oversight

Marina Village Apartments, Sparks, NV, Was Not Always Administered in Accordance With HUD Requirements

Published by the Department of Housing and Urban Development, Office of Inspector General on 2013-10-24.

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

OFFICE OF AUDIT
REGION 9
LOS ANGELES, CA




                  Marina Village Apartments
                         Sparks, NV

    Section 221(d)(4) Multifamily Insurance Program




2014-LA-1001                                  OCTOBER 24, 2013
                                                        Issue Date: October 24, 2013

                                                        Audit Report Number: 2014-LA-1001




TO:            Thomas Azumbrado, Director, San Francisco Multifamily Housing Hub,
               9AHMLAP



FROM:          Tanya Schulze, Regional Inspector General for Audit, Los Angeles Region 9,
               9DGA


SUBJECT:       Marina Village Apartments, Sparks, NV, Was Not Always Administered in
               Accordance With HUD Requirements


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

    HUD Handbook 2000.06, REV-4, sets specific timeframes for management decisions on
recommended corrective actions. For each recommendation without a management decision,
please respond and provide status reports in accordance with the HUD Handbook. Please furnish
us copies of any correspondence or directives issued because of the audit.

    The Inspector General Act, Title 5 United States Code, section 8L, requires that OIG post its
publicly available reports on the OIG Web site. Accordingly, this report will be posted at
http://www.hudoig.gov.

   If you have any questions or comments about this report, please do not hesitate to call me at
213-534-2471.
                                              October 24, 2013
                                              Marina Village Apartments, Sparks, NV, Was
                                              Not Always Administered in Accordance With
                                              HUD Requirements



Highlights
Audit Report 2014-LA-1001


 What We Audited and Why                      What We Found

We audited Marina Village Apartments         The owner did not use project funds in
as a result of the U.S. Department of        compliance with the regulatory agreement and
Housing and Urban Development                HUD requirements. The project paid
(HUD), Office of Inspector General’s         $106,288 for related party loans, nonproject
(OIG) internal audit of HUD’s servicing      expenses, and an unauthorized reimbursement
of multifamily HUD-held mortgages            to a partner. It took these actions when the
and a risk analysis. The objectives were     project had no surplus cash or while the
to determine whether project funds were      mortgage was in default. The project also did
used in compliance with the regulatory       not always follow procurement and
agreement and HUD requirements and           contracting requirements. Lastly, the project
whether the project operated in              allowed overincome tenants to move into
compliance with its use agreement.           vacant units in violation of its use agreement.

 What We Recommend

We recommend that HUD require the
owner to (1) make a $45,656 payment
toward the HUD-held second mortgage
from nonproject funds; (2) deposit
$45,413 into the project’s reserve for
replacement or a restricted capital
account for the ineligible disbursements
made to related entities; and (3) certify,
along with the management agent, that
it understands the requirements in HUD
Handbook 4381.5. We also recommend
that HUD (1) monitor the project to
ensure procurement is conducted in
accordance with HUD requirements and
(2) verify that the owner and
management agent’s corrective action is
effective in ensuring compliance with
the use agreement.
                            TABLE OF CONTENTS

Background and Objectives                                                         3

Results of Audit
      Finding 1:    The Project Improperly Disbursed $106,288 in Project Funds to
                    Identity-of-Interest Entities                                  4
      Finding 2:    The Project Did Not Always Follow Procurement and Contracting
                    Requirements                                                   8
      Finding 3:    The Project Did Not Comply With Its Use Agreement             10

Scope and Methodology                                                            12

Internal Controls                                                                13

Appendixes
A.    Schedule of Questioned Costs and Funds To Be Put to Better Use             15
B.    Auditee Comments                                                           16
C.    Criteria                                                                   17




                                            2
                          BACKGROUND AND OBJECTIVES

Marina Village Apartments is a 240-unit apartment complex located in Sparks, NV. The project
is insured under section 221(d)(4) of the National Housing Act, and its regulatory agreement was
executed on September 1, 2003. The project is owned by a limited liability company, Marina
Village Apartments, LLC.

The project was not in a surplus-cash position between 2008 and 2010. The owner defaulted on
its Federal Housing Administration (FHA)-insured mortgage in 2010. In February 2011, the
U.S. Department of Housing and Urban Development (HUD) made a partial payment of claim
and created a HUD-held second mortgage. The partial payment reduced the monthly payment
on the FHA-insured mortgage from $130,748 to $56,811. Payment on the HUD-held second
mortgage is due annually and is equal to 75 percent of surplus cash of the previous year. The
partial payment also created a use agreement that requires the project to rent vacant units to
income-eligible families at rents that are no more than 30 percent of 80 percent of the area
median income.

We initiated the audit as a result of an internal audit of HUD’s servicing of multifamily HUD-
held mortgages and a risk analysis of the multifamily projects with HUD-held mortgages. In the
internal audit, we identified weaknesses in HUD project managers’ monthly accounting report
reviews. The inadequate reviews increased the risk that project owners took unauthorized
distributions or repaid loans and advances to recoup their investments when the project had no
surplus cash. In the risk analysis, we identified Marina Village Apartments to be the most at risk
due to

    •        The HUD project manager’s lack of review of the monthly accounting reports;
    •        A lack of surplus cash, although it had been nearly a year since the partial payment of
             claim (according to audited financial statements for fiscal year 2011 submitted to
             HUD’s Real Estate Assessment Center), 1 which reduced the mortgage payment by
             more than $70,000;
    •        Fluctuating amounts over the years for loans and notes payable, unrelated to the
             FHA-insured mortgage, which could be an indication of unauthorized distributions;
             and
    •        The Real Estate Assessment Center’s previous flagging of the project for potentially
             unauthorized distributions and referral of the project to the Departmental
             Enforcement Center, which had informed the project owner that future program
             noncompliance would likely result in the imposition of civil money penalties or other
             enforcement actions.

Our objectives were to determine whether project funds were used in compliance with the
regulatory agreement and HUD requirements and whether the project operated in compliance
with its use agreement.

1
  Contrary to what the project’s former certified public accountant reported to the Real Estate Assessment Center in
the audited financial statements, we found that the project had surplus cash at the end of fiscal year 2011.


                                                         3
                                RESULTS OF AUDIT


Finding 1: The Project Improperly Disbursed $106,288 in Project Funds
           to Identity-of-Interest Entities
The owner did not comply with the terms of the project’s regulatory agreement when the project
improperly disbursed $106,288 in project funds to identity-of-interest entities during a period
when the project did not have surplus cash available for distribution or was in default on its
FHA-insured mortgage. Specifically, the project paid the owner and related parties for
reimbursement for the cost of repairing owner-caused freeze damage, interest and principal
payments of owner advances and loans, and travel expenses related to the partial payment of
claim. The problems occurred because the owner misunderstood HUD requirements. As a
result, $106,288 in project funds was not available for reasonable operating expenses and
necessary repairs.


 The Project Used $60,875 From
 Its Reserve for Replacement
 Account To Repay a Partner


              In August 2011, the project paid $60,875 to Schaefer Partners (a partner of the
              ownership entity) for contributing funds to the reserve for replacement account at
              the partial payment of claim closing. As a condition of the partial payment, HUD
              required the owner to fund the project’s reserve for replacement account to pay
              for freeze-damaged units caused by the owner’s turning off utilities in the vacant
              units against the advice of the management agent.

              At HUD’s request, the owner deposited nonproject funds into the reserve for
              replacement account at the partial payment closing. Later, the project paid for the
              repairs using project funds and then submitted a request to HUD for a withdrawal
              from its reserve for replacement account. HUD approved the request but did not
              authorize the project to reimburse the owner or the partner. Upon HUD’s
              approval, the lender released the funds from the reserve for replacement account
              and deposited the funds into the project’s bank account in August 2011. On the
              same day, the owner instructed the project accountant to issue the $60,875
              disbursement to repay Schaefer Partners. The owner mistakenly believed that
              HUD’s required deposit into the reserve for replacement account was equivalent
              to a deposit for a loan guarantee and that it could repay the partner when HUD
              approved the release of funds from the reserve for replacement account.




                                               4
The Project Paid $44,634 for
Owner Advances

            Project funds totaling $44,634 were used for ineligible loan repayments and
            interest payments as follows:

               •   In August 2010, the project disbursed $11,800 to Marina Village
                   Apartments, LLC, without HUD approval to repay an advance the owner
                   had provided to cover the project’s operating shortfall. The project made
                   this repayment when it had no surplus cash and while it was in default of
                   its FHA-insured mortgage.
               •   Between April 2009 and February 2010, the project made two
                   disbursements totaling $16,000 to Marina Village, LLC (a partner of the
                   ownership entity). The project disbursed $6,000 in April 2009 and
                   $10,000 in February 2010 to repay advances provided by the related party.
                   The project made these repayments when it had no surplus cash and
                   without HUD approval.
               •   In June 2009, the project reimbursed Marina Village, LLC, $678 for
                   interest paid on a nonproject personal home equity loan that belonged to a
                   principal of the ownership entity when the project had no surplus cash and
                   without HUD approval.
               •   Between August 2008 and October 2010, the project made 24
                   disbursements totaling $16,156 for interest on 2 home equity loans that
                   belonged to a principal of the ownership entity. The owner claimed that
                   the proceeds from these home equity loans went to the project. However,
                   there was no evidence that any of the proceeds were deposited into the
                   project’s bank account and used for project operations. The project made
                   these interest payments when it had no surplus cash or while it was in
                   default of its FHA-insured mortgage and without HUD approval.

            According to HUD Handbook 4370.2, REV-1, owner advances made for
            reasonable and necessary operating expenses may be repaid only from surplus
            cash or with HUD approval. Paragraph 6(f) of the regulatory forbids the owner
            from incurring any liability or obligation not in connection with the project
            without first obtaining written approval from HUD. In December 2008, HUD
            sent a letter reminding the owner that all repayments of principal and interest on
            owner advances needed to be supported by prior-year surplus cash and that future
            violations could lead to enforcement actions. Yet the owner believed that these
            owner advances could be repaid as long as the advance and corresponding
            repayment occurred within the same reporting period.




                                             5
    Project Funds Were Used for
    $779 in Other Nonproject
    Expenses

                  In November 2010, the project paid $779 to Marina Village, Inc. (the manager of
                  the ownership entity), for the owner’s travel expenses related to the partial
                  payment of claim and other miscellaneous expenses. The owner understood these
                  expenses to be project expenses. According to HUD Handbook 4350.1, expenses
                  incurred related to the partial payment of claim could not be charged to the
                  project.

    Conclusion

                  The owner used $106,288 in project funds for ineligible payments to identity-of-
                  interest entities. Despite a December 2008 warning letter from HUD, the owner
                  misunderstood the HUD requirements and continued to use project funds in an
                  unauthorized manner in violation of the project’s regulatory agreement. These
                  ineligible payments reduced the surplus cash available at the end of the
                  corresponding year. Specifically, the reimbursement to Schaefer Partners that
                  occurred in 2011 reduced the surplus cash available at the end of fiscal year
                  2011. 2 This ineligible reimbursement, in turn, reduced the payment toward the
                  HUD-held second mortgage in 2012 because the payment was equal to 75 percent
                  of the prior year’s surplus cash. In other words, if the ineligible reimbursement
                  had not occurred, the project would have paid $45,656 (60,875 x 75 percent) more
                  toward the HUD-held second mortgage in 2012.

                  The other ineligible payments occurred between 2008 and 2010 when the project
                  had no surplus cash and before the partial payment of claim. Although these
                  other ineligible payments would not have affected the payment on the HUD-held
                  second mortgage, they might have contributed to or worsened the mortgage
                  default.




2
  Contrary to what the project’s former certified public accountant reported to the Real Estate Assessment Center in
the audited financial statements, the project had surplus cash at the end of fiscal year 2011. Based on the amount of
surplus cash available at the end of fiscal year 2011, the project paid $400,389 toward the HUD-held second
mortgage in 2012.


                                                          6
    Recommendations

                 We recommend that the Director of HUD’s San Francisco Office of Multifamily
                 Housing require the owner to

                 1A.      Make a payment of $45,656 toward the HUD-held second mortgage from
                          nonproject funds.

                 1B.      Deposit $45,413, using nonproject funds, for the ineligible disbursements 3
                          cited in this report into the project’s reserve for replacement or a restricted
                          capital account that requires HUD approval for the release of the funds.




3
 The $45,413 ineligible disbursements included $44,634 of ineligible loan repayments and interest payments and
$779 of ineligible expenses related to the partial payment of claim.


                                                       7
                                 RESULTS OF AUDIT


Finding 2: The Project Did Not Always Follow Procurement and
           Contracting Requirements
The project paid $56,234 for carpet and vinyl installations in 2012, but it did not have a contract,
and the management agent did not obtain written cost estimates from at least three contractors as
required by HUD regulations. This condition occurred because the management agent was not
aware of the HUD requirements. As a result, the project could not demonstrate that the prices
paid were reasonable and competitive.


 The Project Did Not Have a
 Contract and Did Not Obtain
 Cost Estimates

               In 2012, the project paid $56,234 for carpet and vinyl installations without a
               contract. The management agent did not obtain written cost estimates from at
               least three contractors as required by HUD Handbook 4381.5, REV-2, paragraphs
               6.50(a) and 6.50(c), because the management agent was not aware of the specific
               requirements. Because there were no cost estimates, the project could not support
               that the prices paid for carpet and vinyl installations were competitive and in
               accordance with HUD requirements.

               Although the project did not have support for this procurement activity, we do not
               believe it is necessary for the project to demonstrate the price reasonableness to
               HUD since the payments were made to an unrelated third-party vendor and
               potential overpayments would not likely be material. However, we recommend
               that the owner and the management agent certify that they understand and will
               comply with HUD requirements to ensure that all future expenditures are for
               reasonable costs.

 Conclusion

               The project paid for carpet and vinyl installations in 2012 outside procurement
               and contracting requirements. This condition occurred because the management
               agent was not aware of HUD requirements. As a result, the project could not
               demonstrate that the prices paid were reasonable and competitive.




                                                 8
Recommendations

          We recommend that the Director of HUD’s San Francisco Office of Multifamily
          Housing

          2A.     Require the owner and the management agent to certify that they
                  understand and will comply with the requirements in HUD Handbook
                  4381.5, The Management Agent Handbook, including those related to
                  project procurement and contracting.

          2B.     Monitor the project to ensure procurement is conducted in accordance
                  with HUD requirements.




                                          9
                                RESULTS OF AUDIT


Finding 3: The Project Did Not Comply With Its Use Agreement
The project allowed overincome families to move into vacant units that should have been set
aside for families with incomes not exceeding 80 percent of the area median income. This
condition occurred because the owner and the management agent misunderstood the
requirements of the project’s use agreement. As a result, the project did not meet the terms of
the use agreement.



 The Project Allowed
 Overincome Families To Move
 Into Vacant Units

               The project allowed overincome families to move into vacant units and had not
               reached the 72 set-aside affordable units required by its use agreement. The use
               agreement specified that all vacant units as of August 16, 2011 were to be set
               aside as affordable units to be rented to families with incomes not exceeding 80
               percent of the area median income. After that date, as additional units became
               vacant, the vacant units would be added to the pool of affordable units until the
               project met the 30 percent requirement. On its August 2012 report to HUD, the
               project reported that it had 19 set-aside units. As of December 2012, the project
               had 25 set-aside units. The use agreement permits the project to request a waiver
               from the local HUD Office of Multifamily Housing to allow the renting of vacant
               units to families with incomes over the threshold when the overall vacancy for the
               previous month exceeds 7 percent. However, the project did not request a waiver
               and rented vacant units to overincome families. Of six randomly selected vacant
               units, only one unit was rented to an income eligible family, four were rented to
               overincome families, and one was not income verified by the project at move-in.

 The Owner and the
 Management Agent
 Misunderstood the
 Requirements

               The owner and the management agent thought that the project met all of the terms
               in the project’s use agreement because the market rents were below the maximum
               affordable set-aside rents so that essentially all units were affordable. However,
               they misunderstood the requirements. The market rents may have been lower
               than the maximum affordable set-aside rents, which are set at no more than 30
               percent of 80 percent of the area median income, but the project was still required


                                                10
             to rent vacant units to income-eligible families until there were 72 set-aside units
             unless it obtained a waiver from HUD.

Future Noncompliance Would
Impact the Availability of
Affordable Units

             The project did not comply with the terms of its use agreement. There was no
             significant impact because market rents were generally at or below the maximum
             rents for affordable units in the area. However, if the market rents increase and
             the project does not correct its practice, affordable units may not be available for
             families with incomes at or below 80 percent of the area median income.

Conclusion

             The project allowed overincome families to move into vacant units that should
             have been set-aside affordable units. This condition occurred because the owner
             and the management agent misunderstood the requirements of the project’s use
             agreement. As a result, the project did not meet the terms of its use agreement,
             and units were not available for families with incomes at or below 80 percent of
             the area median income. The management agent acknowledged that the project
             was in violation of its use agreement and agreed to take action immediately.

Recommendations

             We recommend that the Director of HUD’s San Francisco Office of Multifamily
             Housing

             3A.    Verify that the owner and management agent’s corrective action is
                    effective in ensuring compliance with the use agreement.




                                              11
                         SCOPE AND METHODOLOGY

We performed our onsite audit work at the project’s management agent’s office in Reno, NV,
between May and June 2013. Our audit generally covered January 1, 2009, through December
31, 2012. We expanded our scope as necessary.

To accomplish our audit objectives, we

•      Reviewed the project’s mortgage documents, regulatory agreements, and use agreement;
•      Reviewed HUD handbook requirements as applicable;
•      Interviewed HUD staff, the owner, and the management agent’s staff as appropriate;
•      Reviewed the management agent’s policies and procedures for administering the project;
•      Reviewed the project’s accounting records pertaining to receipts, collections and
       expenditures, and disbursements; and
•      Reviewed tenant applications, income verifications, and leases.

As part of the disbursement testing, we selected the supporting documents for all disbursements
made to those payees who were identified as identity-of-interest entities or individuals of the
project and received more than $5,000 in any calendar year from January 1, 2009, to December
31, 2012.

For the procurement testing, we selected the procurement activities of those vendors that were
paid more than $50,000 in any calendar year from January 1, 2009, to December 31, 2012.

To test the project’s compliance with its use agreement, we used the RAT-STATS computer
software to randomly select units that were vacant as of August 2011 and August 2012. We
selected a random sample of 6 vacant units from a universe of 37 vacant units to test whether the
new tenants who moved into these units were income eligible.

To achieve our audit objective, we relied in part on computer-processed data. The data included
Marina Village’s expenditures, procurement records, and other computer-generated data.
Although we did not perform a detailed assessment of the reliability of the data, we did perform
a minimal level of testing and found the data to be adequate for our purposes.

We conducted the audit in accordance with generally accepted government auditing standards.
Those standards require that we plan and perform the audit to obtain sufficient, appropriate
evidence to provide a reasonable basis for our findings and conclusions based on our audit
objectives. We believe that the evidence obtained provides a reasonable basis for our findings
and conclusions based on our audit objectives.




                                               12
                              INTERNAL CONTROLS

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

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

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


 Relevant Internal Controls

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

               •      Policies and procedures that management has implemented to ensure that
                      project funds are used in accordance with HUD requirements.
               •      Policies and procedures that management has implemented to ensure that
                      affordable units are rented to eligible families in compliance with the
                      project’s use agreement.

               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 Deficiencies

               Based on our review, we believe that the following items are significant deficiencies:

               •      The owner and the management agent did not have a comprehensive
                      understanding of the applicable HUD requirements to ensure that project
                      funds were used only to pay eligible and reasonable project expenses, pay



                                                 13
    distributions of surplus cash permitted, and repay owner advances authorized
    by HUD (findings 1 and 2).
•   The owner and the management agent did not have an adequate
    understanding of the requirements of the project’s use agreement to ensure
    that affordable units were rented only to eligible families (finding 3).




                             14
                                   APPENDIXES

Appendix A

              SCHEDULE OF QUESTIONED COSTS
             AND FUNDS TO BE PUT TO BETTER USE

                 Recommendation                            Funds to be put
                                         Ineligible 1/
                     number                                to better use 2/
                       1A                                      $45,656
                       1B                  $45,413



1/   Ineligible costs are costs charged to a HUD-financed or HUD-insured program or activity
     that the auditor believes are not allowable by law; contract; or Federal, State, or local
     policies or regulations. These ineligible costs consist of project funds that were used to
     repay owner advances when the project had no surplus cash or while it was in default of
     its FHA-insured mortgage, to pay nonproject expenses, and to reimburse a partner for
     repair costs that should have been paid by the owner.

2/   Recommendations that funds be put to better use are estimates of amounts that could be
     used more efficiently if an Office of Inspector General (OIG) recommendation is
     implemented. These amounts include reductions in outlays, deobligation of funds,
     withdrawal of interest, costs not incurred by implementing recommended improvements,
     avoidance of unnecessary expenditures noted in preaward reviews, and any other savings
     that are specifically identified. In this instance, if the project had not made ineligible
     repayments of advances to Schaefer Partners, $45,656 could have been available to pay
     down the second mortgage.




                                             15
Appendix B

                             AUDITEE COMMENTS


We provided the owner an opportunity to respond to this report in writing, which would be
included as an appendix to the report, with a submission due date of September 27, 2013. The
owner informed us at the exit conference on September 25, 2013 that it was not submitting
written comments.




                                              16
Appendix C

                                        CRITERIA

Marina Village Apartments, LLC’s Regulatory Agreement:

   •   Paragraph 6(b) mandates that the owner may not, without the prior written approval of
       the Secretary of HUD, assign, transfer, dispose of, or encumber any personal property of
       the project, including rents, or pay out any funds except from surplus cash, except for
       reasonable operating expenses and necessary repairs.
   •   Paragraph 6(e) prohibits the project owner from making or receiving and retaining any
       distribution of assets or any income of any kind of the project except surplus cash unless
       HUD has given prior written approval.
   •   Paragraph 6(f) forbids the owner from incurring any liability or obligation not in
       connection with the project without first obtaining written approval from HUD.
   •   Paragraph 9(g) stipulates that all rents and other receipts of the project must be deposited
       in the name of the project in a bank and that such funds may be withdrawn only in
       accordance with the provisions of the agreement for expenses of the project. Any owner
       receiving funds of the project must immediately deposit such funds into the project’s
       bank account and, failing to do so in violation of the agreement, must hold such funds in
       trust. At such time as the owner has lost control or possession of the project, all funds
       held in trust must be delivered to the lender to the extent to which the mortgage
       indebtedness has not been satisfied.
   •   Paragraph 12 stipulates that upon default, the owner is not permitted to collect and retain
       any rents due or collected thereafter.
   •   Paragraph 17 stipulates that the project owner, Marina Village Apartments, LLC, remains
       liable under the agreement “a) for funds or property of the project coming into their
       hands which, by the provisions hereof, they are not entitled to retain; and b) for their own
       acts and deeds or acts and deeds of others which they have authorized in violation of the
       provisions hereof.”

HUD Handbook 4350.1, REV-2, Multifamily Asset Management Project Servicing, Chapter 14
– Partial Payments of Claims

Section 6. POST-CLOSING REQUIREMENTS
14-14. POST CLOSING REQUIREMENTS
   B. Field: Expenses should also be closely examined to ensure no expenses have been
       incurred related to the PPC [partial payment of claim].




                                                17
HUD Handbook 4370.2, REV-1, Financial Operations and Accounting Procedures for Insured
Multifamily Projects

2-6. REGULAR OPERATING ACCOUNT
    E. All disbursements from the Regular Operating Account (including checks, wire transfers
       and computer generated disbursements) must be supported by approved invoices/bills or
       other supporting documentation. The request for project funds should only be used to
       make mortgage payments, make required deposits to the Reserve for Replacements, pay
       reasonable expenses necessary for the operation and maintenance of the project, pay
       distributions of surplus cash permitted and repay owner advances authorized by HUD.

2-11. REPAYMENT OF OWNER ADVANCES
   A. Advances made for reasonable and necessary operating expenses may be paid from
       surplus cash at the end of the annual or semi-annual period. Such repayment is not
       considered an owner distribution. It is considered a repayment of advances. Repayment
       of owner advances when the project is in a nonsurplus cash position will subject the
       owner to criminal and civil monetary penalties.

HUD Handbook 4381.5, The Management Agent Handbook, Chapter 6 – Program Monitoring

6.50 CONTRACTING GUIDELINES
    a. When an owner/agent is contracting for goods or services involving project income, an
       agent is expected to solicit written cost estimates from at least three contractors or
       suppliers for any contract, ongoing supply or service which is expected to exceed
       $10,000 per year or the threshold established by the HUD Area Office with jurisdiction
       over the project.
    c. Documentation of all bids should be retained as a part of the project records for three
       years following the completion of the work.

Marina Village Apartments, LLC’s Use Agreement:

2. Definitions.
   e. “Moderate Income Families” are persons or families whose annual incomes do not
       exceed 80% of AMI [area median income].
   f. “Affordable Unit” are Units where the initial rents are set at 30% of 80% of AMI or Units
       in which rents are 30% of 80% of AMI and are occupied by Current Tenants that are
       willing to document their eligibility as Moderate Income Families as of the date of this
       Agreement or at a subsequent renewal.
4. Use Restrictions. Throughout the Term, 100% of the Units in the Project shall be used as
   rental housing Units; 30% of the Units in the Project shall be used as Affordable Units for
   Moderate Income Families; and no Current Tenant shall be required to relocate solely on the
   basis of his or her income.
   a. Affordable Units shall be rented to Moderate Income Families. The Owner shall obtain
       from each prospective New Tenant for an Affordable Unit, prior to admission to the
       Project, a certification of income signed by such New Tenant. The Owner will make a




                                               18
   reasonable effort to certify the accuracy of the income certification made by the New
   Tenant.
c. Notwithstanding the foregoing, in recognition of the necessity to phase in the obligations
   set forth in this Agreement all vacant Units as of August 16, 2011 are designated as
   Affordable Units for Moderate Income Families. After such date, as additional Units
   become vacant, such additional Units will be added to the pool of Affordable Units until
   Units that are occupied with families that meet the affordable test at occupancy (i.e.
   Moderate Income Families), together with vacant Units, equal the 30% requirement.
d. Notwithstanding the foregoing to ensure this Agreement does not adversely affect the
   economic viability of the project, the parties agree that the project may request a waiver
   from the local HUD Hub allowing the renting of vacant Units to families that do not meet
   the definition of Moderate Income Families. The waiver may only be requested when the
   overall vacancy for the previous month exceeds 7% and the Project has documented their
   efforts to attract Moderate Income Families. In considering the waiver request, the HUD
   Hub Director may grant the request, deny the request, or attach additional requirements to
   the request and grant a modified waiver within 10 business days, or the waiver will be
   considered approved as submitted. The waiver (as modified, if applicable) will be valid
   for 90 calendar days.




                                           19