oversight

The City of Pomona, CA, Did Not Administer Its Neighborhood Stabilization Program in Accordance With HUD Rules and Requirements

Published by the Department of Housing and Urban Development, Office of Inspector General on 2014-09-25.

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

OFFICE OF AUDIT
REGION 9
LOS ANGELES, CA




                    The City of Pomona, CA
               Neighborhood Stabilization Program




2014-LA-1006                                 SEPTEMBER 25, 2014
                                                        Issue Date:    September 25, 2014

                                                        Audit Report Number: 2014-LA-1006




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

               Dane Narode, Associate General Counsel, Program Enforcement, CACC

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


SUBJECT:       The City of Pomona, CA, Did Not Administer Its Neighborhood Stabilization
               Program in Accordance With HUD Rules and 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 Pomona’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.
                                          September 25, 2014
                                          The City of Pomona, CA, Did Not Administer Its
                                          Neighborhood Stabilization Program in Accordance With
                                          HUD Rules and Requirements



Highlights
Audit Report 2014-LA-1006


 What We Audited and Why                   What We Found

We audited the City of Pomona’s           The City did not operate its NSP in accordance with
Neighborhood Stabilization Programs       HUD rules and requirements. While we did not
(NSP1 and NSP3). We initiated the         identify problems with the sampled NSP3 funding
audit because of a hotline complaint      activities, we found that the City used $42,129 in
with concerns regarding the               NSP1 funds for duplicate profit and overhead costs,
administration of program funds. Our      ineligible rehabilitation expenses, and ineligible
objective was to determine whether the    developer’s fees. In addition, the City was unable to
City administered its NSP funds in        support the eligibility of $584,148 in NSP1 expenses.
accordance with applicable U.S.           The problem occurred because the City did not follow
Department of Housing and Urban           HUD rules and requirements or its own internal
Development (HUD) rules and               agreements and policies and procedures. As a result,
requirements. Specifically, we wanted     the City paid $626,277 in ineligible and unsupported
to determine whether the City             NSP1 funds that could have been used to further the
monitored its subrecipients and ensured   City’s objective of providing affordable housing in
that NSP expenditures were adequately     target areas affected by the housing crisis.
supported and eligible.
                                         The City allowed a conflict-of-interest situation when
                                         it allowed a City councilmember’s affiliated developer
  What We Recommend
                                         entity to participate in the City’s NSP. This condition
                                         occurred because the City ignored the terms of its
We recommend that HUD require the        executed agreements, such as its disposition and
City to (1) repay $78,155 in ineligible  development agreements that prohibited such conflicts.
costs, (2) support or repay $584,148 in In addition, the City did not understand HUD’s
unsupported costs, and (3) establish and conflict-of-interest regulations. The arrangement
implement better controls for            allowed the developer to inappropriately gain insider
monitoring HUD-related costs and         information and receive $36,026 in NSP funds for
prevent future instances of conflicts of improper developer’s fees and overhead and profit.
interest. We also recommend that
HUD’s Associate Counsel for Program
Enforcement pursue civil remedies,
civil money penalties, or other
administrative action, as appropriate,
against the City, the developer, and the
councilmember for their involvement in
the ineligible use of NSP funds because
of conflicts of interest.
                            TABLE OF CONTENTS

Background and Objective                                                        3

Results of Audit
      Finding 1:    The City Did Not Expend Its NSP1 Funds in Accordance With
                    Requirements                                                4

      Finding 2:    The City Allowed a Conflict-of-Interest Situation           11

Scope and Methodology                                                           14

Internal Controls                                                               16

Appendixes
A.    Schedule of Questioned Costs                                              18
B.    Auditee Comments and OIG’s Evaluation                                     19
C.    Criteria                                                                  34
D.    Table of Questioned Costs by Property                                     38




                                             2
                          BACKGROUND AND OBJECTIVE

The Neighborhood Stabilization Program (NSP) was established for the purpose of stabilizing
communities that have suffered from foreclosures and abandonment. The goal of the program is
being realized through the purchase and redevelopment of foreclosed-upon and abandoned
homes and residential properties. NSP1, a term that references the NSP funds authorized under
Division B, Title III, of the Housing and Economic Recovery Act of 2008 (HERA), provides
grants to all States and selected local governments on a formula basis. NSP3, a term that
references the NSP funds authorized under the Dodd-Frank Wall Street Reform and Consumer
Protection Act of 2010, provides a third round of neighborhood stabilization grants to all States
and select governments on a formula basis.

The City of Pomona, CA, was awarded more than $3.5 million (NSP1) and $1.2 million (NSP3)
in funding through the U.S. Department of Housing and Urban Development’s (HUD) NSP. As
of June 30, 2013, HUD’s Disaster Recovery Grant Reporting 1 system performance reports
showed that the City had drawn down more than $3.1 million in NSP1 funds. As of December
30, 2013, the same system showed that the City had drawn down $951,047 in NSP3 funds. The
City used its NSP funds for two primary activities, plus administration:

    1. Establish financing mechanisms for purchase and redevelopment of foreclosed-upon
       homes and residential properties, including such mechanisms as soft seconds, loan-loss
       reserves, and shared-equity loans for low- and moderate-income home buyers.
    2. Purchase and rehabilitate homes and residential properties that have been abandoned or
       foreclosed upon to sell, rent, or redevelop such homes and properties to assist households
       below 120 percent area median income.
    3. Provide administration and planning in an amount not to exceed 10 percent of the total
       grant amount, plus 10 percent of program income for program planning and
       administration.

The objective of our audit was to determine whether the City administered its NSP1 and NSP3
funds in accordance with applicable HUD rules and regulations. Specifically, we wanted to
determine whether the City monitored its subrecipients and ensured that NSP expenditures were
adequately supported and eligible.




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.


                                                        3
                                 RESULTS OF AUDIT

Finding 1: The City Did Not Expend Its NSP1 Funds in Accordance
           With Requirements
The City did not expend its NSP1 funds in accordance with requirements. Specifically, it paid
$42,129 for duplicate profit and overhead costs, ineligible rehabilitation expenses, and ineligible
developer’s fees. In addition, it was unable to support the eligibility of $584,148 in program
expenses. The problem occurred because the City did not follow HUD rules and requirements or
its own agreements and monitoring policies and procedures. In addition, the City used a review
process to reimburse for costs without obtaining needed supporting documentation. As a result,
it incurred $626,277 in ineligible and unsupported NSP1 costs that were not available to further
its objective of providing affordable housing in target areas affected by the housing crisis.


 The City Reimbursed for
 Ineligible Expenses

               The City approved and reimbursed developers for $42,129 in ineligible expenses
               (see appendix D). These ineligible expenses included

                   •   $36,773 in ineligible profit and overhead,
                   •   $2,008 in ineligible rehabilitation expenses, and
                   •   $3,348 in ineligible developer fee based on ineligible costs.

               Ineligible Profit and Overhead Totaled $36,773
               Contrary to NSP Policy Alert - Guidance on Allocating Real Estate Development
               Costs in the Neighborhood Stabilization Program, updated September 16, 2011
               (see appendix C), the City approved payments of developer’s fees and profit and
               overhead. Specifically, two developers received $36,395 in developer’s fees and
               $36,773 in profit and overhead for the rehabilitation of two NSP properties. The
               profit and overhead are already covered by the developer’s fee. Accordingly, the
               developers receiving both developer’s fees and profit and overhead were double-
               dipping, which should not have been allowed. As a result, we determined that
               $36,773 in profit and overhead charged to the program was ineligible.




                                                 4
                  Ineligible Rehabilitation Expenses Totaled $2,008
                  Contrary to Federal Register, Vol. 75 64332, paragraph H (see appendix C), the
                  City used program funds to reimburse developers $2,008 in expenditures not
                  allowed under the NSP. In one transaction, the developer submitted an invoice
                  for $5,750 for lead abatement services provided by a third-party vendor.
                  However, the third-party vendor invoice for the services was for only $4,750 and
                  the developer had submitted an invoice to the City for reimbursement that
                  included a $1,000 markup ($5,750 – $4,750). The $1,000 markup was an
                  ineligible NSP expense. The City also paid $875 in duplicate asbestos survey
                  costs. In addition, it reimbursed developers $100 for miscellaneous items, such as
                  candies, snacks, and lemonade, as well as $33 for additional garbage disposals,
                  which were also ineligible NSP expenses.

                  Ineligible Developer’s Fees Totaled $3,348
                  The City reimbursed the developer $38,781 for ineligible rehabilitation costs.
                  According to the executed disposition and development agreements between the
                  City and developers, developer’s fees are based on an agreed-upon percentage 2 of
                  the total acquisition and rehabilitation costs of each property in the possession of
                  the developer. Since we identified $38,781 in ineligible rehabilitation costs, we
                  prorated the original amount of developer’s fees earned to total $3,348 in
                  ineligible developer’s fees.

                  One of the two developers received a developer’s fee of $20,395. It also claimed
                  $21,388 in profit and overhead, which was determined to be an ineligible program
                  expense. As a result, we prorated the original amount of the developer’s fee by 7
                  percent, the approved percentage in its agreement, to arrive at a total ineligible
                  developer fee of $1,497. 3

                  The second developer received a developer’s fee of $16,000. It also claimed
                  $15,385 in profit and overhead, which was determined to be an ineligible program
                  expense. As a result, we prorated the original amount of developer’s fees earned
                  to arrive at a total ineligible developer’s fee of $1,851. 4




2
  Two developers received a flat fee of $16,000 and not a percentage of the acquisition and rehabilitation costs.
3
  $97,831 project cost - $21,388 ineligible profit and overhead = $76,443 // $193,527 total acquisition cost +
$76,443 eligible rehabilitation costs = $269,970 total acquisition and eligible rehabilitation costs x 7% = $18,898
correct amount of developer fee. The City paid the amount of $20,395 in developer’s fees. Based on the adjusted
amount of developer’s fees, there was an overpayment of $1,497 ($20,395-$18,898).
4
  $16,000 developer’s fee / $137,536 in total project costs = 12% // 12% x $15,425 in ineligible costs = $1,851.



                                                          5
The City Reimbursed for
Unsupported Expenses

           The City incurred $584,148 in program expenses that it could not support (see
           appendix D).

           There Were No Records To Support Rehabilitation Expenditures of $566,811
           The City reimbursed more than $1.1 million in rehabilitation expenses incurred at
           nine NSP-funded properties. However, neither the City, the developers, nor the
           contractors could provide documentation to support the eligibility $566,811 in
           rehabilitation expenses in accordance with 24 CFR (Code of Federal Regulations)
           570.506(h) (see appendix C).

           Contrary to HUD’s and its own requirements, the City did not ensure that
           developers’ or contractors’ expenses that it submitted were properly supported
           and eligible. Instead, the City approved costs based on a percentage of
           completion method. For instance, when the developer or contractor requested a
           rehabilitation progress payment, the City received a continuation sheet indicating
           the percentage of rehabilitation completed. While conducting site inspections, the
           City looked at the progress of the rehabilitation onsite and compared it to the
           continuation sheet for discrepancies. The rehabilitation progress payment request
           forms did not include documentation that supported incurred costs. Instead, this
           document included only budgeted line item expenses, which the City used to
           determine the amount to reimburse the developer.

           The grantees’ use of the percentage of completion method was not the proper
           method of reimbursement since it provided the developers or contractors the
           opportunity to earn more profits by incurring more expenses. For instance, one
           developer’s scope of work indicated “re-pipe home with new Type ‘L’ copper
           lines” for $5,000 and remove and dispose of existing carpet and install new 6-
           pound padding and carpeting for $6,800 for property number 7 (see appendix D).
           However, a site visit revealed that the house may not have been repiped with
           copper. The homeowner explained that 2 months after moving into the property,
           his family experienced two leaks from pipes he believed to be galvanized, not
           copper as stated in the scope of work. The developer installed only 727 square
           feet of carpeting upstairs. The living area downstairs totaled about 800 square
           feet, of which the hardwood floor was retained and not carpeted. The invoices
           provided by the general contractor showed only $185 and $722, or a total of $907,
           in expenses for copper and carpet and padding, respectively. However, the
           developer received reimbursements for the budgeted line items for the repipe and
           carpet totaling $11,800 ($5,000 + $6,800) and an approved developer fee of 7
           percent for approved rehabilitation costs, or $826, for the budgeted line items
           detailed above.

           At the same property, we also found two invoices submitted by the developer and
           general contractor for the same draw and amount with different descriptions of


                                            6
work performed. For instance, a developer submitted for reimbursement an
invoice of $8,565 (see exhibit 1) stating that work was completed and approved
based on the City’s inspection. However, this general contractor provided another
invoice for $8,565 (see exhibit 2) that showed work completed, which was
different from the work stated in the previous invoice (see exhibit 1). During a
site visit to the subject property, we showed these documents to City officials and
asked for an explanation. However, the City officials could not explain the
differences in the documentation that showed the same draw and amount but
different work performed at the property.




                                      Exhibit 1




                                      Exhibit 2


Source documentation, such as receipts for materials and labor, are important to
show whether items were purchased or rehabilitated and the costs were
reimbursed according to the scope of work. Although the City approved the
scope of work for each property, it did not require the developers and contractors
to support rehabilitation costs before reimbursing them. Therefore, it could not
have known which items in the scope of work had been completed and properly
reimbursed.

Since the profit and overhead for each property was based on incurred expenses,
the developers gained more profit by incurring higher rehabilitation costs.
Without requiring developers to provide invoices to support incurred costs, as


                                 7
                  required in its policies and procedures and by HUD, the City could not provide
                  assurance that the developers performed the required work and that costs were
                  eligible and supported. Based on a discussion with City personnel, it was a
                  common practice to approve reimbursement of costs using the percentage of
                  completion method instead of invoices. As a result, we determined that the City
                  incurred $566,811 in unsupported program expenses.

                  Invoices and Receipts of $3,857 Were Illegible
                  The City provided $3,857 in receipts and invoices from developers or contractors
                  for items used in the rehabilitation work on the NSP-funded properties. The
                  documents appeared to be from vendors such as Home Depot but were illegible;
                  therefore, we could not determine whether the expenses were allowed under the
                  NSP. As a result, we determined that this amount was unsupported.

                  Total Development Costs of $3,242 Were Unsupported
                  According to paragraph 2301(d)(3) of HERA, the maximum sales price for a
                  property is determined by aggregating all costs of acquisition, rehabilitation, and
                  redevelopment (including related activity delivery costs, which may include,
                  among other items, costs related to the sale of property (see appendix C). The
                  City sold an NSP property for $228,000 and claimed the total development costs
                  to be $228,892. However, it provided support for only $224,758 and was unable
                  to provide documentation to support the remaining $3,242 ($228,000 – $224,758).
                  Without this documentation, the City may have oversold the subject property to
                  the homeowner by $3,242.

                  An Unsupported Developer Fee Totaled $10,238
                  We determined that there were unsupported costs of $573,910. Since developer’s
                  fees were based on percentages 5 of acquisition and rehabilitation costs and we
                  determined $573,910 to be unsupported, we prorated the amount of developer’s
                  fees to determine unsupported developer’s fees of $10,238.

                  One of the two developers received a developer’s fee of $14,139. We determined
                  that there were unsupported costs of $78,933 for the subject property rehabilitated
                  by the developer. As a result, we prorated the original amount of developer’s fees
                  of 7 percent approved in its agreement and determined that $2,636 6 of the
                  developer fee was unsupported.

                  The second developer received a developer’s fee of $16,000. We determined that
                  there were unsupported costs of $63,353 for the subject property rehabilitated by



5
 Two developers received a flat fee of $16,000 and not a percentage of the acquisition and rehabilitation costs.
6
 83,433 total project rehabilitation costs - $78,933 unsupported costs = $4,500 eligible costs // $159,831 acquisition
cost + $4,500 eligible costs = $164,331 x 7 percent = $11,503 adjusted developer fee based on unsupported costs //
$14,139 paid developer fee - $11,503 adjusted developer fee based on unsupported costs = $2,636



                                                          8
                  the developer. As a result, we prorated the original amount of developer’s fees
                  received of $16,000 and determined that $7,602 7 was unsupported.

    Conclusion

                  While we did not identify problems with sampled NSP3 funding activities, we
                  found that the City did not expend its NSP1 funds in accordance with
                  requirements. Specifically, the City paid $42,129 for duplicate profit and
                  overhead costs, ineligible rehabilitation expenses, and ineligible developer’s fees.
                  In addition, it was unable to support the eligibility of $584,148 in program
                  expenses. This condition occurred because the City did not follow HUD rules and
                  requirements or its own agreements and monitoring policies and procedures to
                  ensure that costs were eligible and adequately supported. In addition, the City
                  used a review process that allowed it to reimburse developers or contractors for
                  costs without obtaining supporting documentation. As a result, the City paid
                  $626,277 to developers and contractors, which was ineligible and unsupported
                  under the NSP. These funds could be used to further the City’s objective of
                  providing affordable housing in target areas affected by the housing crisis.

    Recommendations

                  We recommend that the Director of HUD’s Los Angeles Office of Community
                  Planning and Development require the City to

                  1A.      Repay HUD, using non-Federal funds, $36,773 paid to developers for
                           ineligible profit and overhead costs identified in this report.

                  1B.      Repay HUD, using non-Federal funds, $2,008 paid to developers and
                           contractors for ineligible rehabilitation expenses identified in this report.

                  1C.      Repay HUD, using non-Federal funds, $3,348 paid to developers for
                           ineligible developer’s fees identified in this report.

                  1D.      Provide documentation to support the $580,906 ($566,811 + $3,857 +
                           10,238) in rehabilitation costs identified in this report or repay HUD,
                           using non-Federal funds, for those costs that the City cannot support.

                  1E.      Provide documentation to support the $3,242 in total development costs
                           identified in this report or reimburse the homeowner.

                  1F.      Implement better internal controls such as monitoring to ensure that all
                           incurred community planning and development-related costs are
                           supported, eligible, and reasonable as required by the Office of
7
 $16,000 developer fee / $137,536 in total project costs = 12 percent // 12 percent x $63,353 in unsupported costs =
$7,602


                                                         9
Community Planning and Development’s rules and requirements and its
own executed agreements, rules, and requirements.




                       10
                                RESULTS OF AUDIT


Finding 2: The City Allowed a Conflict-of-Interest Situation
The City allowed a conflict-of-interest situation when it allowed a City councilmember’s
affiliated developer entity to participate in the City’s NSP. This condition occurred because the
City ignored the terms of its executed agreements, which prohibited such conflicts. In addition,
the City did not understand HUD’s conflict-of-interest regulations that prohibit any appearance
of associated members’ having an interest in the program. The arrangement allowed the
affiliated developer to gain insider information and participate in the program. In addition, the
developer’s ties to the City councilmember allowed the developer to improperly receive $36,026
in NSP funds for developer’s fees and profit and overhead.


 The City Allowed the Conflict
 of Interest To Occur

               Contrary to its own disposition and development agreements and HUD
               requirements (see appendix C), the City inappropriately allowed an apparent
               conflict-of-interest situation to exist when it permitted a councilmember’s
               affiliated developer to participate in the NSP. The councilmember did not remove
               herself from the decision-making process related to the City’s NSP. For instance,
               the councilmember was present on June 1, 2009, for a board meeting and
               approved the list of developers to participate in the NSP. One of the approved
               developers was her affiliated developer entity, yet there was no documentation to
               show that the councilmember recused herself from the meetings.

               The City explained that the councilmember provided a signed disclosure, dated
               September 1, 2010, and indicated that she served as the president of the affiliated
               developer, receiving no compensation. However, the City approved the affiliated
               developer on June 1, 2009, before that disclosure. The councilmember did not
               sign the disclosure form until 15 months after she had voted to approve the
               affiliated developer to participate in the program. As a result, the
               councilmember’s affiliation with the developer allowed it to gain insider
               information regarding the program.

               Further, City officials stated that the affiliated developer wanted the
               councilmember to serve as one of the developer’s board members because of the
               individual’s expertise in real estate. In addition, the councilmember had many
               properties in Pomona, further helping the developer in the targeted area.
               However, the councilmember was the person responsible for overseeing the
               developer’s NSP projects from the initial drafting of the proposal to signing and
               executing the agreements with the City and general contractor. The
               councilmember was also responsible for the bank account and signed all of the


                                                11
            checks on behalf of the developer. Thus, the councilmember was involved in the
            day-to-day operations of the affiliated developer.

The City Claimed That HUD
Was Aware of the Conflict of
Interest

            The City claimed that it disclosed the conflict of interest to HUD and that HUD
            was aware of the councilmember’s affiliation with the developer. Therefore, the
            City believed that HUD had approved the arrangement. However, the City stated
            that the information was conveyed in a phone conversation and not documented.
            We contacted a former HUD representative to confirm the conversation. The
            HUD representative stated that the City did not mention the councilmember’s
            involvement with the developer. As a result, the representative questioned the
            validity of the City’s assertion that HUD approved the arrangement. Further, the
            representative stated that if a councilmember was involved in the NSP, it would
            have been considered a conflict of interest and not allowable. The City would
            have needed to obtain formal approval from HUD headquarters to waive the
            conflict-of-interest prohibition and approve the councilmember to participate in
            the NSP.

The Developer May Have
Received Preferential
Treatment

            The developer associated with the City’s councilmember may have received
            preferential treatment in the NSP. Specifically, the City did not hold the
            developer accountable to its executed agreement for rehabilitation as it did with
            other developers. In addition, the City allowed the developer to participate in the
            NSP without full-time staff, thereby raising concerns about its capacity as a
            developer.

            The Affiliated Developer Was Given Preferential Agreement Terms
            Contrary to the agreement for rehabilitation, there were instances in which
            property vandalism had occurred but the developer was allowed to seek
            reimbursement for the costs. In subject property number 5 (see appendix D), the
            vandalism included stolen wire outlet circuits and a 32-inch exterior door, which
            resulted in an additional $6,700 in rehabilitation costs to the property. However,
            the City did not hold the developer responsible for assuming this cost, nor did it
            deduct the costs from the developer fee. On the other hand, a different,
            nonaffiliated developer was held responsible for making up $2,400 in costs
            associated with the vandalism of NSP-funded property number 2 (see appendix
            D), which resulted in a stolen air conditioning unit.




                                             12
Conclusion

             The City allowed a conflict-of-interest situation when it allowed a City
             councilmember’s affiliated developer entity to participate in the City’s NSP. This
             condition occurred because the City ignored the terms of its agreement
             prohibiting conflicts of interest that involved City officials’ having an interest in
             the NSP. In addition, the City did not understand the Office of Community
             Planning and Development’s conflict-of-interest regulations that prohibited any
             appearance of associated members’ having an interest in the program. As a result,
             the councilmember’s interest in the developer allowed it to gain insider
             information and opportunities that other developers would not have. The
             developer’s ties to the councilmember allowed it to improperly receive $36,026 in
             NSP funds for developer’s fees and profit and overhead.

Recommendations

             We recommend that the Director of HUD’s Los Angeles Office of Community
             Planning and Development require the City to

             2A.    Repay HUD, using non-Federal funds, $36,026, paid in developer’s fees
                    and profit and overhead to the developer because of the conflict of interest
                    associated with the councilmember.

             2B.    Implement appropriate controls to prevent future instances of conflicts of
                    interest that involve NSP funds.

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

             2C.    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 30.35), or other administrative action against the
                    City, the affected developer, and councilmember for allowing NSP funds
                    to be used for ineligible costs as a result of the conflict of interest.




                                              13
                         SCOPE AND METHODOLOGY

We performed our onsite work at the City’s offices located at 505 S. Garey Avenue, Pomona,
CA, from January to July 2014. Our audit covered the period January 1, 2008, to December 31,
2013, and was expanded to other periods as necessary.

To accomplish our audit objective, we

   •   Reviewed relevant HUD NSP1 and NSP3 requirements and regulations,

   •   Reviewed the City’s NSP policies and procedures,

   •   Reviewed executed agreements,

   •   Reviewed pertinent information from the Disaster Recovery Grant Reporting system,

   •   Reviewed files and expenditures that pertained to the acquisition and rehabilitation of
       NSP properties,

   •   Reviewed board minutes and resolutions,

   •   Interviewed key personnel from the City and HUD, and

   •   Conducted site visits to NSP properties.

Initially, we selected a nonstatistical sample of disbursements based on the highest dollar amount
for each project from NSP1 and NSP3. Based on the results from the initial review, we
proceeded with the audit and selected additional samples to review. Our sample included a
review of properties acquired under the acquisition, rehabilitation, and resale of single-family
properties or rental units during the grant period.

HUD awarded the City more than $4.7 million in NSP funding. Of this amount, more than $3.5
million was for the NSP1 and $1.2 million was for the NSP3. Our sample review consisted of
five developers that rehabilitated and resold or converted to rentals nine properties funded with
$2.6 million in NSP1 and NSP3 funds. We reviewed properties from at least one developer
selected for the NSP. Further, we selected properties from one developer because of issues of
questioned costs identified in a previous audit. We selected another developer due to an apparent
conflict of interest that involved a City councilmember.

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.




                                                  14
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.




                                               15
                              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 NSP1 and NSP3 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 of NSP1 and NSP3
                   activities 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.




                                                 16
Significant Deficiency

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

                •   The City did not monitor its programs to ensure that funds were used in
                    compliance with HUD requirements (findings 1 and 2).




                                             17
                                    APPENDIXES

Appendix A

                 SCHEDULE OF QUESTIONED COSTS

            Recommendation
                number                     Ineligible 1/          Unsupported 2/


                   1A                           $36,773
                   1B                            $2,008
                   1C                            $3,348
                   1D                                                   $580,906
                   1E                                                     $3,242
                   2A                           $36,026
                  Total                         $78,155                 $584,148

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 developer’s fees paid to
     the developer because of a conflict of interest, profit and overhead reimbursed to
     developers, and other expenses not allowed under the NSP.

2/   Unsupported costs are those costs charged to a HUD-financed or HUD-insured program
     or activity when we cannot determine eligibility at the time of the audit. Unsupported
     costs require a decision by HUD program officials. This decision, in addition to
     obtaining supporting documentation, might involve a legal interpretation or clarification
     of departmental policies and procedures. In this case, unsupported costs consist of
     rehabilitation expenses, inclusive of developer’s fees and profit and overhead, reimbursed
     to developers and contractors without required documentation to support incurred
     development costs.




                                             18
Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation   Auditee Comments




Comment 1




                         19
Comment 2




Comment 3



Comment 4




            20
Comment 5




Comment 6




Comment 7




            21
Comment 8



Comment 9




Comment 10




             22
Comment 11




Comment 12




             23
Comment 13




Comment 14




Comment 15




             24
Comment 16




Comment 17




             25
Comment 18


Comment 19




Comment 20




             26
27
                         OIG Evaluation of Auditee Comments

Comment 1   We disagree. The report did not question whether the developers can be a
            developer and general contractor. Our review questioned the issue of developers
            receiving developers’ fees as well as profit and overhead. While it may be
            common practice in regular business practices for developers to earn a
            developers’ fee and profit and overhead for services rendered, HUD’s NSP
            prohibits such compensation. According to NSP Policy Alert: Guidance on
            Allocating Real Estate Development Costs in the Neighborhood Stabilization
            Program, Originally Released January 14, 2011, Updated September 16, 2011, 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 (appendix C).

            The City referenced NSP Policy Alert referenced by the City, NSP Policy Alerts –
            “Guidance on Developers, Subrecipients, and Contractors” dated August 27, 2010
            and update on November 16, 2011, that stated “a developer may charge contractor
            fee or brokerage fee if performing separate services for activity delivery and
            general administration.” However, the two developers received payments from
            developers’ fee and profit and overhead, not delivery and general administration
            as stated by the City. For instance, one of the two developers stated “overhead
            and profit (15%)” on its invoices related to services rendered at the properties.
            The second developer’s accounting records showed overhead and profit for the
            unused portion of the approved project cost. As such, any practice in which the
            developer billed and received compensation for profit and overhead outside of
            developers’ fees would be ineligible under the NSP Policy Alerts.

Comment 2   We disagree. We determined $2,008 in ineligible rehabilitation expenses based
            on the following:

            a. $1,000 – The developer submitted and received payment for an invoice
               submitted in the amount of $5,750. This invoice detailed a description of
               work that was similar to the contract and invoice submitted by the third party
               vendor for $4,750. This resulted in the developer adding a $1,000 markup
               that would cover overhead and profit. However, this markup would have been
               covered by the developers’ fee that the developer received for work performed
               under NSP. As a result, we believe that the developer's $1,000 markup is an
               ineligible expense.

            b. $875 – The City used the percentage of completion method to reimburse
               developers and contractors. It did not require the developers and contractors
               to support rehabilitation costs before reimbursing them. As a result, the City
               could not have known that a duplicate payment was made to the developer.
               Source documentation was requested from the developer to support the
               reimbursement costs it received. By its own admission, the developer




                                             28
               indicated that $875 was a duplicate record. As a result, the $875 in duplicate
               asbestos survey costs was ineligible.

            c. $100 – The City reimbursed rehabilitation expenses based on budgeted and
               not actual costs. As a result, the City did not review for actual expenses. We
               requested and reviewed the receipts and invoices provided by the developers
               and contractors to support its rehabilitation expenses. Based on our review,
               we determined that the City did reimburse the developer for those ineligible
               miscellaneous items using NSP funds.

            d. $33 – The City reimbursed rehabilitation expenses based on budgeted and not
               actual costs. We requested and reviewed the receipts and invoices provided
               by the developers and contractors to support its rehabilitation expenses for the
               subject property. Based on our review, we determined that the City did
               reimburse the developer for the ineligible $33 in additional garbage disposal
               expenses.

Comment 3   We agree. We request that the City provide documentation to support the City’s
            assertion that developers’ fees were based on those eligible expenses mentioned
            in Comment 1 and 2. Based on this support, we will adjust the questioned
            developers’ fees accordingly.

Comment 4   We disagree. The Federal Funding Accountability and Transparency Act
            (FFATA) executed on September 26, 2006, was used to reduce wasteful spending
            in the government. Since the City received $4.7 million in NSP funding, it is
            subject to the FFATA reporting requirements to reduce wasteful spending in the
            government. Further, 75 FR 64322 Section O. Reporting states that HUD will use
            grantee reports to monitor for anomalies or performance problems that suggest
            fraud, waste, and abuse of program funds. By reimbursing developers and
            contractors based on budgeted line item expenses deters from the FFATA
            requirement. Further, HUD cannot appropriately monitor the City for anomalies
            such as fraud, waste, and abuse without the City reporting actual costs of NSP
            rehabilitation projects. It should be noted that there were NSP grantees that
            maintained supporting documentation of program expenses in accordance with
            HUD rules and requirements.

            The objective of this audit was to determine whether the City monitored its
            subrecipients and ensured that NSP expenditures were adequately supported and
            eligible. Cost reasonableness was not the objective of our audit. We appreciate
            the City taking the steps to work with the developers and contractors to obtain the
            required source documentation to meet HUD requirements. Based on the
            documentation, we will adjust the questioned costs as warranted during the audit
            resolution process.

Comment 5   We disagree. The copper pipe was used as an example as to how the City’s use of
            percentage of completion was not the proper method of reimbursement since it



                                            29
              did not provide an accurate method of determining whether expenses were
              supported and eligible. Further, the City’s source documentation, such as third
              party receipts and invoices only showed $185 in actual expenses for copper and
              not $5,000 as budgeted and reimbursed to the developer. As a result, we cannot
              remove this paragraph from the final report.

Comment 6     We disagree. The report did not indicate that the $8,565 was billed twice. The
              report states that the “developer submitted for reimbursement an invoice of
              $8,565 stating that work was completed and approved based on the City’s
              inspection.” However, the reviewed file included the general contractor’s invoice
              for $8,565 that showed the description of work completed was different from
              what was on the developer’s invoice. We believe that this instance supports the
              reasoning that source documentation, such as receipts for materials and labor, are
              necessary to determine whether the developer purchased items or performed
              rehabilitation work, as well as whether the City reimbursed these costs according
              to the scope of work. As a result, we cannot remove this statement from the
              report.

Comment 7     We appreciate the City’s effort in working with the developers and contractor to
              1) obtain legible receipts for $3,857 and 2) obtain $3,242 supporting
              documentation for project soft costs. Based on the documentation provided
              during the audit resolution phase, we will adjust these costs as warranted.

Comment 8     We agree. If the City can provide documentation to support the unsupported costs
              identified in this report, we will consider adjusting related unsupported
              developers’ fees during the audit resolution process.

Comment 9     We disagree. The City had not been following HUD rules and requirements as
              well as its own internal agreements, policies, and procedures. As a result, the City
              was unable to support the eligibility of $584,148 in program expenses. We cited
              the criteria (appendix C) for specific HUD requirements, as well as its internal
              agreements, policies and procedures that the City did not follow. We do
              appreciate the City seeking clarification about the type of source documentation
              needed to meet HUD rules and requirements, specifically 24 CFR 570.506. The
              terms “invoices” and “receipts” are both types of source documents that would
              provide support of how the funds were used and whether such expenses were
              eligible. We appreciate that the City will take the necessary action to ensure
              compliance with HUD rules and requirements regarding record keeping of
              program expenses.

Comment 10 We disagree. Contrary to 24 CFR 570.611 and its internal agreements (appendix
           C), the City violated the conflict of interest requirement when it allowed the
           City’s councilmember’s affiliated developer entity to participate in the City’s
           NSP. The criteria and internal agreements did not limit the conflict of interest to
           just financial interest. It should be noted that the councilmember in question did
           not provide OIG requested documentation to allow us to determine if there were



                                               30
               financial benefits earned under the arrangement. In addition, the
               councilmember’s role as active president, as well as hands-on dealings on behalf
               of the developer would show benefits during the individual’s tenure.

Comment 11 We disagree. The City was aware that the councilmember was affiliated with the
           developer; however, the City still allowed the councilmember to contribute in the
           decision-making in the board meetings and permitted its affiliated developer to
           participate in the NSP program. Although the City’s councilmember signed a
           disclosure that no financial interest existed, we found that the councilmember was
           responsible for the bank account and signed all of the checks on behalf of the
           developer. Further, the City did not submit a written request to grant an
           exception, as required by 24 CFR 570.611(d), before the councilmember became
           involved with the developer’s NSP activities. As a result, we cannot remove
           finding two from the report.

Comment 12 We disagree. HUD requirements and the City’s internal agreements regarding
           conflict of interest did not limit the conflict of interest to only financial benefits
           (see appendix C). The councilmember’s active involvement in the developer’s
           participation in NSP-funded projects without written HUD approval violated
           HUD rules and requirements, as well as its own executed agreements between the
           developer and the City.

               We removed the term “closed-session” board meeting to only state board meeting.
               The report does not mention that there was a separate vote for the developer with
               ties to the councilmember. Instead, the report referenced the fact that the
               councilmember did not recuse herself from the meetings when it approved the list
               of developers to participate in the NSP.

Comment 13 We disagree. Although a disclosure was signed, the conflict of interest was not
           disclosed until 15 months after approval of the list of developers. Since NSP
           funds are federal funds, not state funds, the City must follow federal (HUD) rules.
           Further, the City also contradicted its own internal agreement which states in
           “Section 902, Conflict of Interest (1) No member, official or employee of the City
           shall have any personal interest, direct or indirect, in this Agreement, nor shall
           any member, official or employee participate in any decision making to the
           Agreement which affects its personal interest or the interests of any cooperation,
           partnership or association in which it is directly or indirectly interested (see
           appendix C).” Based on HUD rules, as well as the executed agreement between
           the City and the developer, the councilmember should not have been involved
           with the developer.

Comment 14 We disagree. Because the subject councilmember serves on the City council, the
           individual was able to gain insider information regarding the program. In
           addition, the City mentioned that the developer used the councilmember’s real
           estate experience and that the councilmember had many properties in Pomona,
           further helping the developer in the targeted area. As a result, the



                                               31
              councilmember’s involvement with the City discussion about the NSP, as well as
              real estate experience provided the information that other developers would not
              have while participating in the City’s NSP.

Comment 15 We disagree. We contacted the former HUD representative and he confirmed that
           the City did not mention the councilmember’s involvement with the developer.
           Since no written documentation existed, we could not determine whether such
           disclosure to HUD existed. We agree that the City should ensure that any
           discussions or requests for waivers by HUD are documented in writing to ensure
           compliance, as well as minimize any issues such as conflicts-of-interest.

Comment 16 We disagree. We are stating that the affiliated developer connected to the
           councilmember was not held accountable for the costs of vandalism as opposed to
           the nonaffiliated developer who was held to the terms of the agreement and was
           responsible for making up the cost differences associated with the vandalism of
           NSP-funded properties. Paragraph 10 of the agreement for rehabilitation held the
           contractors liable for any costs to maintain or secure the properties (see appendix
           C). During the review, we did not find documentation that supported the City’s
           claim of no preferential treatment given to the affiliated developer. During the
           exit conference, we stated that if the City would provide documentation to show
           that no such preferential treatment existed, we would consider revising the report
           statement in question. However, the City did not provide documentation for
           consideration in revising the report content. As a result, we could not determine if
           the City treated all developers in the same manner and must keep the content
           within the report.

Comment 17 Based on further review, we removed this paragraph from the report. However, it
           is still our position that the councilmember’s involvement with the affiliated
           developer violated conflict-of-interest rules stated in the executed agreement with
           the City as well as HUD rules and requirements.

Comment 18 We disagree with the following:

              Recommendation 2A – The City and councilmember violated HUD requirements
              and its internal agreements which do not limit conflict of interest to only financial
              interest. As mentioned in the previous comments, the councilmember’s active
              involvement with the developer without written HUD approval before the start of
              NSP violated HUD rules and requirements, as well as those agreements executed
              between the developer and the City (see appendix C). As a result, we believe that
              the recommendation is appropriate.

              Recommendation 2B – We commend the City for its plans on implementing
              recommendation 2B to ensure compliance and minimize any future issues of
              conflicts-of-interest.




                                               32
Comment 19 Based on our recommendation and the documentation obtained during the review,
           we will defer to HUD’s Associated General Counsel to determine whether
           appropriate civil and administrative actions should be taken against the
           councilmember, City, and the developer for the conflicts-of-interest issue
           identified in this report.

Comment 20 We removed the term “closed-session” and “inappropriately” from the report.
           However, we believe that the issues of incurred ineligible and unsupported, as
           well as the conflict-of-interest involving the councilmember and affiliated
           developer are factually supported based on the results of the review.




                                             33
Appendix C

                                        CRITERIA

2 CFR Part 225 (Office of Management and Budget Circular 87), Appendix A to Part 225
      C. Basic Guidelines
             1. Factors affecting allowability of costs. To be allowable under Federal awards,
                costs must meet the following general criteria:
                j. Be adequately documented.

24 CFR 570.506
      Each recipient shall establish and maintain sufficient records to enable the Secretary to
      determine whether the recipient has met the requirements of this part. At a minimum, the
      following records are needed:

       (h) Financial records, in accordance with applicable requirements listed in section
       570.502, including source documentation for entities not subject to parts 84 and 85 of this
       title. Grantees shall maintain evidence to support how the CDBG funds provided to such
       entities are expended. Such documentation must include, to the extent applicable,
       invoices, schedules containing comparisons of budgeted amounts and actual
       expenditures, construction progress schedules signed by appropriate parties (e.g. general
       contractor and/or a project architect), and/or other documentation appropriate to the
       nature of the activity.

Office of Management and Budget Circular-133
       CFDA 14.256 [Catalog of Federal Domestic Assistance] Neighborhood Stabilization
       Program (Recovery Act Funded)
       I. Program Objectives
       The objectives of the Neighborhood Stabilization Program (NSP) are to (1) stabilize
       property values; (2) arrest neighborhood decline; (3) assist in preventing neighborhood
       blight; and (4) stabilize communities across America hardest hit by residential
       foreclosures and abandonment. These objectives will be achieved through the purchase
       and redevelopment of foreclosed and abandoned homes and residential properties that
       will allow those properties to turn into useful, safe and sanitary housing.

HERA, Paragraph 2301(d)(3), Sale of Homes
     If an abandoned or foreclosed upon home or residential property is purchased,
     redeveloped, or otherwise sold to an individual as a primary residence, then such sale
     shall be in an amount equal to or less than the cost to acquire and redevelop or
     rehabilitate such home or property up to a decent, safe, and habitable condition.

Federal Register 75 FR 64322
       H. Eligibility and Allowable Costs
       Requirement
       1. Use of grant funds must constitute an eligible use under HERA.


                                               34
       2. In addition to being an eligible NSP use of funds, each activity funded under NSP
          must also be CDBG-eligible under 42 U.S.C. 5305(a) and meet a CDBG national
          objective.

       O. Reporting
       Background
       HUD will use grantee reports to monitor for anomalies or performance that suggest fraud,
       waste, and abuse of funds; to reconcile budgets, obligations, fund draws, and
       expenditures; to calculate applicable administrative and public service limitations and the
       overall percent of benefit to LMMI persons; and as a basis for risk analysis in
       determining a monitoring plan.

NSP Policy Alert: Guidance on Allocating Real Estate Development Costs in the Neighborhood
Stabilization Program, Originally Released January 13, 2011, Updated September 16, 2011
        Developer’s Fees
        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). The overhead expense intended to be defrayed by the developer’s fee is very
        similar to the General Administrative costs in the grantee budget, and may include such
        indirect costs as rent, utilities, and other expenses that cannot be linked to a specific
        project.

NSP Policy Alert: Guidance on Developers, Subrecipients, and Contractors – Updated
November 16, 2011
      Regarding activity delivery and general administration, developer may charge contractor
      fee or brokerage fee if performing these separate services.

Agreement for Rehabilitation
      10. … In addition, CONTRACTOR shall secure the PROPERTY to ensure that squatters
      and the public are unable to enter the PROPERTY or obtain access to the back yard or
      other non-public areas of the site. CONTRACTOR shall be solely responsible for all
      costs incurred to maintain and secure the PROPERTY. In no event shall the CITY be
      liable for any such costs, nor shall CITY be liable for any such costs, nor shall CITY be
      required to reimburse CONTRACTOR for any such costs incurred to maintain or secure
      the PROPERTY during the course of the rehabilitation.

Disposition and Development Agreement
       Section 102, Definitions
       (11) Final Rehabilitation Report. Final Rehabilitation Report means a report to be
            submitted by Developer to City upon completion of the rehabilitation of Property,
            which shall include detailed information regarding the actual, final Rehabilitation
            Costs incurred with respect to the Property, the actual Scope of Development
            performed at the Property, actual profit and overhead paid to contractors and
            subcontractors, and all approved change orders.




                                               35
       Section 902, Conflict of Interest
       (1) No member, official or employee of the City shall have any personal interest, direct or
           indirect, in this Agreement, nor shall any member, official or employee participate in
           any decision relating to the Agreement which affects its personal interests or the
           interests of any corporation, partnership or association in which it is directly or
           indirectly interested.

       Section 1500, Records, Reports, and Audits
       (1) Developer shall maintain, at reasonable times and places, make available to the City
           such records and accounts, including property, personnel, and financial records that
           the City and/or state and federal agencies deem necessary to ensure proper accounting
           for all NSP funds.
       (5) Developer shall maintain all books, records, plans, and data relating to this Agreement
           for (20) years.

24 CFR 85.40, Monitoring and reporting program performance
      (a) Monitoring by grantees. Grantees are responsible for managing the day-to-day
          operations of grant and subgrant supported activities. Grantees must monitor grant
          and subgrant supported activities to assure compliance with applicable Federal
          requirements and that performance goals are being achieved. Grantee monitoring
          must cover each program, function or activity.

City of Pomona Community Development Department Monitoring Plan
        B. Financial Monitoring - All project costs are paid on a reimbursement basis, rather than
           paid in advance. A request for reimbursement must have appropriate documentation
           attached to verify all expenditures.

24 CFR 570.611
      (b) Conflicts prohibited. The general rule is that no persons described in paragraph (c) of
          this section who exercise or have exercised any functions or responsibilities with
          respect to CDBG activities assisted under this part, or who are in a position to
          participate in a decision making process or gain inside information with regard to
          such activities, may obtain a financial interest or benefit from a CDBG-assisted
          activity, or have a financial interest in any contract, subcontract, or agreement with
          respect to a CDBG-assisted activity, or with respect to the proceeds of the CDBG-
          assisted activity, either for themselves or those with whom they have business or
          immediate family ties, during their tenure or for one year thereafter. For the UDAG
          program, the above restrictions shall apply to all activities that are a part of the
          UDAG project, and shall cover any such financial interest or benefit during, or at any
          time after, such person's tenure.

       (c) Persons covered. The conflict of interest provisions of paragraph (b) of this section
           apply to any person who is an employee, agent, consultant, officer, or elected official
           or appointed official of the recipient, or of any designated public agencies, or of
           subrecipients that are receiving funds under this part.




                                                36
       (d) Exceptions. Upon the written request of the recipient, HUD may grant an exception to
       the provisions of paragraph (b) of this section on a case-by-case basis when it has
       satisfactorily met the threshold requirements of (d)(1) of this section, taking into account
       cumulative effects of paragraph (d)(2) of this section.

Federal Funding Accountability and Transparency Act (FFATA) was signed on September 26,
2006. The intent is to empower every American with the ability to hold the government
accounting for each spending decision. The end result is to reduce wasteful spending in the
government.




                                                37
Appendix D

            TABLE OF QUESTIONED COSTS BY PROPERTY

                                    Finding 1 - ineligible expenses
              Property       Ineligible    Ineligible         Ineligible                 Total
                             profit and     prorated        rehabilitation             ineligible
                             overhead      developer          expenses                 expenses
                                               fee
                  1           $21,388        $1,497                -                    $22,885
                  3               -              -              $875                      $875
                  4           $15,385        $1,851              $40                    $17,276
                  5               -              -               $14                       $14
                  6               -              -             $1,072                    $1,072
                  7               -              -                $7                        $7
                Total         $36,773        $3,348            $2,008                   $42,129

                               Finding 1 - unsupported expenses
                      Property Unsupported Unsupported           Total
                                     costs      prorated     unsupported
                                                developer      expenses
                                                    fee
                         2         $78,933        $2,636        $81,569
                         3          $3,500           -           $3,500
                         4         $63,353        $7,602        $70,955
                         5         $94,037           -          $94,037
                                           8
                         6        $59,105            -          $59,105
                         7         $22,580           -          $22,580
                         8        $118,424           -         $118,424
                         9        $133,978           -         $133,978
                       Total      $573,910       $10,238       $584,148

                                     Finding 2 – ineligible expenses
                                       Property       Ineligible
                                          5             $7,050
                                          6            $13,389
                                          7            $15,587
                                        Total          $36,026




8
  We were unable to determine the latter half of a receipt for the amount totaled $55,863.19 of the $59,105. As a
result, this unsupported amount may be more. Of the $59,105 in unsupported costs, $3,242 was for the unsupported
total development costs incurred during the resale of the property.


                                                       38