oversight

The County of San Bernardino, CA, Adequately Ensured That NSP Developer Fees Met HUD Requirements

Published by the Department of Housing and Urban Development, Office of Inspector General on 2014-06-05.

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

OFFICE OF AUDIT
REGION 9
LOS ANGELES, CA




               The County of San Bernardino, CA

               Neighborhood Stabilization Program




2014-LA-1003                                      JUNE 5, 2014
                                                        Issue Date: June 5, 2014

                                                        Audit Report Number: 2014-LA-1003




TO:            William Vasquez, Director, HUD Los Angeles Office of Community Planning
               and Development, 9DD

               //SIGNED//
FROM:          Tanya E. Schulze, Regional Inspector General for Audit, Los Angeles Region 9,
               9DGA


SUBJECT:       The County of San Bernardino, CA, Adequately Ensured That NSP Developer
               Fees Met 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 the developer fees the County of San
Bernardino paid to its Neighborhood Stabilization Program (NSP) developers.

    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
213-534-2471.
                                         June 5, 2014
                                         The County Adequately Ensured That NSP Developer
                                         Fees Met HUD Requirements




Highlights
Audit Report 2014-LA-1003


 What We Audited and Why                  What We Found

We reviewed the developer fees the       The County adequately ensured that NSP developer
County of San Bernardino paid to its     fees paid to its developers met HUD requirements.
Neighborhood Stabilization Program       Documentation provided during OIG’s initial review
(NSP) developers. Our objective was to   was incomplete and made it appear as though there
determine whether the County             were indications of “double-dipping”; however, based
adequately ensured that NSP developer    on a more indepth review, we concluded that was not
fees paid to its developers met HUD      the case and the developer fees paid were eligible
requirements. We performed our           expenses.
review to address questionable costs
identified during a prior Office of
Inspector General (OIG) review (audit
report 2014-LA-0002). During that
review, we found that for one of the
County’s NSP-funded properties, there
were instances in which project
management costs were claimed and
received by the developer when it
appeared that the County should have
paid the costs through an agreed-upon
developer fee. HUD issued policy
alerts stating that HUD considers such
project management fees “double-
dipping” and not allowed under NSP.

 What We Recommend

This report contains no formal
recommendations, and no further action
is necessary.
                          TABLE OF CONTENTS

Background and Objective                                              3

Results of Audit
      The County Adequately Ensured That NSP Developer Fees Met HUD
      Requirements                                                    4

Scope and Methodology                                                 6

Internal Controls                                                     8

Appendix
A.    Auditee Comments                                                9




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                      BACKGROUND AND OBJECTIVE

Neighborhood Stabilization Program
Authorized under Section 2301 of Title III of the Housing and Economic Recovery Act of 2008
as amended, Congress appropriated $4 billion for the Neighborhood Stabilization Program (NSP)
to provide grants to every State and certain local communities to purchase foreclosed-upon or
abandoned homes and to rehabilitate, resell, or redevelop these homes to stabilize neighborhoods
and stem the decline in value of neighboring homes. The Act states that amounts appropriated,
revenues generated, or amounts otherwise made available to States and units of general local
government under Section 2301 must be treated as though such funds were Community
Development Block Grant funds under Title I of the Housing and Community Development Act
of 1974. NSP1 references the grant program authorized under the Act.

Congress amended NSP and increased its funding as part of the American Recovery and
Reinvestment Act of 2009 and the Dodd-Frank Wall Street Reform and Consumer Protection
Act of 2010. The Recovery Act provided HUD an additional $2 billion in NSP funds (NSP2) to
competitively award to States, local governments, nonprofit organizations, or consortia or
nonprofit organizations, which could submit proposals in partnership with for-profit
organizations. The Dodd-Frank Act provided HUD an additional $1 billion in NSP funds
(NSP3) to award to all States and select governments on a formula basis.

County of San Bernardino
The County of San Bernardino’s Economic Development Agency’s Department of Community
Development and Housing administers the County’s NSP. The Department’s mission is to
improve the quality of life for residents of the County through identifying, obtaining, and
administering local, State, Federal, and private funding resources available for community
development and housing programs. HUD awarded the County more than $33.1 million in
NSP1 and NSP3 grant funds. Through December 2013, the County had drawn more than $28.6
million of its total NSP grant funds. The County had primarily used its NSP grant funds to
acquire and rehabilitate several multifamily properties. The County had spent $16.8 million of
its NSP funds toward program administration; single-family acquisition, rehabilitation, and home
ownership activities; and the development of affordable multifamily housing properties that were
in the predevelopment phase or developed by a contracted developer not allowed to earn or
receive a developer fee, such as a public housing authority. In addition, the County had spent
more than $11.8 million of its NSP grant funds to acquire and rehabilitate four affordable
multifamily housing properties where the contracted developers were allowed to earn and receive
developer fees.

The objective of the review was to determine whether the County adequately ensured that
developer fees paid to its NSP developers met HUD requirements.




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                                RESULTS OF AUDIT


The County Adequately Ensured That NSP Developer Fees Met HUD
Requirements
The County adequately ensured that NSP developer fees met HUD requirements for the two
affordable multifamily housing properties reviewed. We reviewed $776,205 in developer fees
paid and found that, contrary to initial indications, these fees were eligible and met HUD
requirements. In addition, fees for project management services totaling $113,215 were eligible
costs incurred by unaffiliated third-party companies.


 The County Adequately
 Monitored Developer Fees

              The County determined that $776,205 in NSP developer fees paid to developers
              for services performed at two program-funded multifamily housing properties,
              Lantern Woods Apartments and Park Place Apartments, were in accordance with
              HUD requirements. During our previous internal review (audit report 2014-LA-
              0002), we reviewed the Park Place Apartments, for which the acquisition and
              rehabilitation of the property were undertaken with combined NSP funding from
              the County and the City of Rialto. During that review, it appeared that the County
              and Rialto Housing Authority staff (administrators of the City’s NSP funding) had
              approved and reimbursed the developer $69,215 in ineligible project management
              services related to the Park Place Apartments. It appeared that the $69,215 in
              project management services should have been paid as part of, not in addition to,
              the $223,350 in developer fees received (audit report 2014-LA-0002).

              While developers are permitted to charge a developer fee, HUD’s NSP Policy
              Alert, dated August 27, 2010, and updated on November 16, 2011, prohibited
              developers from “double-dipping,” or charging grantees both a developer fee and
              project management fee. Specifically, the Policy Alert states that “if a
              developer’s budget called for directly paying a project manager and also a
              developer fee that would be double-dipping and would not be allowed. Direct
              costs or indirect costs of a developer related to project management should be
              paid only through the fee.”

              This review allowed us to conduct a more indepth review of the grantees’
              monitoring of its developer fees to determine whether there were instances of
              noncompliance with the Policy Alert. We found that the fees for the project
              management services totaling $113,215 were allowable program expenses
              incurred by unaffiliated third-party companies. Participating NSP developers
              hired unaffiliated third-party companies to provide project management services
              to oversee the developers’ rehabilitation of the two properties. These companies


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             billed the developers for services rendered at the properties. The developers
             billed the County for reimbursement under NSP. As a result, there were no
             instances of “double-dipping” related to the project management fees incurred
             under the County’s NSP. The diagram below summarizes the billing process for
             the project management services.

             Third-party companies        Developers                    County

                  •Billed for project            •Billed for project         •Reimbursed the
                   management                     management                  developers for
                   services performed             services billed and         incurred project
                   for the development            performed by                management
                   of affordable                  unaffiliated third-         services
                   multifamily housing            party companies
                   properties




             County staff admitted that the documentation it provided to the Office of
             Inspector General (OIG) during the initial review made it appear that there were
             instances of “double-dipping.” In addition, County reviewers who had approved
             and filed incomplete documentation, which resulted from the pressure of meeting
             NSP expenditure deadlines, further caused the indications of “double-dipping.”
             Complete documentation would have shown the complete transaction of the
             project management fees to an outside reviewer not familiar with the development
             arrangements.

Conclusion

             The County ensured that its NSP developer fees paid to developers for services
             were eligible. Incomplete documentation had initially given the appearance of
             “double-dipping”; however, upon further review, we concluded that the fees paid
             met HUD requirements and were eligible expenses.




                                             5
                             SCOPE AND METHODOLOGY

We performed our onsite audit work at the County’s office located at 385 North Arrowhead
Avenue, San Bernardino, CA, between March and April 2014. The audit covered the period
March 1, 2009, to February 28, 2014, but was expanded as necessary to accomplish the
objective.

To accomplish our objective, we

    •   Reviewed relevant background information, including prior OIG audit reports;

    •   Reviewed applicable HUD laws, regulations, and other HUD program requirements;

    •   Reviewed the County’s controls and procedures as they related to our objectives;

    •   Interviewed County staff; and

    •   Reviewed sampled affordable multifamily housing properties’ files pertaining to project
        contracts and expenditures.

Our universe consisted of four NSP-funded properties totaling more than $11.8 million toward
acquisition and rehabilitation activities. Each of the four properties had a developer that was
allowed to earn and receive a developer fee for services rendered to the grantee. We
nonstatistically selected for review two of the four affordable multifamily housing properties, the
Lantern Woods and Park Place Apartments. The County spent more than $5.1 million of its NSP
funds toward the acquisition and rehabilitation of the sampled properties. In addition, the
developers of these sampled properties were allowed to earn and receive $776,205 in developer
fees for services rendered to the grantee. We selected these sampled properties based on
previously identified instances of “double-dipping” related to project management fees and on
the total amount of obligated funding for properties not previously reviewed (audit report 2014-
LA-0002).

We considered data posted on HUD’s Web site to verify our audit universe and select our
sample. We compared the total grant drawn amounts reported in HUD’s online Disaster
Recovery Grant Reporting 1 system as of December 31, 2013, for each of the four projects in our
audit universe to the County’s Financial Accounting System source documents. We determined
that the data were reliable for our intended use in addressing the audit objective.

We conducted the audit in accordance with generally accepted government auditing standards.
Those standards required that we plan and perform the audit to obtain sufficient, appropriate

1
 The Disaster Recovery Grant Reporting system was developed by HUD's Office of Community Planning and
Development for the Disaster Recovery Community Development Block Grant program and other special
appropriations, including NSP. Data from the system is used by HUD staff to review activities funded under these
programs and for required quarterly reports to Congress.


                                                        6
evidence to provide a reasonable basis for our findings and conclusions based on our audit
objective. We believe that the evidence obtained provided a reasonable basis for our findings
and conclusions based on our audit objective.




                                               7
                              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:

               •   Policies and procedures –Implementation of controls to confirm that the
                   County adequately ensured that developer fees paid to its NSP developers met
                   HUD requirements.

               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

               We evaluated the internal controls related to the audit objective in accordance
               with generally accepted government auditing standards. Our evaluation of
               internal controls was not designed to provide assurance regarding the
               effectiveness of the internal control structure as a whole. Accordingly, we do not
               express an opinion on the effectiveness of the County’s internal controls.




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                                     APPENDIX A

                              AUDITEE COMMENTS

The County chose not to provide written comments for this audit report.




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