Final Civil Action: Owner of HUD-insured Multifamily Property Settled Allegations of Authorizing and Paying Out Project Funds for Unallowable Expenses

Published by the Department of Housing and Urban Development, Office of Inspector General on 2015-10-01.

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

                                                U.S. DEPARTMENT OF
                               HOUSING AND URBAN DEVELOPMENT
                                        OFFICE OF INSPECTOR GENERAL

                                           September 30, 2015
                                                                                              MEMORANDUM NO:

TO:           Craig T. Clemmensen
              Director, Departmental Enforcement Center, CACB

FROM:         Ronald J. Hosking
              Regional Inspector General for Audit, Denver Region, 8AGA

SUBJECT:      Final Civil Action: Owner of HUD-insured Multifamily Property Settled
              Allegations of Authorizing and Paying Out Project Funds for Unallowable


We performed a review of subpoenaed bank records based on our audit of The Retreat at Church
Ranch (Office of Inspector General audit report number 2013-DE-1003). The audit disclosed
indications that the owner used project funds for ineligible and questionable costs.


The former managing member of a Colorado limited liability company, Signature – The Retreat,
LLC, is the owner of The Retreat at Church Ranch, a 47-unit assisted-living facility located in
Westminster, CO. The owner refinanced the project’s mortgage with a U.S. Department of
Housing and Urban Development (HUD)-insured mortgage under the National Housing Act. On
September 26, 2007, the owner and HUD signed a regulatory agreement, in which the owner
agreed to operate the project in accordance with HUD requirements. This agreement prohibits
Signature from paying out any funds except for reasonable operating expenses or necessary
repairs or from surplus cash without prior written approval from HUD. Under 12 U.S.C. (United
States Code) 1735f-15, HUD is authorized to impose civil money penalties against the owners of
multifamily projects insured by HUD, as well as any members of a limited liability company that
owns such projects.

                                            Office of Audit Region 8
                                  1670 Broadway, 24th Floor, Denver, CO 80202
                                    Phone (303) 672-5452, Fax (303) 672-5006
                          Visit the Office of Inspector General Web site at www.hudoig.gov.

                                         RESULTS OF REVIEW

Our review disclosed that the owner allegedly made payments for personal expenses from the
project’s bank account. On December 11, 2013, we requested that HUD pursue proceedings
against the owner.
On March 31, 2015, HUD filed a complaint with its Office of Hearings and Appeals, seeking
more than $12.9 million in civil money penalties against the owner. The complaint alleges that,
starting in 2010, the owner authorized and paid out project funds for expenses that were not
reasonable operating expenses, necessary repairs, or from surplus cash and without HUD’s prior
written approval.
The owner denies HUD’s allegations. However, to avoid the uncertainty of litigation and to
arrive at a settlement that was satisfactory to both parties, the parties negotiated in good faith and
reached a settlement in which the owner will pay HUD $500,000.


We recommend that HUD’s Office of General Counsel, Office of Program Enforcement,

1A.           Ensure that HUD records the $500,000 settlement due in its accounting records, including
              the $11,000 paid at the time of settlement, to recognize funds due as a return of an
              ineligible cost.