oversight

The Condominium Association and Management Agent Lacked Adequate Controls Over the Operation of West Park Place Condominium, Chicago, IL

Published by the Department of Housing and Urban Development, Office of Inspector General on 2016-09-30.

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

         West Park Place Condominium,
                  Chicago, IL
                Resident Home-Ownership Program




Office of Audit, Region 5          Audit Report Number: 2016-CH-1009
Chicago, IL                                        September 30, 2016



                               2
To:            Daniel J. Burke, Director of Multifamily Midwest Region, 5AHMLA

               //signed//
From:          Kelly Anderson, Regional Inspector General for Audit, 5AGA
Subject:       The Condominium Association and Management Agent Lacked Adequate
               Controls Over the Operation of West Park Place Condominium, Chicago, IL




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 resident home-ownership program grant
for West Park Place Condominium.
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
312-353-7832.
                    Audit Report Number: 2016-CH-1009
                    Date: September 30, 2016

                    The Condominium Association and Management Agent Lacked Adequate
                    Controls Over the Operation of West Park Place Condominium, Chicago, IL



Highlights

What We Audited and Why
We audited the U.S. Department of Housing and Urban Development’s (HUD) resident home-
ownership program grant for West Park Place Condominium (project) based on the results of a
risk assessment of multifamily housing programs in Region 5’s jurisdiction (States of Illinois,
Indiana, Michigan, Minnesota, Ohio, and Wisconsin) and the activities in our fiscal year 2016
annual audit plan. Our objective was to determine whether the West Park Place Condominium
Association (Condominium Association) and management agent operated the project in
accordance with HUD’s requirements and HUD’s grant agreement with the West Park Place
Resident Association for Preservation (Preservation Association).

What We Found
The Preservation Association did not transfer ownership of the project’s units to the
Condominium Association as required and still owned eight of the units as of July 2016. The
Condominium Association and management agent did not determine the fair market value of
units to support (1) that owners did not pay more than the fair market value for their units, (2)
that HUD’s secured interest in the units was appropriately valued, and (3) the amount of net
proceeds that should have been paid to the City’s HOME investment trust fund from subsequent
unit sales. Further, the Condominium Association and management agent could not provide
sufficient documentation to support that (1) the payments to HUD for initial unit sales were
accurate, (2) the Condominium Association used its share of the proceeds from initial unit sales
in accordance with the grant agreement, and (3) housing was affordable for all members. As a
result, the Condominium Association is at risk of having to reimburse HUD nearly $13.9 million
in program funds.

What We Recommend
We recommend that the Director of HUD’s Multifamily Midwest Region (1) require the
Condominium Association to resolve the issues and implement adequate procedures and controls
to address the weaknesses cited in this audit report and (2) make a preliminary determination as
to whether the Condominium Association is in default of the grant agreement.
Table of Contents
Background and Objective......................................................................................3

Results of Audit ........................................................................................................5
         Finding: The Condominium Association and Management Agent Did Not Operate
                  the Project in Accordance With HUD’s Requirements ................................ 5

Scope and Methodology .........................................................................................14

Internal Controls ....................................................................................................16

Appendixes ..............................................................................................................17
         A. Schedule of Funds To Be Put to Better Use ............................................................ 17

         B. Auditee Comments and OIG’s Evaluation ............................................................. 18

         C. Applicable Requirements ......................................................................................... 33

         D. Schedule of Deficiencies ............................................................................................ 37




                                                                2
Background and Objective
During the 1960s and 1970s, the U.S. Department of Housing and Urban Development (HUD)
financed thousands of housing projects under its Federal Housing Administration (FHA)
mortgage insurance programs, including section 236 of the National Housing Act. HUD insured
loans for the projects under section 236 for up to 40 years. However, it allowed owners to
prepay the FHA-insured mortgage after 20 years and convert the projects to market-rate housing,
providing a powerful incentive for owners to prepay the FHA-insured mortgage, particularly if
the property had appreciated in value. This early prepayment option along with the expiration of
project-based rental assistance contracts resulted in the loss of several hundred thousand
affordable housing units. To prevent further loss of affordable housing units, Congress enacted
the Low-Income Housing Preservation and Resident Homeownership Act in 1990. The Act
imposed a general prepayment limitation of federally insured mortgages and offered owners fair-
market-value incentives to (1) extend low-income affordability standards for the remaining
useful life of the projects or (2) transfer the projects to nonprofit organizations, tenant
associations, or community-based organizations that would keep the housing units affordable for
the remaining useful life of the projects.
In October 1971, HUD insured West Park Place Condominium’s (project) mortgage under section
236(j)(1) of the National Housing Act to provide low-cost rental housing. The West Park Place
Residents Association for Preservation (Preservation Association), an Illinois nonprofit corporation,
was organized in 1992 to ensure that the project remained as quality, affordable housing for low-
and moderate-income households. In January 1995, the Preservation Association submitted a
resident home-ownership plan for the project to HUD to prevent the owner of the project from
prepaying the HUD-insured mortgage and converting the building to market-rate use. In May 1995,
HUD awarded the Preservation Association a grant of nearly $14.2 million through its resident
home-ownership program under the Low-Income Housing Preservation and Resident
Homeownership Act. The Preservation Association was required to use the program funds to
acquire and rehabilitate the project’s buildings and transfer ownership of the project’s units to the
West Park Place Condominium Association (Condominium Association), which would then sell the
project’s units to individual owners through a condominium form of ownership.1 The
Condominium Association was responsible for operating the project in accordance with the Act.
The project is a 69-unit multifamily condominium project located in Chicago, IL. As of July 2016,
there were 59 units owned by Condominium Association members, 6 rental units, 2 vacant units, 1
unit where the owner of record was deceased, and 1 unit used by the Condominium Association as




1
  Tenants were not required to purchase units in the project. If the tenants did not purchase a unit in the project, they
could remain in their unit and were eligible to receive Housing Choice Voucher program housing assistance from
the Chicago Housing Authority.



                                                            3
an office and meeting space. HUD disbursed more than $14.1 million of the nearly $14.2 million in
program funds from May 1995 through August 1999.2
Acorn Property Management, Ltd., has been the management agent for the project since January
2006. The records are at the project’s office unit located 1755 North Larrabee Street, Chicago, IL;
Acorn’s office located at 1819 West Grand Avenue, Chicago, IL; and the Condominium
Association’s attorney’s office located at 440 South LaSalle Street, Chicago, IL.
The Condominium Association was required to remit to HUD 50 percent of the proceeds from
initial unit sales.3 Further, initial owners were required to enter into a 20-year nonrecourse
promissory note payable to HUD for the difference between the fair market value and the purchase
price of a unit. Upon the sale of an initial owner’s unit, the note became due.4 If a subsequent
owner purchased a unit during the 20-year note period for less than the current fair market value of
the unit, that owner was required to enter into a note for the amount of the discount for the period
remaining on the initial note. Further, owners were required to maintain their units at the project as
their principal residence for the initial 15 years of ownership. In addition, the Condominium
Association was required to ensure that owners did not pay more than 35 percent of their monthly
adjusted gross income toward mortgage payments and assessment fees.
Our objective was to determine whether the Condominium Association and management agent
operated the project in accordance with HUD’s requirements and the grant agreement with the
Preservation Association.




2
  The project’s grant account in HUD’s Line of Credit Control System contained a balance of more than $27,000 in
undisbursed program funds as of July 2016.
3
  The Condominium Association generally required a downpayment equal to 2 months of the assessment fees and
mortgage payments for the purchase of a unit. Further, owners generally entered into 20- to 30-year notes payable
to the Preservation Association for the remaining balance due for the unit. The Condominium Association was
required to remit to HUD 50 percent of the downpayments and principal portion of the note payments it received.
4
  The amount due was payable to the City’s HOME investment trust fund from the sales proceeds after deducting (1)
amounts due for the purchase of a unit, (2) other amounts due in connection with the sale of a unit, and (3) the
household’s equity in a unit at the time of sale. Further, 6 years after the owners entered into the notes with HUD,
the amounts payable on the notes were reduced by 1/168th each month until the 20th year, when the notes were to be
forgiven.



                                                         4
Results of Audit

Finding: The Condominium Association and Management Agent
Did Not Operate the Project in Accordance With HUD’s
Requirements
The Preservation Association did not transfer ownership of the project’s units to the
Condominium Association as required and still owned eight of the units as of July 2016. The
Condominium Association and management agent did not determine the fair market value of
units to support (1) that owners did not pay more than the fair market value for their units, (2)
that HUD’s secured interest in the units was appropriately valued, and (3) the amount of net
proceeds that should have been paid to the City’s HOME investment trust fund from subsequent
unit sales. Further, the Condominium Association and management agent could not provide
sufficient documentation to support that (1) the payments to HUD for initial unit sales were
accurate, (2) the Condominium Association used its share of the proceeds from initial unit sales
in accordance with the grant agreement, and (3) housing was affordable for all members. In
addition, the Condominium Association and management agent did not ensure compliance with
other requirements of the grant agreement. These weaknesses occurred because the
Condominium Association and management agent lacked adequate procedures and controls to
ensure that the project was operated in accordance with HUD’s requirements and the grant
agreement.5 As a result, HUD and the Condominium Association lacked assurance that the
project was operated in accordance with HUD’s requirements and the grant agreement, and the
Condominium Association is at risk of having to reimburse HUD nearly $13.9 million in
program funds.
Ownership of the Project’s Units Was Not Transferred to the Condominium Association
We reviewed the ownership of all 69 of the project’s units to determine the owners of the units.
Contrary to the grant agreement, the Preservation Association did not transfer ownership of the
units to the Condominium Association. The Condominium Association members entered into
promissory notes secured by mortgages payable to the Preservation Association for 60 units.
Further, as of July 2016, the Preservation Association owned eight of the units, and the
Condominium Association owned the remaining unit.6 The notes to the project’s audited
financial statements for the fiscal year ended December 31, 2015, stated that the Preservation
Association continued to own certain rental units until the units were converted and sold as
condominium units. The Condominium Association on behalf of the Preservation Association,
collected 100 percent of the rents, paid the expenses of the rental units, and had custody of and
control over these funds. However, the audited financial statements did not include the number




5
    See appendix C of this audit report.
6
    As part of a foreclosure process, the Condominium Association was granted ownership of a unit in April 2016.



                                                           5
of or account for the value of the units owned by the Preservation Association. Further, the
audited financial statements did not include that one of the units was vacant and another unit was
being used as an office and meeting space by the Condominium Association. Therefore, neither
HUD nor the Condominium Association members had a clear understanding of the financial
position of the project and the status of units based on the audited financial statements.
The treasurer of the Condominium Association’s board of directors said that to her knowledge,
the Condominium Association owned the project’s units. Further, the property manager for the
Condominium Association’s management agent said that she was not aware that the Preservation
Association was required to transfer ownership of the project’s units to the Condominium
Association.
Units Were Not Sold in Accordance With the Grant Agreement
We reviewed initial unit sales associated with nine units, which occurred after January 1, 2006,
and subsequent unit sales associated with five units,7 which had occurred as of November 30,
2015, to determine whether (1) units were sold at or below fair market value, (2) owners entered
into promissory notes secured by mortgages payable to HUD for the difference between the fair
market value of the units at the time of sale and the purchase price, and (3) the City received its
full share of the proceeds from subsequent unit sales. Contrary to article IV(e) of the grant
agreement, the Condominium Association and management agent did not determine the fair
market value of the units when they were sold. The fair market value was needed to support (1)
that owners did not pay more than the fair market value for their units as required by article IV(e)
of the grant agreement, (2) that HUD’s secured interest in the units was appropriately valued in
accordance with HUD’s regulations at 24 CFR
(Code of Federal Regulations) 248.173(i)(3)
and 248.173(j), and (3) the amount of net             The Condominium Association may
proceeds that should have been paid to the            have sold units for more than fair
City’s HOME investment trust fund from the            market value.
subsequent unit sales as required by regulations
at 24 CFR 248.173(l).8
The Condominium Association required the initial owners to enter into promissory notes payable
to HUD consistent with the amounts on the HUD notes for units sold from May 1999 through
June 2001, and it generally required subsequent owners to assume the initial owners’ promissory
notes. Therefore, the purchase prices of the units and the amount of the promissory notes
payable to HUD may not reflect the fair market value of the units. The following table shows




7
  Two of the units were sold twice to subsequent owners. Therefore, there were seven subsequent unit sales
associated with the five units.
8
  The Condominium Association did not pay the City net proceeds from the subsequent unit sales. See the following
section for the Condominium Association’s treatment of the proceeds from the subsequent unit sales.



                                                        6
the differences between the purchase price plus the HUD note for the unit sales associated with
14 units (9 units sold to initial owners and 5 units sold to subsequent owners).9
          Unit                                                                                  Purchase
        reference   Initial unit   Subsequent                     Purchase      Amount of        price +
         number         sale        unit sale     Date of sale      price       HUD note10      HUD note
            57           X                         June 2013       $143,588       $169,408       $312,996
            33           X                         Dec. 2012          34,001       169,408        203,409
            17           X                         Apr. 2007          13,847       169,408        183,255
             5           X                        Nov. 2006           13,847       169,408        183,255
            12           X                         June 2008          12,107       147,511        159,618
            65           X                         May 2007           12,107       147,511        159,618
            63                          X          Mar. 2004          10,893       147,511        158,404
            45                          X          July 2002          12,226       147,511        159,737
             6                          X          July 2014          74,979       141,881        216,860
            23                          X          Dec. 2013           7,777       141,881        149,658
            67                          X         Nov. 2013           77,615       141,881        219,496
            69           X                        Sept. 2012         117,429       141,881        259,310
             7           X                         June 2012         126,373       141,881        268,254
            68           X                         Mar. 2008          11,637       141,881        153,518

The attorney for the Condominium Association stated that the fair market value of the units was
not determined when the units were sold. The attorney also stated that since at least May 2012,
the Condominium Association based the purchase price of the units on household income. The
property manager for the Condominium Association’s management agent could not explain why
the fair market value of the units was not determined when the units were sold and was not aware
that the promissory notes payable to HUD were required to be the difference between the fair
market value of the units and the purchase price. The following graph shows the impact on unit
values using the Condominium Association’s methodology of calculating the purchase price of a
unit based on income.11




9
  The Preservation Association or Condominium Association purchased two units from initial owners before the
units were sold to the subsequent owners that owned the units as of July 2016. The subsequent sales of the two units
from the initial owners to the Preservation Association or Condominium Association were not included in the table.
10
   Promissory notes payable to HUD in amounts of $141,881, $147,511, and $169,408 were associated with three-
bedroom garden, three-bedroom townhouse, and four-bedroom townhouse unit types, respectively.
11
   The purchase prices presented in the graph assumed different annual incomes for a four-person household with
two dependents, a promissory note secured by a mortgage amortized over a 30-year term and with a 1 percent
annual interest rate, and monthly assessment fees of $626 for a three-bedroom garden unit.



                                                         7
                       Unit value based on income
        $500,000
        $450,000
        $400,000
        $350,000
        $300,000
        $250,000
        $200,000
        $150,000
        $100,000
         $50,000
              $-



                                        Household's annual income

                                    Purchase price   HUD note


In addition, the Condominium Association could not provide sufficient documentation to support
that it appropriately selected six of the nine households for units sold to initial owners from a
waiting list. As of July 2016, the Condominium Association did not maintain a waiting list for
rental units that met the requirements of the resident home-ownership plan. The property
manager for the Condominium Association’s
management agent said that the Condominium
Association had not sold a unit at the project        The Condominium Association did
since she became the property manager and that not maintain an appropriate waiting
she was not familiar with the resident home-          list for rental units.
ownership plan’s requirements for a waiting
list.
Documentation To Support Proceeds From Initial Unit Sales Was Not Sufficient
We reviewed the proceeds from initial unit sales for fiscal years 1999 through 2015 to determine
whether the Condominium Association (1) remitted 50 percent of the proceeds to HUD and (2)
used its share of the proceeds in accordance with the grant agreement. The project’s audited
financial statements through the fiscal year ended December 31, 2015, stated that the
Condominium Association accrued more than $616,000 in proceeds from initial unit sales, of
which more than $308,000 in proceeds was due to HUD. Further, the Condominium Association
had remitted at least $278,000 to HUD and used more than $27,000 in undisbursed program
funds in the project’s grant account in HUD’s Line of Credit Control System to offset proceeds
due to HUD.
However, contrary to regulations at 24 CFR 248.173(h) and article IV(j) of the grant agreement,
the Condominium Association could not provide sufficient documentation to support that the
amount due to HUD was accurate. A certified public accountant for the firm that conducted the


                                                8
project’s annual audit stated that the annual calculations of HUD’s and the Condominium
Association’s share of the proceeds from initial unit sales were based on estimates rather than
actual amounts collected. The property manager for the Condominium Association’s
management agent also said that accounting records were not available before January 2006 and
stated that the Condominium Association’s members’ total monthly payments were recorded
together rather than being separated into assessment fees and mortgage payments.
Further, (1) contrary to article IV(j) of the grant agreement, the Condominium Association did
not include in its annual calculations proceeds from the initial sale of a unit after the unit had
been sold to a subsequent owner and (2) contrary to regulations at 24 CFR 248.173(h), the
Condominium Association inappropriately included proceeds from the subsequent sale of a unit
in its annual calculations. The certified public accountant stated that the proceeds from the initial
sale of a unit that had been sold to a subsequent owner were excluded from the annual
calculations in error and he did not verify the calculations for all units.
In addition, HUD did not approve the use of undisbursed program funds to offset proceeds due to
HUD. The certified public accountant stated that the Condominium Association sent a letter to
HUD that requested approval to use the undisbursed program funds to offset the proceeds due to
HUD. To his knowledge, HUD did not notify the Condominium Association that it objected to
the offset.
The Condominium Association also could not provide sufficient documentation to support that it
used its share of the proceeds in accordance with article IV(k) of the grant agreement. The
property manager said that the specific uses of the Condominium Association’s share of the
proceeds from initial unit sales could not be determined since the Condominium Association did
not account for its share of the proceeds separate from other funds and the proceeds could have
been used for any expense paid from the Condominium Association’s general operating account.

There Was No Assurance That Housing Was Affordable for All Owners
Contrary to paragraph 12 of HUD’s use
agreement with the Preservation Association,         Mortgage payments and assessment
the Condominium Association and management
agent did not ensure that mortgage payments
                                                     fees may have exceeded 35 percent of
and assessment fees did not exceed 35 percent        households’ income.
of the owners’ monthly adjusted gross income
other than upon unit sales. The property manager for the Condominium Association’s
management agent said that the Condominium Association considered a household’s income
only at the time of application for ownership at the project. Further, the attorney for the
Condominium Association said that it was his understanding that unit owners’ incomes needed
to be considered only at the time of sale. However, the use agreement does not limit the
requirement to only at the time of unit sales. Further, since the Condominium Association and
management agent had not determined the owners’ household income after the unit sales, the
Condominium Association would not be able to support that it sold units to the same proportion




                                                  9
of very low-, low-, and moderate-income households shown in the resident income profile in
paragraph 4.a. and required by paragraph 10.b. of the use agreement.12
In addition, contrary to the resident home-ownership plan, the Condominium Association would
not consider an applicant for the initial sale of a unit if the monthly assessment fees would
exceed 30 percent of the household’s monthly adjusted gross income. Therefore, units would not
be available to some very low-income households.
Other Requirements of the Grant Agreement Not Followed
Owners of Record Did Not Live in Their Units at the Project
We reviewed the principal residency of 94 owners of record associated with 61 units that were
not owned by the Preservation Association as of November 30, 2015, to determine whether the
owners maintained their units as their principal residence in accordance with regulations at 24
CFR 248.173(g)(4) and article IV(i) of the grant agreement. The sole owner of record of a unit
as of July 2016 passed away in December 2010. The property manager for the Condominium
Association’s management agent stated that a relative of the owner who had passed away was
residing in the unit with another individual. The attorney for the Condominium Association
stated that the relative was still residing in the unit as of July 2016.
Further, the property manager said that two owners moved from their unit in early 2015.13 The
attorney stated that the unit was vacant as of July 2016. The property manager also said that the
Condominium Association was attempting to purchase the unit from the owners but there had
been disagreement on the purchase price. However, one of the owners said that he had been
attempting to sell the unit to the Condominium Association since June 2015 but the
Condominium Association and property manager had been unresponsive to his efforts to sell the
unit. In addition, the Condominium Association did not provide documentation to support that it
was attempting to purchase the unit from the owners.

A Unit Was Used for Purposes Other Than Rental or Condominium Housing
Contrary to paragraph 3 of the use agreement, the Condominium Association used a unit as an
office and meeting space.14 The treasurer of the Condominium Association’s board of directors
said that it was her understanding that the Condominium Association could use a unit as an
office and meeting space. However, the Condominium Association did not obtain approval from
HUD to use the unit for purposes other than rental or condominium housing. Further, HUD’s



12
   For example, if the Condominium Association and management agent have not determined the initial owners’
household income since the conversion to homeownership from May 1999 through June 2001, the Condominium
Association would not be able to support that it sold units after the conversion period to the same proportion of very
low-, low-, and moderate-income households.
13
   One of the owners said that they moved to be closer to relatives.
14
   The treasurer of the Condominium Association’s board of directors said that the unit, which was previously
owned by a household, experienced flooding. Therefore, the Condominium Association allowed the household to
move from the unit to another available unit with a similar floor plan. The new unit had not been previously
purchased by an initial owner. Therefore, we considered the unit that the Condominium Association used as an
office and meeting space to be a unit that had never been purchased by an initial owner. Further, the Condominium
Association later resolved the flooding issue with the unit by building a retaining wall.



                                                           10
Chicago Multifamily Housing Hub’s position was that (1) it was inappropriate for the
Condominium Association to use the unit as an office and meeting space and (2) the unit needed
to be rented to a very low-, low-, or moderate-income household selected from a waiting list for
rental units that met the requirements of the resident home-ownership plan.
Reports Were Not Submitted to HUD
Contrary to article VIII(d) of the grant agreement, the Condominium Association did not submit
reports to HUD to demonstrate continued compliance with the program. The reports included
but were not limited to (1) semiannual reports on vacancies, (2) semiannual reports of
nonpurchasing tenants, (3) monthly reports on the status of resales, (4) monthly reports on the
status of sales activity, and (5) reports on changes in closing costs. The property manager for the
Condominium Association’s management agent said that she was not aware that the
Condominium Association was required to submit reports to HUD.
Conclusion
The weaknesses described above occurred because the Condominium Association and
management agent lacked adequate procedures and controls to ensure that the project was
operated in accordance with HUD’s requirements and the grant agreement. Further, the
Condominium Association’s management agent did not have specific policies and procedures for
managing a project under the program. The property manager for the Condominium
Association’s management agent said that she relied on the State of Illinois Condominium
Property Act to manage the project. In addition, the Condominium Association’s board
members and the property manager lacked an adequate understanding of HUD’s requirements
and the grant agreement. As a result, HUD and the Condominium Association lacked assurance
that the project was operated in accordance with HUD’s requirements and the grant agreement,
and the Condominium Association is at risk of having to reimburse HUD nearly $13.9 million in
program funds as allowed by the grant agreement. In addition, the Director of HUD’s
Multifamily Midwest Region stated that based on the results of our review, he believed that the
Condominium Association was in default of its grant and use agreements with HUD.
Recommendations
We recommend that the Director of HUD’s Multifamily Midwest Region require the
Condominium Association to
       1A.     Obtain ownership of the 8 units owned by the Preservation Association and
               assume the promissory notes secured by mortgages payable to the Preservation
               Association for the 60 units that were to be owned by Condominium Association
               members.
       1B.     Implement adequate procedures and controls to ensure that when applicable, the
               Condominium Association, rather than the Preservation Association, (1)
               purchases units from the owners, (2) takes title to the units, (3) assumes the
               promissory notes secured by mortgages payable to HUD, and (4) enters into
               promissory notes secured by mortgages payable to the Condominium Association
               with the purchasers of the units.
       1C.     Have a representative of HUD at the closing for unit sales to sign the HUD notes.


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1D.   Implement adequate procedures and controls to ensure that units are sold at or
      below fair market value, HUD’s secured interest in the units is appropriately
      valued, and the City receives its full share of the proceeds from subsequent unit
      sales as applicable.
1E.   Develop and maintain a waiting list for rental units that meets the requirements of
      the resident home-ownership plan.
1F.   Implement adequate procedures and controls to ensure that any rental units
      vacated by current households are rented to very low-, low-, or moderate-income
      households selected from a waiting list for rental units that meets the requirements
      of the resident home-ownership plan.
1G.   Provide sufficient documentation to support that HUD had received 50 percent of
      the proceeds from initial unit sales as of June 2016. If the Condominium
      Association cannot do this, it should pay HUD half of the principal on the
      promissory notes payable to the Condominium Association for all unit sales less
      the amount the Condominium Association can support that it paid HUD for initial
      unit sales.
1H.   Implement adequate procedures and controls to ensure that HUD receives its full
      share of the proceeds from future initial unit sales.
1I.   Establish and maintain a reserve account for its share of the proceeds from initial
      unit sales to be used as required by the grant agreement.
1J.   Implement adequate procedures and controls to ensure that its share of the
      proceeds from initial unit sales is used in accordance with the grant agreement.
1K.   Verify the current household income for all owners to determine whether the
      owners are paying more than 35 percent of their households’ monthly adjusted
      gross income for mortgage payments and assessment fees. For any owners that
      are paying more than 35 percent of their households’ monthly adjusted gross
      income for mortgage payments and assessment fees, it should determine the
      amount the household overpaid and reimburse the household that amount.
1L.   Implement adequate procedures and controls to ensure that owners do not pay
      more than 35 percent of their households’ monthly adjusted gross income for
      mortgage payments and assessment fees.
1M.   Determine who has the right to ownership of the unit where the sole owner passed
      away, transfer ownership of the unit to that person, and require him or her to
      move into or sell the unit.
1N.   Implement adequate procedures and controls to ensure that the appropriate actions
      are taken when all of the owners of a unit have passed away.




                                        12
1O.   Require the two owners that did not maintain their unit at the project as their
      principal residence to move back into or sell their unit.
1P.   Implement adequate procedures and controls to ensure that owners maintain their
      units at the project as their principal residence or sell their units.
1Q.   Ensure that the unit that it is using as an office and meeting space is in a decent,
      safe, and sanitary condition and then rent the unit to a very low-, low-, or
      moderate-income household selected from a waiting list for rental units that meets
      the requirements of the resident home-ownership plan.
1R.   Implement adequate procedures and controls to ensure that the project’s units are
      used for rental or condominium housing unless otherwise approved by HUD.
1S.   Implement adequate procedures and controls to ensure that it submits the required
      reports to HUD to demonstrate continued compliance with the program.
We also recommend that the Director of HUD’s Multifamily Midwest Region
1T.   Ensure that appraisals are conducted of the seven units sold since May 2012 to
      determine the fair market value of the units at the time of sale. If any of the units
      sold for more than the fair market value, HUD should require the Condominium
      Association to (1) reduce the purchase price of the units to the fair market value
      by reducing the promissory notes payable to the Preservation Association and
      reimbursing the owners for overpayments on the downpayments and notes as
      appropriate and (2) release the promissory notes payable to HUD. If any of the
      units sold for less than the fair market value and the promissory notes payable to
      HUD do not reflect the difference between the fair market value of the units and
      the purchase price, HUD should require the Condominium Association to amend
      the promissory notes payable to HUD as appropriate. Further, for the three
      subsequent unit sales, HUD should require the Condominium Association to remit
      to the City any net proceeds that it should have paid to the City’s HOME
      investment trust fund.
1U.   Ensure that the Condominium Association’s board members and responsible staff
      of the Condominium Association’s management agent are provided training on
      HUD’s requirements and the grant agreement.
1V.   Make a preliminary determination as to whether the Condominium Association is
      in default of the grant agreement. If it is preliminarily determined that the
      Condominium Association is in default, HUD should provide the Condominium
      Association notice of the determination and propose corrective or remedial
      actions to address the default and prevent the Condominium Association from the
      possible repayment of the remaining $13,878,088 in program funds, which HUD
      disbursed for the project ($14,156,600 in program funds disbursed for the project
      – $278,512 in proceeds from initial unit sales the Condominium Association
      remitted to HUD).



                                        13
Scope and Methodology
We performed our onsite audit work from January through May 2016 at the project located from
1719 to 1937 North Larrabee Street, Chicago, IL, and Acorn Property Management, Ltd.’s office
located at 1819 West Grand Avenue, Chicago, IL. The audit covered the period May 1995
through November 2015 and was expanded as necessary.
To accomplish our objective, we reviewed

        Applicable laws, regulations at 24 CFR Part 248, and HUD’s files for the project and
         grant and use agreements with the Preservation Association.

        The project’s audited financial statements from 1998 through 2015, financial records,
         resident home-ownership plan, management agent agreement, and unit files.

        Acorn Property Management, Ltd.’s policies and procedures and organizational chart.

        Data in HUD’s Single Family Insurance System, Integrated Real Estate Management
         System, and Line of Credit Control System.
In addition, we interviewed Condominium Association members, an employee of Acorn
Property Management, Ltd., the attorney for the Condominium Association, and HUD staff.
As of November 2015, there were 61 units that were to be owned by Condominium Association
members and 8 units that were owned by the Preservation Association.15 We selected all 69 (61
+ 8) units for review.16
We reviewed all 69 of the project’s units to determine the owners of the units. We selected a
nonrepresentative sample of all nine initial unit sales that occurred after January 1, 2006, and
selected all seven subsequent unit sales associated with five units to determine whether (1) the
units were sold to owners in accordance with the grant agreement (all 14 (9 + 5) units), (2)
HUD’s interest in the units was appropriately valued (all 14 units), and (3) the City received its
full share of the proceeds from subsequent unit sales (5 units). We used a nonstatistical
nonrepresentative sample since we knew enough about the population to identify a relatively
small number of items of interest that were likely to be misstated or otherwise have high risk and
we were not projecting the results to the population that we did not review.




15
   Of the eight units owned by the Preservation Association, six were rental units, one was vacant, and one was used
by the Condominium Association as an office and meeting space.
16
   Although we selected all 69 units for review, not all of the reviews applied to the 69 units. For example, only 61
of the units were to be owned by Condominium Association members as of November 2015.



                                                          14
We also selected the Condominium Association’s fiscal years 1999 through 2015 payments to
HUD to determine whether HUD received its full share of the proceeds from initial unit sales.
During the review, it appeared that the Condominium Association may not have used its share of
the proceeds from initial unit sales in accordance with the grant agreement. As a result, we
decided to review whether the Condominium Association used its share of the proceeds from
initial unit sales in accordance with the grant agreement. However, the Condominium
Association could not provide sufficient documentation to support its share of the proceeds and
did not account for its share of the proceeds from initial unit sales separate from other funds.
Therefore, we did not select a sample or conduct a review to determine whether the
Condominium Association used its share of the proceeds in accordance with the grant agreement.
In addition, we reviewed all 61 units that were to be owned by Condominium Association
members as of November 2015 to determine whether (1) the Condominium Association and
management agent ensured that mortgage payments and assessment fees did not exceed 35
percent of the owner’s monthly adjusted gross income and (2) owners maintained their units as
their principal residence.
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 operations – Policies and procedures that management has
    implemented to reasonably ensure that a program meets its objectives.
   Reliability of financial reporting – Policies and procedures that management has
    implemented to reasonably ensure that valid and reliable data are obtained, maintained, and
    fairly disclosed in reports.
   Compliance with applicable laws and regulations – Policies and procedures that management
    has implemented to reasonably 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:

   The Condominium Association and management agent lacked adequate procedures and
    controls to ensure that the project was operated in accordance with HUD’s requirements and
    the grant agreement (finding).




                                                  16
Appendixes

Appendix A
                       Schedule of Funds To Be Put to Better Use
                          Recommendation Funds to be put
                              number         to better use 1/
                                  1V                $13,878,088

                                 Totals             $13,878,088



1/   Recommendations that funds be put to better use are estimates of amounts that could be
     used more efficiently if an Office of Inspector General (OIG) recommendation is
     implemented. These amounts include reductions in outlays, deobligation of funds,
     withdrawal of interest, costs not incurred by implementing recommended improvements,
     avoidance of unnecessary expenditures noted in preaward reviews, and any other savings
     that are specifically identified. In this instance, implementation of our recommendations
     will ensure that the Condominium Association does not have to repay the remaining
     nearly $13.9 million in program funds HUD disbursed for the project.




                                             17
Appendix B
             Auditee Comments and OIG’s Evaluation



Ref to OIG
Evaluation    Auditee Comments




Comment 1

Comment 2


Comment 3




Comment 4

Comment 4




Comment 5

Comment 5




                               18
Ref to OIG   Auditee Comments
Evaluation



Comment 5




Comment 6


Comment 7
Comment 8
Comment 7


Comment 2
Comment 2




Comment 9



Comment 2




                            19
Ref to OIG   Auditee Comments
Evaluation



Comment 2

Comment 10



Comment 11




Comment 12

Comment 12


Comment 13
Comment 13




                            20
Ref to OIG   Auditee Comments
Evaluation



Comment 13


Comment 13




Comment 14




Comment 15

Comment 16
Comment 15




Comment 17

Comment 18
Comment 18




                            21
Ref to OIG   Auditee Comments
Evaluation



Comment 18



Comment 4


Comment 4



Comment 2



Comment 19



Comment 6


Comment 7



Comment 7




                            22
Ref to OIG    Auditee Comments
Evaluation



Comment 20
Comment 2



Comment 11




Comment 13


Comment 15


Comments 15
  and 16


Comments 17



Comment 3



Comment 21
Comment 22




                             23
Ref to OIG   Auditee Comments
Evaluation



Comment 22




                            24
                         OIG Evaluation of Auditee Comments


Comment 1   The Condominium Association stated that it appeared that the Office of Inspector
            General (OIG) was more concerned with the design of the Low-Income Housing
            Preservation and Resident Homeownership Act of 1990 and HUD’s
            implementation of the Act rather than the Condominium Association’s
            compliance with program requirements. We disagree. Our objective was to
            determine whether the Condominium Association and management agent
            operated the project in accordance with HUD’s requirements and the grant
            agreement with the Preservation Association. We determined that the
            Condominium Association and management agent did not operate the project in
            accordance with HUD’s requirements and the grant agreement.
Comment 2   The Condominium Association stated that records were generally required to be
            maintained for only a 3 year period. The Condominium Association stated that
            HUD had not required or requested additional documentation to support the
            amount of proceeds due to HUD from initial membership sales.
            The historical records in question are generally needed to support the current
            circumstances. Regulations at 24 CFR 248.173(h) state that the entity that
            transfers ownership interests in or shares representing units to eligible households
            must return 50 percent of the proceeds to HUD for use under 24 CFR 248.173 and
            248.161, subject to the availability of appropriations. The entity must keep and
            make available to HUD all records necessary to calculate payments due to HUD.
            Article IV(j) of the grant agreement states that at the time of the sales of units to
            the initial owners, the Condominium Association must remit to HUD 50 percent
            of all proceeds from the unit sales. The Condominium Association must keep and
            make available to HUD all records necessary to accurately calculate the payments
            due to HUD. Without sufficient documentation to support the historical payments
            to HUD, the Condominium Association would not be able to sufficiently support
            that the recent amounts due to HUD were accurate.
Comment 3   The Condominium Association stated that it believed that it had at all times
            operated the project consistent in all material respects with the provisions of (1)
            the Low-Income Housing Preservation and Homeownership Act of 1990, (2)
            regulations at 24 CFR 248.173, (3) the resident home-ownership plan for the
            project, and (4) HUD’s grant and use agreements with the Preservation
            Association.
            As discussed in the report, the Preservation Association did not transfer
            ownership of the project’s units to the Condominium Association as required and
            still owned eight of the units as of July 2016. The Condominium Association and
            management agent did not determine the fair market value of units to support (1)
            that owners did not pay more than the fair market value for their units, (2) that
            HUD’s secured interest in the units was appropriately valued, and (3) the amount
            of net proceeds that should have been paid to the City’s HOME investment trust


                                              25
            fund from subsequent unit sales. Further, the Condominium Association and
            management agent could not provide sufficient documentation to support that (1)
            the payments to HUD for initial unit sales were accurate, (2) the Condominium
            Association used its share of the proceeds from initial unit sales in accordance
            with the grant agreement, and (3) housing was affordable for all members. In
            addition, the Condominium Association and management agent did not ensure
            compliance with other requirements of the grant agreement. In addition, the
            Director of HUD’s Multifamily Midwest Region stated that based on the results
            of our review, he believed that the Condominium Association was in default of its
            grant and use agreements with HUD.
Comment 4   The Condominium Association disagreed that the Preservation Association was
            required to transfer ownership of the project’s units to the Condominium
            Association and that the Condominium Association should have sold the units
            rather than the Preservation Association. There was no substantive reason for the
            distinction between the Condominium Association and the Preservation
            Association. The OIG mistakenly relied on one reference in the definitions
            section, article 1(a), of the grant agreement with the Preservation Association that
            states the Condominium Association will sell the units.
            The grant agreement with the Preservation Association states that the terms and
            provisions of the grant agreement will be applicable to the condominium entity to
            which ownership of the project is transferred and in turn sells the condominium
            units to the initial owners. Article I(a) of the grant agreement states that the
            Condominium Association will assume ownership of the project from the
            Preservation Association and sell condominium units to individual owners.
            Article XII(h) states that at the time of conversion of the project to condominium
            ownership, all grant funds will be transferred from the Preservation Association to
            the Condominium Association, which will assume all rights, title, interest, and
            obligations held by the Preservation Association in the property, the grant
            agreement, HUD’s use agreement with the Preservation Association, the resident
            home-ownership plan for the project, and any and all other property, real and
            personal, related to the conversion.
            Therefore, contrary to the grant agreement, the Preservation Association did not
            transfer ownership of the units to the Condominium Association. In addition, the
            audited financial statements for the project, which are also the audited financial
            statements for the Condominium Association, did not include the number of or
            account for the value of the units owned by the Preservation Association. As a
            result, neither HUD nor the Condominium Association members had a clear
            understanding of the financial position of the project.
Comment 5   Although the Condominium Association acknowledged that appraisals were not
            obtained for units sold to subsequent owners, it disagreed that units were not sold
            in accordance with the intent of the grant agreement. The Condominium
            Association stated that units were likely sold at prices below fair market value and



                                              26
            obtaining appraisals for the units would have (1) done nothing but add costs that
            would be have been borne by households of limited means and (2) not assured
            that prices were set in accordance with the grant agreement.
            Article IV(e) of the grant agreement states that at the time a unit is sold, the
            Condominium Association must calculate the fair market value of the unit. The
            unit purchase price must never exceed the unit value. Contrary to article IV(e) of
            the grant agreement, the Condominium Association and management agent did
            not determine the fair market value of nine units sold to initial owners after
            January 2006 and five units sold to subsequent owners as of November 2015.
            The fair market value was needed to support (1) that owners did not pay more
            than the fair market value for their units as required by article IV(e) of the grant
            agreement, (2) that HUD’s secured interest in the units was appropriately valued
            in accordance with regulations at 24 CFR 248.173(i)(3) and 248.173(j), and (3)
            the amount of net proceeds that should have been paid to the City’s HOME
            investment trust fund from the subsequent unit sales as required by regulations at
            24 CFR 249.173(l).
Comment 6   The Condominium Association stated that it was agreeable to obtaining appraisals
            for units that are sold in the future. The Condominium Association should work
            with HUD’s Chicago Multifamily Housing Hub to resolve recommendation 1D.
Comment 7   The Condominium Association disagreed that it was required to maintain a
            waiting list for the initial sale of units. It also stated that the Condominium
            Association does not maintain a waiting list for rental units since it would sell
            rather than rent any available units and disagreed that rental units vacated by
            current households must be rented rather than sold.
            We did not state that the Condominium Association was required to maintain a
            waiting list for the initial sale of units.
            Section VI.A of the resident home-ownership plan states any rental units vacated
            by current households, either during the conversion period or after the conversion
            to home ownership, must be marketed and households must be selected in
            accordance with the affirmative fair housing marketing and tenant selection plan
            in tab 15 of the resident home-ownership plan. The marketing and tenant
            selection plan in tab 15 states that the Condominium Association will market units
            using a waiting list and lease units to very low-, low-, and moderate-income
            households as defined in the resident home-ownership plan.
            As the resident home-ownership plan states, the Condominium Association was
            required to maintain a waiting list for rental units that become vacant and then
            rent the vacant units to households appropriately selected from the waiting list.
            However, we would not have taken issue with the six units if the households (1)
            had been appropriately selected from a waiting list for rental units that met the
            requirements of the resident home-ownership plan and (2) decided to purchase the



                                              27
              units upon moving into the units, since the households could have purchased the
              units immediately after moving into the units.
              Therefore, we stated that the Condominium Association could not provide
              sufficient documentation to support that it appropriately selected six of the nine
              households, for units that were sold to initial owners, from a waiting list. As of
              July 2016, the Condominium Association did not maintain a waiting list for rental
              units that met the requirements of the resident home-ownership plan.
Comment 8     The Condominium Association stated that complete records for the six units that
              it could not provide sufficient documentation to support that it appropriately
              selected households from a waiting list may not be available since the initial sales
              occurred almost 20 years ago. However, the initial sales of the six units occurred
              from May 2007 through June 2013, with four of the six units being sold since
              May 2012.
Comment 9     The Condominium Association stated that it does not have access to historical
              documentation related to initial sales. In the future, the Condominium
              Association will submit copies of checks and closing statements to HUD to
              support the amount members pay for their units. The Condominium Association
              requested guidance from HUD for any additional documentation it may require to
              support the amount of proceeds due to HUD from initial membership sales.
              The Condominium Association should work with HUD’s Chicago Multifamily
              Housing Hub to resolve recommendations 1G and 1H as applicable.
Comment 10 The Condominium Association stated that the OIG had not provided the
           Condominium Association the units that it had identified issues with regarding
           amounts calculated as due to HUD. The Condominium Association could not
           provide sufficient documentation to support that the amount due to HUD was
           accurate for any of the units since (1) the Condominium Association’s annual
           calculations of HUD’s share of the proceeds from initial unit sales were based on
           estimates rather than actual amounts collected, (2) accounting records were not
           available before January 2006, and (3) the Condominium Association’s members’
           total monthly payments were recorded together rather than being separated into
           assessment fees and mortgage payments.
Comment 11 The Condominium Association implied that the only eligible use of its share of
           the proceeds from initial sales was to provide loans to owners who demonstrate
           short-term inability to make monthly occupancy payments due to the loss of
           income resulting from medical or other emergencies. The Condominium
           Association stated that (1) since no Condominium Association members have
           requested a loan, no documentation exists to provide for support; (2) all of the
           Condominium Association’s funds are maintained in its general reserve accounts
           to be used in accordance with the grant agreement; and (3) the Act, regulations,
           and grant agreement did not require the Condominium Association to place its
           share of the proceeds into a separate account.


                                                28
              Article IV(k) of the grant agreement states that the portion of the proceeds from
              the initial sale of the units that was not paid to HUD, along with interest paid by
              the owner or the debt if the owner receives financing from the Condominium
              Association, must be used to fund a reserve, the purposes of which will be to (1)
              provide loans to owners who demonstrate short-term inability to make monthly
              occupancy payments due to the loss of income resulting from medical or other
              emergencies, (2) ensure that the Condominium Association can repurchase units
              for not less than the owner’s initial investment if the owner is unable to secure a
              qualified buyer, (3) provide financing for prospective purchasers of low- or
              moderate-income means, and (4) fund a replacement reserve for expenses other
              than usual or customary operating expenses. The property manager for the
              Condominium Association’s management agent said that the specific use of the
              Condominium Association’s share of the proceeds could not be determined since
              the Condominium Association did not account for its share of the proceeds
              separate from other funds and the proceeds could have been used for any expense
              paid from the Condominium Association’s general operating account. Therefore,
              the Condominium Association could not provide sufficient documentation to
              support that it used its share of the proceeds in accordance with article IV(k) of
              the grant agreement. We recommended that the Condominium Association
              establish and maintain a reserve account for its share of the proceeds. The reserve
              account could be a separate account from the Condominium Association’s general
              operating account or a separate account within the Condominium Association’s
              accounting system.
Comment 12 The Condominium Association stated that to the best of its and the management
           agent’s knowledge, units have not been sold to subsequent owners at prices that
           would have resulted in a payment to the City. Contrary to article IV(e) of the
           grant agreement, the Condominium Association and management agent did not
           determine the fair market value of the units when they were sold. The fair market
           value was needed to support the amount of net proceeds that should have been
           paid to the City’s HOME investment trust fund from the subsequent unit sales as
           required by regulations at 24 CFR 249.173(l).
Comment 13 The Condominium Association stated that it disagrees that it did not ensure that
           housing was affordable for all owners and that it was required to ensure that
           ownership fees did not exceed 35 percent of the owners’ monthly adjusted gross
           incomes other than upon unit sales. Regulations at 24 CFR 248.173(g)(2) state
           that prospective debt service payments, occupancy charges, and utilities payable
           by owners must not exceed 35 percent of the monthly adjusted gross income of
           the owners.
              Regulations at 24 CFR 248.173(g)(2) do not limit the determination that debt
              service payments, occupancy charges, and utilities payable by owners must not
              exceed 35 percent of the monthly adjusted gross income to only at the time of unit
              sales. Paragraph 12 of the use agreement states that monthly expenses, including
              principal, interest, utility costs, taxes, property insurance, and home-ownership


                                               29
              fees, for all owners must not exceed 35 percent of the owner’s monthly adjusted
              gross income. Further, paragraph 4.a. of the use agreement states that during the
              conversion period and for as long as any unit in the project continues to be
              operated as rental housing after conversion, the Condominium Association must,
              to the extent practicable, maintain 33, 26, and 41 percent of the rental units in the
              project as affordable to very low-income households, low-income households,
              and moderate-income households, respectively. Paragraph 10.b. states that the
              Condominium Association to the extent practicable, must sell units at the project
              to the same proportion of very low-, low-, and moderate-income households as
              indicated in the resident income profile in paragraph 4.a. of the use agreement.
              Therefore, contrary to paragraph 12 of the use agreement, the Condominium
              Association and management agent did not ensure that mortgage payments and
              assessment fees did not exceed 35 percent of the owners’ monthly adjusted gross
              income other than upon unit sales. Further, the Condominium Association would
              not be able to support that it sold units to the same proportion of very low-, low-
              and moderate income households shown in the resident income profile in
              paragraph 4.a. and required by paragraph 10.b. of the use agreement. The
              Condominium Association should work with HUD’s Chicago Multifamily
              Housing Hub to resolve recommendations 1K and 1L as applicable.
Comment 14 The Condominium Association stated that it disagrees that denying ownership
           opportunities to households if the monthly assessment fees would exceed 30
           percent of the household’s monthly adjusted gross income was contrary to the
           resident home-ownership plan.
              Section IV.A. of the resident home-ownership plan states that prices and
              financing terms available from the Condominium Association will be established
              so that an initial homeowner’s expenses will not exceed 35 percent of the
              homeowner’s adjusted monthly income. Contrary to the resident home-ownership
              plan, the Condominium Association would not consider an applicant for the initial
              sale of a unit if the monthly assessment fees would exceed 30 percent of the
              household’s monthly adjusted gross income. Therefore, units would not be
              available to some very-low income households where the monthly assessment
              fees were from 30 to 35 percent of the households’ monthly adjusted gross
              income.
Comment 15 The Condominium Association stated that it has made an effort to enforce and it
           believed that owners have complied with the principal residency requirements.
           Further, the issues regarding the unit where the sole owner of record had passed
           away and the unit where the owners were attempting to sell their unit to the
           Condominium Association were in transition and would soon be resolved.
              Regulations at 24 CFR 248.173(g)(4) and article IV(i) of the grant agreement
              require initial owners to occupy their unit for at least the initial 15 years of
              ownership. The sole owner of record of a unit as of July 2016 passed away in
              December 2010 and two owners moved from their unit in early 2015. The


                                                 30
              Condominium Association should work with HUD’s Chicago Multifamily
              Housing Hub to resolve recommendations 1M, 1N, 1O, and 1P as applicable.
Comment 16 The Condominium Association stated that the OIG took issue with a vacant unit
           due to an owner’s illness. We did not include, in the audit report, a vacant unit
           due to an owner’s illness.
Comment 17 The Condominium Association stated that it had disclosed its use of a unit as an
           office and meeting space to HUD in annual reports over many years. Further, the
           Condominium Association stated that it would reconsider its use of the unit as an
           office and meeting space upon HUD’s request.
              Contrary to paragraph 3 of the use agreement, the Condominium Association used
              a unit as an office and meeting space. Further, the Condominium Association did
              not obtain approval from HUD to use the unit for purposes other than rental or
              condominium housing. The Condominium Association’s audited financial
              statements did not include that the unit was being used as an office and meeting
              space by the Condominium Association. Further, contrary to article VIII(d) of the
              grant agreement, the Condominium Association did not submit reports to HUD to
              demonstrate continued compliance with the program. The Condominium
              Association should work with HUD’s Chicago Multifamily Housing Hub to
              resolve recommendations 1Q and 1R as applicable.
Comment 18 The Condominium Association stated that to the best of its knowledge it had
           submitted all reports required under the grant agreement to HUD, and that it
           believed that it has fulfilled its reporting requirements. Further, the
           Condominium Association stated that it would work with HUD if HUD requires
           additional reporting.
              Article VIII(d) of the grant agreement states that the Preservation Association or
              Condominium Association must submit reports to HUD to demonstrate continued
              compliance with the requirements of the program. The areas of the resident
              home-ownership plan that currently require reports include but are not limited to
              (1) semiannual reports on vacancies, (2) semiannual reports or surveys of
              nonpurchasing tenants, (3) monthly reports on the status of resales, (4) monthly
              reports on the status of sales activity until all units have been initially sold, and (5)
              reports on changes in closing costs as needed. The submission of reports was not
              limited to the four-year term of the grant agreement. Therefore, contrary to article
              VIII(d) of the grant agreement, the Condominium Association did not submit
              reports to HUD to demonstrate continued compliance with the program. The
              Condominium Association should work with HUD’s Chicago Multifamily
              Housing Hub to resolve recommendation 1S.
Comment 19 The Condominium Association stated that it welcomes a representative of HUD at
           the closings for unit sales if HUD can provide a single point of contact for
           scheduling. The Condominium Association should work with HUD’s Chicago
           Multifamily Housing Hub to resolve recommendation 1C.


                                                  31
Comment 20 The Condominium Association stated that it had remitted to HUD all proceeds
           from initial unit sales due to HUD. Contrary to regulations at 24 CFR 248.173(h)
           and article IV(j) of the grant agreement, the Condominium Association could not
           provide sufficient documentation to support that the amount due to HUD was
           accurate.
Comment 21 The Condominium Association stated that it fixed reporting and accounting
           weaknesses as it was made aware of the weaknesses. The Condominium
           Association did not identify which reporting and accounting weaknesses that it
           fixed and did not provide documentation to support that it had addressed any
           weaknesses. The Condominium Association should provide HUD’s Chicago
           Multifamily Housing Hub documentation to support which reporting and
           accounting weaknesses that it fixed.
Comment 22 The Condominium Association stated that it will work with HUD to ensure that
           HUD receives information necessary to assure that the project continues to
           succeed as an example of resident home-ownership for low- and moderate-income
           households and it looks forward to working with HUD. The Condominium
           Association should work with HUD’s Chicago Multifamily Housing Hub to
           address the recommendations cited in this audit report.




                                              32
Appendix C
                                    Applicable Requirements
Section 226(b)(5)(a)(i) of the Low-Income Housing Preservation and Resident Homeownership
Act of 1990 states that a homeowner under a home-ownership program may transfer the
homeowner’s ownership interest in or membership representing the unit except that a program
may establish restrictions on the resale of units under the program.
Regulations at 24 CFR 248.173(g)(4) state that HUD must require that the form of home
ownership impose the appropriate conditions to ensure that each initial owner occupies the unit
the owner acquires for at least the initial 15 years of ownership, unless the resident council
determines that the initial owner is required to move outside the market area due to a change in
employment or an emergency situation. Section 248.173(h) states that the entity that transfers
ownership interests in or shares representing units to eligible households must return 50 percent
of the proceeds from the initial sale to HUD for use under 24 CFR 248.157 and 248.161, subject
to the availability of appropriations. The entity must keep and make available to HUD all
records necessary to accurately calculate payments due to HUD.
Regulations at 24 CFR 248.173(i)(3) state that at closing, the initial homeowner must execute a
nonrecourse promissory note for a term of 20 years equal to the difference between the fair
market value of the unit and the purchase price, payable to HUD, together with a mortgage
securing the obligation of the note. Section 248.173(i)(3)(i) states that with respect to a sale by
an initial homeowner, the note must require payment upon sale by the initial homeowner to the
extent that proceeds of the sale remain after paying off other outstanding debt incurred in
connection with the purchase of the property; paying any other amounts due in connection with
the sale, including closing costs and transfer taxes; and paying the household the amount of its
equity in the property, computed in accordance with 24 CFR 248.173(k). Section
248.173(i)(3)(ii) states that with respect to a sale by an initial homeowner during the first 6 years
after acquisition, the household may retain only the amount computed under 24 CFR 248.173(k).
Any excess is distributed as provided in 24 CFR 248.173(l). Section 248.173(i)(3)(iii) states that
with respect to a sale by an initial homeowner 6 to 20 years after acquisition, the amount payable
under the note must be reduced by 1/168th of the original principal amount of the note for each
full month of ownership by the household after the end of the sixth year. The homeowner may
retain all other proceeds of the sale.
Regulations at 24 CFR 248.173(j) state that when a subsequent purchaser during the 20-year
period, measured by the term of the initial promissory note, purchases the property for less than
the then current fair market value, the purchaser must also execute at closing such a promissory
note and mortgage for the discount. The term of the promissory note must be the period
remaining in the original 20-year period. Section 248.173(k) states that the amount of equity an
initial homeowner has in the property is determined by computing the sum of (1) the
contribution to equity paid by the household, if any, including any downpayment and any
amount paid toward principal on a mortgage loan during the period of ownership; (2) the value
of any improvements installed at the expense of the household during the household’s tenure as
owner, as determined by the resident council based on evidence of amounts spent on the



                                                  33
improvements, including the cost of material and labor; and (3) the appreciated value,
determined by applying the consumer price index against the contribution to equity under 24
CFR 248.173(k)(1) and (2), excluding the value of any sweat equity or volunteer labor used to
make improvements to the unit. Section 248.173(l) states that any net sales proceeds that may
not be retained by the homeowner under the program approved under 24 CFR 248.173 must be
paid to the HOME investment trust fund for the unit of general local government in which the
project is located.
In HUD’s grant agreement with the Preservation Association, dated May 10, 1995, the
Preservation Association and Condominium Association agreed to carry out grant activities
under the grant agreement in compliance with the regulations, the terms of the resident home-
ownership plan for the project, and any other applicable laws and regulations. Article I(a) of the
grant agreement states that the Condominium Association will assume ownership of the project
from the Preservation Association and sell condominium units to individual owners.
Article IV(e) of the grant agreement states that at the time a unit is sold, the Condominium
Association must calculate the fair market value of the unit. The unit purchase price must never
exceed the unit value. Article IV(h) states that if a subsequent owner purchases a unit for less
than the then current fair market value, as determined by the Condominium Association, that
subsequent owner must execute a promissory note meeting the requirements of 24 CFR
248.173(j) for the amount of the difference between the purchase price and the fair market value.
Article IV(i) states that the Condominium Association must ensure that all initial owners use the
project as their principal residence. Initial owners must agree to occupy the unit for at least the
initial 15 years of ownership, unless the Condominium Association determines that the owner is
required to move outside the market area where the project is located due to a change in
employment or an emergency situation.
Article IV(j) of the grant agreement states that at the time of the sales of units to the initial
owners, the Condominium Association must remit to HUD 50 percent of all proceeds from the
unit sales. If cash is received from the initial owner because the owner receives a loan for the
purchase price, 50 percent of the cash received must be remitted to HUD. If the Condominium
Association provides the mortgage loan to the owner, the Condominium Association must remit
to HUD 50 percent of the principal paid by the owner as it is paid to the Condominium
Association. If the initial owner transfers the unit to a subsequent purchaser who assumes the
initial owner’s remaining debt, 50 percent of the principal amount collected will continue to be
remitted to HUD. Article IV(k) states that the portion of the proceeds from the sale of the units
that is not paid to HUD, along with interest paid by the owner on the debt if the owner receives
financing from the Condominium Association, must be used to fund a reserve, the purposes of
which will be to (1) provide loans to owners who demonstrate short-term inability to make
monthly occupancy payments due to loss of income resulting from medical or other emergencies,
(2) ensure that the Condominium Association can repurchase units for not less than the owner’s
initial investment if the owner is unable to secure a qualified buyer, (3) provide financing for
prospective purchasers of low- or moderate-income means, and (4) fund a replacement reserve
for expenses other than usual or customary operating expenses. HUD may approve additional
uses for the funds. The Condominium Association must keep and make available to HUD all
records necessary to accurately calculate the payments due to HUD.


                                                 34
Article IV(n) of the grant agreement states that if the initial owner sells the unit within the first 6
years after acquisition, the owner may retain only amounts as allowed by 24 CFR 248.173(k). If
the initial owner sells the unit 6 to 20 years after acquisition, the owner may retain all proceeds
in excess of amounts payable on the promissory note to HUD allowed by 24 CFR 248.173(i)(3)
and as provided by the formula specified in the resident home-ownership plan for the project.
Article VIII(b) of the grant agreement states that the Condominium Association must submit an
annual audit to HUD. Article VIII(d) states that the Preservation Association or Condominium
Association must submit reports to HUD to demonstrate continued compliance with the
requirements of the program. The areas of the resident home-ownership plan that currently
require reports include but are not limited to (1) semiannual reports on vacancies, (2) semiannual
reports or surveys of nonpurchasing tenants, (3) monthly reports on the status of resales, (4)
monthly reports on the status of sales activity until all units have been initially sold, and (5)
reports on changes in closing costs as needed.
Article X of the grant agreement states that a default under the grant agreement will consist of
any (1) material noncompliance with the Act; the regulations; the resident home-ownership plan;
or any other Federal, State, or local law as determined by HUD or (2) other material breach of
the grant agreement. If HUD preliminary determines that the Preservation Association or
Condominium Association is in default, HUD will give the Preservation Association or
Condominium Association notice of a determination of default and the corrective or remedial
action proposed by HUD. The Preservation Association or Condominium Association must have
the opportunity to demonstrate, within the time prescribed by HUD, that it is not in default or
that the proposed corrective or remedial action is inappropriate before HUD implements the
corrective or remedial action. When HUD determines that corrective or remedial actions by the
Preservation Association or Condominium Association have not been undertaken as instructed or
will not be effective to correct the default and prevent further default, HUD may take the
following additional corrective and remedial actions under the agreement: (1) demand
repayment of all program funds disbursed, including funds held in escrow accounts funded by
the grant agreement; (2) initiate litigation or other legal proceedings designed to require
compliance with the Act, the regulations, the resident home-ownership plan, the grant agreement,
or any other authorities; (3) require the Preservation Association or Condominium Association to
transfer all of its rights and interest in the project to HUD; or (4) take any other remedial action
legally available. No delay or omission by HUD in exercising any right or remedy under the
grant agreement will impair HUD’s ability to exercise such right or remedy or constitute a
waiver of or consent in any default by the Preservation Association or Condominium
Association.
Article XII(a) of the grant agreement states that the Preservation Association or Condominium
Association, in performing the terms, provisions, and requirements of the grant agreement, must
also follow the provisions and terms of HUD’s use agreement with the Preservation Association
and the resident home-ownership plan for the project, which are incorporated into the grant
agreement. Article XII(h) states that at the time of conversion of the project to condominium
ownership, all grant funds will be transferred from the Preservation Association to the
Condominium Association, which will assume all rights, title, interest, and obligations held by
the Preservation Association in the property, the grant agreement, HUD’s use agreement with the


                                                   35
Preservation Association, the resident home-ownership plan for the project, and any and all other
property, real and personal, related to the conversion.
Paragraph 2 of HUD’s use agreement with the Preservation Association, dated May 10, 1995,
states that the use agreement will remain in effect until each of the following four events has
occurred but in no event for longer than the remaining useful life of the project: (1) there are no
longer any units of the project used as rental housing, (2) all initial owners have sold their units,
(3) all of the owners’ promissory notes to HUD have been paid in full, and (4) all terms of the
resident home-ownership plan have been performed. The Condominium Association may
petition HUD to determine that the remaining useful life of the project has expired not less than
50 years from the date of approval of the plan of action for the project. Paragraph 3 states that
the project must be used solely as rental or condominium housing, unless otherwise approved by
HUD, for the full term of the use agreement.
Paragraph 4.a. of the use agreement states that during the conversion period and for as long as
any unit in the project continues to be operated as rental housing after conversion, the
Condominium Association must, to the extent practicable, maintain 33, 26, and 41 percent of the
rental units in the project as affordable to very low-income households, low-income households,
and moderate-income households, respectively. Paragraph 10.b. states that the Condominium
Association, to the extent practicable, must sell units at the project to the same proportion of very
low-, low-, and moderate-income households as indicated in the resident income profile in
paragraph 4.a. of the use agreement. Paragraph 12 states that monthly expenses, including
principal, interest, utility costs, taxes, property insurance, and home-ownership fees, for all
owners must not exceed 35 percent of the owner’s monthly adjusted gross income. Paragraph 18
states that the Condominium Association must maintain the project in a decent, safe, and sanitary
condition.
Section I of the resident home-ownership plan for the project, dated January 11, 1995, states that
the Preservation Association submitted the resident home-ownership plan of action as an
innovative model for the implementation of the resident home-ownership objectives of the Act.
Section IV.A. states that prices and financing terms available from the Condominium
Association will be established so that an initial homeowner’s expenses will not exceed 35
percent of the homeowner’s adjusted monthly income. Estimated monthly home-ownership fees
and an estimate of utility costs, taxes, and insurance for each unit size based on the financing
available from the Condominium Association are included in the monthly cost schedule in tab 10
of the resident home-ownership plan. Any rental units vacated by current households, either
during the conversion period or after the conversion to home ownership, must be marketed and
households must be selected in accordance with the affirmative fair housing marketing and
tenant selection plan in tab 15 of the resident home-ownership plan. The schedule of estimated
monthly homeowner assessments and expenses in tab 10 states that monthly housing expenses
include homeowners’ assessments and debt service. Utilities, taxes, and insurance are included
in the homeowners’ assessments. The marketing and tenant selection plan in tab 15 states that
the Condominium Association will market units using a waiting list and lease units to very low-,
low-, and moderate-income households as defined in the resident home-ownership plan.




                                                  36
Appendix D
                              Schedule of Deficiencies
  Unit       Unit    Preservation
reference   owner-   Association Initial unit Subsequent        Owners’   Principal
 number      ship        note          sales       unit sales   income    residence
     1                    X                                        X
     2                    X                                        X
     3                    X                                        X
     4                    X                                        X
     5                    X              X                         X
     6                    X                            X           X
     7                    X              X                         X
     8                    X                                        X
     9                    X                                        X
    10                    X                                        X
    11        X
    12                    X             X                         X
    13        X
    14                    X                                       X
    15        X
    16                                                            X
    17                    X             X                         X
    18                    X                                       X
    19                    X                                       X
    20                    X                                       X           X
    21                    X                                       X
    22                    X                                       X
    23        X                                       X
    24                    X                                       X
    25                    X                                       X
    26                    X                                       X
    27                    X                                       X
    28                    X                                       X
    29        X
    30                    X                                       X
    31                    X                                       X
    32                    X                                       X
    33                    X             X                         X
    34                    X                                       X
    35                    X                                       X
    36                    X                                       X



                                         37
   Unit           Unit        Preservation
 reference       owner-       Association        Initial unit     Subsequent        Owners’       Principal
  number          ship            note              sales          unit sales       income        residence
     37                            X                                                   X
     38                            X                                                   X
     39                            X                                                   X
     40                            X                                                   X
     41                            X                                                   X
     42                            X                                                   X
     43                            X                                                   X
     44                            X                                                   X
     45                            X                                    X              X
     46                            X                                                   X
     47                            X                                                   X               X
     48             X
     49                              X                                                  X
     50                              X                                                  X
     51             X
     52                              X                                                  X
     53                              X                                                  X
     54                              X                                                  X
     55                              X                                                  X
     56                              X                                                  X
     57                              X                 X                                X
     58                              X                                                  X
     59                              X                                                  X
     60                              X                                                  X
     61                              X                                                  X
     62                              X                                                  X
     63                              X                                  X               X
     64                              X                                                  X
     65                              X                 X                                X
     66             X
     67                              X                                  X               X
     68                              X                 X                                X
     69                              X                 X                                X
   Totals           8               60                 9                5              61              2
* The blue fields represent when the review did not apply. During the audit, we provided the Condominium
  Association schedules that detailed the results of our reviews.




                                                       38