OFFICE OF AUDIT
REGION 6
FORT WORTH, TX
Yale Court Apartments
Houston, TX
Section 223(f) Multifamily Insurance Program
2014-FW-1005 September 22 , 2014
Issue Date: September 22, 2014
Audit Report Number: 2014-FW-1005
TO: Raynold Richardson
Director, Multifamily Housing Program Center, 6EHM
Craig Clemmensen
Director, Departmental Enforcement Center, CACB
//signed//
FROM: Gerald R. Kirkland
Regional Inspector General for Audit, Fort Worth Region, 6AGA
SUBJECT: The Former Owner of Yale Court Apartments, Houston, TX, Used Project Funds
in Violation of the Regulatory Agreement With HUD
Attached is the U.S. Department of Housing and Urban Development (HUD), Office of
Inspector General’s (OIG) final results of our review of Yale Court Apartments in Houston, TX.
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
(817) 978-9309.
September 22, 2014
The Former Owner of Yale Court Apartments, Houston,
TX, Used Project Funds in Violation of the Regulatory
Agreement With HUD
Highlights
Audit Report 2014-FW-1005
What We Audited and Why What We Found
At the request of the Director of the The former owner used more than $3.5 million of the
U.S. Department of Housing and Urban project funds for ineligible and unsupported expenses.
Development’s (HUD) Houston, TX, Specifically, it (1) used $3.2 million for unauthorized
Office of Multifamily Housing distributions, transfers to non-HUD-insured properties,
Programs, we conducted a review of or repayments to the former owner for advances; (2)
Yale Court Apartments (project). Our used several incorrect documents to support more than
objective was to determine whether the $88,000 in withdrawals from the repair escrow
project owner used the project funds in account; (3) paid more than $16,000 for other
accordance with its regulatory ineligible project expenses; (4) overpaid management
agreement and HUD regulations. fees by nearly $16,000; (5) underfunded the tenant
security deposit account by more than $9,000; (6)
made ineligible loans to employees; and (7) spent more
What We Recommend
than $160,000 in project funds for items that it could
not properly support. Further, the former owner did
We recommend that the Director of not maintain accurate financial information and did not
HUD’s Houston, TX, Office of submit annual audited financial statements as required.
Multifamily Housing Programs flag the These conditions occurred because the former owner
form HUD-2530 for all appropriate did not implement adequate controls to ensure
parties for the regulatory agreement compliance with the regulatory agreement and
violations in this report. We also disregarded the project’s regulatory agreement. The
recommend that the Director of HUD’s former owner’s improper use of project funds reduced
Departmental Enforcement Center the amount available for physical repairs and payment
pursue civil money penalties and of the mortgage, which resulted in the project being
administrative sanctions, as appropriate, left in poor physical condition and contributed to
against the owner, operator, and/or their HUD’s nearly $4 million loss when HUD resold the
principals/owners for their part in the note in August 2012.
regulatory violations cited in this report.
TABLE OF CONTENTS
Background and Objective 3
Results of Audit
Finding: The Former Project Owner Used More Than $3.5 Million in Project
Funds in Violation of the Regulatory Agreement 5
Scope and Methodology 13
Internal Controls 15
Appendixes
A. Auditee Comments and OIG Evaluation 16
B. Fund Transfers Into and Out of the Project 17
C. Unsupported Disbursement Samples 21
2
BACKGROUND AND OBJECTIVE
Yale Court Apartments (project no. 114-11246) is a 250-unit apartment complex located at 5050
Yale Street, Houston, TX, and was owned by Shiraz US Yale, LLC. The company consisted of
seven members – six persons and a corporation:
Member Ownership percentage
1. Owner 1 (person) 20.633%
2. Owner 2 (person) 20.633%
3. Owner 3 (person) 17.942%
4. Owner 4 (person) 16.148%
5. Owner 5 (person) 9.644%
6. Optimum RE Investment, LLC 7.500%
7. Managing member (person) 7.500%
According to the company’s membership regulations, the managing member was responsible for
the property, affairs, and business of the company. No other member had the authority to act for
or on behalf of the company, to do any act that would be binding on the company, or to incur any
expenditures on behalf of the company, unless approved by the manager. On February 7, 2008,
the managing member executed a regulatory agreement with the U.S. Department of Housing
and Urban Development (HUD) in which the former owner agreed to be bound by the terms and
conditions of the regulatory agreement for a mortgage loan insured by the Federal Housing
Administration (FHA). The former owner purchased the project with more than $6.3 million in
financing provided by Evanston Financial Corporation and insured by FHA under section 223(f)
of the National Housing Act. The managing member also owned, leased, or operated at least 17
additional non-HUD-insured properties and was affiliated with 27 other businesses.
The former owner became delinquent on the project mortgage in September 2009. The mortgage
company assigned the mortgage to FHA in July 2011 when the former owner was $169,485
behind on its mortgage payments. FHA paid a claim of more than $6 million to the lender on
November 9, 2011, and sold the mortgage note on August 9, 2012, for $2.2 million.
Three different management agents managed the project between February 2008 and July 2011.
From February 2008 to April 2010, 100 Percent Leased Management, LLC, an identity-of-
interest company, 1 was the management agent. It maintained its office and records at 2400
Augusta Drive, Suite 453, Houston, TX. Centra Partners, LLC, located at 3730 FM 1960 West,
Suite 300, Houston, TX, managed the project from May 2010 to March 2011. Sumar Realty
Corporation, located at 3838 North Sam Houston Parkway, Suite 290, Houston, TX, managed
the project from May 2011 to July 2011. After July 2011, 100 Percent Leased Management
resumed managing the project.
1
The identity of interest existed because the project owner’s managing member was also the managing member
of 100 Percent Leased Management, LLC.
3
The owner during our field work no longer owns or manages the project. An unrelated company,
PEM FSF Yale Court, LLC, and UG Acquisition, LLC, purchased the note in August 2012 and
sold it to Tidwell Apartments Houston, LP, in February 2013. The mortgage is no longer insured
by FHA.
Between 2009 and 2013, HUD flagged the form HUD-2530 (Previous Participation
Certification) 2 for the former owner and the managing member for financial default, failure to
file financial statements, mortgage assignment, and unacceptable physical condition of the
property.
Our objective was to determine whether the project owner used the project funds in accordance
with the regulatory agreement and HUD regulations.
2
HUD places 2530 flags or indicators in HUD’s internal form HUD-2530 system to notify HUD personnel that
the flagged parties have unresolved regulatory noncompliance issues if the parties attempt to conduct future
business with HUD.
4
RESULTS OF AUDIT
Finding: The Former Project Owner Used More Than $3.5 Million in
Project Funds in Violation of the Regulatory Agreement
From February 2008 through July 2011, the former owner inappropriately paid more than $3.2
million in unauthorized distributions, in transfers to non-HUD-insured properties, and to the
former owner for advances; more than $16,000 in payments for other projects’ expenses; nearly
$16,000 in excess management fees; and more than $160,000 in unsupported disbursements.
Further, the former owner underfunded the tenant security deposits by nearly $10,000.
Additionally, the former owner used inappropriate documents to support more than $88,000 in
withdrawals from the repair escrow account and inappropriately loaned project funds to six
employees. As of July 2011, four employees owed the project $12,850. These conditions
occurred because the former owner did not implement adequate controls to ensure compliance
with the regulatory agreement and disregarded the project’s regulatory agreement. The former
owner’s improper use of project funds reduced the amount available for physical repairs and
payment of the mortgage, which resulted in the project being left in poor physical condition and
contributed to the project’s default on its $6.3 million FHA-insured mortgage, and the loss of
nearly $4 million to the FHA insurance fund when FHA sold the mortgage note in August 2012.
The Former Owner Made
Unauthorized Distributions,
Transfers, and Repayments of
Advances
The former owner violated the regulatory agreement when it made 308 transfers,
unauthorized distributions, and repayments of advances totaling more than $3.2
million to 30 non-HUD-insured properties or affiliated entities from February 7,
2008, to July 15, 2011. 3 The inappropriate transfers included $900,000 in
insurance proceeds that the former owner transferred to a bank in Israel.
Based on a review of bank statements and general ledgers, the former owner
transferred more than $2.1 million into the project’s account, including advances
or additional equity contributions for reasonable and necessary operating
expenses to sustain the project. However, bank statements showed that the former
owner transferred more than $3.2 million for distributions or repayments of
advances to the former owner, none of which HUD authorized. For example,
3
Section 6(e) of the regulatory agreement prohibits owners from making or receiving and retaining any
distribution of assets or any income of any kind of the project except surplus cash and except under certain
other conditions without prior HUD approval. Section 13(g) of the regulatory agreement defines a distribution
as any withdrawal or taking of cash or other assets of the project for anything other than reasonable expenses
incident to the operation and maintenance of the project.
5
according to one of the management agents, the managing member instructed him
to cancel a property mortgage payment and transfer $15,000 into his personal
bank account and then to transfer an additional $3,000 into his identity-of-interest
management agent’s bank account in July 2011. Table 1 is a summary of fund
transfers into and out of the project’s account by year, while appendix A is a
detailed list of the transfers. Since the project was in a non-surplus-cash position
from February 2008 through July 2011, HUD prohibited repayments of
advances. 4
Table 1: Fund transfers to and from other entities
Transfer of Transfer of Net transfers out
project funds to funds from (transfers out
Year other entities other entities less transfers in)
2008 $ 672,667 $ 406,756 $265,911
2008 900,000* 900,000
2009 868,149 659,012 209,137
2010 723,438 903,490 (180,052)
2011 81,153 191,010 (109,857)
Totals $ 3,245,407 $ 2,160,268 $ 1,085,139
* Transferred to a bank in Israel by the managing member of Optimum
The project’s 2008 audited financial statements showed that the project had
surplus cash of $1.1 million. However, the independent auditor incorrectly
calculated the surplus cash for 2008 when he included excess insurance proceeds
from hurricane damage. Further, the financial statements were not issued until
January 6, 2010, and would not have been an excuse for fund transfers in 2008
and 2009. According to HUD, surplus cash is calculated based on project
operations. 5 Based on our calculation of surplus cash, the project was in a non-
surplus-cash position during 2008. Also, the former owner had been delinquent
on the project’s mortgage since September 2009. Finally, there was no surplus
cash in 2009 or 2010. Therefore, the project was in a non-surplus-cash position
from the time the former owner purchased it in February 2008 through July 2011.
Thus, the former owner was not authorized to make any distributions or repay any
owner advances.
HUD sent the former owner several letters, dated June 30, 2009, February 26,
2010, April 27, 2010, and August 26, 2010, advising the former owner not to
misuse the funds while the mortgage was in default. The independent auditor
notified the former owner through the project’s fiscal year 2008 audit report that
distributions or repayment of advances could not be made if the project did not
have surplus cash.
4
Section 2-11 of HUD Handbook 4370.2, REV-1, Financial Operations and Accounting Procedures for Insured
Multifamily Projects
5
Section 7 of the regulatory agreement
6
However, the former owner disregarded this regulatory agreement requirement
and continued to make distributions and repayments of advances.
The Former Owner Transferred $900,000 to a Bank in Israel
Due to damage sustained from Hurricane Ike in 2008, the project received $2.9
million in insurance proceeds. The former owner, specifically the managing
member of Optimum, 6 instructed the project’s bank to wire transfer $900,000 of
the insurance proceeds from the project’s bank account to a bank in Israel to repay
a loan advanced to the project and to return $700,000 of owner equity. The
project’s general ledgers as of July 2011 showed that there was $527,473 in the
Israeli bank after the former owner repaid a $350,000 non-HUD loan and accrued
interest of $22,527 in December 2009. However, the former owner should not
have transferred the project funds because the project had been delinquent on its
mortgage since September 2009 and it was in a non-surplus-cash position.
The project owner was able to obtain the insurance proceeds without HUD’s and
the lender’s endorsements. Contrary to sections 8(a) and (b) of form HUD-92447,
Property Insurance Requirements, the insurance checks did not include HUD and
the lender as payees.
Further, section 7 of the regulatory agreement required that money derived from
any insurance on the property be applied in accordance with the terms of the
mortgage. According to the deed of trust, insurance proceeds were to be paid to
the note holder, which was Evanston Financial at that time. 7 The deed of trust
allowed Evanston Financial to, at its option, apply excess insurance proceeds to
the debt or release them for repairing or rebuilding the project. There was no
evidence that Evanston Financial either applied excess proceeds to the debt or
released them for repairing or rebuilding the project.
The Former Owner Used
Inappropriate Supporting
Documents To Withdraw Funds
The former owner used inappropriate documents, including a contract, an invoice,
and a check, to support $88,560 in withdrawals from the repair escrow account.
The managing member requested a meeting with HUD staff on May 18, 2009, to
discuss the reimbursements of draw requests since several noncritical repairs had
not been completely addressed before the property suffered the effects of
Hurricane Ike on September 13, 2008. At that time, it became impossible to
distinguish between what required reimbursement from insurance proceeds and
6
According to the former owner’s membership regulations, other than the managing member, its members,
which included Optimum, had no managerial power unless explicitly authorized by a majority vote of the
members.
7
Paragraph 7 of the deed of trust
7
what would be covered by the repair escrow. HUD staff explained to the
managing member in the meeting that any invoice dated before Hurricane Ike that
had been paid and had not been submitted in previous draws would be reimbursed
and any invoice dated after Hurricane Ike would be considered storm damage and
would not be eligible for repair escrow proceeds.
The managing member then submitted documents that were created after the fact
to support withdrawing $88,560 from the property’s escrow account on May 20,
2009. These documents included a general contract, an invoice, and a check
made payable to a construction company as proof of payment. The general
contract was dated August 18, 2008, before Hurricane Ike, but was signed and
notarized on August 18, 2009, after Hurricane Ike and after the submission date.
The owner of the construction company confirmed and provided evidence
showing that the invoice was not his and claimed to have not done the work and
not received the money. The back-dated check made payable to the construction
company was voided and not cashed, although the money was removed from the
escrow account and deposited in the project account.
The Former Owner Paid The
Expenses Of Other Projects
The former owner made 13 disbursements totaling $16,292 from the project’s petty
cash fund and used its debit card and checking account for expenses 8 that benefited
other non-HUD-insured properties. These ineligible expenses are listed in table 2
and include payments for utilities, accounting fees, labor costs, and eviction fees.
Table 2: Ineligible expenses paid for other properties
Source Date Project Purpose Amount
Petty cash 09/22/2008 Arbor Oak Eviction fee $650
Petty cash 09/26/2008 Arbor Oak Contract labor 3,658
Petty cash 09/26/2008 Arbor Oak Maintenance 192
Petty cash 10/01/2008 Yishlam, Inc. Contract labor 8,059
Debit card 05/20/2008 Meadow Rose Electric bill 567
Debit card 06/19/2008 Meadow Rose Electric bill 458
Debit card 09/03/2008 Meadow Rose Electric bill 781
Debit card 10/16/2008 Meadow Rose Electric bill 9
Debit card 07/17/2008 Meadow Rose Electric bill 301
Debit card 08/18/2008 Meadow Rose Electric bill 321
Debit card 11/13/2008 Meadow Rose Electric bill 9
Debit card 04/25/2008 Meadow Rose Electric bill 387
Check # 3174 04/15/2011 Various projects Accounting fee 900
Total $16,292
8
Section 6(b) of the regulatory agreement prohibits paying out any funds except for reasonable operating
expenses or necessary repairs unless it is from surplus cash.
8
Further, timesheet and payroll records showed that the project manager and
maintenance staff worked at other properties while their entire salaries were paid
from project funds. Both the project manager and the maintenance person
estimated that they spent 80 percent of their time at the project and 20 percent at
two other projects. There was no indication in the general ledger that the other
properties reimbursed the project for their salaries. Since the timesheets did not
show how many hours each employee worked for the other properties, we could
not reliably estimate the amount of funds that the other projects should have
reimbursed to the project.
The Former Owner Overpaid
Management Fees
The former owner overpaid $15,935 in management fees to 100 Percent Leased
Management, LLC, an identity-of-interest management agent, at a time when
Centra Partners, a non-identity-of-interest management agent, managed the
project. According to Centra Partners’ certification, the fees should have been 3.5
percent of project income. 9 However, 100 Percent Leased Management, LLC
was paid 5 percent of rental and miscellaneous income collected. 100 Percent
Leased Management, LLC passed 3.5 percent to Centra Partners and kept the
remaining 1.5 percent. As a result, the former owner overpaid $15,935 in
management fees to 100 Percent Leased Management, LLC from May 6, 2010, to
March 11, 2011.
The Former Owner Made
Unsupported Disbursements
The former owner could not adequately support that 57 of 74 disbursements totaling
more than $163,00010 were for the project. Although the project is located in
Houston, TX, the unsupported disbursements included payments to the City of
Galveston, purchases from a Home Depot in Galveston, hotel costs in San Antonio
and Washington, DC, and other expenses, which lacked support to show that they
were for the project. Further, some disbursements appeared to be for meals and
entertainment, such as project payments to a delicatessen, a Houston spa, and a
9
HUD Handbook 4381.5, REV-2, paragraph 3-2(b), relating to allowable management fees from project funds,
states that fees should be derived from project income (residential, commercial, and miscellaneous). Sections 2-
2 and 3-1 state that the management agent is subject to HUD approval and the management fees may be paid
only to the person or entity approved by HUD to manage the project.
10
Section 6(b) of the regulatory agreement states that without prior HUD approval, the owner must not assign,
transfer, dispose of, or encumber any personal property of the project, including rents, and must not pay out any
funds except for reasonable operating expenses and necessary repairs. HUD Handbook 4370.2, REV-1,
paragraph 2-6E, requires that all disbursements from the regulatory operating account be supported by approved
invoices or bills or other supporting documentation.
9
Galveston water park. See appendix B for a list of the 57 unsupported
disbursements.
The Former Owner
Underfunded the Tenant
Security Deposit Account
The former owner did not fully fund the project’s tenant security deposit account as
required.11 The former owner acquired the project in February 2008 and certified on
February 7, 2008, that the tenant security deposit was fully funded. However, it did
not open a tenant security deposit bank account until April 15, 2010, and did not
fully fund it. From February 2008 through April 15, 2010, the former owner
deposited and refunded tenant security deposits using the project’s operating bank
account. According to the project’s general ledger, the security deposit should have
been more than $34,000 as of July 2011. According to the management agent in
July 2011, the security deposit should have been nearly $10,000. We accepted the
management agent’s estimate of the necessary balance over the general ledger
estimate because the management agent prepared the tenant security deposit
liabilities based on the tenant files, which we considered to be more reliable than the
general ledger. However, the maximum balance that was ever in the tenant security
deposit bank account was $7,087. The managing member transferred $7,000 to his
identity-of-interest management agent on March 18, 2011, and following the
transfer, there was only $87 in the tenant security deposit bank account.
The General Ledger Showed
Outstanding Loans to
Employees
According to the general ledger, the former owner inappropriately loaned project
funds to six employees. The ledger also showed that some of the employees had
repaid some of the loans through their payroll. However, as of July 2011, four
employees owed the project $12,850. 12
The Property Was in Poor
Physical Condition and Its
Obligations Remained Unpaid
The former owner did not maintain the project in good repair and condition as
required by section 7 of the regulatory agreement. HUD’s Real Estate Assessment
Center performed physical inspections of the property on February 12, 2010, and
11
Section 6(g) of the regulatory agreement states that any funds collected as security deposits must be kept
separate from all other funds of the project in a trust account, the amount of which must at all times equal or
exceed the total of all outstanding obligations under the account.
12
Section 6(b) of the regulatory agreement prohibits paying out any funds except for reasonable operating
expenses or necessary repairs unless it is from surplus cash.
10
July 15, 2011. The property failed the inspections and received a score of 57c and
51c, respectively. The “c” indicated health and safety deficiencies. Further, the
Real Estate Assessment Center reports identified serious physical deficiencies, such
as obstructed or missing accessible route and damaged soffits, fascia, walls, and
vents.
According to one management agent, as of June 2011, the project had not paid its
electric bills since January 2011 and owed more than $60,000. The management
agent also said that vendors, including the mortgage company, did not accept checks
from the project or its identity-of-interest management agent because of a history of
insufficiently funded checks. The project had more than $200,000 in unpaid bills,
not including the $169,485 in delinquent mortgage payments, as of July 2011. At
various times during May and June 2011, cable, gas, trash removal, phones, and
Internet services, as well as a rent roll system, had been terminated for varying
lengths of time. Further, HUD’s management review in September 2011 disclosed
that the project had been without water for about 3 weeks.
The Former Owner Did Not
Maintain Accurate Financial
Information
The project’s books and records were incomplete and inaccurate. 13 Transactions
were not always recorded in the check registers or general ledgers. Further, the
independent auditor stated that he could not complete the 2009 audited financial
statements because of incomplete books and records. The former owner
submitted the project’s 2008 audited financial statements to HUD but had not
submitted the 2009 and 2010 audited financial statements as required. 14
Conclusion
The former owner failed to maintain accurate financial records and further
violated the regulatory agreement by not submitting annual audited financial
statements for 2009 and 2010. As a result, HUD and other stakeholders could not
properly assess the project’s true financial condition.
The former owner disregarded the project’s regulatory agreement and diverted or
misused $3.2 million of the project funds and insurance proceeds when the project
was in a non-surplus-cash position. Further, the former owner did not fully fund
tenant security deposits and made loans to employees from project funds.
13
Sections 9(c) and 9(d) of the regulatory agreement require the owner to keep the books and accounts of the
project operations in condition for a proper audit and in accordance with HUD requirements. HUD Handbook
4370.2, REV-1, paragraph 2-3B, requires that financial records be complete, accurate, and updated monthly.
14
Section 9(e) of the regulatory agreement requires the owner to submit audited annual financial statements
within 60 days following the end of each fiscal year. HUD extended the time to submit them to 90 days in 24
CFR 5.801(c)(2).
11
Additionally, the former owner used several inappropriate documents to support
more than $88,000 in withdrawals from the repair escrow account. As a result,
the project was in poor physical and financial condition, and HUD suffered a loss
of nearly $4 million when it resold the note.
Since the auditee no longer owns the project, there are no recommendations in
this report to address the causes. Rather, the recommendations are designed to
prevent the auditee from causing similar problems at other FHA-financed projects
and for pursuing any possible recoveries from the auditee for the loss that FHA
suffered when it resold the note.
Recommendations
We recommend that the Director of HUD’s Houston, TX, Office of Multifamily
Programs
1A. Expand the 2530 flags on all the former project owners and managing
members to include the regulatory agreement violations noted in this report.
We recommend that the Director, Departmental Enforcement Center,
1B. Pursue civil money penalties and administrative sanctions, as appropriate,
against the owner, operator, and/or their principals/owners for their part in
the regulatory violations cited in this report.
12
SCOPE AND METHODOLOGY
We conducted the review at the offices of 100 Percent Leased Management, LLC, the project, and
the local HUD office in Houston, TX. Our review period was February 7, 2008, to July 15, 2011.
To accomplish our objective, we
• Reviewed background information and the criteria that controlled the insured
multifamily housing project.
• Reviewed various reports and documents to determine the financial and physical unit
conditions at the project. The reports and documents included available independent
public accountant reports for fiscal year 2008, information contained in HUD’s Real
Estate Management System, and documents maintained by the multifamily project
manager assigned to monitor the project.
• Reviewed funds transferred into and out of the project’s bank accounts and contacted the
independent public accountant and obtained his audit working papers supporting the
findings in the project’s 2008 audited financial statements.
• Performed a walk-through inspection of the exterior of the project and reviewed HUD
inspection reports to determine the project’s overall physical condition.
• Reviewed tenant security deposit accounts.
• Reviewed the loan payment history and reserve for replacement and escrow accounts for
the audit period.
• Reviewed insurance deposits and contacted the appropriate insurance agent for
information to determine whether insurance proceeds were properly accounted for.
• Reviewed disbursements and deposits in the accounting records and supporting
documentation to determine whether they appeared appropriate. We reviewed and
tested a nonstatistical sample of 74 disbursements totaling $224,955 from a total of more
than $8.7 million disbursed, excluding fund transfers, during the audit period. The
selected sample included various vendors, accounts, and transactions that were, based on
our professional judgment, likely to have a high risk of error. The conclusions reached
in this report relate only to the sample items tested and have not been projected to the
universe of approximately 1,900 disbursements.
• Reviewed the project’s electronic format check registers and general ledgers. We
assessed the computerized data and found that the transfers and disbursements were
not always recorded in the check registers and general ledgers. The audit results,
therefore, are also based on our review of source documentation, including check
vouchers, invoices, and bank records.
• Interviewed the former managing member, management agent staff from all three
management agent companies, a contractor, the project manager, and HUD officials.
We performed the audit from July 2011 to January 2012. FHA sold the note on August 9, 2012.
The report documents what we found while the project was FHA insured and the former owner
was obligated by the regulatory agreement. We conducted the audit in accordance with
generally accepted government auditing standards, except as noted below. Those standards
13
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 objective.
We did not comply with the auditing standard for early communication of control deficiencies
resulting in noncompliance with provisions of laws, regulations, contracts, or grant agreements,
or abuse because we suspended the audit from January 2012 to September 2013 at the request of
our Office of Investigation and the U.S. Department of Justice. We then updated our review
work to incorporate changes in the project’s status and revise our recommendations.
14
INTERNAL CONTROLS
Internal control is a process adopted by those charged with governance and management,
designed to provide reasonable assurance about the achievement of the organization’s mission,
goals, and objectives with regard to
• Effectiveness and efficiency of operations,
• Reliability of financial reporting, and
• Compliance with applicable laws and regulations.
Internal controls comprise the plans, policies, methods, and procedures used to meet the
organization’s mission, goals, and objectives. Internal controls include the processes and
procedures for planning, organizing, directing, and controlling program operations as well as the
systems for measuring, reporting, and monitoring program performance.
Relevant Internal Controls
We determined that the following internal controls were relevant to our audit
objective:
• Controls over compliance with laws and regulations and
• Controls over disbursements.
We assessed the relevant controls identified above.
A deficiency in internal control exists when the design or operation of a control does
not allow management or employees, in the normal course of performing their
assigned functions, the reasonable opportunity to prevent, detect, or correct (1)
impairments to effectiveness or efficiency of operations, (2) misstatements in
financial or performance information, or (3) violations of laws and regulations on a
timely basis.
Significant Deficiency
Based on our review, we believe that the following item is a significant deficiency:
• The project owner did not implement adequate policies and procedures to
ensure compliance with the regulatory agreements and HUD regulations
(finding).
15
APPENDIXES
Appendix A
AUDITEE COMMENTS AND OIG’S EVALUATION
The Director, Office of Multifamily Programs in Houston agreed with the report and the
recommendations and elected not to submit written comments.
16
Appendix B
FUND TRANSFERS INTO AND OUT OF THE PROJECT
February 7 to December 31 2008, transfers
Transfer out of Transfer into Net transfer out
Payee or payor Yale Court Yale Court of Yale Court
100% Leased Management, LLC $110,000 $35,000 $75,000
Aqua Bella, LLC 6,900 6,900
Arbor Oak Apartments 34,250 34,250
Evia Israel, LLC 200 200
Kasif, Inc. 56,625 14,770 41,855
One Rose Meadow Apartments 1,400 1,400
Yishlam, Inc. 26,000 28,000 (2,000)
Carriage House 200,000 90,000 110,000
Houstate 5,000 5,000 0
Optimum RE Investments Equity 70,986 20,986 50,000
Shiraz Inwood Oaks 65,000 50,000 15,000
Shiraz US Galveston 83,000 163,000 (80,000)
Shodim, LLC 13,306 13,306
Bank Leumi 900,000 900,000
Totals $1,572,667 $406,756 $1,165,911
17
January 1 to December 31, 2009, transfers
Transfer out of Transfer into Net transfer out
Payee or payor Yale Court Yale Court of Yale Court
100% Leased Management, LLC $51,800 $51,800
Arbor Oak Apartments 420,600 137,750 282,850
Houston Coloventure, LLC 21,881 50,000 (28,119)
Managing Member Optimum 29,000 113,029 (84,029)
BlueBay Amberwood 33,500 33,500
Bluebay Yale 69,800 900 68,900
Shiraz Inwood Oaks, LLC 113,594 256,221 (142,627)
Yishlam, Inc. 47,600 3,700 43,900
One Rose Meadow Apartments 14,200 7,000 7,200
Kasif, Inc. 10,691 59,290 (48,599)
Prosperity Avenue Apartments 2,145 2,145
Evia Israel, LLC 6,300 6,300
Coral Isle, Inc. 3,600 3,600
Shiraz Galveston 800 17,122 (16,322)
Optimum RE Investments, LLC 798 798
Foreclosure International Dallas, 5,000 5,000 0
LLC
Unknown – Other accounts 19,840 19,840
Shiraz Galveston***1935 9,000 (9,000)
BlueBay Colonial Square 17,000 17,000
Apartments (Galveston)
Totals $868,149 $659,012 $209,137
18
January 1 to December 31, 2010, transfers
Transfer out of Transfer into Net transfer out
Payee or payor Yale Court Yale Court of Yale Court
2828Q – Account ***8496 $300 $1,000 ($700)
100% Leased Management, LLC 71,700 58,055 13,645
2828Q – Account ***7439 4,360 0 4,360
5008 Avenue S 3,030 2,000 1,030
A/R Blue Bay Construction 5,000 5,000 0
Amberwood Apartments 8,905 1,700 7,205
Aqua Bella, LLC 31 6,900 (6,869)
Arbor Oak Apartments 276,710 252,495 24,215
Dor Estates, LLC 14,000 14,000 0
Evia Israel, LLC 10,722 6,600 4,122
Houston Coloventure, LLC 2,970 1,300 1,670
Kasif, Inc. 43,075 43,870 (795)
One Rose Meadow Apartments 8,310 15,601 (7,291)
Employee - Loan 1,050 1,050
Oak Villa Apartments 8,200 5,200 3,000
Managing Member Shiraz US 5,000 15,500 (10,500)
Yale LLC
Optimum Global Investments, 3,640 3,640
LLC
Park Valley Apartments 58,494 58,494
Prosperity Ave, LLC 360 360
Shiraz Galveston 4,960 303,088 (298,128)
Shiraz Inwood 50,042 98,800 (48,758)
Spanish Trail 1,900 1,900 0
Managing Member Optimum 84,029 84,029
Transfer withdrawal per Tzur 16,650 5,650 11,000
Email
Yishlam, Inc. 16,800 50,700 (33,900)
Note Payable Oak Villa Apts 15,500 1,000 14,500
Unknown - Other accounts 7,700 13,130 5,430
Totals $723,438 $903,490 ($180,052)
19
January 1 to July 15, 2011, transfers
Transfer out of Transfer into Net transfer out
Payee or payor Yale Court Yale Court of Yale Court
100% Leased Management, LLC $3,000 $3,410 ($410)
A/R Blue Bay Construction 20,000 23,000 (3,000)
Arbor Oak Apartments 1,300 0 1,300
One Rose Meadow Apartments 2,000 2,000
Managing Member Shiraz US 15,000 15,000
Yale, LLC
Prosperity Ave, LLC 36,400 (36,400)
Shiraz Inwood 39,503 128,200 (88,697)
Other accounts 350 350
Totals $81,153 $191,010 ($109,857)
Total transfers 2008 - 2011
Transfer out of Transfer into Yale Net transfer out
Year Yale Court Court of Yale Court
2008 $1,572,667 $406,756 $1,165,911
2009 868,149 659,012 209,137
2010 723,438 903,490 (180,052)
2011 81,153 191,010 (109,857)
Totals $3,245,407 $2,160,268 $1,085,139
20
Appendix C
UNSUPPORTED DISBURSEMENT SAMPLES
Payment
method Date Payee Purpose Amount
Debit card 06/04/2008 AFLAC Insurance - Houstate Health insurance $ 205
Debit card 11/10/2008 Alamo Rental Car - Houston Rental car 1,195
Debit card 11/10/2008 Alamo Rental Car - Houston Rental car 143
Debit card 08/14/2008 Amazon.com Furniture and 730
equipment
Wire 09/23/2009 Amsalem Business Travel Travel expenses 6,978
transfer
Check 08/12/2009 BITUM Fix asphalt 4,000
#2063
Check 09/03/2009 BMB, INC. Property insurance 28,302
#2083
Debit card 2/11/2009 City of Galveston Unknown 1,960
Check 03/11/2011 David Dahan Plumbing Plumbing 4,614
#3142
Debit card 04/05/2010 Delta Airlines - Atlanta, GA Airfare 556
Debit card 04/05/2010 Delta Airlines - Atlanta, GA Airfare 556
Check 06/04/2009 HD Supply Facilities Maintenance Unknown 9,077
#1941
Check 11/22/2009 HD Supply Facilities Maintenance Appliances 11,263
#2250
Debit card 03/02/2009 Highland Products Group Unknown 367
Debit card 02/02/2009 Hilton Hotel - Washington DC Hotel 274
Debit card 02/02/2009 Hilton Hotel - Washington DC Hotel 274
Debit card 08/03/2009 Home Depot 6574 - Galveston Materials 101
Debit card 05/03/2010 Home Depot 6574 - Galveston Unknown 290
Wire 04/20/2011 Home Depot 6574 - Galveston Unknown 128
transfer
Debit card 04/09/2010 Hotel Contessa - San Antonio Hotel 605
Debit card 4/21/2010 Hotel Contessa - San Antonio Hotel 55
Debit card 4/23/2009 Hotels.com Unknown 63
Debit card 07/10/2008 Kenny and Ziggy’s Deli - Houston Meals 142
Debit card 07/10/2008 Kenny and Ziggy’s Deli - Houston Meals 93
Debit card 09/01/2009 Moody Gardens Spa - Galveston Spa 234
Wire 09/14/2009 Moody Gardens, Inc. - Galveston Bonus 527
transfer
Wire 09/14/2009 Moody Gardens, Inc. - Galveston Bonus 527
transfer
Wire 09/15/2009 Moody Gardens, Inc. - Galveston Bonus 240
transfer
Check 08/06/2010 Namco Manufacturing, Inc. Sewer machine 1,500
#3062
21
Check 01/18/2010 Oak Villa/Arbor Oaks, LLC Reimburse for burner 156
#2350
Wire 06/24/2010 Oak Villa/Arbor Oaks, LLC Reimburse for pool 416
transfer supplies
Debit card 01/23/2009 Unknown person or company Unknown 2,054
Debit card 01/07/2009 Olshan Lumber Company Unknown 2,392
Check 10/6/2008 Optimum Arbor Oak Reimbursed for 8,486
#1451 purchase order #1241
Wire 01/13/09 unknown Unknown 17,539
transfer
Debit card 10/06/2010 SBI Finance Insurance 5,349
Debit card 12/08/2010 SBI Finance Insurance 5,349
Debit card 02/07/2011 SBI Finance Insurance 5,349
Check 8/31/2010 SBI Finance Insurance 10,483
#3088
Check 09/02/2009 Schlitterhahn (water park) Three tickets for the 127
#2087 project manager for
waterpark
Debit card 07/20/2009 Schlitterhahn - Galveston Meals and 346
entertainment
Check 03/26/2009 Shiraz Inwood Oak Unknown 7,337
#1835
Wire 07/07/2011 Shiraz Inwood Oak Unknown 1,370
transfer
Check 12/22/2009 SICOLA Corporation Landscaping & lawn 3,464
#2303 maintenance
Check#2084 09/03/2009 Project manager Bonus + commission 2,638
Debit card 06/04/2008 T- Mobile – Managing member Telephone expenses 2,142
Shiraz Yale, LLC
Wire 07/03/2009 Managing member of Optimum Airfare 1,500
transfer
Check 07/29/2009 Managing member of Optimum Hotel 1,853
#1160
Check 07/30/2009 Managing member of Optimum Hotel 371
#1175
Wire 05/06/2011 Managing member of Optimum Hotel 459
transfer
Check 01/25/2011 Tax Recourse, LLC Unknown 4,159
#3259
Debit card 9/26/2008 Trellis Spa - Houston Spa 240
Check 08/10/2009 WCA of Texas Houston Hauling Trash 3,104
#2059
Debit card 07/13/2009 Yahoo Hotjobs Advertising 337
Check 05/06/2011 Unknown person Unknown 1,000
#3202
Check 10/21/2010 Unknown person Reimburse for soil 215
#3112
Check 03/10/2011 Unknown person Reimburse for 255
#3248 materials
Total $163,489
22
The Former Owner of Yale Court Apartments, Houston, TX, Used Project Funds in Violation of the Regulatory Agreement with HUD
Published by the Department of Housing and Urban Development, Office of Inspector General on 2014-09-22.
Below is a raw (and likely hideous) rendition of the original report. (PDF)