oversight

Limited Review of Bentley Court, Columbia, SC

Published by the Department of Housing and Urban Development, Office of Inspector General on 1996-03-28.

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

                                                       U.S. Department of Housing and Urban Development

                                                       District Office of the Inspector General
                                                       Richard B. Russell Federal Building
                                                       75 Spring Street, SW, Room 700
                                                       Atlanta, GA 30303-3388
                                                       (404) 331-3369




March 28, 1996
             Audit-Related Memorandum
                                                       96-AT-212-1810


TO:            Robert A. Rifenberick, Director, Multifamily Housing Division, 4EHM


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

SUBJECT:       Limited Review of
               Bentley Court (BC)
               Columbia, South Carolina


                                        INTRODUCTION

In our initial survey, we found indications of irregular transactions using project funds. Also, th e
partnership was in default during August 1994 to April 1995 on its BC mortgage, and the project had
not earned a profit nor generated surplus cash since it began operations in August 1991.

This limited review's purpose was to establish whether there were any improper distributions o f
project assets; and if so, relationship to the mortgage default. Our review was conducted Ma y
through September 1995 with updating during March 1996 for status information.

                                         BACKGROUND

Bentley Court Apartments are owned by Bentley Court II Limited Partnership. The two genera l
partners (GP) are Edwin Lewis, II and Canal Court II Limited Partnership. The Limited Partners are
Boston Financial Qualified H ousing Tax Credits LP IV and SLP 89, Inc. The apartment complex is
managed by Brookstone Ltd. of Columbia, an affiliate of GP Lewis. The mortgagee is America n
Capital Resource, Inc. (ACR).

BC is HUD insured and consists of 272 1 to 3 bedroom units. All units are available to low an d
moderate income persons because they qualify for the Low Income Housing Tax Credit Program.
                                                SCOPE

During this limited review for distributions of projec t assets, we reviewed 1991 through 1994 project
financial statements*, and relate d documentation. Discussions were held with the managing GP and
the affiliated management agent, and with HUD staff at the Columbia field office. We also reviewed
the status of the mortgage and the re serve for replacement fund. Our limited review did not provide
full audit coverage for any of the project's activities.

                                            *   *       *    *

We found that:

   -   The GP made unauthorized distributions of $305,551, and

   -   The reserve for replacement escrow was underfunded.

More details on our findings and recommendations for corrective actions are in Attachment 1. We
provided a draft to you and GP Lewis on September 7, 1995. We received comments from Mr .
Lewis which are summarized following each finding and included in full as Attachment 3.

Within 60 days, please furnish this office, for the recommendations in Attachment 1, a status report
on: (1) corrective action taken; (2) prop osed corrective actions and the date to be completed; or (3)
why actions are considered unnecessary. Also, fu rnish us copies of any correspondence or directives
issued because of our review. Please keep in mind the recent emphasis for timely managemen t
decisions on audit findings within set periods.

We are providing GP Lewis a copy of this report.

Should you or your staff have questions, please call Ted E. Drucker, Assistant District Inspecto r
General for Audit (404 -331-3369), or Senior Auditor Richard Pirsig in Columbia (765-5784).


Attachments:
    1 - Findings and Recommendations
    2 - Summary of Unauthorized Distributions
    3 - Auditee Comments
    4 - S c h e d u l e            o f                      I n e l i g i b l e          C o s t s

   5 - Report Distribution


* OIG Note
  At March 19, 1996, HUD had not received BC's audited Financial Statements for 1995, which
  were overdue.


                                                    2
3
                                                                                     ATTACHMENT I

                           FINDINGS AND RECOMMENDATIONS

Finding 1. Partners Made Unauthorized Distributions Of Project Funds .

           From 1992 through 1994 , BC paid $305,551 in unauthorized distributions while having
           no surplus cash. The distributions were payments for construction costs ($33,203), for
           non-project legal fees ($107,477), for or to affiliated entities or persons ($164,871) .
           These amounts are discussed below and listed in Attachment 2. Distributions in excess
           of surplus cash violate the project's contract with the mortgagee for HUD's benefit, and
           other applicable HUD requirements. Improper distributions subject the partners t o
           criminal and/or civil penalties; they contributed to defaults in mortgage payments.

           Criteria

           Paragraph B.3.b. of the owners' contract (regulatory agreement) with ACR, for th e
           mortgage co-insured by H UD, states in part that the owners may use project funds only
           to pay reasonable expenses necessary to the proper operation and maintenance of th e
           project, distributions of surplus cash if permitted by paragraph B.4.a. of the regulatory
           agreement, and owner advances if such repayments are authorized by the Secretary' s
           administrative procedures and approved by the mortgagee.

           According to paragraph B.4.a. of the regulatory agreement, distributions may be pai d
           only from surplus cash which existed as of the end of a semi-annual or annual fisca l
           period. Distributions may be paid only after the end of the fiscal period in which th e
           surplus cash is generated.

           An improper distribution is any w ithdrawal or taking of cash or any assets of the project
           other than for the payment of reasonable expenses necessary to the operation an d
           maintenance of the project. If the owner takes distributions when the project is not in a
           surplus cash position, the owner is subject to criminal and/ or civil penalties. Surplus cash
           generated at the end of the p roject fiscal year is not to be distributed until the next fiscal
           period. (HUD Handbook 4370.2 REV-1, Financial Operations and Accountin g
           Procedures for Insured Multifamily Project, Chapter 2, paragraph 2-10)

           Owner advances for reasonable and necessary operating expenses may be repaid fro m
           surplus cash at the end of the annual or semi-annual period. (HUD Handbook 4370.2
           REV-1, Chapter 2, paragraph 2-11). Repayment without specific advance approval of
           advances when the project is not in a surplus cash position is prohibited and may subject
           the owners to criminal and civil penalties.




                                                   4
                                                                     ATTACHMENT 1

             Summary of Unauthorized Distributions

                     Surplus Cash at the           Unauthorized
      Year           end of Prior Year             Distributions

      1992              $ (196,374)                  $ 33,203 (1)
      1993                (119,135)                  123,870 (2)(3)
      1994                (156,969)                  148,478 (2)(3)

      Total Unauthorized Distributions               $ 305,551

(1) Year 1992

    These unauthorized distributions are, as detailed in Attachment 2, amounts paid
    for construction costs with project funds. These amounts were charged a s
    building improvements. The managing GP told us these payments were related
    to project construction cost paid after final endorsement (June 12, 1991) with
    no amounts escrowed for their payment.

    Section B.3.b. of the regulatory agreement provides that project funds may not
    be used to liquidate liabilities related to the cons truction of the project unless the
    mortgagee authorizes such use. We found no mor tgagee authorization for these
    construction costs to be paid with project operating funds.

    No surplus cash was availa ble as of the end of the prior year to pay these costs.
    In fact, there was negative surplus cash of ($196,374).

(2) Legal Fees for 1993 and 1994

    The owners made distributions while having no surplus cash as of the end o f
    either prior year. Unauthorized distributions during 1993 and 1994 include d
    $45,559 and $61,918, respectively, (detailed in Attachment 2) for non-project
    legal fees. Based on our review of the invoices and information, as provided by
    the managing GP, thes e amounts were primarily for partnership related and not
    project matters. The audited financial statements reported some as partnership
    legal expenses, and other charges were not supported as being project related.

(3) Other Unauthorized Distributions in 1993 and 1994

    In addition, unauthorized distributions of project funds during 1993 and 1994
    included $78,311 and $86,560 paid to or for affiliated entities. These amounts
    are listed in Attachment 2.



                                   5
                                                                      ATTACHMENT 1

Mortgagor's Positions -The managing GP (Mr. Lewis) asserted that the owners mad e
advances to the partnership in excess of distributions.* These advances wer e
commingled with project funds in the same bank account.

The GP also pointed out that as of November 14, 1994 a separate bank account wa s
established to account for partnership transactions separate from project transactions.

Delinquent Mortgage Payments - While the improper distributions were being made, BC
mortgage and escrow payments were delinquent (i.e., ..received after the 16th day of the
month in which they a re due). During most of 1993 and 1994 payments were generally
received by the mortgagee during the last few da ys of the month in which they were due
or the first few days of the following month.

During the months of August 1994 to April 1995, BC was in default (i.e.. paymen t
received more than 30 days after its due date) by one or more of its mortgage and escrow
payments. The default was cured April 13, 1995; however at March 8, 1996, BC was
again delinquent (for three monthly payments).

Owners Subject to Civil Action for Double Damages - Among purposes of requiring a
contract (regulatory agreement) with owners of multifamily insured housing are to help
protect the security for the mortgage lien, and the financial viability of the insure d
project. Violations of the regulatory agreement by misus e of project funds are a basis for
civil legal action against owners to recoup double damages for the unauthorized use of
project assets and income (12 U.S.C. 1715z-4a) .


Auditee/GP Comments (Summary)

Some assumptions made by the auditors were incorrect. The checking account fro m
which the reportedl y unauthorized distributions were made was not and never had been
a project operating account. Project funds were deposited into this real estate escrow
account of the management company, Brookstone Ltd. The account was, and up until
November 1994 had been, a partnership account. Also, during the period of 199 0
through November 1994 (when BC opened its own checking account), deposits of GP
funds into this account were made of over $559,000; far in excess


* OIG Note
  We did not audit the amount or timing of such advances to the partnership because
  such advances to the partnership usually would have been made for the purpose of
  funding critical cash flow needs; as indicated also by the mortgage default durin g
  most of 1993 and 1994, and again during 1996.



                                      6
                                                                      ATTACHMENT 1

of the reported $305,551 in unauthorized distributions. At no time were these funds ever
considered to be part of the project. Therefore, any distributions of these funds could
not be considered as unauthorized distributions of project assets. The Limite d
Partnership also funded $193,818 to this account in August 1992.

The GP did allow the management company to use funds in the account to subsidiz e
short falls in the cash flow of the project, and to pay project expenses directly from this
real estate escrow account. Both practices were discontinued in November 1994.

According to the auditee, the two primary factors contributing to the mortgago r
delinquency problem were: (1) the impact of the 1986 changes in the tax law; and, (2)
the projected increase in the median income of Richland County which neve r
materialized. The a uditee challenged the $33,202 in unauthorized distributions made in
1992 for construction related costs because dur ing 1992 the construction lender released
$195,880 in completion assurance funds to the project, which should be considered.

   GP Closing Comments - As of June 30, 1995, the project has achieved a point that
   would indicate a surplus cash position of $1. These matters could be cured "from the
   records" by:

      -   The recognition that t he accounting method was improper, but the funds were
          never co-mingled in any of the project owned accounts and therefore wer e
          never part of project funds.

      -   The replacement of the funds that ACR removed from escrow accounts, and
          the replacement of funds improperly taken, and finally the refunding of late fees
          charged by ACR if the money authorized by the general partner had gone t o
          mortgage payments instead of to ACR's account.

      -   And finally, doing a cash surplus report as of June 30, 1995, borrowing th e
          funds, making a deposit and then withdrawing the funds to pay the loan off.

OIG Evaluation and Conclusion

Actual circumstances differ from the auditee's views. Although the auditee contends that
the real estate escrow account was never part of the project, its audited financia l
statements up until November, 1994, presented this accou nt as a project asset, which was
used in the computation of surplus cash. In actual practice this account was a projec t
operating account, a nd was so used and reported. Also, the GP's Response to our draft
findings included as its last page (page 18 herein) a sample statement for this ban k
account entitled: Brookstone Ltd of Columbia; DBA Bentley Court II.




                                      7
                                                                             ATTACHMENT 1

     Concerning the $33,202 in unauthorized distributions for construction costs made i n
     1992, and the contention that these payments were made from the release of th e
     completion assurance fund by the construction lender, the GP admitted that these funds
     should have been deposited into the partnership account and not the project account .
     When funds are deposited into the project account, they become subject to the surplus
     cash rules for subsequent distributions. The surplus cash position of the project at th e
     end of 1992 was a negative ($119,135) which in our opinion confirms that all deposits
     were for project-cash needs. The GP also contended that they advanced other funds to
     the project to cover cash flow shortfalls. Such advances, without the prior approval of
     HUD, can only be repaid from surplus cash.

     Pertaining to the auditee's rebuttal that as of June 30, 1995, the project has achieved a $1
     cash surplus position, this assertion has not been verified to our knowledge by a n
     independent public accountant. Even if correct, only any amount confirmed (the $1) as
     surplus cash can be distributed. The available evidence however indicates that surplu s
     project cash does not exist. At the start of 1994, surplus cash was a negative ($156,969).


     We emphasize also the mortgagor's retention of resid ual project cash while three monthly
     payments, as of March 8, 1996, were delinquent. The di sputes between the GP and ACR
     are beyond the scope of our limited review.

     The surplus cash rules limit the repayment of owner advances until the project generates
     surplus cash, so as to protect bot h the project's cash flow needs and the likelihood of the
     insured mortgage's repayment. Thus, any advances placed in the project account by the
     owners became project funds restricted by the surplus cash rules.

Recommendations

We recommend that you:

1A. Notify the owners wi thin 10-working days that they must repay $305,551 to the project
    account to restore the identified unauthorized distributions made during 1992 through
    1994, and any additional d istributions of these types for 1995 to date* (as determined in
    part by analysis of the overdue 1995 audited financial statements).



*    OIG Note
     The process of identifying any diverted project funds during 1995 and 1996 to dat e
     should not delay either management actions on the known $305,551 of imprope r
     distributions or sanctions' consideration.



                                            8
                                                                         ATTACHMENT 1

1B. If the owners fail to repay within 30 days of the above notice, pursue administrativ e
    sanctions and/or referral to Counsel (program enforcement) for consideration o f
    litigation.

1C. Take actions with the mortgagee to protect HUD's interests in the delinquent insure d
    mortgage (such as: By either having the GP bring the mortgage fully current by May 17,
    1996; or replace the management agent affiliate of the GP, and initiate through HU D
    Counsel litigation to obtain all BC assets including the residual project cash generate d
    recently by the mortgagor while monthly mortgage payments were not made).




                                          9
                                                                                  ATTACHMENT 1

Finding 2.   Reserve for Replacement (RR) Escrow Was Underfunded

             The regulatory agreement requires monthly deposits of $3,237 (rounded) to the R R
             escrow account commencing on the date amortization of the mortgage began. Al l
             requests for withdrawals fro m the RR account must be in writing. As of 7/31/95, there
             was a shortfall of $74,455 in the RR escrow account, and no request for withdrawal:

                 Required RR deposits:

                     5/1/91 to 7/31/95
                     51 mo. X $3,236.92                                          $ 165,083

                 Less actual RR balance at 7/31/95                                    -90,628

                 Amount Underfunded                                               $ 74,455

             As a result of BC's failure to make its August 1994 mortgage and escrow paymen t
             within 30 days of its due date, the mortgagee ACR transferred from the RR escro w
             $75,538 during Sept ember for the August payment of principal, interest, and insurance
             escrow. ACR did not notify HUD of this withdrawal from RR for up to one month' s
             debt service and mortgage escrows (as required under Handbook 4566.2.)

             The managing GP beli eves that BC can justify the reduced RR escrow balance because
             the project has incurred and paid for qualified capital expenditures approximatin g
             $75,000. At August 2, 1995, he had not su bmitted to ACR the required documentation
             to claim these amounts.

             Based on our discussions with ACR, they believe that BC had incurred qualified capital
             expenditures, and they had not pursued full funding of the RR escrow account. ACR
             recognized that BC sho uld provide documentation supporting the capital expenditures.
             On June 21, 1995 ACR wrote BC requesting that documentation.

             Auditee Comments

             The auditee did not specifically address this finding in its comments.

             Recommendation

             2A We recommend that you have the general partners fully fund the RR account, or
                submit the required documentation (supporting qualified expenditures) to clai m
                credit for a reduced escrow balance.




                                                 10
                                                                                                                      ATTACHMENT 2
                                                                                                                           Page 1 of 3
                                                             BENTLEY COURT

                                                    Summary of Unauthorized Distributions

For the Year Ended 12/31/92

Building Improvements
                                              Check        BC G/L
 Date          Payee                          No. (1)      Acct.#         Amount
                                                                           Reason
08/19/92      Dixie Heating & Cooling           380         1200           $ 11,203     Health Club Electrical Work less A/C Repairs
                                                                                         Total Check Amount $12,897 Less $1,694
08/19/92      James C. Stancel                  381         1200             10,000     Note Payment for James C. Stancel
08/27/92      Jim Griggs                        392         1200             12,003     Note Payment for James C. Stancel

              Total for 1992                                               $ 33,203

For the Year Ended 12/31/93

Non-Project Legal Expenses
                                              Check        BC G/L
Date           Payee                          No. (1)      Acct.#         Amount
                                                                           Reason
01/28/93      Ralph C. Robinson                 471         6910            $ 5,000     Non-Project Legal Fees
03/01/93      Ralph C. Robinson                3006         6910              7,559     Non-Project Legal Fees Total Check
                                                                                         Amount $8,000 less $441 for Project
04/05/93      Ralph C. Robinson                 508         6910              3,500     Non-Project Legal Fees
05/03/93      Ralph C. Robinson                 528         6910              3,500     Non-Project Legal Fees
06/03/93      Ralph C. Robinson                3136         6910              3,500     Non-Project Legal Fees
07/13/93      Ralph C. Robinson                3199         6910              3,500     Non-Project Legal Fees
08/10/93      Ralph C. Robinson                3273         6910              3,500     Non-Project Legal Fees
10/04/93      Ralph C. Robinson                3363         6910              3,500     Non-Project Legal Fees
10/06/93      Ralph C. Robinson                3365         6910              1,500     Non-Project Legal Fees
10/28/93      Ralph C. Robinson                3408         6910              3,500     Non-Project Legal Fees
12/01/93      Ralph C. Robinson                3458         6910              3,500     Non-Project Legal Fees
12/30/93      Ralph C. Robinson                3489         6910              3,500     Non-Project Legal Fees

              Sub-total                                                    $ 45,559

Payments to or for Affiliated Entities or Persons

                                              Check        BC G/L
 Date          Payee                          No. (1)       Acct.#        Amount
                                                                           Reason
04/01/93      Canal Court II, Ltd.              508         2434            $ 7,000     Cash transfer by GP to Canal Court II, LP
04/02/93      Canal Court II, Ltd.              510         2434             16,000     Cash transfer by GP to Canal Court II, LP
06/09/93      First Union National Bank         542           (2)            11,647     Pay IRS Trust Portion of Payroll Taxes
                                                                                         for Bentley Construction Co. Inc.
06/11/93      First Union National Bank         544         2434              7,826     Purchase Cashier's Check to repay portion of
              - Continued -                                                              Personal Loan made to Charlotte S. Lewis



(1)   Three-digit numbered check s were drawn on the project account at First Union National Bank. Four digit checks were drawn on the
      Management Agent account at First Union National Bank and reimbursed by the project account.

(2)   General Ledger ( G/L) Account number could not be determined from accounting records provided; however the canceled check was
      payable to an affiliated company.




                                                                     11
                                                                                                                     ATTACHMENT 2
                                                                                                                          Page 2 of 3
                                                             BENTLEY COURT

                                                    Summary of Unauthorized Distributions

For the Year Ended 12/31/93

Payments to or for Affiliated Entities or Persons
             - Continued -
                                               Check       BC G/L
 Date          Payee                           No. (1)      Acct.#        Amount
                                                                           Reason
07/20/93     Orangeburg National Bank            571        2434            $ 1,000     Repay Portion of Loan made to Charlotte Lewis
07/27/93     BDL Partnership                     578        2434              5,323     Monthly Reimbursement of Construction Loan
                                                                                         provided to BDL '89, Inc.
07/30/93      Richland County Treasurer          581        2434             28,515     Pay Real Property Taxes for Canal Court II, L
08/09/93      Orangeburg National Bank           590        2434              1,000     Repay Portion of Loan made to Charlotte Lewis

              Sub-total                                                    $ 78,311

              Total for 1993                                              $ 123,870

For the Year Ended 12/31/94

Non-Project Legal Expenses
                                              Check        BC G/L
 Date          Payee                          No. (1)      Acct.#         Amount
                                                                           Reason
02/23/94      Ralph C. Robinson                3570         6910            $ 3,500     Non-Project Legal Fees
03/01/94      Ralph C. Robinson                3586         6910              3,500     Non-Project Legal Fees
03/28/94      Powell, Goldstein                 699         6910              7,168     Non-Project Legal Fees
03/31/94      Ralph C. Robinson                3634         6910              3,500     Non-Project Legal Fees
05/02/94      Ralph C. Robinson                3697         6910              3,500     Non-Project Legal Fees
05/31/94      Ralph C. Robinson                3728         6910              3,500     Non-Project Legal Fees
06/27/94      Ralph C. Robinson                3784         6910              3,500     Non-Project Legal Fees
07/22/94      Ralph C. Robinson                3836         6910              3,500     Non-Project Legal Fees
07/28/94      Ralph C. Robinson                3847         6910              3,500     Non-Project Legal Fees
08/31/94      Ralph C. Robinson                3918         6910              3,500     Non-Project Legal Fees
09/08/94      Ralph C. Robinson                3926         6910              9,750     Non-Project Legal Fees
11/01/94      Ralph C. Robinson                4035         6910              3,500     Non-Project Legal Fees
12/06/94      Ralph C. Robinson                4072         6910              7,000     Non-Project Legal Fees
12/15/94      Ralph C. Robinson                4094         6910              3,000     Non-Project Legal Fees

              Sub-total                                                    $ 61,918

Payments to or for Affiliated Entities or Persons

                                              Check      BC G/L
 Date           Payee                         No. (1)     Acct.#        Amount
                                                                          Reason
03/16/94      Canal Court II                  Draft Transfer
                                                         2440to Canal Court
                                                                       $ 4,025
                                                                            II (GP)
03/21/94      Canal Court II                  Draft Transfer
                                                         2440to Canal Court
                                                                       7,500II (GP)
07/07/94      Brookstone, Ltd                   748        2430              15,000     Transfer to Brookstone, Ltd. (MA)
                of Columbia
07/08/94      Primesouth, Inc.                   749        2434              5,500     Repayment on Letter of Credit Fee
07/12/94      Primesouth, Inc.                   751        2434              2,200     Repayment on Letter of Credit Fee
              - Continued -

(1)   Three-digit numbered check s were drawn on the project account at First Union National Bank. Four digit checks were drawn on the
      Management Agent account at First Union National Bank and reimbursed by the project account. Bank drafts were drawn on the
      project account.


                                                                     12
                                                                                                                     ATTACHMENT 2
                                                                                                                          Page 3 of 3
                                                             BENTLEY COURT

Payments to or for Affiliated Entities or Persons
             - Continued -

                                              Check        BC G/L
 Date          Payee                          No. (1)       Acct.#        Amount
                                                                           Reason
09/19/94      Primesouth                        797         2434            $ 1,100      Repayment on Letter of Credit Fee
09/26/94      First Union National Bank        3967         2434              4,235      Repayment on Commercial Loan Invoice
09/28/94      Prime South Construction         3969         2428             25,000      Repayment on Letter of Credit Fee
10/03/94      Hungiville, J.R.                 3979         2428             12,000      Repayment on Loan from General Partner
11/16/94      Prime South Construction         4051         2430             10,000      Repayment on Letter of Credit Fee

              Sub-total                                                    $ 86,560

              Total for 1994                                              $ 148,478


                        Building                    Non-Project       To or For Affiliated
Summary                Improvements                 Legal Fees        Entities or Persons             Total
 1992                    $ 33,203                                                                    $ 33,203
 1993                                                 $ 45,559               $ 78,311                  123,870
 1994                                                   61,918                 86,560                  148,478
                          $ 33,203                   $ 107,477              $ 164,871                $ 305,551




(1)    Three-digit numbered checks were drawn on the project account at First Union National Bank. Four digit checks were drawn on the
       Management Agent account at First Union National Bank and reimbursed by the project account.




                                                                     13
     ATTACHMENT 3




14
     ATTACHMENT 3




15
     ATTACHMENT 3




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     ATTACHMENT 3




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     ATTACHMENT 3




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     ATTACHMENT 3




19
                                                                                                       ATTACHMENT 4

                                     SCHEDULE OF INELIGIBLE COSTS


                   Recommendation                              Ineligible Costs 1


                          1A                                        $ 305,551




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

                                                             20
                                                                          ATTACHMENT 5


                                     DISTRIBUTION

Secretary's Representative, 4AS
Assistant General Counsel, 4AC/4ACE
Special Agent in Charge, 4AGI
Field Comptroller, 4AF
Director, Accounting Division, 4AFF
South Carolina State Coordinator, 4ES
Director, Multifamily Housing Division, 4EHM (2)
Associate Director, US GAO, 820 1st St. NE Union Plaza, Bldg 2,
 Suite 150, Washington, DC.
Chief Financial Officer, F (Room 10166) (2)
Office of Internal Control and Audit Resolution, FOI (Room 10176)
Housing-FHA Comptroller, HF ATTN: Audit Liaison Officer (Room 5132)
Associate General Counsel, Office of Assisted Housing and Community
  Development, CD (Room 8162)
Assistant to the Deputy Secretary for Field Management, SDF (Room 7106)
Bentley Court II (Mr. E. Lewis, GP)




                                            21
 We did not audit the amount or timing of such advances to the partnership because any suc h
advances to the partnership usually would have been made for only one purpose: to fund critical cash
flow needs. The surplus cash rules limit the repay ment of owner advances until the project generates
surplus cash, so as to protect the project's cash flow needs and thereby the insured mortgage' s
repayment. Thus, any advances placed in the project account by the owners became project funds
restricted by the surplus cash rules.




                                                 22