oversight

Continental Building Management CO., Inc., San Juan, PR

Published by the Department of Housing and Urban Development, Office of Inspector General on 1995-10-13.

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

                                                                   Audit Related Memorandum
October 13, 1995                                                          No. 96-AT-212-1801


MEMORANDUM FOR:             Minerva Bravo, Director
                            Multifamily Housing Division, 4NHM


FROM:      Kathryn Kuhl-Inclan
            District Inspector General for Audit-Southeast/Caribbean, 4AGA

SUBJECT:      Eduardo Carlos Gomez
              ECEGE Development & Investment Co., Inc.
              Continental Building Management Co., Inc.
                             and
              Executive Homesearch & Realty Services Corporation
              San Juan, Puerto Rico


We have completed a review of ECEGE Development & Investment Company, Inc., Continental
Building Management Company, Inc., and Executive Homesearch & Realty Services, Inc.,
relating to ownership and/or management of five HUD-insured projects in Puerto Rico. Our
primary objective was to identify instances of equity skimming.

Our review included: (1) interviews with HUD staff, management agents, project employees, and
others, (2) review of HUD Caribbean Office project files, (3) review of project records at the
management agent's office, (4) review of a subcontractor's records, and (5) a visit to a project.
The review was performed from September 1994 to June 1995.

We confirmed that:

    Continental Building Management Company, Inc., the former management agent,
    improperly disbursed $1,295,065 of project funds during the period from 1989 to 1993 at
    the direction or on behalf of its owner, Eduardo Carlos Gomez; and

    Executive Homesearch, which replaced Continental Building as management agent in the
    five projects, charged $19,628 to Jardines de Country Club and $2,059 to Lissette
    Apartments for personnel costs of employees who provided services to other projects.
    Executive Homesearch also prorated an excessive portion of its controller's salary to the 11
    projects it administered.
A total of $1,316,752 should be reimbursed to the applicable projects through: (1) cash
repayment by Executive Homesearch for specific amounts identified as ineligible or improper,


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(2) cancellation of project payables to Eduardo Carlos Gomez, and (3) enforcement of the
repayment agreement with the current general partner of Lissette, Jardines, and San Juan Park
I under the modified transfers of physical assets (TPA). We also recommend that you start
administrative procedures to debar Eduardo Carlos Gomez, ECEGE, and Continental Building,
as well as any other identified parties who fail to comply with your repayment instructions. We
are notifying Field Counsel, by copy of this memorandum, of the need for their assistance to
debar Gomez, and to enforce compliance with conditions of the modified TPA's or, if necessary,
to pursue other legal remedy including civil enforcement.

We discussed our findings and recommendations with Eduardo Carlos Gomez, Executive
Homesearch, and Commercial Advisers and considered their comments. In addition, we have
provided a copy of this memorandum to each of them. We have also referred certain matters
relating to the management of Lissette Apartments to our Office of Investigation.

Please give us a status report within 60 days for each recommendation herein showing: (1) the
corrective action taken, (2) the proposed corrective action and the target date for completion, or
(3) why action is considered unnecessary. Also, please furnish us copies of any correspondence
or directives issued because of the review.

If you or your staff have any questions, please contact Nancy H. Cooper, Assistant District
Inspector General for Audit, at (404) 331-3369, or Aurora Rodriguez, Senior Auditor, at (809)
766-5879.


Attachments

1 - Schedule of Ineligible Costs
2 - Distribution




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                                     BACKGROUND

ECEGE Development & Investment Company was a profit motivated corporation organized in
January 1979 under the laws of the Commonwealth of Puerto Rico. Its president and director was
Eduardo Carlos Gomez. ECEGE was the General Partner of five HUD-insured projects:

                            Lissette Apartments, Carolina
                            Jardines de Country Club, Carolina
                            San Juan Park I, Santurce
                            San Juan Park II, Santurce
                            Pentagon Apartments, Santurce

Continental Building Management Company is a for-profit corporation organized in July 1978
under the laws of the Commonwealth of Puerto Rico. Its president and director is also Eduardo
Carlos Gomez. This identity-of-interest firm managed the five projects until March 1993 when
HUD replaced it with Executive Homesearch & Realty Services, Inc., because of continued
management deficiencies.

Executive Homesearch is a for-profit corporation organized in March 1969 under the laws of the
Commonwealth of Puerto Rico. Its president and director is Ana C. Pages. Chairman of its
Board of Directors is Hector C. Pages.

In October 1993, ECEGE's charter was canceled and its president, Eduardo Carlos Gomez began
acting as General Partner of the projects. In May and June 1994 HUD authorized three modified
transfers of physical assets (TPA) in which Gomez was replaced with Commercial Advisers, Inc.
as General Partner of Lissette Apartments, Jardines de Country Club, and San Juan Park I. The
TPA's were conditional upon the payment by the new general partner of monies owed by ECEGE
or Gomez. The new General Partner had its IOI firm take over management of the three projects.


As of our review, Gomez still owned San Juan Park II and Pentagon Apartments and both were
still managed by Executive Homesearch.




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                                         FINDINGS

1 - Improper Use of Project Funds

Continental Building, the former management agent of the five HUD-insured projects, improperly
disposed of $1,295,065 of projects funds from 1989 to 1993. The management agent made
advances and loans to the former General Partner, ECEGE and to its related parties totaling
$1,179,428, diverted $5,836 to other projects, and charged the projects $109,801 in ineligible
expenses. Although HUD had previously informed the General Partner that advances and loans
to owners and related parties were unauthorized distributions, the Management Agent and
General Partner continued the practice, disregarding the provisions of the regulatory agreement
as well as HUD's specific instructions. Consequently, the five projects were deprived of funds
needed for their operation and maintenance.

Criteria

Project operations are governed by regulatory agreements executed by the mortgagor and HUD.
Paragraph 8 of the agreements state that, "Owners shall not without the prior written approval
of the Secretary:

    "(b)...pay out any funds except from surplus cash, except for reasonable operating
    expenses and necessary repairs.

    "(e) Make, or receive and retain, any distribution of assets or any income of any kind
    of the project except surplus cash...."

Projects in which Gomez/ECEGE is no longer the General Partner

The audited financial statements for 1989 through 1993 show that Continental Building made
advances to its identity-of-interest General Partner, ECEGE, and other related parties, diverted
project funds to other projects through loans and advances, and charged ineligible expenses to
the projects as follows:


                                Advances to          Advances and     Ineligible
           Project             Related Parties       Loans to Other   Expenses       Total
                                                        Projects
 Lissette Apartments                $540,243               $2,270                  $542,513
 Jardines de Country Club            338,559                                        338,559
 San Juan Park I                       31,407                3,566    109,801       144,774




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            Total
                                     $910,209              $5,836     $109,801      $1,025,846

Based on these and other deficiencies, and at the request of the other project owners, HUD
removed ECEGE as the General Partner of the three projects in May 1994. One of the conditions
imposed by HUD for approval of the TPA's was that the new General Partner, Commercial
Advisers, agreed to reimburse the projects for amounts owed by Gomez. The amount was
tentatively set at $981,043 which included $542,513 to Lissette Apartments, $338,559 to Jardines
de Country Club, and $99,971 to San Juan Park I project. The $981,043 did not include $44,803
for the San Juan Park I ($31,407 in advances plus $3,566 for diversion plus $9,830 of the
$109,801 ineligible), because at the time the payment plan was discussed the 1993 financial
statements for this project had not been reviewed. HUD informed Commercial Advisers, Inc., that
the amount in the San Juan Park I project could vary depending on results of the 1993 audited
financial statements. As of our review, Commercial Advisers appeared reluctant to fulfill its part
of the agreement.

Projects in which Gomez/ECEGE is still the General Partner

Continental Building Management also made advances and loans to its identity-of-interest
General Partner, ECEGE, amounting to $269,219 from San Juan Park II and Pentagon
Apartments as follows:


                                                      Advances to General
                                                       Partner and Other
                               Project                  Related Parties
                    San Juan Park II                              $154,356
                    Pentagon Apartments                             114,863


                                Total                             $269,219


Most of the advances and loans to ECEGE, its related parties, and other projects were made from
1989 to 1993 and were still reflected in the 1993 audited financial statements of the projects as
"Accounts Receivable from Related Parties."

Despite HUD's requests, the unauthorized distributions were not returned to the projects, and the
practice continued. In our opinion, Gomez, Continental Building, and ECEGE willfully
disregarded the provisions of paragraphs 8(b) and 8(e) of the regulatory agreement.




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Recommendations:


We recommend that you:

    1A   Begin procedures to debar Eduardo Carlos Gomez, ECEGE, and Continental Building
         from doing business with the Federal Government.

    1B   Require Eduardo Carlos Gomez to reinstate $154,356 to the San Juan Park II project
         and $114,863 to the Pentagon Apartments by reversing the project payable to him.

    1C   Require Executive Homesearch to reimburse $3,566 to the San Juan Park I project
         from Pentagon Apartments.

    1D   Seek HUD Field Counsel's assistance to enforce the payment plan with Commercial
         Advisers, Inc., for $981,043, or to pursue other legal remedy.

    1E   Require Commercial Advisers, Inc., to reimburse $41,237 to the San Juan Park I
         project. Add this amount to the payment plan.




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2 - Improper Distribution of Salaries

Executive Homesearch, a former Management Agent of Jardines de Country Club and Lissette
Apartments, charged $19,628 and $2,059, respectively, for salaries and payroll taxes of
employees who provided services to other projects. The management agent claimed that the
service performed at other projects was temporary and due to emergencies. Therefore, it did not
consider a proration necessary. Also, the management agent overcharged 40 percent of the salary
of its controller to the 11 projects it administered. These charges were improper because the
controller was performing supervisory duties which is a cost of the management agent, not the
projects. As a result of these deficiencies, the projects have been deprived of funds needed for
operation and maintenance.

Criteria

The operations of the projects are governed by regulatory agreements executed by the mortgagor
and HUD. Paragraph 8(b) of the agreements states, "Owners shall not without the prior written
approval of the Secretary ...pay out any funds except from surplus cash, except for reasonable
operating expenses and necessary repairs."

Charges to Jardines de Country Club

Executive Homesearch charged the salaries and payroll taxes of the project administrator, a
handyman, and a gardener to Jardines de Country Club project while they were providing
services to the Pentagon Apartments project. The Jardines project manager provided a written
statement to Commercial Advisers, Inc., the new general partner, indicating that she and two
other project employees performed work at the Pentagon Apartments while their salaries were
charged to Jardines. We interviewed the three employees involved who confirmed the statement.
The improper charges for salaries and payroll taxes amounted to $19,628.

Charges to Lissette Apartment Project

Executive Homesearch charged salaries and payroll taxes of five employees to the Lissette
Apartments project when, in fact, they were working at three other projects and at the home of
Eduardo Carlos Gomez, the former General Partner. This information was provided by the
project administrator and confirmed by us through interviews with the employees. The salaries
and payroll taxes improperly charged to Lissette Apartments amounted to $2,059 and were
incurred as follows:




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                                                          Salaries and Payroll
                         Service Provided To:                    Taxes
                   San Juan Park I                                   $1,273
                   San Juan Park II                                      380
                   Santa Juanita                                         239
                   Eduardo Carlos Gomez, former
                   General Partner                                       167


                                   Total                             $2,059

Excessive Allocation of Controller's Salary

From its offices in Santurce, Puerto Rico, Executive Homesearch provided centralized accounting
services to all projects it managed including the five HUD insured projects we reviewed. From
April 1993 to March 1994, the agent's controller provided direct accounting services to all
projects. After March 1994, however, she provided mostly supervision of the projects. Based
on our interview with the controller, we estimated that 70 percent of her tasks involved
supervision and 30 percent involved direct accounting service to the projects. The management
agent prorated her salary costs at just the reverse; 70 percent to the projects and 30 percent to the
management agent. This resulted in an overcharge of 40 percent of her salary to all projects and
undue profit to the agent. Lissette Apartments, Jardines de Country Club, and San Juan Park I
projects were managed by Executive Homesearch until August 1994. Executive Homesearch still
managed San Juan Park II and the Pentagon Apartments as of our review. These projects were
deprived of funds needed for operation and maintenance.

Recommendations:

We recommend that you require:

     2A    Executive Homesearch to repay $19,628 to Jardines de Country Club and $619 to
           Lissette Apartments, and to charge employee expenses to the projects for which the
           work was performed.

     2B    Commercial Advisers to reimburse $167 to Lissette Apartments and transfer $1,273
           from San Juan Park I to Lissette Apartments.

     2C    Executive Homesearch to adjust the allocation of its controller's salary from April
           1994 to the present and reimburse each project accordingly.


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                                                                                         ATTACHMENT 1


                            SCHEDULE OF INELIGIBLE COSTS


                       Recommendation                               Ineligible Costs1

                                1B                                    $ 269,219

                                1C                                          3,566

                                1D                                       981,043

                                1E                                        41,237

                                2A                                        20,247

                                2B                                          1,440

                                Total                               $ 1,316,752




1
Ineligible amounts obviously violate law, contract, HUD or local agency policies or regulations.

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                                                                        ATTACHMENT 2

                                       Distribution



Secretary's Representative, 4AS
Director, Multifamily Housing Division, 4NHM
Field Comptroller, 4AF
Director, Accounting Division, 4AFF
Field Audit Liaison Officer, 4AFI
Assistant General Counsel, 4AC
State Coordinator, Caribbean Office, 4NS
Assistant to the Deputy Secretary for Field Management, SDF (Room 7106)
Chief Financial Officer, F (Room 10166) (2)
Deputy Chief Financial Officer for Operations, FO (Room 10166) (2)
Director, Office of Internal Control and Audit Resolution, FOI (Room 10176) (2)
Housing - Federal Housing Comptroller, HF
 ATTN: Audit Liaison Officer (Room 4122)
Associate Director, US GAO, 820 1st St. NE Union Plaza,
Bldg. 2, Suite 150, Washington, DC 20002
Executive Homesearch & Realty Services
Eduardo Carlos Gomez
Commercial Advisers




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