing the rafters and wall studs; electrical
               wiring was stripped; bathroom fixtures were missing; carpets were ruined; and the
               walls with sheetrock had many holes. One unit was burned out, and no action had
               been taken to repair the unit. Regulations at 24 CFR 92.251(c) state that an owner
               of rental housing assisted with HOME funds must maintain the housing in
               compliance with all State and local housing quality standards and code
               requirements and if there are no such standards or code requirements, the housing
               must meet the housing quality standards in 24 CFR 982.401. In August 2013, the
               project manager confirmed that 60 of Mirabeau’s 229 units remained offline and
               needed major repairs to make the units livable. Therefore, Mirabeau lost the
               opportunity to earn income on those units.

 The Exterior of Buildings Was
 Deteriorating

               Our inspections of the exteriors in February and May 2011 showed that the
               buildings’ exteriors needed significant repair. There were indications of rotten
               wood on all of the buildings. It appeared that the rotten wood was not replaced
               during rehabilitation but, rather, painted over to cover up the rot. The soffits and
               fascia boards were rotten and falling down. The trim work on all of the buildings
               needed painting, and the gutters were falling off the buildings. We noted several
               exterior steps that did not have hand rails for safety. We performed cursory
               inspections of the exteriors in August 2013 and observed that similar conditions
               remained.


                                                12
Annual Inspections Were Not
Properly Documented

           The Department is required by 24 CFR 92.504(d)(1) to inspect the project
           annually to determine compliance with property standards. It did not properly
           document the annual inspections performed during rehabilitation. It inspected the
           project after our inspections. In its report, the Department identified the problem
           with the rotten wood and stated that it planned to conduct a follow-up inspection
           for rotten wood by August 19, 2011. The report did not mention the other
           deficiencies identified. As of August 28, 2013, the project was still in disrepair,
           and the owner had not made necessary repairs to the project.

Recommendations

           We recommend that the Director of HUD’s Alabama Office of Community
           Planning and Development require the City to

           3A.    Ensure that its annual inspections are properly performed and thoroughly
                  documented so the inspection reports provide a clear trail of necessary
                  repairs to ensure that the deficiencies are corrected and those corrections
                  can be verified against the identified deficiencies.

           3B.    Inspect the project, identify the deficiencies, and require the owner to correct
                  all deficiencies identified.




                                            13
Finding 4: The Department’s Participation Agreement Did Not Include
Required Elements
The Department’s participation agreement with the developer of the Mirabeau Apartments did
not include all of the elements required by HUD regulations. Although its agreement did not
comply with HUD requirements, the Department disbursed HOME funds. This condition
occurred because the City allowed the Department to administer the program without its review
or approval. As a result, the Department could not effectively monitor the completion of the
Mirabeau project and account for the use of HOME funds.



 Written Agreements Did Not
 Comply With HUD Regulations

              The Department executed a “participation agreement” with the developer dated
              March 7, 2002. The funds were for acquisition and rehabilitation. However, the
              City allowed the Department to execute the agreement and administer the
              program without proper oversight. The agreement lacked key elements stipulated
              by 24 CFR 92.504(c). The agreement did not describe the use of HOME funds,
              the tasks to be performed, a schedule for completing the tasks, and a budget.
              These items must be in sufficient detail to provide a sound basis for the
              Department to effectively monitor performance under the agreement. Also, the
              agreement did not include the period of affordability, the project requirements, the
              property standards, records, enforceability requirements, a request for
              disbursement of funds, and the duration of the agreement.

              By not having an agreement with its developer that contained all of the
              information required by the regulations, the Department could not effectively
              monitor the project and take appropriate actions when necessary to ensure
              compliance with program requirements.

 Recommendation

              We recommend that the Director of HUD’s Alabama Office of Community
              Planning and Development require the City to

              4A.    Review all of the Department’s participation agreements to ensure
                     compliance with HUD and HOME requirements.




                                               14
Finding 5: A Cost Allocation Plan Was Not Developed for the
Mirabeau Apartments
The Department did not prepare a cost allocation plan to allocate the unit costs or identify the
number of HOME-assisted units in the project. This condition occurred because the Department
did not have the financial data to make the necessary calculations. Without an allocation plan,
the Department could not support the number of HOME units, the eligible unit costs, and the
period of affordability.



 The Eligible Costs Per Unit or
 Period of Affordability Was Not
 Established

              The project consisted of 229 units, which included efficiency and one-, two-, and
              three-bedroom units of varying square footage and style. Some of the units also
              included a study. The HOME Program Final Rule, 92.205 d, Multi-unit projects,
              provides that only the actual HOME-eligible development costs of the assisted
              units may be charged to the HOME program. If the assisted and nonassisted units
              are not comparable, the actual costs may be determined based on a method of cost
              allocation. Because the Mirabeau units were not comparable, the Department was
              required to prorate the actual costs on a unit-by-unit basis for the HOME-assisted
              units in the project. However, the Department did not have the records it needed
              to support the actual costs on a per-unit basis. Also, the Department did not have
              the total actual costs of the project because it did not obtain the records from the
              developer.

              By not establishing the eligible costs per unit, the Department could not establish
              the period of affordability as required by 24 CFR 92.252(e), Qualification as
              Affordable Housing. The period of affordability is based on the eligible costs per
              unit. The period of affordability is the period during which the units are subjected
              to HOME program rules and regulations. As a result of this deficiency, the
              Department could not support the number of HOME units, the eligible unit costs,
              and the period of affordability.

 Recommendations

              We recommend that the Director of HUD’s Alabama Office of Community
              Planning and Development require the City to

              5A.     Ensure that the Department obtains all of the project costs from the
                      developer to determine the applicable costs and properly prepare a cost
                      allocation plan.


                                               15
5B.   Provide the cost allocation plan for review.




                                16
                        SCOPE AND METHODOLOGY

We conducted our audit from February through May 2011 at the Birmingham, AL, HUD office and
the Department’s central office located at 120 East Holmes Avenue, Huntsville, AL. We returned
to these offices in August 2013 and conducted additional audit work. Our audit period was
November 1, 2001, through December 31, 2010, and was expanded back to November 1999 to
accomplish our objectives and to cover all HUD funds used in the Mirabeau project. It became
necessary to expand our scope to include the earlier loans because the recent loans were used to
repay older loans. Therefore, it was necessary to determine whether those older loans had been
used as intended for eligible and supported activities.

To accomplish our audit objectives, we

   •   Reviewed applicable laws, regulations, and other HUD program requirements relating to the
       use of HOME and CDBG funds;
   •   Interviewed HUD and Department staff;
   •   Reviewed HUD’s program files for the Department;
   •   Obtained and reviewed HUD’s Integrated Disbursement and Information System reports;
       and
   •   Reviewed the Department’s accounting records, policies, and procedures.

We reviewed 100 percent of the Department’s expenditures for the Mirabeau project. Our review
covered the period November 1999 through December 2010. We reviewed contracts and
expenditures totaling more than $8.3 million.

We relied in part on data maintained by the Department and the developer for the Mirabeau
project and data in HUD’s system. Although we did not perform detailed assessments of the
reliability of the data, we performed minimal levels of testing and found the data to be
adequately reliable for our purposes. Testing for reliability included the comparison of
computer-processed data to payment requests and other supporting documentation.

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(s). We believe that the evidence obtained provides a reasonable basis for our findings
and conclusions based on our audit objectives.




                                               17
                              INTERNAL CONTROLS

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

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

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


 Relevant Internal Controls

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

               •      Compliance with laws and regulations – Policies and procedures that
                      management has implemented to reasonably ensure that resource use is
                      consistent with laws and regulations.

               •      Effectiveness and efficiency of operations – Policies and procedures that the
                      audited entity has implemented to provide reasonable assurance that a
                      program meets its objectives, while considering cost effectiveness and
                      efficiency.

               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.




                                                 18
Significant Deficiency

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

            •   The Department did not have proper controls and procedures to administer its
                CDBG and HOME programs to prevent and detect unsupported and ineligible
                costs for the Mirabeau Apartments project (see findings 1, 2, 3, 4, and 5).




                                             19
                                   APPENDIXES

Appendix A

                 SCHEDULE OF QUESTIONED COSTS

                 Recommendation
                         number          Ineligible 1/      Unsupported 2/
                      1A                   $1,183,642
                      1B                                         $1,031,000
                      2A                       772,000
                      2B                       323,720
                      2C                       100,000           _________
                     Total
                                            $2,379,362           $1,031,000


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.




                                             20
Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION

Ref to OIG Evaluation   Auditee Comments




                         21
Comment 1




            22
Comment 2




            23
Comment 3




            24
Comment 2




Comment 4




            25
Comment 5




Comment 2




Comment 6

Comment 4



Comment 2




            26
Comment 7




Comment 3




Comment 2




Comment 3




            27
Comment 2




Comment 3




Comment 2



Comment 3




Comment 2




            28
Comment 8




Comment 6




Comment 9




            29
Comment 3




Comment 6



Comment 2




Comment 7




Comment 1




            30
Comment 4




            31
                         OIG Evaluation of Auditee Comments

Comment 1   The audit report is based upon the City’s policies and procedures in place at the
            time the activities we audited. The policies and procedures provided in the City’s
            comments were not presented during the audit; therefore, we did not review them.
            HUD needs to review these policies and procedures and ensure the City
            implements them.

Comment 2   While HUD did perform monitoring reviews that included the City’s HOME and
            CDBG programs, the HUD reviews included limited testing of selected items.
            The City comments state that it did not know what instruments HUD may have
            reviewed or inspected during the monitoring review. HUD’s monitoring review
            reports disclosed that limited testing was used to make its determinations. HUD’s
            2005 monitoring report specifically stated that HUD performed a 4 day
            monitoring review with results based on a sample of CHDO agreements, three
            files from the City’s Homebuyer Program files, two CDBG activities, and three
            CDBG housing rehabilitation files, all unrelated to the Mirabeau activity. HUD’s
            2007 monitoring report also evaluated the eligibility of selected CDBG activities
            and HUD’s review of rental rehabilitation at Mirabeau was based on inspections
            of 3 units. Conversely, the OIG audit was a much more complete and detailed
            review of the City’s specific activities for the Mirabeau project and its
            predecessor Westland.

Comment 3   The City was responsible for maintaining all documents to support it used the
            HUD funds for eligible and supported activities at the time funds were provided
            and expended. The City should have obtained, protected, and archived the
            documents during the personnel changes. The City should not have to rely on
            obtaining the necessary documents from its developers and former employees
            after the transactions were completed. The difficulties the current City
            administration encountered during the audit to locate and obtain necessary
            documents from external parties to support its use of HUD funds does not alter its
            responsibility.

Comment 4   The cost allocation plan is the planning document that the City was required to
            prepare and use from the beginning of the project for any of the HOME funds to
            be eligible. Without an allocation plan, the Department could not support the
            number of HOME units, the eligible unit costs, and the period of affordability.
            The HOME Program Final Rule, 92.205 d, Multi-unit projects, provides that only
            the actual HOME-eligible development costs of the assisted units may be charged
            to the HOME program. If the assisted and nonassisted units are not comparable,
            the actual costs may be determined based on a method of cost allocation. Because
            the Mirabeau units were not comparable the cost allocation plan must designate
            the specific units funded by HOME for the Mirabeau project. By not establishing
            the eligible costs per unit, the Department could not establish the period of
            affordability as required by 24 CFR 92.252(e).



                                            32
Comment 5   As discussed in finding 1, the loans were used for activities that were not eligible.

Comment 6   The Mirabeau project must be properly maintained at all times for the funding to
            be eligible, notwithstanding difficulties the City encountered to get the developer
            to perform ongoing maintenance. OIG is not criticizing the construction process,
            but the lack of documentation to support that Mirabeau met the standards and that
            adequate rehabilitation was performed to bring the property into compliance.

Comment 7   The HOME Program Final Rule, 92.205 d, Multi-unit projects, provides that only
            the actual HOME eligible development costs of the assisted units may be charged
            to the HOME program. If the assisted and nonassisted units are comparable in
            terms of size, features and number of bedrooms, the actual costs of the HOME-
            assisted units can be determined by prorating the total eligible development costs
            of the project. However, the Mirabeau units were not comparable. The project
            consisted of 229 units that included efficiency and one-, two-, and three-bedroom
            units of varying square footage and style. Some of the units also included a study.
            Because the units were not comparable, the Department was required to prorate
            the actual costs on a unit-by-unit basis. The Department did not have the records
            it needed to support the actual costs on a per-unit basis. Also, it did not have the
            total actual costs of the project because it did not have the records from the
            developer. The instructions for preparing a cost allocation plan and identifying
            the number of HOME-assisted units are included in HUD’s Notice CPD 8-2. The
            City needs to work with HUD regarding the cost allocation plan because the
            Mirabeau units are not comparable; therefore, they cannot be floating units.

Comment 8   While the City may seek to amend its agreement with its developer, the stated
            purpose of the executed $100,000 CDBG loan agreement was to reduce the
            principal of the project’s debt. However, the CDBG loan funds were used for
            other purposes by the developer. Consequently, these funds remain unsupported.
            The City needs to work with HUD regarding if it can seek to amend the
            developer’s former agreement.

Comment 9   The collateral amount is $323,720 not $336,720, as stated in the City’s comments.
            The deposits were required by the bank to maintain the pledge value for the $1.6
            million mortgage pool that the City pledged as collateral to secure a $3.4 million
            loan, as discussed finding 2. Therefore, the City’s monthly deposits were not
            interest payments.




                                             33
   Appendix C

                   THE MIRABEAU APARTMENTS LOANS


                                                    Loan amount        Loan amount
      Loan title – Program Funds     Loan amount      ineligible       unsupported
Loan refinance - HOME                     932,831            932,831
Loan refinance - CHDO                     250,811            250,811
Bridge loan - CDBG                        950,000                            300,000
First acquisition loan - CDBG           1,200,000                            200,000
Mezzanine loan - CDBG                     171,000                             41,000
Second acquisition loan - CDBG            390,000                            390,000
Third acquisition loan - CDBG             100,000                            100,000
Rehabilitation loan - HOME                772,000           772,000
Collateral deposit loan - CDBG            323,720           323,720
Condominium investment loan - HOME        100,000           100,000
Totals                                 $5,190,362        $2,379,362        $1,031,000




                                       34