oversight

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)

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