oversight

Charlesview Apts., Allston, MA

Published by the Department of Housing and Urban Development, Office of Inspector General on 1995-10-17.

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

Audit Related Memorandum
Issued: October 17, 1995
No:    96-BO-212-1802

TO: Jeanne McHallam, Director, Multifamily Division, Office of Housing,
   Massachusetts State Office

FROM: William D. Hartnett, District Inspector General, Office of Audit

SUBJECT: Charlesview Apartments
    Multifamily Mortgagor Operations
    Allston, Massachusetts

Introduction

We conducted an audit of Charlesview Apartments, a 221 (d)(3) project
located in Allston, Massachusetts. Audit work was performed between
June, 1995 and August, 1995 and covered the period January 1, 1994
through May 1995. We conducted the review in accordance with generally
accepted auditing standards.

Our objectives were to assess the projects physical condition and whether
the current rental structure could support repair estimates. To
accomplish our objective we reviewed physical inspection reports and
financial reports for the last three fiscal years. We also projected
increased revenues and subsidy requirements for a possible rent increase
and analyzed the impact of the rent increase would have on current
tenants at Charlesview.

Summary

The project has not raised rents since 1991 and, therefore, is not
generating sufficient income for repairs. The project currently needs
over $3 million for repairs.

The Project is not generating sufficient revenue to properly maintain the
project. The prior Management Agent kept rents artificially low by not
requesting rent increases. The reduced rental income precluded
management from performing critical project repairs. Projects rents are
now substantially below the Fair Market Rents (FMR). Further, these low
rents have caused substantial Section 8 resources, which could supply
funds for needed repairs, to be under utilized. Over $4 million in
Section 8 fund authority will lapse within the next three years.

Our analysis showed that a significant rental increase was possible since
the majority of tenants would receive additional Section 8 subsidy to
offset the increase. Working with you and your staff we supplied data
which enabled the auditee to request and you to quickly approve a
substantial rent increase to address the repair problems.

Since you are taking action to address the repair problems which will
lower HUD's insurance risk, no audit recommendation is necessary. The
attached finding details our analysis and provides data for your staff's
use.

Background

Charlesview Apartments (023-55128) is a 221 (d) (3) project, consisting
of 10 buildings containing 210 apartments and four commercial units,
located at Allston, Massachusetts. The project is owned and operated by
Charlesview Inc., a consortium of three local churches. Josephine
Fiorentino, President of Charlesview Inc., was the Chairman of the
Churches Board of Directors.

Until December of 1994,the project was managed by Carter Realty of
Allston. The Counsel elected to terminate the prior Management Agent.
Claremont Management Corporation replaced Carter Realty Inc. in January
of 1995. Claremont Management has submitted a rent increase to HUD and
is currently processing tenant comments.

We appreciate the cooperation and assistance of the Claremont Management
Corporation and you and your staff in conducting this review.

Please furnish us copies of any correspondence related to this review. A
copy of this memorandum has been provided to Charlesview Inc. Should
your staff have any questions, please contact our office at (617)
565-5259.

Attachment

The Project Needs More Revenue

Charlesview is not generating sufficient revenue to fund needed repairs.
The project's estimated repair requirements have now increased to over
$3 million. Rents have not been increased since 1991 and are now well
below Fair Market Rents (FMRs). Further, because of these low rents,
Section 8 subsidies have been under-utilized. As a result, Section 8
reserves have increased to over $4 million and are in danger of being
lost when the HAP contracts expire within the next three years.
Since 1991, the Board allowed the prior manager to follow a philosophy of
keeping rents artificially low even though the majority of tenants
qualified for Section 8 assistance. The artificially low rents did not
generate sufficient income to keep up with project repair requirements.
The project now needs in excess of $3 million in repairs.

Rents charged for Charlesview apartments are well below Fair Market Rents
in the local area. Charlesview rents range between $229 to $680 below
Fair Market Rents for the Boston area.

     BR Size        Project Rents        FMRs         Difference

       1           $414             $ 643        $ 22
       2           $445             $ 804        $359
       3           $479             $1,005       $526
       4           $501             $1,181       $680

While the project continued to pay expenses, debt service requirements
and replacement reserve deposits, the rents were not sufficient to
generate enough funds to pay for major repairs.

    Fiscal Year        1992             1993         1994

    Revenues       $1,147,626            $1,194,036   $1,209,483
    Expenditures    $1,119,252            $1,140,634   $1,151,693
    Cash throw-off $ 28,374              $ 53,402    $ 57,790

Due to lack of cash flow, the project delayed critical repairs. Physical
inspections demonstrate a steady decline in the project's physical
condition:

                  Inspection Date      Repairs Required

                  June 11, 1990         $ 290,000
                  April 16, 1991        $ 374,550
                  April 14, 1995        $1,774,903
                  August 22, 1994        $1,912,665
                  July 11, 1995         $3,053,568

The Regulatory Agreement requires the owners to keep the project in good
repair and condition. It is clear that the Regulatory Agreement is not
being followed and the project is deteriorating. This deterioration
jeopardizes HUD's interest and creates an unnecessary risk to the
Insurance Fund.
The project has two Section 8 Housing Assistance Program (HAP) contracts
covering 200 units. Contract MA06000036 is for 158 units and expires on
October 31,1996 and Contract MA06L000167 for 42 units will expire on
May 31, 1998. These two contracts can potentially provide the project
$1,054,580 annually for Section 8 assistance. As of May, 1995, the
project was drawing down about $287,000 per year.

Many tenants who qualified for Section 8 did not require subsidy because
their income is sufficient to pay the project's artificially low contract
rents. As of May, 1995, 47 of the 89 tenants not receiving Section 8
assistance were paying less than 20 percent of their income for rent.
For those qualified tenants receiving Section 8 subsidy, the low rents
reduced the amount of subsidy HUD needed to pay. As a result, only
116 of the 200 Section 8 units were being used and Section 8 project
reserves for these contracts grew to the following amounts as of July 31,
1995:

                 MA00036 - $2,922,848
                 MA00167 - $1,064,168

Upon the expiration of these HAP contracts, these funds cannot be used
for project expenses or repairs and either sit idle or are returned to
the Treasury. Currently, the only available use of these funds is to
supplement tenant-rent payments.

The rents need to be increased to a realistic level to generate funds for
critical repairs. The higher rents will increase the number of tenants
who receive Section 8, and for those tenants already receiving Section 8,
will increase the subsidy HUD pays on their behalf, therefore, generating
additional project income for repairs.

As an example, we calculated the effect of a 40 percent across the board
rent increase. Such a rent increase would still leave Charlesview Rents
10 - 40 percent below the Fair Market Rents in the immediate area while
generating significant additional revenue.

             Monthly    Monthly
            Tenant Rents Subsidy Rents       Annual Total *

Present Rents     $69,667        $23,905       $1,122,864
Rents+40% *        $91,446        $39,555       $1,572,012
Increases        $21,779        $15,650       $ 449,148

                 * Calculated by auditor
These additional funds could be earmarked for project repairs.

We found that the impact of these rent increases on the majority of the
current tenants would not be severe. The majority of tenants would be
protected by Section 8 subsidy. We found that:

o 116 of the tenants now on Section 8 would be protected from the rent
  increase by an increase in HUD's Section 8 subsidy on their behalf.

o 29 tenants not now receiving Section 8 subsidies would require
  subsidies to keep their rents at 30 percent of income. Of these
  29 tenants, 16 were eligible for Section 8 subsidies and 2 were not
  eligible when they moved in. In 11 cases, available records were not
  sufficient to determine if the tenant was eligible for Section 8
  subsidy.

o 60 tenants were not on subsidy and would not require subsidy to
  remain at Charlesview. Their rent burden, currently between 9 to
  27 percent of monthly income, would increase to 12 to 30 percent of
  monthly income. Twenty-one of these tenants were market rate tenants
  with an average income of $51,510 who have resided at Charlesview for
  an average 18 years. These tenants paid a 10 percent premium over
  contract rents. If these tenants should elect to move out, occupancy
  should not be a problem as there is a waiting list of 178 families
  ready to replace them. Should additional Section 8 eligible people
  move in, there would also be an increase the Section 8 funds being
  drawn.

                 * * * * * *

We met and discussed this matter with HUD Massachusetts State Officials
who agreed with our analysis. During August, 1955, they instructed the
Management Agent to process a significant rent increase. On
August 31,1995, the Management Agent issued a notice to tenants of a
proposed 40 percent rent increase to be submitted to HUD which provided
for a 30-day period for tenants to review materials and submit comments.
On October 2, 1995, the "Request for Rental Increase", which has a target
date of November 3, 1995 to approve, adjust, or reject the proposal, was
submitted to HUD and they are currently reviewing it.

Based upon the results of our audit, we are not making any specific
recommendations. The Massachusetts State Office is taking the
appropriate action to provide the cash flow necessary to restore and
maintain the project's physical condition and protect HUD's interest.
.