oversight

The Owner of Coconut Grove Apartments Did Not Always Operate Its HUD-Insured Project in Accordance With HUD Rules and Requirements

Published by the Department of Housing and Urban Development, Office of Inspector General on 2015-09-22.

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

   Coconut Grove Apartments, Phoenix,
                  AZ
                Sections 223(f) and 241(a) Programs




Office of Audit, Region 9          Audit Report Number: 2015-LA-1008
Los Angeles, CA                                    September 22, 2015
To:            Thomas Azumbrado, Director, San Francisco Multifamily Hub, 9AHMLAP

               //SIGNED//
From:          Tanya E. Schulze, Regional Inspector General for Audit, 9DGA
Subject:       The Owner of Coconut Grove Apartments Did Not Always Operate Its HUD-
               Insured Project 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 Sections 223(f) and 241(a)-insured Coconut
Grove Apartments multifamily project.
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.
                    Audit Report Number: 2015-LA-1008
                    Date: September 22, 2015
                    The Coconut Grove Apartments’ Owner Did Not Always Operate Its
                    HUD-Insured Project in Accordance With HUD Rules and
                    Requirements


Highlights

What We Audited and Why
We audited Coconut Grove Apartments due to concerns expressed by the U.S. Department of
Housing and Urban Development’s (HUD) Office of Multifamily Housing Programs regarding
the management of the project. The main concern was that the owner may have diverted project
funds for nonproject expenses. Our audit objective was to determine whether Coconut Grove’s
owner operated its Sections 223(f) and 241(a)-insured multifamily rental housing project in
accordance with HUD rules and requirements.

What We Found
HUD’s concerns about the project’s management were valid. The owner did not always operate
its multifamily project in accordance with HUD rules and requirements. Specifically, it recorded
unsupported transactions that were charged to the project, and disbursed funds for non-HUD-
approved rental credits and a loan to an employee. In addition, it did not obtain HUD approval
for the management of the project. The owner failed to maintain an adequate financial
management system and submit required financial statements to HUD and secured loans that
placed unauthorized liens on the project. As a result, it did not ensure that at least $72,547 in
unsupported transactions was used for eligible project expenses.

What We Recommend
We recommend that the Director of the San Francisco Office of Multifamily Housing Programs
require the owner to (1) support or reimburse the project for the unsupported transactions and
rental credits, (2) implement adequate written policies and procedures to address the finding
cited in this report, and (3) obtain approval from HUD for its management.
Table of Contents
Background and Objective......................................................................................3

Results of Audit ........................................................................................................4
         Finding: Coconut Grove Apartments’ Owner Did Not Always Operate Its HUD-
         Insured Project in Accordance With HUD Rules and Requirements .......................... 4

Scope and Methodology ...........................................................................................9

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

Appendixes ..............................................................................................................12
         A. Schedule of Questioned Costs .................................................................................. 12

         B. Auditee Comments and OIG’s Evaluation ............................................................. 13

         C. Criteria ....................................................................................................................... 17

         D. Summary of Questioned Costs ................................................................................. 19




                                                                     2
Background and Objective
The U.S. Department of Housing and Urban Development’s (HUD) Section 223(f) program
insures mortgage loans to facilitate the purchase or refinancing of multifamily rental housing.
These projects may have been financed originally with conventional or Federal Housing
Administration (FHA)-insured mortgages. Properties requiring substantial rehabilitation are not
eligible for mortgage insurance under this program. HUD requires completion of critical repairs
before endorsement of the mortgage and permits the completion of noncritical repairs after the
endorsement for mortgage insurance. This program insures lenders against loss on mortgage
defaults.

HUD’s Section 241(a) program insures mortgage loans to finance repairs, additions, and
improvements to multifamily rental housing and health care facilities with FHA-insured first
mortgages or HUD-held mortgages. This program insures lenders against loss on mortgage
defaults. It is intended to keep the project competitive, extend its economic life, and finance the
replacement of obsolete equipment.

Tuscan Grove Properties, LLC, owns Coconut Grove Apartments, a 236-unit multifamily rental
housing project located in Phoenix, AZ. In December 2005, HUD executed regulatory
agreements with the owner in which the owner agreed to be bound by the terms and conditions
of the agreements for two mortgage loans insured by FHA. Specifically, the owner assumed a
more than $3.4 million acquisition loan and a $438,200 supplemental loan for project
improvements under Sections 223(f) and 241(a) of the National Housing Act, respectively. In
addition, the owners executed agreements with HUD that released the previous owner from all
liability for obligations and responsibilities.

Our audit objective was to determine whether Coconut Grove’s owner operated its Sections
223(f) and 241(a)-insured multifamily rental housing project in accordance with HUD rules and
requirements.




                                                 3
Results of Audit

Finding: Coconut Grove Apartments’ Owner Did Not Always
Operate Its HUD-Insured Project in Accordance With HUD Rules
and Requirements
Coconut Grove Apartments’ owner did not always operate its HUD-insured project in
accordance with HUD rules and requirements. Specifically, the owner (1) recorded unsupported
transactions that were charged to the project, (2) failed to obtain HUD approval for the use of
rental credits, (3) disbursed funds for a loan without a surplus cash flow, (4) failed to obtain
HUD approval for its management, (5) failed to maintain an adequate financial management
system, (6) failed to submit required financial statements to HUD, and (7) secured loans that
placed unauthorized liens on the project. These conditions occurred because the owner generally
lacked an understanding of HUD’s rules and requirements in relation to the financial aspects of
the project and disregarded HUD’s rules and requirements in relation to the management of the
project. In addition, the owner lacked written policies and procedures to ensure project
compliance. As a result, it did not ensure that at least $72,547 in unsupported transactions was
used for eligible project expenses.

Unsupported Transactions
The owner recorded $54,873 in unsupported transactions that were charged to the project. This
amount included $36,000 in accounting journal entries, $14,873 in expenses, and $4,000 related
to a deposit.

The Owner Lacked Documents To Support Accounting Journal Entries
Coconut Grove’s regulatory agreements, sections 9(c) and 9(d), require its owner to keep the
books and accounts of the operations in condition for a proper audit and in accordance with HUD
requirements (see appendix C). The owner’s general ledger showed three accounting journal
entries, each in the amount of $12,000 that had a corresponding entry monetarily canceling it out.
However, there were no records to support the three journal entries totaling $36,000 (see
appendix D). As a result, the owner recorded journal entries for $36,000 in unsupported
transactions.

The Owner Made Unsupported Disbursements
Coconut Grove’s regulatory agreements, section 6(b), prohibit using program funds, except for
reasonable operating expenses or necessary repairs, unless it is from surplus cash. Additionally,
HUD Handbook 4370.2, REV-1, paragraph 2-6(E), requires that all disbursements from the
regular operating account be supported by approved invoices or bills or other supporting
documentation (see appendix C). The owner disbursed up to $14,873 for unsupported expenses
(see appendix D). Of this amount, it disbursed $12,688 to a related intercompany bank account
for unsupported payroll expenses. The owner disbursed $2,185 to individuals, including
employees, for unsupported purposes or services. It could not support these expenses with
invoices, bills, or other supporting documentation.


                                                4
The Owner Made an Unsupported Deposit
Contrary to Coconut Grove’s regulatory agreements, sections 9(c) and 9(d) (see appendix C), the
owner’s general ledger and bank statements showed an unsupported deposit of $4,000 (see
appendix D). The property manager explained that the deposit was a loan that Coconut Grove
received. However, the owner did not provide supporting documents for the loan or show that it
properly recorded the loan in its general ledger. In addition, the owner’s trial balances did not
support that the transaction had been recorded.

Failure To Obtain HUD Approval for Use of Rental Credits
Coconut Grove’s regulatory agreements, section 6(h), prohibit the use of dwelling
accommodations without HUD approval for any purpose, except that which was originally
intended. From November 2011 through May 2015, the project had at least two non-revenue-
generating rental housing units that were occupied by individuals who were provided monthly
rental credits (see appendix D). According to Coconut Grove’s property manager and owner,
monthly employee concessions, or rental credits, were given to individuals who worked at the
project. However, the owner did not obtain HUD approval for the use of rental credits. The
owner was not aware of the requirement for HUD approval of employee concessions. It stated
that it would correct this noncompliance. The amount of lost rental revenue for the two non-
revenue-generating rental housing units and individuals totaled at least $17,674.

Loans to Employees Without Surplus Cash
Coconut Grove’s regulatory agreements, section 6(b), prohibit using program funds, except for
reasonable operating expenses or necessary repairs, unless it is from surplus cash. The owner
loaned project funds from its regular operating account without determining the availability of
surplus cash. The owner provided $1,875 in payroll advances to employees. Currently, the
owner deducted $1,675 from the employees’ pay to repay the loaned funds. There is still an
outstanding loan amount of $200 owed to the project from an employee. This amount is
included in the reported unsupported disbursements that totaled $14,873. While the employees
repaid most of the loans, the owner should not have used project funds for nonproject activities
unless paid from surplus cash.

Failure To Obtain HUD Approval for Management
Coconut Grove’s regulatory agreements, section 6(c), prohibit the owner from conveying,
assigning, or transferring any right to manage the project without HUD approval. Further, HUD
Handbook 4381.5, REV-2, section 2-6, requires that a management agent, including the owner,
assume management responsibility of the project only after HUD approval and the following
actions: the execution and submission of the appropriate certification form and the execution of a
management agreement. The owner did not have the required HUD approvals, certification
forms, or agreements to self-manage or convey project management rights to its identity-of-
interest management agent, Optima Management Services, LLC. Since August 2006, the owner
appeared to have self-managed the project. As of January 2013, Optima Management Services,
LLC, managed the project without compensation.

The owner claimed it was not aware that it needed HUD approval to self-manage the project.
However, HUD project files showed that the owner was aware of the requirement. In November
2005, the owner obtained approval for, executed, and submitted the required management


                                                5
documents for its last HUD-approved management agent. These management documents
included the owner’s certification (form HUD-9839-B) certifying that it would submit a new
management agent certification to HUD before making changes in the project’s management,
including undertaking self-management of the project. In March 2006, the owner certified that
the management certification and agent approval topics were discussed at loan closing.
Additionally, emails, dated February and November 2007 and October 2009, noted that the
subject of management approval was discussed by HUD and the owner. For example, the email,
dated October 2009, included details about the documents needed to obtain HUD approval for a
management agent. This email included HUD form numbers and referenced HUD Handbook
4381.5, REV-2, as a guide to help the owner obtain an approved management agent. In October
2007 and July 2011, HUD communicated through official letters to the owner about violations of
the executed regulatory agreements, which included the required approval for a management
agent. Thus, the owner disregarded the requirements for obtaining approval for the project’s
management.

Inadequate Financial Management System
Coconut Grove’s regulatory agreements, sections 9(c) and 9(d), require its owner to keep the
books and accounts of the operations in condition for a proper audit and in accordance with HUD
requirements. HUD Handbook 4370.2, REV-1, CHG-1, paragraph 2-3(B) and section 2-4,
require that financial records be complete, accurate, and updated monthly. Chapter 4 defines the
prescribed uniform system of accounts used by owners of all HUD-insured properties. The
owner did not have a financial management system that complied with its regulatory agreements
or HUD’s handbook. Specifically,

   •   It did not maintain a complete and accurate general ledger of its transactions. At least 32
       percent of the general ledger line item records did not have reference numbers to identify
       project transactions. The property manager explained that the project management
       software, Rent Manager, did not assign reference numbers to electronic check (online
       payment) transactions and that the bookkeeper did not enter reference numbers into these
       fields. Therefore, the reference number fields for these transactions were left blank.

   •   It did not use HUD’s prescribed uniform system of accounts with account categories that
       followed generally accepted accounting principles. Coconut Grove’s trial balances and
       profit and loss statements for the periods ending December 31, 2013 and 2014, and
       March 31, 2015, had discrepancies in the income statement accounts balances as well as
       missing accounts. The property manager explained that the recording and classification
       of the project’s accounting transactions were performed using Rent Manager’s preset
       chart of accounts, that had inconsistencies related to misclassified accounts.

   •   It lacked procedures to manage the project’s operations. For example, it did not have
       written policies and procedures or management contracts that defined roles,
       qualifications, or duties. In addition, it did not have written accounting policies and
       procedures to ensure compliance with HUD rules and requirements.




                                                6
Required Financial Statements Not Submitted to HUD
Coconut Grove’s regulatory agreements, section 9(e), require that the owner submit audited
annual financial statements within 60 days following the end of each fiscal year. HUD
regulations at 24 CFR (Code of Federal Regulations) 5.801(c)(2) allowed HUD to extend the
time to submit the documents from 60 to 90 days. Since its fiscal year ending December 31,
2011, the owner had not submitted its financial statements to HUD. In May 2015, it stated that
the financial statements for the fiscal year ending December 31, 2011, were complete and
waiting to be signed by the certified public accounting firm. About 3½ years later, in June 2015,
the owner submitted these financial statements to HUD. In May 2015, it provided a signed
engagement letter related to the financial statements for the fiscal year ending December 31,
2012. The engagement letter was dated a week after the start of our review in April 2015.
Overall, the owner explained that the filing of the financial statements was delayed due to
personal medical issues that caused delays in providing requested documents to the certified
public accountant responsible for ensuring that audited financial statements were submitted to
HUD before the deadlines. The owner did not respond to our requests for additional information
related to Coconut Grove’s action plan to comply with HUD’s requirements regarding the
submission of its financial statements for the fiscal years ending December 31, 2012, 2013, and
2014.

Unauthorized Liens on the Project
Coconut Grove’s regulatory agreements, section 6(c), prohibit the owner from conveying,
assigning, or transferring any beneficial interest in any trust holding title to the project or
receiving the rents and profits from the project without HUD approval. The owner secured two
loans recorded by the Maricopa County Recorder’s Office that placed unauthorized liens on the
project without HUD approval. HUD was unaware of the owner’s actions until April 2015. In
April 2007, the owner placed the first lien on the project related to a $3 million loan. In
November 2008, the lender released the owner from this debt and transferred the project title
back to the owner. In June 2013, the owner placed a second lien on the project that remained
active. This lien did not contain the details of the related loan, including the loan amount. The
owner had not provided documentation related to the second lien. However, on August 20,
2015, the owner provided documentation that showed the lien being terminated on June 5, 2015.
As a result, this issue has been resolved.

Conclusion
The owner of Coconut Grove did not always operate its HUD-insured project in accordance with
HUD rules and requirements. This condition occurred because the owner did not understand the
rules and requirements related to the financial aspects of the project, disregarded rules and
requirements related to the management of the project, and lacked written policies and
procedures to ensure project compliance. As a result, the project incurred at least $72,547 in
unsupported project expenses, and the owner’s practices confirmed HUD’s concerns about the
owner’s use of project funds for nonproject expenses.




                                                7
Recommendations
We recommend that the Director of HUD’s San Francisco Office of Multifamily Housing
Programs require the owner to

1A.   Provide supporting documentation for the $36,000 in unsupported accounting journal
      entries and correct inaccurate information related to these entries in its general ledger.
1B.   Provide supporting documentation for the $14,873 in unsupported disbursements that
      included a $200 loan to an employee, or repay its project from nonproject funds for costs
      that remain unsupported.
1C.   Provide supporting documentation for the $4,000 unsupported loan deposit entry and
      correct inaccurate information related to the deposit in its general ledger.
1D.   Obtain written approval from HUD for the $17,674 in unsupported rental credits or repay
      its project from nonproject funds for rental credits that remain unsupported.
1E.   Develop and implement written policies and procedures to ensure that project funds are
      used solely for reasonable operating expenses or necessary repairs unless it receives prior
      written approval from HUD and uses surplus cash.
1F.   Obtain written approval from HUD for its management agent and execute a management
      agreement that defines the management agent’s roles and responsibilities as required by
      HUD rules and requirements.
1G.   Develop and implement written policies and procedures to address the financial
      operations of the project.
1H.   Submit to HUD all outstanding financial statements.
1I.   Obtain HUD training and technical assistance for itself and its identity-of-interest
      management agent to ensure compliance with HUD rules and requirements that pertain to
      the management and operation of its project.




                                                 8
Scope and Methodology
We performed our audit work at Coconut Grove’s office in Phoenix, AZ, and our offices in
Phoenix, AZ, and Los Angeles, CA, from April 20 to June 26, 2015. Our review generally
covered the period January 1, 2013, to March 31, 2015, and was expanded as necessary.
To accomplish our objective, we performed the following:

•   Obtained relevant background information;

•   Reviewed the regulatory agreements and applicable HUD rules, regulations, and guidance;

•   Reviewed Coconut Grove’s owner’s articles of organization;

•   Reviewed Coconut Grove’s owner’s fiscal year 2010 audited financial statements;

•   Reviewed Coconut Grove’s general ledger;

•   Reviewed bank statements related to income deposits and expenditures;

•   Interviewed Coconut Grove’s owner and staff; and

•   Interviewed HUD Phoenix Office of Multifamily Housing Programs staff.
The audit universe consisted of deposits and expenses totaling more than $2.14 and $2.15
million, respectively, during the period January 1, 2013, through March 31, 2015. For our
review, we nonstatistically sampled 67 transactions totaling $98,115 in deposits, $290,759 in
expenses, $36,000 in journal entries that resulted in the transactions monetarily canceling out,
and a $400 voided check. Overall, the deposits and expenses reviewed represented 5 percent
($98,115/$2,143,462) and 14 percent ($290,759/$2,153,578) of the total deposits and expenses,
respectively.
We relied in part on Coconut Grove’s general ledger as a basis for defining the audit universe
and selecting a sample for testing. Using the data analysis application ACL Analytics, we
analyzed Coconut Grove’s general ledger and determined that it was sufficiently reliable to meet
the audit objective and for the intended use of the data.
We conducted the audit in accordance with generally accepted government auditing standards.
Those standards require that we plan and perform the audit to obtain sufficient, appropriate
evidence to provide a reasonable basis for our findings and conclusions based on our audit
objective(s). We believe that the evidence obtained provides a reasonable basis for our findings
and conclusions based on our audit objective.




                                                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 objective:

•   Effectiveness and efficiency of operations – Policies and procedures that management has
    implemented to reasonably ensure that a program meets its objectives.

•   Reliability of financial information – Policies and procedures that management has
    implemented to reasonably ensure that it obtains relevant and reliable information to
    adequately support program expenditures and discloses that information in the required
    reports.

•   Compliance with laws and regulations – Policies and procedures that management has
    implemented to reasonably ensure that program expenses are supported and comply with
    program funding guidelines and restrictions.

We assessed the relevant controls identified above.
A deficiency in internal control exists when the design or operation of a control does not allow
management or employees, in the normal course of performing their assigned functions, the
reasonable opportunity to prevent, detect, or correct (1) impairments to effectiveness or
efficiency of operations, (2) misstatements in financial or performance information, or (3)
violations of laws and regulations on a timely basis.
Significant Deficiencies
Based on our review, we believe that the following items are significant deficiencies:

•   The project did not have adequate controls over program operations to ensure project
    management by a HUD-approved management agent (see finding).



                                                  10
•   The project did not have an adequate financial management system and controls to ensure
    that the project’s books and records were maintained in accordance with HUD requirements
    (see finding).




                                              11
Appendixes

Appendix A


                             Schedule of Questioned Costs
                           Recommendation
                                             Unsupported 1/
                               number
                                   1A              $36,000
                                   1B              $14,873
                                   1C               $4,000
                                   1D              $17,674
                                 Totals            $72,547


1/   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.




                                              12
Appendix B
             Auditee Comments and OIG’s Evaluation



Ref to OIG    Auditee Comments
Evaluation




Comment 1




Comment 2


Comment 3




                               13
Comment 4




Comment 5


Comment 6




            14
                         OIG Evaluation of Auditee Comments


Comment 1   We appreciate the owner’s acknowledgement of the report and the opportunity to
            meet with the owner to discuss the report.

Comment 2   We acknowledge that Fennemore Craig will be the legal counsel for the owner.

Comment 3   We acknowledge the circumstances that the owner experienced in operating its
            only HUD-insured property. We commend the owner for taking the necessary
            corrective actions to ensure compliance with HUD rules and requirements.
            Further, we believe that the implementation of the recommendations in this report
            will help the owner be in compliance with HUD rules and requirements.
Comment 4   We appreciate the owner’s acknowledgement of the issues identified in this
            report. For clarification, establishing the availability of surplus cash allows for
            the disbursement of advances to project employees. In addition, HUD approval is
            necessary before the owner can provide rent credits to on-site maintenance
            engineers. During the audit resolution process, the owner will have the
            opportunity to provide HUD documentation to support the rent credits in question.

Comment 5   We commend the owner for being current on its mortgage payments. We
            appreciate the owner for taking the necessary corrective actions to ensure
            compliance with HUD rules and requirements.

Comment 6   We appreciate the owner for providing us supporting documentation for review.
            The owner provided supporting documentation to support that the second lien on
            the project was terminated on June 5, 2015. Additionally, the owner provided
            supporting documentation for $5,524 in disbursements made to individuals and
            for security expenses. This supporting documentation showed that the owner had
            loaned an additional $1,375 of project funds from its regular operating account
            without determining the availability of surplus cash. As a result, the owner
            provided $1,875 in loans to employees. The owner provided documentation to
            support the deduction of $1,675 from the employees’ pay towards the loaned
            funds. There is still one employee who owes the project $200. As a result, we
            reduced the $20,397 in reported unsupported transactions to $14,873 and revised
            the total loans made to employees without determining surplus cash from $500 to
            $1,875.

            The owner provided insufficient supporting documentation for the $36,000 in
            unsupported journal entries identified in the report. Instead, the owner provided
            general ledger accounting summaries for each of the questioned unsupported
            journal entries. The general ledger accounting summaries show accrued payroll
            expenses for contracted employees. However, the documentation did not show
            that the liabilities related to these expenses were recorded or that reversal entries
            were made once the expenses were paid. During the fieldwork, the owner did not


                                              15
provide a contract for “leased” employees identified in the documentation. As a
result, the $36,000 in questioned accounting journal entries is still unsupported.

The owner provided insufficient supporting documentation for the reported
$4,000 unsupported loan deposit entry. The owner provided a transfer history
report dated August 20, 2015, that scheduled a transfer of $4,000 to the bank
account from where the loaned funds were obtained. In addition, the owner
provided a copy of an e-mail from the bank stating that the capability to perform
intercompany transfers using the project bank account were to be removed.
However, the owner did not provide a copy of the confirmation that showed the
complete transfer of questioned funds. Consequently, the questioned $4,000 loan
deposit entry is still unsupported.

Based on our review of the documentation, we adjusted the report accordingly.
Furthermore, copies of the supporting documentation are not included within this
report, but are available upon request. As previously stated, the owner will have
the opportunity to work with the HUD Office of Multifamily Housing Programs
to resolve the remaining issues identified in the report.




                                  16
Appendix C
                                              Criteria

The following sections of the regulatory agreements; 24 CFR Part 5; Handbook 4370.2, REV-1,
CHG-1; and Handbook 4381.5, REV-2, were relevant to our audit of Coconut Grove
Apartments.

Regulatory Agreements, Section 6
Owners shall not without the prior written approval of the Secretary:

(b) Assign, transfer, dispose of, or encumber any personal property of the project, including
    rents, or pay out any funds except from surplus cash, except for reasonable operating
    expenses and necessary repairs.

(c) Convey, assign, or transfer any beneficial interest in any trust holding title to the property, or
    the interest of any general partnership owning the property, or any right to manage or receive
    the rents and profits from the mortgaged property.

(h) Permit the use of the dwelling accommodations or nursing facilities of the project for any
    purpose except the use which was originally intended, or permit commercial use greater than
    that originally approved by the Secretary.

Regulatory Agreements, Section 9
(c) The mortgaged property, equipment, buildings, plans, offices, apparatus, devices, books,
    contracts, records, documents, and other papers relating thereto shall at all times be
    maintained in reasonable condition for proper audit and shall be subject to examination and
    inspection at any reasonable time by the Secretary or his duly authorized agents. Owners
    shall keep copies of all written contracts or other instruments which affect the mortgaged
    property, all or any of which may be subject to inspection and examination by the Secretary
    or his duly authorized agents.

(d) The books and accounts of the operations of the mortgaged property and of the project shall
    be kept in accordance with the Requirements of the Secretary.

(e) Within sixty (60) days following the end of each fiscal year the Secretary shall be furnished
    with a complete annual financial report based upon an examination of the books and records
    of mortgagor prepared in accordance with the requirements of the Secretary, prepared and
    certified to by an officer or responsible Owner and, when required by the Secretary, prepared
    and certified by a Certified Public Accountant, or other person accept able to the Secretary.




                                                   17
24 CFR Part 5, General HUD Program Requirements; Waivers, Section 5.801, Uniform financial
reporting standards
(c) Filing of financial reports. (2) For entities listed in paragraphs (a)(3) and (4) of this section,
    the financial information to be submitted to HUD in accordance with paragraph (b) of this
    section, must be submitted to HUD annually, no later than 90 days after the end of the fiscal
    year of the reporting period, and as otherwise provided by law.

Handbook 4370.2, REV-1, CHG-1: Financial Operations and Accounting Procedures for
Insured Multifamily Projects, Chapter 2, Section 2-3: Maintenance of Books and Accounts
(b) Books and accounts must be complete and accurate. The books of original entry must be
    kept current at all times, and postings must be made at least monthly to ledger accounts.
    Standard journal entries may be established for recurring items and posted monthly.

Handbook 4370.2, REV-1, CHG-1: Financial Operations and Accounting Procedures for
Insured Multifamily Projects, Chapter 2, Section 2-4: Prescribed Accounts
In order to ensure that books are complete and reporting is uniform, prescribed accounts must be
maintained as outlined and described in Chapter 4.

Handbook 4370.2, REV-1, CHG-1: Financial Operations and Accounting Procedures for
Insured Multifamily Projects, Chapter 2, Section 2-6: Regular Operating Account
(e) All disbursements from the Regular Operating Account (including checks, wire transfers and
    computer generated disbursements) must be supported by approved invoices/bills or other
    supporting documentation. The request for project funds should only be used to make
    mortgage payments, make required deposits to the Reserve for Replacements, pay reasonable
    expenses necessary for the operation and maintenance of the project, pay distributions of
    surplus cash permitted and repay owner advances authorized by HUD.

Handbook 4370.2, REV-1, CHG-1: Financial Operations and Accounting Procedures for
Insured Multifamily Projects, Chapter 4: HUD Chart of Accounts, Section 4-1: Introduction
This chapter lists and defines the prescribed uniform system of accounts used by owners of all
HUD-insured projects. To assure that project accounting transactions are properly recorded and
classified, project bookkeepers must familiarize themselves with the account definitions
contained in this chapter.

Handbook 4381.5, REV-2, Chapter 2: Approval of Management Agents, Section 2.6:
Management Agent Assumption of Responsibility
Generally, the management agent may assume management responsibility only after:
   (a) The HUD Loan/Asset Management staff has issued a letter approving the agent proposed
       by the owner; and

   (b) The owner and agent have executed and submitted the appropriate Management
       Certification form (Form HUD-9839a, b, or c); and

   (c) The owner and agent have executed a Management Agreement, as necessary.



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Appendix D
                            Summary of Questioned Costs

      Date       Reference number                Description           Amount

    8/20/2013          J3801                     Journal entry         $12,000
   10/20/2013          J3802                     Journal entry         $12,000
   11/20/2013          J3803                     Journal entry         $12,000
                 Total of unsupported journal entries                  $36,000
    4/5/2013            J2880             Disbursement for payroll     $12,688
   10/21/2013          109508            Disbursement to individual     $595
                                        Disbursement to individual –
   11/14/2013          109511                                           $200
                                              payroll advance
     3/6/2014          109537            Disbursement to individual     $595
     5/1/2014          109546            Disbursement to individual     $595
    5/27/2014          109548            Disbursement to individual     $200
       Total of unsupported disbursements to individuals and for
                                                                       $14,873
                     payroll and security expenses
    4/22/2014           J3270                      Loan                $4,000
                      Total of unsupported loan                        $4,000


                                Questioned rental credits

                                    Month                   Amount

                              November 2011                  $416
                              December 2011                  $558
                               February 2012                 $408
                                March 2012                   $408
                                 April 2012                  $408
                                 May 2012                    $405
                                 June 2012                   $405
                                August 2012                  $408
                              September 2012                 $408
                         October 2012 - March 2015
                                                            $12,000
                        (30 months x $400 per month)
                                 April 2015                  $925
                                 May 2015                    $925
                                    Total                   $17,674




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