oversight

The Owner and Former Management Agents Lacked Adequate Controls Over the Operation of Lake Village of Fairlane Apartments, Dearborn, MI

Published by the Department of Housing and Urban Development, Office of Inspector General on 2014-09-30.

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

OFFICE OF AUDIT
REGION 5
CHICAGO, IL  




               Lake Village of Fairlane Apartments,
                          Dearborn, MI

      Section 223(f) Multifamily Insurance Program




2014-CH-1012                                  SEPTEMBER 30, 2014 
                                                        Issue Date: September 30, 2014

                                                        Audit Report Number: 2014-CH-1012

                 


TO:          Barbara Chiapella, Director of Multifamily Housing Hub, 5FHLMA
             Craig T. Clemmensen, Director, Departmental Enforcement Center, CACB

             //signed//
FROM:        Kelly Anderson, Regional Inspector General for Audit, Chicago Region, 5AGA


SUBJECT: The Owner and Former Management Agents Lacked Adequate Controls Over the
         Operation of Lake Village of Fairlane Apartments, Dearborn, MI


    Attached is the U.S. Department of Housing and Urban Development (HUD), Office of
Inspector General’s (OIG), final results of our review of Lake Village of Fairlane Apartments.

    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
(312) 913-7832.
                                          September 30, 2014 
                                          The Owner and Former Management Agents Lacked
                                          Adequate Controls Over the Operation of Lake Village of
                                          Fairlane Apartments, Dearborn, MI 



Highlights
Audit Report 2014-CH-1012


 What We Audited and Why                    What We Found

We audited Lake Village of Fairlane       The owner and former management agents could not
Apartments as part of the activities in   provide sufficient documentation to support that
our fiscal year 2014 annual audit plan.   project funds were used for reasonable operating
We selected the project based on a        expenses or necessary repairs of the project. Further,
referral from the U.S. Department of      (1) other project funds were not used for reasonable
Housing and Urban Development’s           operating expenses or necessary repairs of the project,
(HUD) Detroit Office of Multifamily       (2) the project’s security deposit account balance did
Housing Programs. Our objective was       not equal or exceed the total obligations associated
to determine whether the project’s        with the account, and (3) the project lost rental revenue
owner and former management agents        by providing a household rent-free housing. As a
operated the project in accordance with   result, HUD and the owner lacked assurance that
HUD’s requirements and the regulatory     nearly $3 million in project funds was used for
agreement.                                reasonable operating expenses or necessary repairs of
                                          the project and nearly $19,000 in additional rental
  What We Recommend                       revenue was not lost. Further, nearly $8,000 in project
                                          funds and more than $10,000 in lost rental revenue
                                          were not available for reasonable operating expenses
We recommend that HUD require the         and necessary repairs of the project. In addition,
owner to (1) support disbursements and nearly $47,000 in security deposits was not available to
that rental revenue was not lost or       (1) reimburse the owner for damages to project units,
reimburse the project from nonproject     (2) pay the owner for unpaid rent, or (3) reimburse
funds, (2) reimburse the project for      households.
ineligible disbursements and lost rental
revenue, (3) reimburse the project’s
underfunded security deposit account,
and (4) implement adequate procedures
and controls to address the findings
cited in this audit report. We also
recommend that HUD pursue double
damages remedies, civil money
penalties, and administrative sanctions
against the responsible parties for their
part in the violations of the regulatory
agreement cited in the audit report.
 




                            TABLE OF CONTENTS

Background and Objective                                                               3

Results of Audit
       Finding 1: The Project’s Owner and Former Management Agents Did Not Always
                  Operate the Project in Accordance With HUD’s Requirements and the
                  Regulatory Agreement                                                4

Scope and Methodology                                                                 10

Internal Controls                                                                     12

Appendixes
    A. Schedule of Questioned Costs                                                   14
    B. Auditee Comments and OIG’s Evaluation                                          15
    C. Federal Requirements and State Laws                                            21




                                           2
 




                       BACKGROUND AND OBJECTIVE

Lake Village of Fairlane Apartments is a 172-unit multifamily housing project in Dearborn, MI.
In June 2009, the U.S. Department of Housing and Urban Development (HUD) insured the
project’s mortgage of more than $11.4 million under section 223(f) of the National Housing Act
and executed a regulatory agreement with the project’s owner, Lake Village of Fairlane, LLC.
Wynnestone Communities Corporation and Wingate Management Companies were the project’s
former management agents. Wynnestone, formerly Amurcon Corporation, was the project’s
identity-of-interest management agent from June 2009 through January 2013. The general
partner of Lake Village of Fairlane, LLC, owned Wynnestone. Wingate was the project’s
management agent from February 2013 through March 2014. However, the general partner
maintained control of the project’s accounts. Staff from Silverman Development Company,
LLC, an identity-of-interest company owned by the general partner and also previously known as
Silverman Companies, processed the disbursements. The project’s expenses were paid from the
project’s operating account and Wynnestone’s corporate accounts.

As of August 2014, Freedomview Management Company, LLC, was the project’s management
agent. The project was in a non-surplus-cash position from January 2010 through December
2012. Further, as of August 1, 2014, the 2013 audited financial statements for the project had
not been submitted. The project’s records are located at 101 Southfield Road, Birmingham, MI.

Our objective was to determine whether the project’s owner and former management agents
operated the project in accordance with HUD’s requirements and the regulatory agreement.
Specifically, we wanted to determine whether (1) project funds were used only for reasonable
operating expenses or necessary repairs of the project, (2) the project’s security deposit account
balance equaled or exceeded the total obligations associated with the account, and (3) the project
lost rental revenue by providing a household rent-free housing.




                                                  3
                                                   
 




                                 RESULTS OF AUDIT

Finding 1: The Project’s Owner and Former Management Agents Did
      Not Always Operate the Project in Accordance With HUD’s
             Requirements and the Regulatory Agreement
The owner and former management agents could not provide sufficient documentation to support
that project funds were used for reasonable operating expenses or necessary repairs of the
project. Further, (1) other project funds were not used for reasonable operating expenses or
necessary repairs of the project, (2) the project’s security deposit account balance did not equal
or exceed the total obligations associated with the account, and (3) the project lost rental revenue
by providing a household rent-free housing. These weaknesses occurred because the owner and
former management agents lacked adequate procedures and controls for the operation of the
project to ensure that project funds were used and security deposits were managed in accordance
HUD’s requirements and the regulatory agreement. As a result, HUD and the owner lacked
assurance that nearly $3 million in project funds was used for reasonable operating expenses or
necessary repairs of the project and nearly $19,000 in additional rental revenue was not lost.
Further, nearly $8,000 in project funds and more than $10,000 in lost rental revenue were not
available for reasonable operating expenses and necessary repairs of the project. In addition,
nearly $47,000 in security deposits was not available to (1) reimburse the owner for damages to
project units, (2) pay the owner for unpaid rent, or (3) reimburse households.


    The Project Lacked Sufficient
    Support for Nearly $3 Million
    Disbursed From Its Operating
    Account

                Contrary to paragraphs 6(b), 6(e), and 9(b) of the owner’s regulatory agreement
                and paragraphs 2-6(A)(4) and 2-6(E) of HUD Handbook 4370.2 REV-1, CHG-1,
                the owner and former management agents were unable to provide sufficient
                documentation to support nearly $3 million disbursed from the project’s operating
                account. Further, nearly $8,000 in operating funds was not used for reasonable
                operating expenses or necessary repairs of the project.

                Disbursements to Wynnestone
                We reviewed 152 disbursements from the project’s operating account to
                Wynnestone totaling nearly $2.1 million. Silverman Development Company,
                LLC’s corporate controller stated that more than $1 million in disbursements was
                loans from the project and nearly $878,000 in disbursements was to pay for
                project expenses. The corporate controller did not comment on the remaining
                nearly $176,000 in disbursements. However, the owner and former management
                agents could not provide sufficient documentation to support $2,008,598
                associated with 143 of the 152 disbursements. The corporate controller also




                                                 4
                                                   
 




                             stated that Wynnestone reimbursed the project for more than $930,000 of the
                             more than $1 million in loans. However, the documentation provided only
                             showed that Wynnestone transferred nearly $799,000 into the project’s operating
                             account. Deposits into and disbursements from Wynnestone’s corporate account
                             were not always clearly traceable to the project. In addition, the balance of the
                             corporate account was less than $15,000 as of December 31, 2013, and less than
                             $20 as of June 30, 2014.

                             Disbursements to Other Payees
                             We also reviewed 113 disbursements totaling nearly $1.1 million from the
                             project’s operating account to payees other than Wynnestone.1 The owner and
                             former management agents were unable to provide sufficient documentation to
                             support that $953,500 associated with 107 disbursements was for reasonable
                             operating expenses or necessary repairs of the project. Of the $953,500, the
                             project’s owner and former management agents did not provide documentation to
                             show that (1) $541,440 in disbursements was supported with sufficient invoices
                             and properly procured, (2) $373,207 in disbursements was properly procured, (3)
                             $36,765 in purchasing service fees (markup) that identity-of-interest companies
                             charged was reasonable,2 and (4) $2,088 in disbursements was supported with
                             sufficient invoices.

                             In addition, $7,521 from three disbursements was not for reasonable operating
                             expenses or necessary repairs of the project. The disbursements included (1) a
                             distribution to a limited partner, (2) duplicate costs (3) expenses for another
                             apartment complex, and (4) late payment fees.

    The Project’s Security Deposit
    Account Was Underfunded by
    Nearly $47,000

                             The project’s security deposits were not appropriately managed as required by
                             paragraph 6(g) of the owner’s regulatory agreement and paragraph 2-9(A) of
                             HUD Handbook 4370.2, REV-1, CHG-1. The security deposits were not placed
                             into a separate trust account from June 2009 through January 2010. Further, from
                             February 2010 through June 2014, the balance in the project’s security deposit
                             account did not equal or exceed the total outstanding obligations associated with
                             the account. In addition, $85,000 was transferred from the security deposit
                             account into Wynnestone’s corporate account and $52,500 was transferred from
                             the corporate account into the security deposit account from February through
                             July 2012. Two transfers from the security deposit account to the corporate
                             account totaling $32,500 were not reimbursed. The security deposit account was
                             underfunded by $54,809 as of December 31, 2013, and $46,731 as of June 30,
                                                            
1
  The 113 disbursements included 61 disbursements totaling nearly $680,000 to companies disclosed as having an
identity-of-interest relationship with the project.
2
  The project used identity-of-interest companies as purchasing agents to acquire supplies, equipment, and services.




                                                               5
                                                                
 




               2014. The following graph shows the difference between the outstanding
               obligations and the balance of the account from February 2010 through June
               2014.

                             Underfunded security deposit account
                 $100,000
                  $80,000
                  $60,000
                  $40,000
                  $20,000
                       $0
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                              0




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                              3




                              4
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                      O
                                                Obligations         Balance

    The Project Lost Rental
    Revenue by Providing a
    Household Rent-Free Housing

               One of the project’s units was used to provide a household rent-free housing from
               February 2011 through December 2013. The rents during this period totaled
               nearly $36,000. The project’s site manager said that the tenant was a former
               maintenance employee of the project whose employment ended in February 2013.
               However, sufficient documentation was only provided to support that the tenant
               worked at the project 11 pay periods during 7 months from February 2011
               through February 2013. Therefore, contrary to paragraph 6(h) of the owner’s
               regulatory agreement, the project lost $10,250 in rental revenue by allowing the
               household to inappropriately live in a unit for 10 months (March through
               December 2013) and lacked sufficient documentation to support that $18,700 in
               additional rental revenue was not lost.

    The Owner and Former
    Management Agents Lacked
    Adequate Procedures and
    Controls

               The weaknesses described above occurred because the project’s owner and former
               management agents lacked adequate procedures and controls for the operation of
               the project to ensure that operating funds were used and security deposits were
               managed in accordance with HUD’s requirements and the regulatory agreement.




                                               6
                                                 
 




                             The general partner of the project said that the former employees of Wynnestone
                             were responsible for disbursing funds from the project’s operating account to
                             Wynnestone and the poor accounting and record keeping. He removed the
                             responsible employees in 2012. However, Silverman Development Company,
                             LLC’s director of finance and assistant vice president said that the general partner
                             approved all of the project’s disbursements starting in August 2012. Further,
                             Wingate allowed the general partner to maintain control of the project’s accounts
                             when it became the project’s management agent in February 2013. Nearly $1.2
                             million of the nearly $2.1 million in unsupported project funds disbursed to
                             Wynnestone and nearly $146,000 of the $953,500 in unsupported project funds
                             disbursed to other payees were disbursed after August 2012. In addition, the
                             general partner said that procurement was not required for professional service
                             firms.

                             The general partner said that he was not aware that the project’s security deposit
                             account was underfunded until we informed him during our audit. However, the
                             project’s audited financial statements for 2010, 2011, and 2012 included a finding
                             that the project’s security deposit account was underfunded. The summary of
                             auditee’s comments on the findings and recommendations stated that management
                             was aware that the project’s security deposit account was underfunded and the
                             account would be fully funded as soon as possible. Further, the general partner
                             certified that he examined the annual audited financial statements and
                             supplemental data and certified that the annual audited financial statements and
                             supplemental data were complete and accurate.

                             The general partner also said that he was not aware that the household received
                             rent-free housing until we informed him during our audit. However, Wingate
                             notified the general partner of the situation in November 2013.

    Conclusion

                             The project’s owner and former management agents lacked adequate procedures
                             and controls for the operation of the project to ensure that operating funds were
                             used and security deposits were managed in accordance with HUD’s requirements
                             and the regulatory agreement. As a result, HUD and the owner lacked assurance
                             that nearly $3 million in project funds was used for reasonable operating expenses
                             or necessary repairs of the project3 and nearly $19,000 in additional rental
                             revenue was not lost. Further, nearly $8,000 in project funds and more than
                             $10,000 in lost rental revenue were not available for reasonable operating
                             expenses and necessary repairs of the project. In addition, nearly $47,000 in
                             security deposits was not available to (1) reimburse the owner for damages to
                             project units, (2) pay the owner for unpaid rent, or (3) reimburse households, as
                             appropriate, when the households move out of the units.
                                                            
3
 The nearly $3 million included (1) more than $2 million in disbursements to Wynnestone and (2) $953,500 in
disbursements to other payees.




                                                               7
                                                                
 




    Recommendations

              We recommend that the Director of HUD’s Detroit Office of Multifamily
              Housing Programs require the project’s owner to

              1A. Support or reimburse the project from nonproject funds $2,008,598, as
                  appropriate, for the project funds disbursed to Wynnestone without sufficient
                  documentation to support that the project funds were used for reasonable
                  operating expenses or necessary repairs of the project.

              1B. Support or reimburse the project from nonproject funds $541,440, as
                  appropriate, for the project funds disbursed to payees other than Wynnestone
                  without documentation showing that the disbursements were supported with
                  sufficient invoices and properly procured.

              1C. Support or reimburse the project from nonproject funds $373,207, as
                  appropriate, for the project funds disbursed to payees other than Wynnestone
                  without documentation showing that the disbursements were properly
                  procured.

              1D. Support or reimburse the project from nonproject funds $36,765, as
                  appropriate, for the project funds disbursed for purchasing service fees
                  charged by identity-of-interest companies.

              1E. Support or reimburse the project from nonproject funds $2,088, as
                  appropriate, for the project funds disbursed to payees other than Wynnestone
                  without documentation showing that the disbursements were supported with
                  sufficient invoices.

              1F. Reimburse the project from nonproject funds $7,521 for the project funds
                  that were not used for reasonable operating expenses or necessary repairs of
                  the project.

              1G. Reimburse the project’s security deposit account from nonproject funds
                  $46,731 for the amount by which the security deposit account was
                  underfunded.

              1H. Reimburse the project from nonproject funds $10,250 for the lost rental
                  revenue.

              1I. Support that additional rental revenue was not lost or reimburse the project
                  from nonproject funds $18,700 as appropriate.

              1J. Implement adequate procedures and controls to ensure that (1) project funds
                  are used for reasonable operating expenses or necessary repairs of the project
                  when the project is in a non-surplus-cash position, (2) the project’s security



                                               8
                                                 
 




        deposit account equals or exceeds the total outstanding obligations associated
        with the account, and (3) rental revenue is not lost by providing a household
        rent-free housing.

    We recommend that the Director of HUD’s Michigan State Office of Multifamily
    Housing Hub, in coordination with the Director of HUD’s Departmental
    Enforcement Center

    1K. Pursue double damages remedies against the responsible parties for the
        ineligible use of the project’s operating funds, the applicable portion of the
        unsupported disbursements, and the improper management of the project’s
        security deposits cited in this audit report that violated the regulatory
        agreement.

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

    1L. Pursue civil money penalties and administrative sanctions against the
        responsible parties for their part in the violations of the regulatory
        agreement cited in the audit report.




                                     9
                                       
 




                                                 SCOPE AND METHODOLOGY

We performed our onsite work from January through July 2014 at Wynnestone’s office located
at 101 Southfield Road, Birmingham, MI. The audit covered the period June 2009 through
December 2013 and was expanded as determined necessary.

To accomplish our objectives, we reviewed

                            Applicable laws; Title 12, United States Code, sections 1715z-4a and 1735f-15;
                             Federal regulations at 2 CFR (Code of Federal Regulations) 180 and 2424;
                             HUD’s regulations at 24 CFR Parts 24, 200, and 207; HUD Handbooks 4350.1
                             REV-1, CHG 9; 4370.2 REV-1, CHG-1; and 4381.5 REV-2; and HUD’s
                             regulatory agreement with the project’s owner.

                            The project’s audited financial statements for 2009 through 2012; accounting
                             records; management agent agreements; and data in HUD’s Integrated Real Estate
                             Management System.

                            Wynnestone’s accounting records; data for the project in its Timberline and
                             OneSite systems; policies and procedures; and organizational chart.

                            Wingate’s bank statements and organizational chart.

                            HUD’s files for the project.

In addition, we interviewed employees of Wingate and Silverman Development Company, LLC;
the general partner of the project’s owner; and HUD’s staff.

Project funds were disbursed from the project’s operating account to (1) Wynnestone, (2)
companies other than Wynnestone that were disclosed to have an identity-of-interest relationship
with the project, and (3) payees that were not disclosed as having an identity of interest
relationship with the project. Through 1,099 disbursements, more than $7.3 million was
disbursed from the operating account from January 1, 2011, through December 31, 2013.4 We
selected for review all 152 disbursements totaling nearly $2.1 million to Wynnestone and all 61
disbursements totaling nearly $680,000 to companies disclosed to have an identity of interest
relationship with the project. We also initially selected for review a non-statistical sample of 15
disbursements totaling more than $200,000 from 557 disbursements totaling nearly $4.5 million
to payees that were not disclosed as having an identity-of-interest relationship with the project.
We selected one disbursement from each of the 10 payees that received the most disbursements

                                                            
4
 The disbursements included (1) 622 checks totaling more than $5 million, (2) 148 wire transfers totaling more than
$2.2 million, and (3) 329 electronic withdrawals totaling nearly $101,000. We did not include the electronic
withdrawals in the three populations due to the average withdrawal being significantly less than the average
disbursement made through checks and wire transfers.




                                                               10
                                                                 
 




in total dollars and five other disbursements that we determined to be of high risk. Based on our
review of the 15 disbursements, we then selected for review a non-statistical sample of an
additional 37 disbursements totaling more than $219,000. We used non-statistical samples since
we knew enough about the population to identify a relatively small number of items of interest
that were likely to be misstated or otherwise have high risk and we were not projecting the
results to the population that we did not review.

We reviewed the project’s tenant security deposit bank statements for February 2010 through
June 2014 and the project’s monthly rent roll reports for February 2010 through June 2014.

We also reviewed the project’s employee credit report to identify households receiving reduced-
rent or rent-free housing.

We relied in part on data maintained in Wynnestone’s systems. Although we did not perform a
detailed assessment of the reliability of the data, we performed a minimal level of testing and
found the data to be adequately reliable 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 finding and conclusions based on our audit
objective. We believe that the evidence obtained provides a reasonable basis for our finding and
conclusions based on our audit objective.




                                               11
                                                 
 




                                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:

                       Effectiveness and efficiency of operations – Policies and procedures that
                        management has implemented to reasonably ensure that a program meets
                        its objectives.

                       Reliability of financial reporting – Policies and procedures that
                        management has implemented to reasonably ensure that valid and reliable
                        data are obtained, maintained, and fairly disclosed in reports.

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

                 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.




                                                   12
                                                     
 




    Significant Deficiency

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

                      The project’s owner and former management agents lacked adequate
                       procedures and controls over the operation of the project to ensure that
                       operating funds were used and security deposits were managed in
                       accordance with the regulatory agreement and HUD’s requirements.




                                                 13
                                                    
 




                                   APPENDIXES

Appendix A

                 SCHEDULE OF QUESTIONED COSTS

               Recommendation
                   number               Ineligible 1/        Unsupported 2/
                     1A                                          $2,008,598
                     1B                                             541,440
                     1C                                             373,207
                     1D                                              36,765
                     1E                                               2,088
                     1F                            $7,521
                     1G                            46,731
                     1H                            10,250
                     1I                                               18,700
                    Totals                        $64,502         $2,980,798

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.




                                             14
                                               
 




Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION

Ref to OIG Evaluation   Auditee Comments

              




Comment 1

Comments 1
 and 2


Comment 3




Comment 4




                         15
                           
 




            AUDITEE COMMENTS AND OIG’S EVALUATION

Ref to OIG Evaluation       Auditee Comments

               




Comment 4

Comment 4




Comment 1

Comment 5

Comment 6




Comment 1




Comment 7
Comments 2
    and 7



Comment 8




                            COmment




                              16
                                
 




        AUDITEE COMMENTS AND OIG’S EVALUATION

Ref to OIG Evaluation   Auditee Comments




Comment 9




Comment 10




Comment 1




                                                 

              




                         17
                           
 




                        OIG’s Evaluation of Auditee Comments

Comment 1   Silverman Development Company, LLC’s corporate controller stated that the $1.6
            million in disbursements from the project’s operating account to Wynnestone
            questioned in the report reflects only the transfers out of the project’s bank
            account and does not reflect transfers back into the project’s bank account. These
            payments were reconciled and a summary of the use of the disbursements were
            reflected in the intercompany payment application spreadsheet. Of the $878,000
            mentioned in the report as disbursements to pay for project expenses, $500,000
            was for payroll, $50,000 was for health insurance, $217,000 was for management
            fees, and the remaining $92,000 were for miscellaneous expenses. The corporate
            controller also stated that through the end of the audit period and as of September
            16, 2014, Wynnestone had funded the project’s operating losses, covered payroll,
            and paid bills for the project in excess of reimbursements to Wynnestone from the
            project.

            However, the owner and former management agents could not provide sufficient
            documentation to support more than $2.1 million in disbursements from the
            project’s operating account to Wynnestone. According to the corporate
            controller, the amounts in the spreadsheet were reconciled to Wynnestone’s
            general ledger but were not verified using source documentation. Further,
            sufficient documentation was not provided to support the amounts in the
            spreadsheet. The corporate controller previously stated that more than $1 million
            in disbursements was loans from the project and Wynnestone reimbursed the
            project for more than $930,000 of the loans. Loans from the project to
            Wynnestone would be a violation of the regulatory agreement. In addition,
            sufficient documentation was not provided to support that the nearly $799,000
            transferred from Wynnestone into the projects operating account were
            reimbursements for loans.

Comment 2   We did not include in appendix B the attachments that the corporate controller
            provided since the attachments were not necessary to understand the corporate
            controller’s comments. We provided the Director of HUD’s Detroit Office of
            Multifamily Housing Programs with a complete copy of the corporate controller’s
            written comments plus the attachments.

Comment 3   The corporate controller stated that the largest use of funds disbursed from the
            project to Wynnestone was for $500,000 in payroll. However, as stated in the
            report, according to the corporate controller, more than $1 million in
            disbursements was loans from the project.

Comment 4   The corporate controller stated that payroll was processed electronically through
            third party vendors; HUD’s Office of Inspector General (OIG) was provided
            nearly 100 percent of the information, including pay summaries, provided by the
            vendors; and payroll disbursements were appropriate. However, not all of the pay
            summaries identified the project where the employees worked. Further, the




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            owner and management agents did not provide sufficient documentation to
            support that employees were paid by Wynnestone.

Comment 5   The corporate controller stated that certain expenses, such as management fees,
            were disallowed without any follow up questions from HUD’s OIG. We
            requested documentation to support the project’s disbursements to Wynnestone
            and held update meetings throughout the audit. Further, we provided the general
            partner and employees of Silverman Development Corporation, LLC, schedules
            showing unsupported disbursements to Wynnestone during the audit.

Comment 6   The corporate controller stated that invoices for items such as health insurance
            were provided but were deemed insufficient to support the disbursements.
            Invoices could not always be traced to disbursements from the project’s operating
            account to Wynnestone. Further, the owner and management agents did not
            provide sufficient documentation to support that Wynnestone disbursed funds for
            project expenses.

Comment 7   The corporate controller provided documentation, as attachments to the response
            to the report, for disbursements from the project’s operating account to payees
            other than Wynnestone.

            We revised the report to state the following:

               Of the $953,500, the project’s owner and former management agents did not
                provide documentation to show that (1) $541,440 in disbursements was
                supported with sufficient invoices and properly procured, (2) $373,207 in
                disbursements was properly procured, (3) $36,765 in purchasing service fees
                (markup) that identity-of-interest companies charged was reasonable, and (4)
                $2,088 in disbursements was supported with sufficient invoices.

            We also amended recommendations 1B, 1C, 1D, and the schedule of questioned
            costs to reflect this revision.

Comment 8   The corporate controller stated that disbursements were questioned due to a lack
            of procurement documentation although the disbursements appeared to be
            supported by invoices. Some disbursements were based on long standing
            relationships and agreed upon unit pricing. Paragraph 9(b) of the regulatory
            agreement states that payment for services, supplies, or materials should not
            exceed the amount ordinarily paid for such services, supplies, or materials in the
            area where the services are rendered or the supplies or materials are furnished.
            Paragraphs 6.50(a) and (b) of HUD Handbook 4381.5 REV-2 require solicitation
            of estimates for any contract, ongoing supply, or service. Paragraph 6.50(c) states
            that documentation of all bids should be retained as part of the project’s records
            for three years following the completion of the work.




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Comment 9     The corporate controller stated that Silverman Development Company, LLC, was
              investigating how and why the project’s security deposit account was
              underfunded. We commend Silverman Development Company, LLC, for
              investigating how and why the account was underfunded. The project owner’s
              should work with HUD’s Detroit Office of Multifamily Housing Programs to
              resolve recommendations 1G and 1J as applicable.

Comment 10 The corporate controller stated that payroll reports were provided for each
           employee that received a rent-free unit at the project.

              We revised the report to state the following:

                 One of the project’s units was used to provide a household rent-free housing
                  from February 2011 through December 2013. The rents during this period
                  totaled nearly $36,000. The project’s site manager said that the tenant was a
                  former maintenance employee of the project whose employment ended in
                  February 2013. However, sufficient documentation was only provided to
                  support that the tenant worked at the project 11 pay periods during 7 months
                  from February 2011 through February 2013. Therefore, contrary to paragraph
                  6(h) of the owner’s regulatory agreement, the project lost $10,250 in rental
                  revenue by allowing the household to inappropriately live in a unit for 10
                  months (March through December 2013) and lacked sufficient documentation
                  to support that $18,700 in additional rental revenue was not lost.

              We also amended recommendation 1I to reflect this revision.




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Appendix C 

           FEDERAL REQUIREMENTS AND STATE LAWS

Paragraph 6(b) of HUD’s regulatory agreement with the project’s owner states that without the
prior written approval of HUD’s Secretary, the owner must not convey, transfer, dispose of, or
encumber any personal property of the project, including rents, or pay out any funds except from
surplus cash, except for reasonable operating expenses and necessary repairs. Paragraph 6(e)
states that without the prior written approval of the Secretary, the owner must not make or
receive and retain any distribution of assets or any income of any kind of the project except
surplus cash and except on the following conditions: (1) all distributions must be made only as
of and after the end of a semiannual or annual fiscal period, and only as permitted by the law of
the applicable jurisdiction; (2) no distribution will be made from borrowed funds prior to the
completion of the project or when there is any default under the regulatory agreement or
mortgage note; (3) any distribution of any funds of the project which the party receiving such
funds is not entitled to retain hereunder, must be held in trust and separate and apart from any
other funds; and (4) there must have been compliance with all outstanding notices of
requirements for proper maintenance of the project. Paragraph 6(g) states that any funds
collected as security deposits must be kept in a separate trust account apart from all other funds
of the project. The account balance must at all times equal or exceed the total outstanding
obligations associated with the account. Paragraph 6(h) states that the owner must not without
the prior written approval of the Secretary, permit the use of the dwelling accommodations of the
project for any purpose except the use which was originally intended.

Paragraph 9(b) of the regulatory agreement states that payment for services, supplies, or
materials shall not exceed the amount ordinarily paid for such services, supplies, or materials in
the area where the services are rendered or the supplies or materials are furnished. Paragraph
9(c) states that the mortgage property, equipment, buildings, plans, offices, apparatus, devices,
books, contracts, records, documents, and other papers relating thereto must at all times be
maintained in reasonable condition for proper audit and subject to examination and inspection at
any reasonable time by the Secretary or his duly authorized agents. Owners shall keep copies of
all written contracts or other instruments which affect the mortgaged property, all or any of
which may be subject to inspection and examination by the Secretary or his duly authorized
agents. Paragraph 9(g) states that all rents and receipts of the project must be withdrawn only in
accordance with the provisions of the regulatory agreement for expenses of the project or
distributions of surplus cash as permitted by paragraph 6(e) of the regulatory agreement. Any
owner receiving funds of the project other than by such distribution of surplus cash must
immediately deposit such funds in the project bank account and failing to do so in violation of
the regulatory agreement, must hold such funds in trust.

Paragraph 13(f) of the regulatory agreement defines surplus cash as any cash remaining after (1)
the payment of: (i) all sums due or currently required to be paid under the terms of any mortgage
or note insured or held by the Secretary; (ii) all amounts required to be deposited in the reserve
fund for replacements; (iii) all obligations of the project other than the insured mortgage unless
funds for payments are set aside or deferment of payment has been approved by the Secretary;



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and (2) the segregation of: (i) an amount equal to the aggregate of all special funds required to
be maintained by the project; and (ii) all tenant security deposits held. Paragraph 13(g) defines a
distribution as any withdrawal or taking of cash or any asset of the project, including the
segregation of cash or assets for subsequent withdrawal within the limitations of paragraph 6(e)
of the regulatory agreement, and excluding payment for reasonable expenses incident to the
operation and maintenance of the project.

Paragraph 2-6(A) of HUD Handbook 4370.2 REV-1, CHG-1, authorized management agents to
hold project funds in a centralized account. Paragraph 2-6(A)(4) states that deposits to and
disbursements from the centralized account must clearly be traceable to each project. The actual
cash position of each and every project in the centralized account must be easily identifiable at
all times without exception. Paragraph 2-6(E) states that all disbursements must be supported by
approved invoices/bills or other supporting documentation. Paragraph 2-9(A) states that
individual states have specific regulations governing the handling of tenant security deposits that
should be complied with. Paragraph 2-9 (B) states that all disbursements from the security
deposit account must be supported by approved invoices/bills or other documentation.
Disbursements must be only for refunds to tenants and for payment of appropriate expenses
incurred by the tenant.

Paragraph 6.50(a) of HUD Handbook 4381.5 REV-2 states that when an owner/agent is
contracting for goods or services involving project income, an agent is expected to solicit written
cost estimates from at least three contractors or suppliers for any contract, ongoing supply, or
service which is expected to exceed $10,000 per year. Paragraph 6.50(b) states that for any
contract, ongoing supply, or service estimated to cost less than $5,000 per year, the agent should
solicit verbal or written cost estimates in order to assure that the project is obtaining services,
supplies, and purchases at the lowest possible cost. The agent should make a record of any
verbal estimate obtained. Paragraph 6.50(c) states that documentation of all bids should be
retained as a part of the project records for three years following the completion of the work.

HUD’s regulations at 24 CFR 24.1 state that HUD is permitted to take administrative sanctions
against employees or recipients under HUD assistance agreements that violate HUD’s requirements.
The sanctions include limited denial of participation, suspension, or debarment and are
authorized by 2 CFR 2424.1110, 2 CFR 180.700, and 2 CFR 180.800, respectively. HUD may
impose administrative sanctions based upon the following conditions:

       Failure to honor contractual obligations or to proceed in accordance with contract
        specifications or HUD regulations (limited denial of participation);

       Violation of any law, regulation, or procedure relating to the application for financial
        assistance, insurance, or guarantee, or to the performance of obligations incurred pursuant to
        a grant of financial assistance, or pursuant to a conditional or final commitment to insure or
        guarantee (limited denial of participation);

       Violation of the terms of a public agreement or transaction so serious as to affect the
        integrity of an agency program such as a history of failure to perform or unsatisfactory
        performance of one or more public agreements or transactions (debarment); or




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       Any other cause so serious or compelling in nature that it affects the present responsibility of
        a person (debarment).

Title 12, United States Code, section 1715z-4a, Double Damages Remedy for Unauthorized Use
of Multifamily Housing Project Assets and Income, allows the U.S. Attorney General to recover
double the value of any project assets or income that was used in violation of a regulatory
agreement or any applicable regulation, plus all cost relating to the action, including but not
limited to reasonable attorney and auditing fees.

Title 12, United States Code, section 1735f-15, Civil Money Penalties Against Multifamily
Mortgagors, allows HUD’s Secretary to impose a civil money penalty of up to $25,000 per
violation against a mortgagor with five or more living units and a HUD-insured mortgage. A
penalty may be imposed for any knowing and material violation of a regulatory agreement by the
mortgagor, such as paying out any funds for expenses that were not reasonable and necessary
project operating expenses or making distributions to owners while the project is in a non-surplus
cash position.

Section 554.607 of the Michigan Compiled Laws states that a security deposit may only be used
to: (1) reimburse a landlord for actual damages to a rental unit or any ancillary facility that are
the direct result of conduct not reasonably expected in the normal course of habitation of a
dwelling, or (2) pay a landlord for all rent in arrearage under a rental agreement, rent due for
premature termination of a rental agreement by a tenant, and utility bills not paid by a tenant. 




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