oversight

Park View Care Center, Fort Worth, TX, Did Not Always Comply With Its Regulatory Agreement and HUD Requirements

Published by the Department of Housing and Urban Development, Office of Inspector General on 2016-09-29.

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

                 Park View Care Center,
                     Fort Worth, TX
                       Section 232 Loan Program




Office of Audit, Region 6           Audit Report Number: 2016-FW-1009
Fort Worth, TX                                      September 29, 2016
To:            Roger Lewis, Director, Office of Residential Care Facilities

               //signed//
From:          Tracey Carney, Acting Regional Inspector General for Audit, 6AGA
Subject:       Park View Care Center, Fort Worth, TX, Did Not Always Comply With Its
               Regulatory Agreement and HUD Requirements




Attached is the U.S. Department of Housing and Urban Development (HUD), Office of Inspector
General’s (OIG) final results of our review of Park View Care Center’s compliance with HUD
requirements.
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
817-978-9309.
                   Audit Report Number: 2016-FW-1009
                   Date: September 29, 2016

                   Park View Care Center, Fort Worth, TX, Did Not Always Comply With Its
                   Regulatory Agreement and HUD Requirements




Highlights

What We Audited and Why
We audited Park View Care Center’s owner based on a referral from the U.S. Department of
Housing and Urban Development’s (HUD) Departmental Enforcement Center. Our objective
was to determine whether the property owner complied with the owner’s regulatory agreement
and HUD requirements for the Section 232 program.

What We Found
Park View’s owner did not comply with all the terms of its regulatory agreement and HUD
requirements. Specifically, the owner withdrew ineligible distributions and charged the property
for fees without a written contract or HUD approval of the fees. This condition occurred because
the owner disregarded or misunderstood its regulatory agreement and HUD requirements. As a
result, Park View’s owner received $220,282 in an ineligible distribution and fee
reimbursements.

What We Recommend
We recommend that the Director, Office of Residential Care Facilities, require that Park View’s
owner repay $220,282 for ineligible distributions and fees.
Table of Contents
Background and Objective......................................................................................3

Results of Audit ........................................................................................................4
         Finding 1: Park View’s Owner Did Not Comply With Its Regulatory Agreement
         and HUD Requirements ................................................................................................... 4

Scope and Methodology ...........................................................................................7

Internal Controls ......................................................................................................8

Appendixes ................................................................................................................9
         A. Schedule of Questioned Costs .................................................................................... 9

         B. Auditee Comments and OIG’s Evaluation ............................................................. 10




                                                                2
Background and Objective
Park View Care Center, located at 3301 View Street, Fort Worth, TX, is a 179-bed facility
licensed by the Texas Department of Aging and Disability Services. Park View’s owner is 3301
View Street LLC. 1 It is a single-member LLC located at 2071 Flatbush Avenue, Suite 22,
Brooklyn, NY. Park View’s owner organized on November 30, 2009, to purchase Park View, a
46-year-old facility, with an $8.1 million non-Federal Housing Administration (FHA)-insured
loan. On March 16, 2011, the owner 2 refinanced the mortgage with KeyCorp Real Estate Capital
Market for $8.56 million under section 232(f) of the National Housing Act as amended. The
Section 232 program is a FHA mortgage insurance program that insures HUD-approved lenders
against financial loss from mortgage defaults. HUD administers and regulates the Section 232
program.
Section 232 mortgage insurance is available on mortgages that finance residential healthcare
facilities, such as nursing homes, assisted living facilities, and board and care facilities. Eligible
mortgages can be for the purchase, refinance, new construction, or substantial rehabilitation—or
a combination of these. HUD’s Office of Healthcare Programs, specifically the Office of
Residential Care Facilities within Office of Healthcare Programs, has responsibility for
administering the Section 232 mortgage insurance program.
The 232 program requires participants to follow certain HUD requirements, including entering
into a regulatory agreement with HUD. One of the regulatory agreement stipulations is that the
owner calculates surplus cash as of June 30 and December 31 and may take the surplus cash as a
distribution up to the amount of the calculation at the established times of the properties fiscal
year. Distributions outside these parameters are a violation of the regulatory agreement.
Park View SNF3 LLC leased and operated the nursing home until October 1, 2014. At that time,
because of changes to Medicaid payments in the State of Texas, Jack County Hospital District
began leasing Park View. These changes require that a Texas governmental entity be the
operator for Medicaid payment reimbursement purposes. Jack County Hospital is the current
operator of the property.
Our objective was to determine whether the property owner complied with the regulatory agreement
and HUD requirements for the Section 232 program.




1
    LLC is defined as limited liability company.
2
    The owner executed the regulatory agreement on March 11, 2011.
3
    SNF is defined as skilled nursing facility.



                                                       3
Results of Audit

Finding 1: Park View’s Owner Did Not Comply With Its
Regulatory Agreement and HUD Requirements
Park View’s owner did not comply with the terms of its regulatory agreement and HUD
requirements. Specifically, the owner took an ineligible distribution and charged the property for
fees without a written contract or HUD approval of the fees. This condition occurred because
Park View’s owner disregarded or misunderstood its regulatory agreement and HUD
requirements. As a result, the owner received $220,282 in an ineligible distribution and fee
reimbursements.

Ineligible Distribution
In March 2011, HUD insured the refinanced loan on Park View and executed a regulatory
agreement with the owner. Park View’s owner took an ineligible $178,900 distribution on April
5, 2011, 20 days after closing and before allowable distribution dates of June 30 and December
31. Park View’s bank balance on April 5, 2011, was $947. On that day, four identity-of-interest
entities 4 advanced $135,200 to Park View resulting in a $136,147 bank balance. According to
the owner’s accountant, the $135,200 was for positive equity and cash flow for Park View.
However, on the day of the $135,200 advance, the owner distributed $178,900 to a different
identity-of-interest entity, resulting in a negative bank balance. To correct the negative balance,
on April 5, 2011, the owner deposited $42,800 into the account from one of the identity-of-
interest entities that contributed a portion of the $135,200. The accountant stated that the
$42,800 deposit should not be considered project funds because those funds came from another
entity. On July 1, 2011, Park View’s owner reimbursed the identity-of-interest entity for the
$42,800 it advanced to Park View when it took its allowed owner’s surplus cash distribution.
See figure 1 for the April 5, 2011, bank account transactions.




4
    Identity-of-interest entities 200 SW 25th Ave LLC (Palo Pinto Nursing Home) provided $37,100, 4200 Shepard
    Lane LLC (Balch Springs Nursing Home) provided $35,100, 424 N Tarpley Road LLC (Bay Oaks Health Care
    Center) provided $21,200, and 6621 Dan Dancigier Road LLC (Wedgewood Nursing Home) provided $41,800
    for a total of $135,200.



                                                        4
Figure 1 Account Transactions




The regulatory agreement stated that all distributions would be made only after the end of the
semiannual or annual fiscal period and after the calculation of surplus cash. 5 The owner
disregarded its regulatory agreement’s surplus cash distribution requirement. As a result, the
owner gave the ineligible $178,900 distribution to an identity-of-interest entity on April 5, 2011,
20 days after closing and before allowable surplus cash distribution dates of June 30 and
December 31, 2011.

Fees Paid With No Written Agreement or HUD Approval
Park View’s owner paid an identity-of-interest company $41,382 in ineligible fees from June 27,
2013, through December 31, 2015 to make the mortgage payments. The owner did not have an
agreement with the identity-of-interest company or obtain the required HUD approval. HUD
regulations required agreements to be in writing. 6 It also required HUD approval of fees. 7
According to Park View’s owner, it did not execute an agreement as required by HUD because it
did not believe it had to put the agreement in writing since it was an identity-of-interest
arrangement and all parties understood what was required of them. Specifically, it makes the
mortgage payments. Because of its incorrect understanding of requirements, the owner paid an
identity-of-interest entity $41,382 8 in ineligible fees.

Conclusion
Park View’s owner did not comply with all of the terms of the regulatory agreement and HUD
requirements because the owner disregarded or misunderstood the requirements. As a result, it
withdrew $178,900 in ineligible distributions and charged $41,382 for fees without a written
contract or HUD approval.




5
    Regulatory agreement (form HUD-92466), section 6(e)(1)
6
    HUD Handbook 4370.2, REV-1, paragraph 2-13(C)
7
    HUD Handbook 4232.1, paragraph 8-7(A)(5)
8
    Park View’s owner paid $1,310 monthly to an identity-of-interest entity for 27 months. In November 2015, the
    fee amount increased to $3,006 (($1,310*27) + ($3,006 * 2) = $41,382).



                                                        5
Recommendations
We recommend that the Director, Office of Residential Care Facilities, require the owner to

       1A.    Develop policies and procedures to ensure compliance with the regulatory
              agreement and HUD requirements.

       1B.    Repay Park View from non-project funds $178,900 for ineligible distributions.

       1C.    Repay Park View from non-project funds $41,382 for ineligible fees.




                                                6
Scope and Methodology
We conducted the audit of Park View in Fort Worth, TX, from January through July 2016. The
audit scope generally covered March 11, 2011, through December 31, 2015.
To accomplish our objective, we
   •   Reviewed owner and operator regulatory agreements;
   •   Reviewed relevant regulations and program guidance;
   •   Reviewed background information, including news articles and HUD reports;
   •   Reviewed Park View’s owner’s policies and procedures;
   •   Reviewed audited financial statements for years 2011 through 2015;
   •   Reviewed accounting records;
   •   Reviewed Park View and Jack County leases; and
   •   Interviewed 3301 View Street LLC staff, the accountants for 3301 View Street LLC, and
       staff of Jack County Hospital and its oversight entity.
We reviewed 100 percent of payments totaling $1,465,582 for the surplus cash payments and
fees paid to an identity-of-interest to make the mortgage payments.
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.




                                                7
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:

•   Compliance with the Section 232 program and HUD handbook requirements.
•   Compliance with regulatory agreement requirements.
•   Policies and procedures to implement regulatory agreement requirements.
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:

•   Park View owners did not follow applicable regulatory agreement or HUD handbook
    requirements regarding surplus cash distributions and management agreements (finding).




                                                  8
Appendixes

Appendix A


                             Schedule of Questioned Costs
                            Recommendation
                                               Ineligible 1/
                                number
                                    1B            $178,900
                                    1C               41,382

                                  Total             220,282



1/   Ineligible costs are costs charged to a HUD-financed or HUD-insured program or activity
     that the auditor believes are not allowable by law; contract; or Federal, State, or local
     policies or regulations.




                                             9
Appendix B
             Auditee Comments and OIG’s Evaluation



Ref to OIG
Evaluation    Auditee Comments




Comment 1




                               10
                         OIG Evaluation of Auditee Comments


Comment 1   3301 View Street LLC’s response did not address what actions it will take to
            resolve Recommendation 1A. It will need to work with HUD to develop the
            policies and procedures to ensure compliance with its regulatory agreement and to
            prevent future instances of noncompliance.
            We appreciate 3301 View Street LLC’s acceptance of Recommendations 1B and
            1C to repay the ineligible distribution and fees. However, it will need to provide
            HUD with supporting documents, such as bank statements, showing that the funds
            went into the Park View account to resolve the two recommendations.




                                             11