oversight

HUD's Office of Multifamily Asset Management and Portfolio Oversight Did Not Comply With Its Requirements For Monitoring Management Agents' Costs

Published by the Department of Housing and Urban Development, Office of Inspector General on 2015-08-21.

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

   HUD’s Office of Multifamily Asset
   Management and Portfolio Oversight
          Washington, DC
            Multifamily Housing Management Agents




Office of Audit, Region 4       Audit Report Number: 2015-AT-0002
Atlanta, GA                                        August 21, 2015
To:            Nancie-Ann Bodell, Acting Director, Multifamily Asset Management and
               Portfolio Oversight, HTN


               //signed//
From:          Nikita N. Irons, Regional Inspector General for Audit, Atlanta Region, 4AGA
Subject:       HUD’s Office of Multifamily Asset Management and Portfolio Oversight Did Not
               Comply With Its Requirements For Monitoring Management Agents' Costs


Attached is the U.S. Department of Housing and Urban Development (HUD), Office of Inspector
General’s (OIG) final results of our review of HUD’s Office of Multifamily Asset Management
and Portfolio Oversight.
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
404-331-3369.
                        Audit Report Number: 2015-AT-0002
                        Date: August 21, 2015

                        HUD’s Office of Multifamily Asset Management and Portfolio Oversight Did Not
                        Comply With Its Requirements For Monitoring Management Agents’ Costs




Highlights

What We Audited and Why
We reviewed the U.S. Department of Housing and Urban Development (HUD), Office of
Multifamily Asset Management and Portfolio Oversight. We initiated the audit under the HUD
Office of Inspector General’s (OIG) annual audit plan. Our audit objective was to determine
whether HUD adequately monitored its management agents to ensure that front line costs and
direct costs 1 were not excessive across the portfolios as identified in audits 2 performed by OIG.

What We Found
HUD did not adequately monitor its management agents. HUD's monitoring of its management
agents did not always include detailed reviews of management agents' front line costs and direct
costs across their portfolios to ensure costs were not excessive. This condition occurred because
HUD chose to forego its requirements for monitoring the management agents’ portfolios, and
performed other broader and less detailed assessments. As a result, funds may not be available
to maintain property conditions, and Section 8 reserves may be reduced if project funds are used
to pay improper frontline and direct costs.

What We Recommend
We recommend that the Director of HUD’s Office of Multifamily Asset Management and
Portfolio Oversight comply with its handbook requirements that stipulate HUD must perform
management reviews of the management agent’s central office activities as well as regular onsite
reviews of functions carried out at the projects. These central office reviews should be
performed at least once every 18 months.




1
  The Management Agent Handbook, HUD Handbook 4381.5, REV-2 Paragraphs 6.37(a) and 6.38(a)(1) and figure
6.2 describe assigning management costs and charging those costs to project operating accounts. Eligible front line
costs are certain reasonable expenses that owners are allowed to charge to a project’s operating account, in addition
to the management fee. Direct costs are costs for the day-to-day activities of a particular property and are chargeable
directly to that respective project’s operating account.
2
  McClain Barr and Associates (2013-AT-1002) managed 17 projects, and The Avesta Housing Management
Corporation (2010-BO-1008) managed 30 projects.
Table of Contents
Background and Objectives ....................................................................................3

Results of Audit ........................................................................................................4
         Finding 1: HUD Did Not Adequately Monitor Front Line And Direct Costs
         Charged By Management Agents .................................................................................... 4

Scope and Methodology ...........................................................................................8

Internal Controls ....................................................................................................10

Appendix .................................................................................................................11
         A. Auditee Comments and OIG’s Evaluation ............................................................. 11




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Background and Objectives
The Office of Asset Management and Portfolio Oversight is a division within the Office of
Multifamily Housing. The Office of Asset Management and Portfolio Oversight is responsible
for the portfolio of multifamily projects assets after the development phase. The core roles are to
develop supporting policies and to provide interpretation of policy, control participation in the
multifamily asset programs, provide oversight of lender and field servicing activities including
multifamily management and field operations, and manage relationships with internal and
external partners. The Office of Asset Management and Portfolio Oversight is comprised of five
Divisions:

   •   Multifamily Asset and Counterparty Oversight Division,
   •   Assisted Housing Oversight Division,
   •   Business Relationships and Support Contracts Division,
   •   Field Asset Management and Program Administration Division, and
   •   The Property Disposition Division.

The processing of the multifamily housing programs is done within the Multifamily Regional
Centers, Satellite Offices, Hubs and Program Centers. The Office of Multifamily is in the
process of restructuring its offices.

The multifamily property owners contract with management agents, through a management
agreement, to oversee the day-to-day operations of the property, and maintain the financial and
accounting records. The owners and HUD must ensure that the projects will be managed in a
prudent, efficient, and costs-effective manner, in accordance with applicable laws and HUD
requirements. The management agents that oversee the HUD-insured and HUD-assisted
multifamily properties play a key role in helping HUD provide quality affordable housing. The
management agents execute a management certification providing that it will comply with the
property’s regulatory agreement and other HUD requirements. Management agents provide
property owners with dedicated property management services focused on ensuring that all
expenses of the project are reasonable and necessary, increasing property cash flow, improving
resident satisfaction, and improving properties’ physical condition.

Our audit objective was to determine whether HUD adequately monitored its management agents
to ensure that front line costs and direct costs were not excessive across the portfolios as
identified in audits performed by OIG.




                                                 3
Results of Audit

Finding: HUD Did Not Adequately Monitor Front Line and Direct
Costs Charged by Management Agents
HUD did not adequately monitor its management agents. HUD's monitoring of its management
agents did not always include detailed reviews of management agents' front line costs and direct
costs across their portfolios to ensure costs were not excessive. This condition occurred because
HUD chose to forego its requirements for monitoring the management agents’ portfolios, and
performed other broader and less detailed assessments. As a result, funds may not be available
to maintain property conditions, and Section 8 reserves may be reduced if project funds are used
to pay improper frontline and direct costs.
HUD Did Not Follow Its Management Agent Handbook Requirements for Monitoring
HUD's monitoring of its management agents were inadequate to ensure management agents'
front line costs and direct costs were not excessive for their portfolios, as required by its
Management Agent Handbook 4381.5, Rev 2. 3 Handbook 4381.5, Rev 2 provides guidance for
charging only reasonable expenses incurred for frontline costs and day-to-day activities to the
project’s operating account. 4 Owners are allowed to charge certain management costs to the
project’s operating account. However, other management costs may be paid only out of the
management fee. 5

Additionally, the Management Agent Handbook states that management agents with more than
one project may perform certain management functions from a centralized location. The HUD
Multifamily staff must perform management reviews of the agent’s central office activities, as
well as regular onsite reviews of functions carried out at the projects. 6 These central office
reviews should be performed at least once every 18 months. 7 These types of reviews were not
normally performed.




3
  The Management Agent Handbook, HUD Handbook 4381.5, REV-2, Paragraph 1.3(a) defines the purpose of the
handbook.
4
  The Management Agent Handbook, HUD Handbook 4381.5, REV-2, paragraphs 6.38(a)(1) defines eligible front
line expenses that management agents may charge HUD properties. Some examples include taking applications,
screening tenants, maintaining the project, and accounting for project income and expenses.
5
  The Management Agent Handbook, HUD Handbook 4381.5, REV-2, Paragraph 6.37(a) discusses assigning
management costs to the project.
6
  The Management Agent Handbook, HUD Handbook 4381.5, REV-2, Paragraph 6.33(a) provides guidance for
HUD review of management agents’ central offices.
7
  The Management Agent Handbook, HUD Handbook 4381.5, REV-2, Paragraph 6.33(c) requires that HUD
perform central office management reviews at least once every 18 months.



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We interviewed HUD Multifamily officials with governance over the program and determined
that they did not perform detailed monitoring to ensure management agents were not
overcharging for front line costs and direct costs across the portfolio. Instead, HUD officials
delegated the monitoring to the field office staff and relied on them to oversee the monitoring.
The HUD officials were not aware of the specifics about the field offices monitoring of
management agents and if the monitoring included steps to ensure that management agents did
not overcharge for front line costs and direct costs across the portfolio.
Interviews of 17 HUD field staff, and 4 individuals from 2 of HUD’s performance based contract
administrators, revealed that they did not perform detailed monitoring to ensure management
agents were not overcharging for front line costs and direct costs across the portfolio.
HUD’s field staff monitoring was generally performed through the review of the annual audited
financial statements or during a request for a budget based rent increase. Additionally, projects
that were troubled or those with indicators of other financial performance concerns were
reviewed more closely. HUD field staff monitoring typically included general consideration of
the overall amount of the charges and if those overall charges exceeded 5 percent, or $500 from
the previous year. However, budget based reviews are becoming far less common as more and
more projects are being restricted by market rents, and rents are more frequently being adjusted
by operating cost adjustment factors. Additionally, many of the multifamily staff’s portfolios
have increased because of attrition and the multifamily reorganization.

HUD’s performance based contractors stated that they did not always conduct reviews to ensure
management agents were not overcharging for front line costs and direct costs. The current court
case 8 protesting HUD’s performance based contracts has put the responsibility of conducting
management operating reviews back on HUD’s multifamily staff.


HUD Chose To Perform Broader Less Detailed Assessments.
HUD chose to forego its handbook requirements for performing central office reviews of
management agents portfolios at least once every 18 months and decided to perform other
broader, less detailed assessments. Also, HUD did not intend to include adding any detailed
review of front line or direct costs in its updated matrix as part of the Multifamily Division
reorganization.

    •    HUD Multifamily officials performed a more broad assessment of risk designed to
         evaluate the financial condition of the management agent to assess if they could pay back
         the loan and properly maintain the condition.




8
 The case is CNS Contract Management Services Inc., et al vs. United States. Case number for the US Court of
Appeals for the Federal Circuit is 13-5093. HUD is appealing the latest decision and it is currently waiting to be
heard by the Supreme Court.




                                                          5
      •   HUD field staff evaluations of front line and direct costs focused on the overall charges
          and if charged amounts at the project level appeared reasonable instead of verifying that
          charges were comprised of eligible and supported costs.

      •   HUD’s performance-based contractors’ evaluations were limited to reviewing and
          processing the monthly HAP vouchers and did not include evaluations of front line and
          direct costs across portfolios.

Less Funding Available To Maintain The Properties
By not performing management reviews of the agent’s central office activities, as well as regular
onsite reviews of functions carried out at the projects at least once every 18 months, funds may
not be available that otherwise would be used to maintain property conditions. Also, Section 8
reserves may be reduced because the surplus cash positon may be reduced, if project funds are
used to pay improper frontline and direct costs.

Prior OIG audits determined that the management agent did not follow HUD’s requirements and
charged more than $1.6 million for ineligible and unsupported frontline and direct costs.

      •   OIG audited McClain Barr and Associates (management agent) based on a request from
          the HUD Greensboro, NC, Office of Multifamily Housing. 9 The management agent did
          not follow HUD’s requirements for charging its properties frontline expenses. It failed to
          maintain documentation supporting the eligibility of its charges, made charges based on
          budgeted amounts, charged management agent staff costs to properties, and charged
          some ineligible items. This condition occurred because the agent disregarded both
          HUD’s requirements and its management agreements with the property owners. As a
          result, the agent charged more than $872,000 of ineligible and unsupported front line and
          direct costs to the project which could have been used for project operations,
          improvements, or other allowable expenditures.


      •   OIG also audited the Avesta Housing Management Corporation (management agent),
          located in Portland, ME in response to a request from HUD’s Manchester, NH, Office of
          Housing field office. 10 The management agent failed to comply with HUD requirements
          to ensure that the allocation of the time spent by its property managers working with
          HUD projects was adequately supported. As a result, there was no assurance that the
          property manager salaries were allocated equably among the 30 HUD and 30 non-HUD
          projects it managed. The management agent also could not support the reasonableness of
          costs for accounting and bookkeeping services it charged. As a result, more than
          $796,000 charged over a 3-year period was unsupported.




9
    McClain Barr and Associates (2013-AT-1002) managed 17 projects.
10
    Avesta Housing Management Corporation (2010-BO-1008) managed 30 projects.



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Conclusion
HUD did not adequately monitor front line and direct costs charged by its management agents.
HUD did not follow its management agent handbook requirements for monitoring. Instead,
HUD chose to perform broader and less detailed assessments designed to assess the overall
financial condition of the management agent and if charged amounts at the project level appeared
reasonable. By not performing management reviews of the agent’s central office activities, as
well as regular onsite reviews of functions carried out at the projects at least once every 18
months, HUD lacks assurance that management agents have not used project funds to pay
improper frontline and direct costs. Prior OIG audits determined that the management agent did
not follow HUD’s requirements and charged more than $1.6 million for ineligible and
unsupported frontline and direct costs. Consequently, project funds may not be available that
otherwise would be used to maintain property conditions. Also, Section 8 reserves could be
reduced because the surplus cash positon may be reduced.

Recommendation
We recommend that the Director of HUD’s Office of Multifamily Asset Management and
Portfolio Oversight

       1A.    Comply with its Management Agent Handbook requirements that stipulate HUD
              must perform management reviews of the management agent’s central office
              activities as well as regular onsite reviews of functions carried out at the projects.
              These central office reviews should be performed at least once every 18 months.




                                                 7
Scope and Methodology
We performed the audit from November 2014 through July 2015 at headquarters offices located at
451 7th Street SW, Washington DC, HUD Multifamily Field office located in Atlanta, GA, and at
HUD Office of Inspector General’s (OIG) Atlanta regional office. We also made site visits to
management agent offices located in Savannah, GA and Greenville, SC. Our review generally
covered the period October 1, 2012, through September 30, 2014, and was adjusted as necessary.

To accomplish our objective, we

   •   Interviewed Multifamily officials with governance over the program and the six projects
       reviewed.

   •   Interviewed personnel from HUD’s performance-based contract administrators that
       provided contract administration services for the six projects.

   •   Interviewed management agent personnel, and project managers for the six projects.

   •   Reviewed applicable criteria, including HUD handbook 4381.5, REV 2, Office of
       Multifamily Asset Management and Portfolio Oversight organizational charts, and
       monitoring reports relating to the monitoring of management agents’ charges for frontline
       and direct costs.

   •   Reviewed HUD’s applicable management controls and policies and procedures used to
       administer the program.

   •   Reviewed two prior HUD OIG audit reports. We summarized the information from these
       reports for inclusion in our report.

   •   Reviewed management agreements, management agent and project ledgers, bank
       statements, financial statements, and supporting documentation for the frontline and direct
       costs charged to the six projects.

We relied in part on data maintained in HUD’s system and on data maintained by the management
agents and the project managers. Although we did not perform detailed assessments of the data, we
performed minimal levels of testing and found the data to be adequately reliable for our purposes.
Testing for reliability included comparison of the computer-processed data to source documents and
records such as general ledgers, bank statements, audited financial statements, and invoices
maintained by the management agent and/or the project managers.

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



                                                 8
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.




                                                9
Internal Controls
Internal control is a process adopted by those charged with governance and management,
designed to provide reasonable assurance about the achievement of the organization’s mission,
goals, and objectives with regard to

•   Effectiveness and efficiency of operations,
•   Reliability of financial reporting, and
•   Compliance with applicable laws and regulations.
Internal controls comprise the plans, policies, methods, and procedures used to meet the
organization’s mission, goals, and objectives. Internal controls include the processes and
procedures for planning, organizing, directing, and controlling program operations as well as the
systems for measuring, reporting, and monitoring program performance.

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

•   Compliance with applicable laws and regulations – Policies and procedures to ensure that
    resource use is consistent with laws and regulations.
We assessed the relevant controls identified above.
A deficiency in internal control exists when the design or operation of a control does not allow
management or employees, in the normal course of performing their assigned functions, the
reasonable opportunity to prevent, detect, or correct (1) impairments to effectiveness or
efficiency of operations, (2) misstatements in financial or performance information, or (3)
violations of laws and regulations on a timely basis.
Significant Deficiency
Based on our review, we believe that the following item is a significant deficiency:

•   HUD's monitoring of its management agents did not adequately comply with its Management
    Agent Handbook requiring detailed reviews of management agents' front line costs and direct
    costs across their portfolios to ensure costs were not excessive (see finding).




                                                  10
Appendix A
             Auditee Comments and OIG’s Evaluation



Ref to OIG
Evaluation    Auditee Comments




Comment 1




                               11
                        OIG Evaluation of Auditee Comments


Comment 1   We agree with HUD’s Office of Multifamily Asset Management and Portfolio
            Oversight proposed action. HUD’s Office of Multifamily will submit the
            management decisions with acceptable timelines after the report is issued.




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