Housing Authority of the City of Los Angeles, Los Angeles, CA Rental Assistance Demonstration Program Office of Audit, Region 9 Audit Report Number: 2018-LA-1007 Los Angeles, CA August 24, 2018 To: Thomas R. Davis, Director, Office of Recapitalization, HTR Marcie P. Chavez, Director, Office of Public Housing, Los Angeles, CA, 9DPH //SIGNED// From: Tanya E. Schulze, Regional Inspector General for Audit, 9DGA Subject: The Housing Authority of the City of Los Angeles, CA, Generally Administered Its Rental Assistance Demonstration in Accordance With 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 the Housing Authority of the City of Los Angeles’ Rental Assistance Demonstration conversion. 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 website. Accordingly, this report will be posted at http://www.hudoig.gov. If you have any questions or comments about this report, please do not hesitate to call me at 213-534-2471. Audit Report Number: 2018-LA-1007 Date: August 24, 2018 The Housing Authority of the City of Los Angeles, CA, Generally Administered Its Rental Assistance Demonstration in Accordance With HUD Requirements Highlights What We Audited and Why We audited the Housing Authority of the City of Los Angeles’ Rental Assistance Demonstration (RAD) conversion to the Section 8 Project-Based Voucher Program. We selected the Authority because review of RAD conversions was aligned with the goals of our annual audit plan and the Authority’s conversion included previously environmentally toxic land that was recently remediated. The objective of our review was to determine whether the Authority administered its RAD conversion projects in accordance with applicable HUD requirements. Specifically, we wanted to determine whether the Authority (1) executed appropriate written agreements, (2) ensured that project financing sources were secured, (3) ensured that the required environmental reviews were accomplished, (4) maintained separate books and records for the RAD conversion, (5) spent HUD funds for eligible and reasonable purposes, (6) followed occupancy requirements, and (7) obtained a capital needs assessment. What We Found The Authority generally complied with RAD program requirements in the areas that we were able to fully review. However, since the Authority’s conversions were in progress, we could not make a full assessment for all RAD program requirements. What We Recommend This report contains no recommendations. Table of Contents Background and Objective......................................................................................3 Results of Audit ........................................................................................................5 Finding: The Authority Generally Administered Its Rental Assistance Demonstration Conversions in Accordance With HUD Program Requirements ...... 5 Scope and Methodology ...........................................................................................8 Internal Controls ....................................................................................................10 Appendixes ..............................................................................................................11 A. Auditee Comments and OIG’s Evaluation ............................................................. 11 Background and Objective The Housing Authority of the City of Los Angeles was established in 1938 by the City of Los Angeles and has an annual budget of more than $1 billion. The Authority’s funds come from five main sources: HUD’s annual operating subsidy, HUD’s annual Public Housing Capital Fund, Section 8 administrative fees, and rent from public housing residents, plus other program and capital grants from various sources. The Authority’s strategic mission is to preserve its existing affordable housing supply of more than 83,000 units, while ensuring that the units are both safe and clean. The Authority works collaboratively with residents and public, nonprofit, and private entities to create viable, healthy communities and to empower able residents to achieve financial independence. The Rental Assistance Demonstration program (RAD) was authorized by the Consolidated and Further Continuing Appropriations Act of 2012 and has two separate components: • The First component allows projects funded under the public housing program to convert their assistance to long-term, project-based Section 8 rental assistance contracts. Under this component of RAD, public housing agencies may choose between two forms of Section 8 housing assistance payments contracts: project-based vouchers or project-based rental assistance. • The Second component allows owners of projects funded under the Rent Supplement, Rental Assistance, and Mod Rehab programs to convert tenant protection vouchers to project-based vouchers or project-based rental assistance upon contract expiration or termination occurring after October 1, 2006. RAD provides the opportunity for public housing agencies to test the conversion of public housing and other HUD-assisted properties to long-term, project-based Section 8 rental assistance properties to achieve certain goals, including the preservation and improvement of these properties through enabling access by public housing agencies and owners to private debt and equity to address immediate and long-term capital needs. RAD is also designed to test the extent to which residents have increased housing choices after the conversion and the overall impact on the subject properties. The Authority received its commitments to enter into housing assistance payments contracts between August 2014 and October 2017. It began converting a total of 297 units from its Ramona Gardens1 and Jordan Downs public housing projects to project-based voucher RAD and other affordable units. The Jordan Downs RAD project consists of 106 units converting to RAD and an additional 180 affordable apartments, including Section 8 project based voucher, tax credit only, 1 The RAD conversion will take place at the Rose Hill Courts development, which is administered by the Ramona Gardens public housing project. 3 and manager units. The projects total more than $133 million in estimated development costs, and there are plans to ultimately replace all 713 units in the development. As of May 2018, the Authority had closed one project with construction in progress. The remaining three were open and were in various stages of the conversion process. During the course of our review, the Authority closed an additional project, with two remaining in an open status. The table below lists the RAD conversion projects, estimated development cost, and status. Project Estimated Status development cost 1 Ramona Gardens $50,029,160 Open Subtotal 50,029,160 2 Jordan Downs 1A 59,471,678 Closed 3 Jordan Downs 1B 73,972,060 Closed 4 Jordan Downs MP3* 0 Open 5 Jordan Downs MP4* 0 Open Subtotal 133,443,738 Total 183,472,898 *No estimated development costs were available. Our objective was to determine whether the Authority administered its RAD conversion projects in accordance with applicable HUD requirements. Specifically, we wanted to determine whether the Authority (1) executed appropriate written agreements, (2) ensured that project financing sources were secured, (3) ensured that the required environmental reviews were accomplished, (4) maintained separate books and records for the RAD conversion, (5) spent HUD funds for eligible and reasonable purposes, (6) followed occupancy requirements, and (7) obtained a physical conditions assessment. 4 Results of Audit Finding: The Authority Generally Administered Its Rental Assistance Demonstration Conversions in Accordance With HUD Program Requirements The Authority generally administered its RAD conversion in accordance with HUD requirements. Specifically, the Authority ensured that it (1) executed proper written agreements, (2) secured project financing sources, (3) completed required environmental reviews, (4) spent HUD funds for eligible and reasonable purposes, (5) generally complied with HUD occupancy requirements, and (6) completed a capital needs assessment to determine short-term rehabilitation and long-term capital needs. We could not fully evaluate all areas intended for review because the conversion process was ongoing for all of the projects and a number of requirements were not yet required to be performed or complete. Written Agreements Were Properly Executed For Jordan Downs 1A,2 the Authority had written agreements, which ensured that HUD’s interest in the program units was protected as required by HUD Office of Public and Indian Housing (PIH) Notice PIH-2012-32 (REV-3).3 The Authority established a use agreement, which included the necessary provisions to ensure that the agreement would be superior to all liens on the property, run for the same term as the initial housing assistance payments contract, automatically renew upon extension or renewal of the contract, and remain in effect even in the case of abatement or termination of the contract. The Authority’s agreement also provided appropriate provisions in the event that the housing assistance payments contract was removed due to breach, noncompliance, or insufficiency of appropriations. The Authority also established a ground lease agreement to further protect its interests. 2 The other three Jordan Downs conversions (1B, MP3, and MP4) did not have an agreement in place due to the early status of their conversions. 3 Notice PIH-2012-32 (REV-3), paragraph 1.6(B)(4), states that covered projects must have an initial RAD use agreement that will (1) be recorded superior to all liens on the property; (2) run for the same term as the initial housing assistance payments contract, automatically renew upon extension or renewal of the contract for a term that coincides with the renewal term of the contract, and remain in effect even in the case of abatement or termination of the contract (for the term the contract would have run, absent the abatement or termination), unless the HUD Secretary approves termination in the case of a transfer of a assistance; (3) in case of breach, noncompliance, or insufficient appropriations, provide that new tenants have incomes at or below 80 percent of area median income and rents that do not exceed 30 percent of 80 percent of area median income for the remainder of the term of the agreement; and (4) require compliance with all fair housing and civil rights requirements. 5 Financing Sources Were Secured The Authority’s financing plans for Jordan Downs 1A and 1B4 generally met the requirements outlined in Notice PIH-2012-32 (REV-3).5,6 We reviewed the Authority’s financing letters, source of funds, and plans for the use of funds and determined that the financing sources for Jordan Downs 1A were properly secured and that financing sources for Jordan Downs 1B were also obtained but were being finalized at the time of our review. Financing sources were identified in the Authority’s RAD application and generally included the key terms required by the Notice. The Authority used mainly secondary financing, 4 percent low-income housing tax credits, State and local funds, and the Authority’s own internal funding to fund the conversions. Environmental Requirements Were Met The Authority obtained the necessary environmental reviews and certifications7 to ensure that no environmental issues would impact the Jordan Downs 1A and 1B conversions.8 No problems were noted, and reviewing officials determined that no further action was required. In addition, we did not find evidence that any environmental remediation costs were charged to any of the four projects. HUD Funds Were Used for Eligible and Reasonable Purposes For Jordan Downs 1A, we verified that the Authority spent $5 million in HUD replacement housing factor funds for eligible and reasonable purposes.9 The funds were spent on eligible escrow, construction, and development costs. We took no issue with the Authority’s payment of 4 Jordan Downs projects MP3 and MP4 were still in the early stages, and financial plans were, therefore, not yet available or required to be complete. 5 Notice PIH-2012-32 (REV-3), attachment 1A, paragraph H, states that for each proposed loan, equity contribution, or grant, the public housing agency must include (1) a recent lender, investor, or grant engagement letter, dated no later than 60 days after the financing plan submission, with key terms identified (including amount, repayment terms, interest rate, amortization, maturity, prepayment restrictions, pay-in schedule, etc.) from all financing provider(s) (key terms for permanent financing must comply with conditions in paragraph 1.4(B)(1) of the Notice); (2) a brief discussion of conditions or milestones to be satisfied before closing; (3) documentation showing that the first mortgage lender has consented to the use agreement and that the lien of the new first mortgage loan will be subordinate to the use agreement; and (4) an estimated projected closing date for all proposed financing. 6 Notice PIH-2012-32 (REV-3), paragraph 1.4(B)(1), requires permanent debt financing on covered projects to be at a fixed rate of interest, for a fixed term, fully amortized over no more than 40 years, and with a maturity date or balloon of not earlier than 18 years, except in the case of project-based voucher conversions when the contract is for less than 18 years, in which case the maturity date or balloon cannot be less than the term of the contract. 7 Notice PIH-2012-32 (REV-3), paragraph 1.4(A)(3), requires that proposed RAD projects receive environmental review under either 24 CFR (Code of Federal Regulations) Part 50 or Part 58, as applicable, and environmental documents be submitted as a part of the applicant’s financing plan. 8 Environmental reviews were not available or due for Jordan Downs MP3 and MP4 during our fieldwork due to the early stages of the projects. 9 Notice PIH-2012-32 (REV-3), paragraph 1.5(A), states that public housing agencies are permitted under RAD to use available public housing funding, including operating reserves, capital funds, and replacement housing factor funds, and demolition and disposition transitional funding as a source of capital in the development budget to support conversion, whether for rehabilitation or new construction, as well as to increase initial contract rents. Eligible conversion-related uses for these funds include predevelopment, development, or rehabilitation costs of the covered project. 6 predevelopment expenses and verified that no HUD funds had been spent for the remaining projects. HUD Occupancy Requirements Were Generally Followed The Authority held the required meetings to inform residents of the upcoming RAD conversions and address questions from tenants. Public housing agencies are required to notify residents of the proposed RAD conversion, conduct meetings, and prepare written responses to any comments received.10 The meetings were slightly delayed for Jordan Downs 1A and 1B, but HUD was notified and they had taken place. Documentation was also provided showing that later meetings were held to discuss the remaining conversion phases, provide redevelopment updates, and discuss associated relocation planning. Some Areas Could Not Be Fully Evaluated Due to the ongoing status of the conversions (see the Background and Objective section), a number of requirements were not yet required to be performed or completed. Therefore, we could not fully evaluate several areas intended for review at the Jordan Downs sample projects. We could not determine whether the Authority maintained separate books and records from the RAD owner because the properties were not complete; therefore, no applicable housing assistance payments contracts had been established. In addition, the Authority’s action on its waiting list and developer fees could not be fully assessed. Development of the waiting list was underway during the course of our review for Jordan Downs 1A and 1B, and all developer fees had not been finalized and paid for Jordan Downs 1A. Finally, the Authority completed the required capital needs sssessment for Jordan Downs 1A and 1B. However, we could not compare the work identified in the assessment to completed work because contruction is not yet complete. Conclusion The Authority generally administered its RAD conversion in accordance with HUD requirements. Specifically, the Authority ensured that it executed proper written agreements, secured project financing sources, completed required environmental reviews, spent HUD funds for eligible and reasonable purposes, and generally complied with HUD occupancy requirements. However, we could not fully evaluate all areas intended for review because the conversion process was ongoing for all of the projects. Recommendations This report contains no recommendations. 10 Notice PIH-2012-32 (REV-3), section 1.8, requires the public housing agency to (1) notify residents of projects proposed for conversion and legitimate resident organizations of the agency’s intent to pursue a conversion; (2) conduct at least two meetings with residents of projects proposed for conversion to discuss conversion plans and provide an opportunity for comment; (3) before the two meetings, issue a RAD information notice to inform residents about proposed projects and to inform them of their rights; and (4) prepare written responses to comments received from residents to be submitted with the RAD application. 7 Scope and Methodology We performed our audit work at the Authority located at 2600 Wilshire Boulevard, Los Angeles, CA, from March to May 2018. Our review generally covered the period January 2014 through May 2018. To accomplish our objective, we performed the following: • Reviewed HUD regulations and requirements. • Interviewed appropriate HUD and Authority personnel. • Reviewed the Authority’s policies, procedures, and controls. • Reviewed HUD monitoring reports. • Reviewed status reports from HUD’s RAD Resource Desk11. • Conducted a site visit to the Jordan Downs redevelopment. • Reviewed and analyzed supporting documents, including financing plans, written agreements, and program expenditures. The audit universe consisted of five projects with an estimated total development cost of more than $183.4 million. For our survey, we selected four projects totaling more than $133.4 million from the Jordan Downs redevelopment for review. Our survey items represented 73 percent of the total estimated development cost for the five RAD conversion projects initiated by the Authority. We used a nonstatistical sample selection for our review because our audit universe consisted of a small number of projects. We did not perform a 100 percent review due to resource constraints. We selected a sample of the four Jordan Downs projects in our universe (1A, 1B, MP3, and MP4) because the site included land that was recently environmentally remediated. Since the sampled project conversions were in progress at varying stages, our review was limited to evaluating requirements that should have been completed for each project at the time of our fieldwork. Therefore, our audit results were limited to the projects in our sample and cannot be projected to the universe. 11 The RAD Online Resource Desk serves as a comprehensive information archive enabling searches of all published guidance on the Rental Assistance Demonstration. The Desk also serves as the main portal for Demonstration participants to ask questions, search for information and forms, upload documents, and track their progress toward closing. Access is available to the public as well as HUD employees and public housing agency staff. 8 Our conclusions were based primarily on supporting documentation obtained during the audit. However, we used reporting data from HUD’s RAD Resource Desk to verify information in the source documentation received from the Authority and to obtain needed background information. The reporting data were consistent with the information contained in the source documents. Therefore, the data were sufficiently reliable for our use during the audit. We conducted the audit in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objective(s). We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objective. 9 Internal Controls Internal control is a process adopted by those charged with governance and management, designed to provide reasonable assurance about the achievement of the organization’s mission, goals, and objectives with regard to • effectiveness and efficiency of operations, • reliability of financial reporting, and • compliance with applicable laws and regulations. Internal controls comprise the plans, policies, methods, and procedures used to meet the organization’s mission, goals, and objectives. Internal controls include the processes and procedures for planning, organizing, directing, and controlling program operations as well as the systems for measuring, reporting, and monitoring program performance. Relevant Internal Controls We determined that the following internal controls were relevant to our audit objective: • Effectiveness and efficiency of program operations – Implementation of policies and procedures to ensure that program funds are used for eligible purposes. • Relevance and reliability of information – Policies and procedures that management has implemented to reasonably ensure that operational and financial information used for decision making and reporting externally is relevant, reliable, and fairly disclosed in reports. • Compliance with applicable laws and regulations – Implementation of policies and procedures to ensure compliance with applicable HUD rules and 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. We evaluated the internal controls related to our audit objective in accordance with generally accepted government auditing standards. Our evaluation of internal controls was not designed to provide assurance regarding the effectiveness of the internal control structure as a whole. Accordingly, we do not express an opinion on the effectiveness of the Authority’s internal control. 10 Appendixes Appendix A Auditee Comments and OIG’s Evaluation Ref to OIG Evaluation Auditee Comments Comment 1 11 Auditee Comments and OIG’s Evaluation Ref to OIG Evaluation Auditee Comments Comment 2 Comment 3 12 Auditee Comments and OIG’s Evaluation Ref to OIG Evaluation Auditee Comments 13 OIG Evaluation of Auditee Comments Comment 1 We added a footnote to clarify that the RAD conversion will take place at the Rose Hill Courts development, which is administered by the Ramona Gardens public housing project. Comment 2 Since the paragraph in question was intended to provide general background on all conversions currently in progress, we included the total number of units for the Ramona Gardens and Jordan Downs housing projects. We also added clarification that more than $133 million in development costs included RAD and other affordable housing apartments consisting of Section 8 project based voucher, tax credit only, and manager units. Comment 3 We clarified that the Authority completed the required Capital Needs Assessments for Jordan Downs 1A and 1B. We also clarified that since the projects are still under construction, we could not compare work identified in the assessment to any completed work. 14
The Housing Authority of the City of Los Angeles, CA, Generally Administered Its Rental Assistance Demonstration in Accordance With HUD Requirements
Published by the Department of Housing and Urban Development, Office of Inspector General on 2018-08-24.
Below is a raw (and likely hideous) rendition of the original report. (PDF)