oversight

The City of Richmond, CA, Did Not Administer Its Neighborhood Stabilization Program in Accordance With Requirements

Published by the Department of Housing and Urban Development, Office of Inspector General on 2014-08-22.

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

OFFICE OF AUDIT
REGION 9
LOS ANGELES, CA




                   The City of Richmond, CA
               Neighborhood Stabilization Program




2014-LA-1005                                  AUGUST 22, 2014
                                                        Issue Date: August 22, 2014

                                                        Audit Report Number: 2014-LA-1005




TO:            Maria Cremer, Director, Office of Community Planning and Development, San
               Francisco, 9AD

               Dane Narode, Associate General Counsel, Program Enforcement, CACC

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


SUBJECT:       The City of Richmond, CA, Did Not Administer Its Neighborhood Stabilization
               Program in Accordance With 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 City of Richmond’s Neighborhood
Stabilization Program.

    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.
                                           August 22, 2014
                                           The City of Richmond, CA, Did Not Administer Its
                                           Neighborhood Stabilization Program in Accordance With
                                           Requirements



Highlights
Audit Report 2014-LA-1005


 What We Audited and Why                    What We Found

We audited the City of Richmond’s          The City did not administer its NSP1 in accordance
Neighborhood Stabilization Program 1       with requirements related to procurement and cost
(NSP1) in response to the U.S.             eligibility. Based on flawed procurement decision
Department of Housing and Urban            making, the City awarded contracts to developers that
Development (HUD), Office of               lacked the capacity and financial resources to
Community Planning and                     administer the program. In addition, it did not monitor
Development’s concerns over the City’s     the rehabilitation progress or the quality of work
management of its NSP1. Our objective      performed by three developers. As a result, the
was to determine whether the City          rehabilitation of some properties suffered significant
administered its NSP1 in accordance        delays, while the rehabilitation of other properties had
with requirements related to               not been completed after more than 3 years. Further,
procurement and cost eligibility.          the City paid $691,005 for rehabilitation work that was
                                           not performed and other ineligible and unreasonable
 What We Recommend                         costs. Lastly, the City did not ensure that NSP1
                                           properties were sold to eligible home buyers. These
                                           same issues likely occurred under the City’s NSP3 and
We recommend that HUD require the          will continue unless HUD closely monitors the City to
City to (1) repay HUD the actual           ensure compliance.
administrative costs charged or
$223,085 for mismanaging three
developers and (2) repay HUD
$691,005 for ineligible or unreasonable
costs and for work not performed. We
also recommend that HUD review the
City’s remaining NSP1 activities and its
$1.1 million NSP3 grant and require the
City to reimburse the programs for any
ineligible or unreasonable costs.

We recommend that HUD’s Associate
General Counsel for Program
Enforcement pursue civil and other
administrative sanctions against the
City, its developers, or both for
allowing NSP1 funds to be used for
ineligible costs.
                            TABLE OF CONTENTS

Background and Objective                                                         3

Results of Audit
      Finding:      The City Did Not Administer Its Neighborhood Stabilization   4
                    Program in Accordance With Requirements

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 and OIG’s Evaluation                                      16
C.    Criteria                                                                   21
D.    Table of Ineligible Costs by Property                                      24
E.    Table of Unreasonable Costs by Property                                    25




                                            2
                       BACKGROUND AND OBJECTIVE

The Neighborhood Stabilization Program (NSP) was authorized under Title III of the Housing
and Economic Recovery Act of 2008. It provides grants to States and certain local communities
to purchase foreclosed-upon or abandoned homes and rehabilitate, resell, or redevelop them to
stabilize neighborhoods and stem the declining value of neighboring homes. The Act calls for
allocating funds to “states and units of local governments with the greatest need.” In the first
phase of the program, NSP1, the U.S. Department of Housing and Urban Development (HUD)
allocated $3.9 billion in program funds to assist in the redevelopment of abandoned and
foreclosed-upon homes. The Dodd-Frank Wall Street Reform and Consumer Protection Act of
2010 provided HUD an additional $1 billion in NSP funds (NSP3) to award to all States and
select governments on a formula basis.

In March 2009, the City of Richmond signed an agreement with HUD for more than $3.3 million
in NSP1 funds. In March 2011, HUD awarded the City an additional $1.1 million in NSP3
funds. As a grantee, the City is responsible for ensuring that NSP funds are used in accordance
with program requirements. According to the City’s action plan, NSP1 funding will be used to
purchase, rehabilitate, and redevelop foreclosed-upon and abandoned homes and residential
properties to prevent blight and create affordable housing opportunities. Similarly, NSP3
funding will be used for the purchase and rehabilitation of single-family units. As of June 20,
2014, HUD’s Line of Credit Control System showed that the City had more than $595,000 in
NSP1 funds and more than $35,000 in NSP3 funds remaining to be drawn down.

Under its NSP1, the City provided NSP loans to developers to purchase and rehabilitate
foreclosed homes. Developers were to repay these loans in full upon the earlier occurrence of
these events: (1) the sale of the property to an eligible home buyer, (2) the expiration of the loan
term, (3) the transfer of the property, or (4) default as defined in the loan agreement.

Our audit objective was to determine whether the City administered its NSP1 in accordance with
requirements related to procurement and cost eligibility.




                                                  3
                                RESULTS OF AUDIT


Finding 1: The City Did Not Administer Its Neighborhood Stabilization
           Program in Accordance With Requirements
The City awarded contracts to developers that lacked the capacity and financial resources to
implement its NSP1. It also did not monitor three developers’ rehabilitation work and did not
verify home-buyer eligibility. These conditions occurred because the City disregarded HUD’s
NSP requirements and its own NSP policies and procedures. As a result, the rehabilitation of
properties was significantly delayed or not completed; one property was sold to ineligible home
buyers, and the eligibility of other home buyers was uncertain; and $914,079 in NSP1 funds was
used for ineligible and unreasonable costs.


 The City Awarded Contracts to
 Three Developers That Lacked
 the Capacity and Financial
 Resources to Administer Its
 NSP1

              While the City’s decision to use a competitive procurement process was
              acceptable, the actual implementation and decision making was flawed. This
              resulted in the award of contracts to three developers that lacked the capacity and
              financial resources to administer its NSP1. This condition occurred because the
              City chose to override certain aspects of the competitive procurement method
              during program implementation.

              The City used the competitive proposal method of procurement to award NSP1
              developer contracts. Under this procurement method, the City identified four
              evaluation factors. The four factors were (1) capacity, (2) soundness of approach,
              (3) strategic importance, and (4) cost and leveraging.

              The City evaluated seven proposals and selected four developers to administer its
              NSP1. It entered into developer agreements with these four developers, which
              included a requirement that the developer leverage at least 50 percent of its NSP
              property budget from non-NSP funds. Leveraging was also one of the factors
              used to evaluate proposals. However, the City did not enforce the leverage
              requirement when administering its program. Instead, during program
              implementation, the City paid for all costs claimed by three of the four
              developers. Therefore, it effectively removed all risks for the three developers,
              contrary to an NSP policy alert that requires developers to assume some of the
              risk by investing some of their own money in the project (see appendix C).




                                               4
                    Three of the four developer proposals included the same principal consultant,
                    general contractor, and real estate broker. These three firms were Community
                    First Development, LLC, MissionRich Development, LLC, and KL Hampton
                    Group, LLC. When evaluating the capacity of these three developers, the City did
                    not consider that using the same individuals could impact the capacity of the
                    service providers to complete projects in a timely manner. The three developers
                    also did not use the general contractor, Eastmont Builders, as specified in their
                    proposals. In place of this contractor, the three developers hired another general
                    contractor, Isamar Construction, which had certified to the Contractors State
                    License Board that it had no employees for the past 7 years. The City did not
                    question this substitution. Because the three developers were managed by the
                    same principal consultant and all rehabilitation was performed by the same
                    general contractor, the developers lacked the capacity to administer the program.

                    Since the developers did not have risk through leveraging and lacked the capacity
                    to complete the rehabilitation work in a timely manner, there were unreasonable
                    delays to the rehabilitation and resale of the properties. Some properties took up
                    to 3 years to complete. After more than 3 years, rehabilitation on three properties
                    had not been completed (see appendix D). This condition resulted in the City’s
                    having to take the unfinished properties back via the deed-in-lieu-of-foreclosure
                    process 1.

    The City Did Not Monitor
    Three Developers’
    Rehabilitation

                    The City used NSP1 funds to provide developers with acquisition loans to
                    purchase foreclosed-upon or abandoned homes. After the properties were
                    acquired, the City did not monitor the three developers, Community First
                    Development, LLC, MissionRich Development, LLC, and KL Hampton Group,
                    LLC. The City did not monitor the progress of the rehabilitation and did not
                    receive quarterly reports from the developers as required by the City’s NSP
                    policies and procedures. Because of the City’s lack of monitoring, the developers
                    did not complete the rehabilitation of three properties, and there were significant
                    delays with the rehabilitation of other properties. For the properties that were
                    resold to home buyers, the City authorized the use of sales proceeds to pay for all
                    rehabilitation costs claimed by the three developers through the resale escrows,
                    regardless of cost eligibility or supporting documentation.

                    The developers also claimed that the properties had been broken into and
                    vandalized, thereby requiring rehabilitation work to be redone. However, the City
                    did not substantiate these claims or assess the damage to determine what
                    additional repairs were necessary. In one instance, the City was unaware that a


1
    This is a process in which the developer conveys the property to the City to satisfy the defaulted NSP loan.


                                                            5
              developer had received a vandalism-related insurance claim reimbursement for
              more than $18,000.

 The City Allowed the Use of
 Sales Proceeds to Pay Off
 Unauthorized Subordinate
 Liens

              During the resale of the properties, the City learned that unauthorized subordinate
              liens had been placed on the properties purchased by developers Community First
              Development, LLC, and KL Hampton Group, LLC. The entity and individuals
              who filed these subordinate liens were investors affiliated with the owner of KL
              Hampton Group, LLC. The City assumed that these secondary finances were
              used to rehabilitate the properties and allowed the sales proceeds to be used to pay
              off these subordinate liens, with up to 12 percent interest, in addition to paying all
              other costs claimed by the developers. Although the NSP loans were recorded as
              first mortgage liens, the City allowed all subordinate liens and other costs, without
              supporting documentation, to be paid before taking repayments on its NSP loans.
              As a result, the City forgave significant portions of the developers’ NSP loans as
              there were few sales proceeds leftover to repay the City (see example below).

                            NSP loan example – property no. 6
                                                                                  Portion of
                     Payoffs to                                                developer’s NSP
City NSP loan to   second & third      Other payments       Payoff to City     loan forgiven by
   developer            liens           to developer          NSP loan             the City
    $119,249          $65,000             $78,615                $0               $119,249

              As shown in the example above, the entire $119,249 developer’s loan was
              forgiven since there were no sales proceeds.

 The City Paid for
 Rehabilitation Work Not
 Performed

              The City authorized sales proceeds to be used to pay for rehabilitation costs
              claimed by three developers, but the costs could not be supported. For the City to
              meet NSP policy alert requirements, it must ensure that the developers’ costs were
              reasonable and have records to demonstrate how it made this determination (see
              appendix C). Although the City approved a scope of work for each property, it
              did not monitor the properties during rehabilitation or at completion. Therefore, it
              could not have known which items on the scope of work had been completed.

              The City project manager responsible for monitoring the three developers
              admitted that she was not aware of the rehabilitation costs incurred until the


                                                6
property was in escrow to be resold to a home buyer. Rehabilitation costs
claimed by the three developers appeared on the estimated HUD-1 settlement
statements when the properties were in escrow. The City project manager said
she verified the rehabilitation costs on the estimated HUD-1 settlement statements
by comparing them against supporting documentation provided by the developers.
Based on her review, she approved the escrow disbursements, which included
payoffs of subordinate liens and payments to developers and contractors.

Contrary to the City project manager’s claim and NSP requirements, the City’s
files contained insufficient records to support the rehabilitation costs paid.
Therefore, to determine the actual rehabilitation work performed, we inspected
the properties that were resold to home buyers and confirmed that some
rehabilitation work in the City-approved scope of work was not performed.
Rehabilitation work that was not performed included but was not limited to the
installation or replacement of dishwashers, tankless water heaters, energy-
efficient furnaces, dual-pane windows, carpets, sump pumps, and low-flow toilets
and repairs to plumbing and fences (see photographs). Based on our inspections,
more than $449,000 in rehabilitation costs paid off through subordinate liens or
paid to the developers and contractors could not be supported. Not only were
NSP1 funds misused, three home buyers had to pay out of pocket to repair items
that should have been repaired by the developers. Below are photographs from
our inspections that illustrate examples of rehabilitation work that was in the City-
approved scope of work but not completed.




             Dishwasher not installed at property no. 5




                                  7
       Fence not repaired and held up by a string attached to the shed at property no. 5

The City Paid for Ineligible
Costs

             In addition to paying for rehabilitation work not performed, the City authorized
             the use of sales proceeds for ineligible costs. Developers may earn a developer
             fee, which includes a reasonable profit margin. The purpose of the developer fee
             is to compensate the developer for related overhead expenses and provide a return
             on the developer’s investment. When a developer fee is paid, NSP policy alert
             prohibits grantees from also paying a project management fee because doing so
             would be double-dipping (see appendix C). The City ignored NSP requirements
             and allowed sales proceeds to be used to pay $103,806 in ineligible costs (see
             appendix D). These ineligible costs included the following:

  Ineligible cost                          Explanation
  $31,112 in seller credits to home        For-profit developers are prohibited from
  buyers with Federal Housing              providing financial assistance under FHA (see
  Administration (FHA) loans               appendix C).
  $21,759 in overhead & profit             Double-dipping
  $20,743 in developer fees paid to        Non-developers are not entitled to developer
  non-developers                           fees.
  $18,376 already reimbursed by            Double-dipping
  developer’s insurance for property
  vandalism
  $10,750 in project management fees       Double-dipping
  $1,066 in non-developer expenses         Expenses that did not belong to the developer
  and duplicate payments                   were paid, and there were duplicate payments.




                                              8
The City Paid for Unreasonable
Costs

            NSP policy alerts require grantees to ensure that costs and developer fees are
            reasonable (see appendix C). Cost reasonableness takes into account factors such
            as prudence, sound business practices, and arm’s-length bargaining. The City
            ignored NSP requirements and allowed sales proceeds to be used to pay $137,601
            in unreasonable costs (see appendix E). These costs included the following:

  Unreasonable cost                      Explanation
  $98,017 in cash to seller or           Allowing sales proceeds to be disbursed to the
  developer                              developers instead of using them to repay the
                                         City’s NSP loan was unreasonable.
  $17,866 in house sitter fees           Allowing developers to pay house sitters to live
                                         at the properties, which ranged from months to
                                         nearly 2 years, was unreasonable.
  $11,540 in interest on subordinate     Developers obtained subordinate loans from
  loans provided by the KL Hampton       their affiliates without the City’s approval.
  Group, LLC’s affiliates                Allowing interest to be paid on these
                                         unauthorized loans from affiliates was
                                         unreasonable.
  $10,178 in penalties & redemption      Developers should have paid real estate taxes in
  fees for late payment of real estate   a timely manner. Penalties and redemption fees
  taxes                                  resulting from late payments were
                                         unreasonable.

            None of these costs met NSP cost reasonableness requirements. After these
            unreasonable costs were paid, there were few sales proceeds left to repay the City.
            As a result, the City forgave significant portions of the three developers’ NSP
            loans.

Home-Buyer Eligibility Was
Not Adequately Verified

            NSP properties were sold to home buyers whose eligibility was not adequately
            verified. The City did not ensure that the developers adequately documented,
            reviewed, and verified the eligibility of all household members as required by the
            City’s NSP policies and procedures (see appendix C). In one case, a property was
            sold to ineligible home buyers. The home buyers were not income-eligible, and
            one of the home buyers, who was also the real estate agent representing the
            buyers, certified that she would not occupy the property. This condition occurred
            because the City did not adequately monitor its developers and relied on the
            developers to select home buyers and determine home-buyer eligibility. As a
            result, the City could not assure HUD that other NSP properties were sold only to
            eligible home buyers.


                                             9
    Conclusion

                 The City did not administer its NSP1 in accordance with requirements, from the
                 procurement of the developers to the sale of the rehabilitated properties to the
                 home buyers. Specifically, the City had an improper procurement process, which
                 resulted in the award of contracts to three developers that lacked the capacity and
                 financial resources to administer its NSP1. The City paid three developers
                 $449,598 for rehabilitation costs that could not be supported by the actual work
                 performed. In addition, the City paid $103,806 in ineligible costs and $137,601 in
                 unreasonable costs that did not meet NSP requirements. Lastly, the City sold at
                 least one NSP property to ineligible home buyers. We attributed these issues to
                 the City’s disregard of HUD’s NSP requirements and its own policies and
                 procedures. As a result, total costs of the City’s NSP1 were inflated, the three
                 developers received undue enrichment, and there was no assurance that properties
                 were sold to families that the program was intended to benefit. The City should
                 return $223,085 in administrative fees for mismanaging its program. These same
                 issues likely occurred under the City’s NSP3 and will continue unless HUD
                 closely monitors the City to ensure compliance.

    Recommendations

                 We recommend that the Director of HUD’s San Francisco Office of Community
                 Planning and Development

                 1A.      Require the City to return to HUD, using non-Federal funds, the actual
                          amount of administrative costs charged to the grant related to the three
                          developers or $223,085 2 because the City mismanaged its NSP1.

                 1B.      Require the City to repay HUD, using non-Federal funds, $449,598 paid to
                          secondary lien holders, developers, and contractors for rehabilitation work
                          not performed.

                 1C.      Require the City to repay HUD, using non-Federal funds, $103,806 for all
                          other ineligible costs identified in the report.

                 1D.      Require the City to repay HUD, using non-Federal funds, $137,601 for the
                          unreasonable costs identified in the report.

                 1E.      Require the City to submit to HUD for review and approval of all
                          remaining NSP1 activity, including documentation to justify and support
                          all future NSP1 draw requests for the $595,863 remaining in HUD’s Line

2
 The City’s NSP1 grant was $3,346,105. 10 percent of the grant, or $334,611, may be used for administrative costs.
The City mismanaged three of the four developers. These 3 developers purchased 12 of the 18 properties, or 66.67
percent of the properties. Therefore, if actual costs cannot be determined, the City shall return $223,085 (or 66.67
percent of $334,611) in administrative costs to HUD.


                                                        10
                            of Credit Control System, 3 home-buyer eligibility, and developer and
                            contractor selection.

                   1F.      Review all of the City’s activities for its $1,153,172 NSP3 grant and
                            require the City to repay its NSP3 using non-Federal funds for any
                            ineligible and unreasonable costs. This process should include a review of
                            documentation to justify and support all expenditures, home-buyer
                            eligibility, and developer and contractor selection.

                   We recommend that HUD’s Associate General Counsel for Program Enforcement

                   1G.      Determine legal sufficiency and if legally sufficient, pursue civil remedies
                            (31 U.S.C. (United States Code), sections 3801-3812, 3729, or both), civil
                            money penalties (24 CFR (Code of Federal Regulations) 30.35), or other
                            administrative sanctions against the City, its developers, or both for
                            allowing NSP funds to be used for ineligible and unreasonable costs.




3
    As of June 20, 2014, the City had $595,863 remaining in HUD’s Line of Credit Control System.


                                                         11
                         SCOPE AND METHODOLOGY

We performed our onsite work at the City’s office at 440 Civic Center Plaza, Richmond, CA,
from November 2013 to February 2014. Our audit generally covered the period January 1, 2009,
through June 30, 2013, and was expanded to other periods as necessary.

To accomplish our audit objective, we

   •   Reviewed applicable HUD requirements;

   •   Reviewed relevant background information related to the City and its NSP1 grant;

   •   Reviewed the City’s policies and procedures for administering its NSP1;

   •   Interviewed HUD staff, City staff, and developers, as appropriate;

   •   Reviewed the City’s records pertaining to property acquisition, rehabilitation,
       expenditures and disbursements, and property resale;

   •   Reviewed escrow files; and

   •   Inspected the properties that were purchased and rehabilitated under NSP1.

The City was awarded more than $3.3 million in NSP1 funds. It provided loans to four
developers to purchase a total of 18 properties. Initially, we selected a nonstatistical sample of
four properties to review, which included one property for each of the four developers. Our
initial review found that the City did not monitor rehabilitation performed by three developers
managed by the same individual, which resulted in questionable costs. As a result, we expanded
our review to include all nine remaining properties purchased by the three developers. Our
overall sample included the purchase and rehabilitation of 13 properties that were financed by
the City through NSP1 loans totaling more than $2 million.

We determined that computer-processed data generated by the City were not used to materially
support our audit findings, conclusions, and recommendations. Thus, we did not assess the
reliability of the City’s computer-processed data.

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
objective(s). We believe that the evidence obtained provides a reasonable basis for our findings
and conclusions based on our audit objective.




                                                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
               objective:

               •      Effectiveness and efficiency of program operations – Implementation of
                      policies and procedures to ensure that program funds are used for eligible
                      purposes.
               •      Reliability of financial information – Implementation of policies and
                      procedures to reasonably ensure that relevant and reliable information is
                      obtained to adequately support program expenditures.
               •      Compliance with applicable laws and regulations – Implementation of
                      policies and procedures to ensure that monitoring and expenditures
                      comply with applicable 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.




                                                 13
Significant Deficiency

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

            •      The City had not implemented controls to monitor three developers to ensure
                   that program funds were used in compliance with HUD requirements
                   (finding).




                                             14
                                     APPENDIXES

Appendix A

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

        Recommendation                                                   Funds to be put
                                 Ineligible 1/        Unreasonable 2/
            number                                                       to better use 3/

                1A                $223,085
                1B                $449,598
                1C                $103,806
                1D                                       $137,601
                1E                                                          $595,863
               Total              $776,489               $137,601           $595,863

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. In this case, ineligible costs consist of administrative fees that the
     City was not entitled to receive for failing to monitor three developers, payments for
     rehabilitation work that was not performed, and other expenditures not allowed by NSP
     requirements.

2/   Unreasonable costs are those costs not generally recognized as ordinary, prudent,
     relevant, or necessary within established practices. Unreasonable costs exceed the costs
     that would be incurred by a prudent person in conducting a competitive business.

3/   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. The $595,863 represents the City’s NSP1 funds
     remaining in HUD’s Line of Credit Control System as of June 20, 2014.




                                                 15
Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation   Auditee Comments




                         16
Comment 1




Comment 2




Comment 3




            17
Comment 4




Comment 5




Comment 6




            18
Comment 7




Comment 8




            19
OIG Evaluation of Auditee Comments


Comment 1   The City stated that three of the seven respondents withdrew from the selection
            process. However, during the audit, the City’s Housing Director stated that one
            developer withdrew its proposal. In addition, the City did not provide
            documentation to support any respondent’s withdrawal from the selection process.
            The number of developers that withdrew from the selection process did not
            impact the audit findings or recommendations.

Comment 2   The City indicated that it is taking steps to address errors in its procurement
            activities and to follow NSP requirements. The City will work with HUD during
            the audit resolution process to further address these items.

Comment 3   The City stated that since April 2014, City staff has received assistance and
            training from Training and Development Associates (TDA) in the area of
            monitoring and drafted a HOME Compliance Manual pending submittal to HUD.
            The City further stated that the draft manual was attached for reference.
            However, the City did not provide the draft manual as stated. Further, HOME
            and NSP are programs with different requirements. Therefore, a HOME
            Compliance Manual would be irrelevant for the administration of NSP.

Comment 4   The City stated that it will seek return of the funds paid to the developer for costs
            claimed due to vandalism as it relates to the nondisclosure of the receipt of the
            $18,000 insurance claim. This item is part of recommendation 1C. The City will
            work with HUD to resolve the recommendation.

Comment 5   The City stated that it will investigate the circumstances regarding how the
            $119,249 loan was forgiven on NSP property no. 6 and will seek return on
            ineligible payments from the developer. This item is part of recommendation 1B.
            The City will work with HUD to resolve the recommendation.

Comment 6   The City stated that it is requesting back-up documentation from the developers
            related to the $449,598 that was paid to secondary lien holders, developers, and
            contractors to determine how monies were used and will seek return of ineligible
            payments. This is responsive to recommendation 1B. The City will work with
            HUD to resolve the recommendation.

Comment 7   The City stated that it is gathering documents for the ineligible costs of $103,806
            and unreasonable costs of $137,601. This is responsive to recommendations 1C
            and 1D. The City will work with HUD to resolve the recommendations.

Comment 8   The City stated that it will investigate the income eligibility of all of its NSP
            home buyers and ensure that verification procedures are set up and performed.
            This will need to be verified by HUD during the audit resolution process.




                                             20
Appendix C

                                         CRITERIA

The NSP1 Federal Register Bridge Notice, also known as Revisions to Neighborhood
Stabilization Program (NSP) and Technical Corrections, dated June 19, 2009, states:

       Revenue generated from the use of NSP funds and received by a private individual or
       other entity that is not a subrecipient is not required to be returned to the grantee as was
       required by section 2301(d)(4). Notwithstanding the elimination of this requirement,
       grantees are strongly encouraged to avoid the undue enrichment of entities that are not
       subrecipients.

HUD NSP Policy Alert: Guidance on FHA [Federal Housing Administration] Mortgage
Insurance for NSP Grantees, dated May 23, 2010, states:

       FHA will allow a public NSP grantee (city, county, or state) to work with another entity,
       such as a non-profit, to make the downpayment assistance. Only the public entity may
       provide the downpayment assistance on an FHA-insured mortgage, provided that the
       non-profit is not an instrumentality of that public entity, holds title to the subject
       property, and will be the seller of record.

       Non-profit subrecipients or non-profit developers working in the NSP program are
       required to register and be approved to make second mortgages, pay closing costs, or
       other forms of NSP Homeownership Assistance in conjunction with FHA insurance.
       (For-profit developers may not offer financial assistance under FHA.)

HUD NSP Policy Alert: Guidance on Allocating Real Estate Development Costs in the
Neighborhood Stabilization Program, originally issued on January 13, 2011, and updated on
September 16, 2011, states:

       The purpose of allowing the developer’s fee to be included in the cost of a project is to
       compensate the developer for related overhead expenses and to provide a return on the
       developer’s investment (which return may be referred to as “profit” for simplicity’s
       sake).

HUD NSP Policy Alert: Guidance on Developers, Subrecipients, and Contractors, originally
issued on August 27, 2010, and updated on November 16, 2011, states:

       Grantees and subrecipients may not earn a developer’s fee. An entity may charge
       developer’s fees only under 24 CFR 570.202(b)(1), which allows a grantee to provide
       CDBG [Community Development Block Grant] funds (or NSP funds) to assist in the
       acquisition and rehabilitation/reconstruction of property by private individuals or entities.
       The right to charge a developer’s fee is available only to an entity that receives assistance



                                                 21
       from the grantee or the subrecipient and assumes some of the risk of the project, which
       the developer does by investing some of his/her own money in the project.

       When negotiating a developer fee, it is crucial for grantees to clearly specify what project
       costs can and cannot be paid with NSP fees. For example, 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. Grantees may also require a
       developer to pay some of the holding costs and receive reimbursement through the fee.

HUD NSP Policy Alert: Guidance on NSP Appraisals: Voluntary Acquisitions, originally
issued on November 5, 2009, and updated on March 15, 2012, states:

       2. Current and Cost Reasonableness Requirements.
       A fundamental requirement in the OMB [Office of Management and Budget] Circulars is
       that costs charged to an NSP grant must be reasonable. Cost reasonableness takes into
       account factors such as prudence, sound business practices, and arm’s length bargaining.

HUD NSP Policy Alert: Guidance on the Procurement of Developers and Subrecipients, dated
June 1, 2012, states:

       In order for a grantee to meet its NSP requirements, it must ensure that the developer’s
       costs are reasonable and have records to demonstrate how they made this determination.

       The developer in turn must demonstrate that costs are reasonable and that any in-house
       staff or subcontractors with whom it works are employing principles of cost
       reasonableness.

       In the case of entities who are directly affiliated with a developer (an identity of interest
       situation) the grantee should be careful in reviewing the eligibility and reasonableness of
       costs, especially the developer’s profit and overhead. The grantee should look at all of
       the types of return that the developer is earning (developer’s fee, builder’s profit, rental
       income, etc.) and ensure that, in sum, the return is reasonable for the type of construction
       and local market.

The City’s NSP Policies and Procedures Manual, revised 2011, states:

       The Developer shall make a good faith effort to leverage NSP funds with other private
       and public funds. The goal of the Program is to leverage at least fifty percent (50%) of
       the NSP Property Budget from non-NSP funds.

       In the submittal of the NSP Property Budget, the Developer must identify all non-NSP
       funds which it intends to use in connection with the Unit Property. The Developer must
       provide an explanation for any Unit Property in which it is unable to meet the leverage
       requirement.




                                                22
       The Developer shall submit regular progress reports to the City in the form, content, and
       frequency required by the City. The progress reports must be submitted at least quarterly,
       unless otherwise directed by the City.

       Following the rehabilitation of a Unit Property, the Developer shall use reasonable efforts
       to cause the Unit Property to be sold to an Eligible Purchaser.

       The City of Richmond Consolidated Plan has established a priority to increase
       homeownership opportunities for very-low and low-income households in the target area.
       Projects designed to increase neighborhood stability and improve the quality of housing
       through an increased incidence of homeownership in an identified target area is an
       identified priority in the Consolidated Plan. For the purposes of NSP assisted housing,
       households must have an income no greater than 120 percent of the area median income.
       All assisted households must agree to occupy the acquired unit as their principle place of
       residence throughout the loan period; no temporary subleases will be permitted.

The City’s loan agreement with developers, section 1.1, Definitions, defines “eligible purchaser”
as a person who “(i) qualifies as a Low Income Household (with household annual income equal
to or less than 50% of the Median Income), Moderate Income Household (with household annual
income that does not exceed 80% of the Median Income), or Middle Income Household (with
household annual income that does not exceed 120% of the Median Income), (ii) will occupy the
renovated Property as his or her primary residence, and (iii) has completed at least eight hours of
pre‐purchase counseling through a counseling agency certified by HUD.”

The City’s loan agreement with developers, section 2.6, Repayment of Loan, states “the Loan
shall be due in full upon earlier to occur of the following events: (i) the date of sale of the
Property to an Eligible Purchaser; (ii) the date of expiration of the Term; (iii) the date of an
authorized or unauthorized Transfer of the Property; (iv) the date of any Default hereunder.”




                                                23
Appendix D

                                       TABLE OF INELIGIBLE COSTS BY PROPERTY

                                            Seller credits                                                                       Non-developer
                                            to home                          Developer fee                      Project          expense &            Total other
Prop.                                       buyers with       Overhead       paid to non-     Insurance         management       duplicate            ineligible
no.          Developer                      FHA loans         & profit       developer        claim             fee              payments             costs
    1        Community First Development                 -               -                -                 -                -                    -                -
    2        Community First Development            $4,551               -                -                 -                -                    -           $4,551
     3       Community First Development                  -              -                -                 -                -                    -                 -
     44      KL Hampton Group                      $2,921                -                -                 -                -                    -           $2,921
     5       KL Hampton Group                      $4,565          $5,961                 -                 -                -                    -         $10,526
     6       KL Hampton Group                      $5,100         $15,798                 -                 -                -                    -         $20,898
     7       KL Hampton Group                      $9,550                -                -                 -                -                    -           $9,550
     8       MissionRich Development                 $805                -          $10,500          $18,376                 -                    -         $29,681
         5
     9       MissionRich Development                      -              -                -                 -                -                    -                 -
    105      MissionRich Development                    -                -                -                 -               -                     -               -
     11      MissionRich Development               $3,620                -          $10,243                 -         $10,750                     -         $24,613
    125      MissionRich Development                      -              -                -                 -                -                    -                 -
    13       Parkway Housing                              -              -                -                 -                -              $1,066            $1,066
             Total                                $31,112         $21,759           $20,743          $18,376          $10,750               $1,066         $103,806



4
  This property was in escrow to be resold to a home buyer. The sale was pending as of July 1, 2014. HUD will determine ineligible costs by addressing
recommendation 1E of this report during the audit resolution process.
5
  Rehabilitation of these three properties had not been completed as of the date of our inspection on February 28, 2014. HUD will determine ineligible costs by
addressing recommendation 1E of this report during the audit resolution process.



                                                                               24
Appendix E

                                  TABLE OF UNREASONABLE COSTS BY PROPERTY

                                                                                                                  Penalties &
                                                                                                Interest on       redemption         Total
              Prop.                                                             House sitter    subordinate       fees on real       unreasonable
              no.         Developer                        Cash to seller       fees            loans             estate taxes       costs
                   1      Community First Development                 $88                   -           $2,972            $215               $3,275
                   2      Community First Development                       -          $2,300                 -           $115               $2,415
                   3      Community First Development                       -               -                 -                  -                  -
                  46      KL Hampton Group                                  -               -            3,485            $321               $3,806
                   5      KL Hampton Group                                  -               -            5,083            $839               $5,922
                   6      KL Hampton Group                           $846                   -                 -          $1,883              $2,729
                   7      KL Hampton Group                        $96,943                   -                 -          $2,155             $99,098

                   8      MissionRich Development                           -         $14,166                 -          $1,242             $15,408
                      7
                  9       MissionRich Development                           -               -                 -                  -                  -
                      7
                 10       MissionRich Development                           -               -                 -                  -                  -

                  11      MissionRich Development                           -          $1,400                 -          $1,056              $2,456
                 127      MissionRich Development                           -               -                 -          $2,352              $2,352
                  13      Parkway Housing                            $140                   -                 -                  -             $140
                          Total                                   $98,017             $17,866          $11,540         $10,178             $137,601




6
  This property was in escrow to be resold to a home buyer. The sale was pending as of July 1, 2014. HUD will determine unreasonable costs by addressing
recommendation 1E of this report during the audit resolution process.
7
  Rehabilitation of these three properties had not been completed as of the date of our inspection on February 28, 2014. HUD will determine unreasonable costs
by addressing recommendation 1E of this report during the audit resolution process.


                                                                                 25