oversight

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




                                         December 16, 2015
                                                                         MEMORANDUM NO:
                                                                         2016-AT-1801

Memorandum
TO:           Roger Lewis, Director, Office of Residential Care Facilities, 0HP


              //signed//
FROM:         Nikita N. Irons, Regional Inspector General for Audit, 4AGA

SUBJECT:      Saltillo Assisted Living, Saltillo, MS, Did Not Maintain Liability and Property
              Insurance


                                      INTRODUCTION

We are conducting an audit survey of Saltillo Assisted Living (project) based on a referral from
the U.S. Department of Housing and Urban Development’s (HUD) Departmental Enforcement
Center and the activities included in our 2015 annual audit plan. Our survey objective is to
determine whether the owners and management agents of Saltillo Assisted Living complied with
the executed regulatory agreement and HUD’s requirements. Our preliminary results identified
significant condition that we want to bring to your attention immediately. Our audit work is
ongoing. The project owners or operator did not provide written comments to this report.

This memorandum contains one recommendation for corrective action. 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 this review.

                              METHODOLOGY AND SCOPE

Our survey generally covers the period January 1, 2012, through December 31, 2014. Due to the
immediate need to issue an interim memorandum to address an issue that put the project’s
residents and HUD at significant risk, we were unable to comply with generally accepted
government auditing standards. We interviewed HUD and project personnel and reviewed
HUD’s and the project’s files and documentation pertaining to the survey.
                                           BACKGROUND

Saltillo Assisted Living (formerly known as Dogwood Homeplace Assisted Living) is an assisted
living facility located in Saltillo, MS, and is insured by the Federal Housing Administration
(FHA) under Sections 232 and 223(f) of the National Housing Act. The Section 232 program
provides mortgage insurance for residential care facilities, such as nursing homes, intermediate
care facilities, board and care homes, and assisted living facilities. Section 223(f) FHA mortgage
insurance is used to facilitate the purchase or refinance of multifamily rental housing. The
project consists of three one-story buildings, consisting of 53 units, and is licensed for 54 beds.
Building three also consists of 13 studio units and is closed, according to the operator, due to a
water line break that occurred in late 2014.

A member of the project ownership entity, Dogwood Homeplace Assisted Living, LLC,
executed the regulatory agreement for the project. Based on information provided by HUD,
Dogwood Homeplace Assisted Living, LLC, is composed of a majority owner with 80 percent
ownership interest in the project and a minority owner with 20 percent ownership in the project.
In August 2013, the majority owner was sentenced to 30 months in Federal prison for failure to
pay Federal taxes as a result of an Internal Revenue Service criminal investigation. In January
2013, the minority owner left due to disagreements with the majority owner.

The minority owner held the operating license with the State of Mississippi from August 10,
2012, through September 17, 2015. The onsite management received a provisional license from
the State of Mississippi on September 18, 2015, to operate the project as an assisted living
facility. The onsite management consists of two nurses that have worked at the project since
2009 and 2011.

The project ownership has not made a mortgage payment since September 14, 2012. As a result,
the project was assigned to HUD on August 27, 2013. HUD has since paid a claim totaling more
than $2.3 million, and the project is in the process of foreclosure.

                                         RESULTS OF REVIEW

The owners and operators of the project did not follow HUD’s requirements to carry liability and
property insurance. We obtained insurance documentation showing that the project’s liability
insurance was canceled, effective July 31, 2014, and the property insurance was canceled,
effective September 1, 2014, due to nonpayment of the insurance premiums. HUD requires 1
each property having a mortgage that is federally insured under the Section 232 program to be
covered by property and liability insurance for the life of the mortgage loan. In addition, section
2(f) of the security agreement for the property provides that the debtor (ownership entity) must
insure the property for its full replacement value, subject to a deductible of not more than the
lesser of $10,000 or 1 percent of the indebtedness. According to the onsite management, the
cancellation of insurance was caused by a lack of available project funds. Because of the lack of
property insurance, the project could not file an insurance claim to fix the water line damage to
the units in building three. Possible injury to the residents, damage to the property, or lawsuits
put the project’s residents and HUD at unnecessary risk.
1
    Handbook 4232.1, paragraph 14.1(A)
                                                 2
                                   RECOMMENDATION

We recommend that the Director of the Office of Residential Care Facilities

1A.    Enforce HUD’s requirements for the owners and operator to immediately obtain and
       maintain liability and property insurance on the project.




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