oversight

National Investments, Ltd., Johnston, RI

Published by the Department of Housing and Urban Development, Office of Inspector General on 1995-10-26.

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

Issue Date
10/26/95
Audit Case Number
96-BO-214-1001

TO:      Luisa G. Osborne, Director, Multifamily Division,
        Office of Housing, Rhode Island State Office, 1GHM

FROM:       William D. Hartnett, District Inspector General,
        Office of Audit, New England, 1AGA

SUBJECT:    National Investments, Ltd.
      Management Agent
      Johnston, Rhode Island

We performed an audit of National Investments, Ltd.,an Identity-of-Interest
Management Agent, located in Johnston, Rhode Island. The primary audit
objective was to assess the ability of the Management Agent to initiate and
complete required repairs at Evergreen and Riverbend Apartments.
Specifically, our objective was to evaluate the projects' physical and
financial condition, and identify the best method for the Management Agent
to optimize cash flow, restore and maintain the projects' physical
condition, and protect HUD's interests.

Due to a shortage of available funds, the projects need more than $3.5
million in substantial repairs. Rents at both projects are well under the
Fair Market Rent for existing housing and market rents in the locality. The
Rhode Island State Office is currently processing project rent increases
and Section 241(a) loans to address the physical and economic health of
these projects. Such approach will protect HUD's interests, while aiding
in the restoration and maintenance of the physical condition of the
projects. Based on your office's actions, no recommendations are needed
at this time.

Please furnish us copies of any correspondence or directives issued because
of the audit.

Please note that a copy of the report has been provided to the Management
Agent. Should your staff have any questions, please contact our office at
(617) 565-5259.


Executive Summary

Our primary audit objective was to assess the ability of National
Investments, Ltd.,an Identity-of-Interest Management Agent, to initiate and
complete required repairs at Evergreen and Riverbend Apartments located in
East Providence and Cranston, Rhode Island, respectively. We also evaluated
the projects' physical and financial condition, and reviewed actions of the
Management Agent and Rhode Island State Office to optimize cash flow,
restore and maintain their physical condition and protect HUD's interests.

The two projects have deteriorated to a point where substantial funds are
needed to make repairs. These funds are not readily available. Funds
exceeding $3.5 million are needed to correct the deficiencies (more than
$1.7 million at each project). Rents at both projects are well under the
Fair Market Rent for existing housing and market rents in the locality.
The Rhode Island State Office is currently processing project rent
increases and Section 241(a) loans to address the physical and economic
health of these projects. These actions should protect HUD's interests,
while aiding in the restoration and maintenance of the physical condition
of the projects.

HUD's latest inspections show that more than $3.5 million ($1,772,665 at
Evergreen Apartments and $1,797,865 at Riverbend Apartments) are needed to
correct project deficiencies.

In order to obtain funds to make necessary repairs, the Rhode Island State
Office is processing project rent increases and Section 241(a) loans to
obtain funds to address the projects' physical needs. The Section 241(a)
loan applications, submitted by the Management Agent, request $2.1 million
for Evergreen Apartments and $2.3 million for Riverbend Apartments to be
used exclusively for project repairs and capital needs. The projects' rent
increase is to be provided by the State Office in coordination with the
Section 241(a) loans Project rent increases are feasible and beneficial to
the projects while not harming the tenants.

HUD is currently processing the project rent increases and Section 241(a)
loans to protect HUD's interests and provide for the restoration of each
project. Therefore, no additional recommendations are necessary.

We have discussed our concerns with the Management Agent and your staff
during the course of our review. The

Management Agent was provided a draft report for comment on October 10,1995.
The Management Agent's comments were received on October 20, 1995 and were
considered this report. A copy of the Management Agent's comments are
included in Appendix A.
Table of Contents

Management Memorandum                                          i

Executive Summary                                       iii

Introduction                                      1

Finding

Projects Require Substantial Repairs                           5

Internal Controls                                  11

Appendices

A Auditee Comments                                        13

B Distribution                                    15

Abbreviations

CPA    Certified Public Accountant
FMR    Fair Market Rent
HAP    Housing Assistance Payments
HUD    Department of Housing and Urban Development
LTD    Limited


Introduction

National Investments Ltd. is an Identity-of-Interest Management Agent of
the owner and General Partner, Alfred Carpionato. The Management Agent
manages four HUD insured projects:


          Project Name             Project Number

          Evergreen Apartments             016-44067
          Riverbend Apartments             016-44011
          1890 House                   016-44066
          Carties Health Center          016-43018

Evergreen Apartments is located at 15 Evergreen Drive, East Providence,
Rhode Island, and Riverbend Apartments is located at 517 Dyer Avenue,
Cranston, Rhode Island. The projects have been 100 percent Section 8
subsidized since October 1992. Both projects are Section 236 family
projects of 10 wooden two-story buildings each, consisting of 168 (one,
two and three bedroom) rental units. The projects' mortgages are current
but have been recently added by the Rhode Island State Office to their
list of projects which are "potentially troubled."

The 1890 House is a 52-unit elderly Section 236 project located at 254
Washington Street, Providence, Rhode Island, which is also 100 percent
Section 8 subsidized. Carties Health Center is a 213-bed Section 232
nursing home project located at 21 Lincoln Avenue, Central Falls, Rhode
Island. Both 1890 House and Carties Health Center are in good physical
condition. However, Evergreen and Riverbend Apartments have physical
deficiencies which require corrective action.

National Investment Ltd.,also manages eight non-HUD insured projects having
Section 8 subsidies administered by the Rhode Island Housing Mortgage
Finance Corporation.

The Management Agent's staff consists of three full-time corporate
employees and eight on-site employees for the three Section 236 projects
(Carties Health Center employees are all leased through a Leasing Company).
All employees, including the senior property manager, are under the
direction of John Kokot, Vice President of Development.

Financial and accounting records for the Section 236 projects are
maintained at the corporate offices located at 1414 Atwood Avenue,Johnston,
Rhode Island. Records for Carties Health Center are maintained at the Health
Center Office located at 21 Lincoln Ave, Central Falls, Rhode Island.

Our audit objective was to assess the ability of National Investments, Ltd.
to initiate and complete required repairs at Evergreen and Riverbend
Apartments. We also evaluated each projects' physical and financial
condition and reviewed actions of the Management Agent and Rhode Island
State Office to optimize cash flow, restore and maintain their physical
condition and protect HUD's interests.

Audit work was performed between October 1994 and May 1995 and covered the
period from October 1, 1991 through September 30, 1994. Where appropriate,
the audit period was extended.

We focused our review on the financial operations and physical condition of
the Evergreen and Riverbend Apartment projects. To accomplish the audit
objectives, we:
o Reviewed the Regulatory Agreements and Section 8 Housing Assistance
  Payment Contracts.

o Reviewed audited Financial Statements for the Fiscal Years 1991 to 1994.

o Reviewed the Certified Public Accountant's (CPA) working papers.

o Analyzed Project Replacement Reserve Accounts.

o Reviewed the latest HUD and Mortgagee Physical Inspections.

o Analyzed deficiencies cited in the Physical Inspection Reports performed
  by HUD.

o Conducted site inspections at Evergreen and Riverbend Apartments.

o Analyzed funding sources cited in Evergreen and Riverbend Apartments'
  Corrective Action Plans.

o Reviewed HUD's Rhode Island State Office appraisals for Evergreen and
  Riverbend Apartments.

o Evaluated the potential cost of the Section 241(a) loan applications if
  approved by HUD.

o Analyzed Market Rents for unassisted housing projects located around
  Evergreen and Riverbend Apartments.

o Conducted interviews with the Management Agent's staff, the projects'
  CPA, and personnel of HUD's Rhode Island State Office of Housing,
  Multifamily Division.

We conducted the audit in accordance with generally accepted government
audit standards.


Projects Require Substantial Repairs

Evergreen and Riverbend Apartments have deteriorated to a point where over
$3.5 million is needed to correct physical deficiencies at both projects.
A shortage of available funds has left the Management Agent, National
Investments Limited, incapable of making the required repairs. As a result,
tenants are living in projects where substantial repairs are required, and
the deferred maintenance is jeopardizing HUD's overall interests. The Rhode
Island State Office is currently processing rent increases and Section
241(a) loans to obtain funds to complete the required repairs.

The Regulatory Agreements for Evergreen and Riverbend Apartments provide
that the projects must be maintained in good repair or condition. The
Section 8 Housing Assistance Payments (HAP) Contracts for both projects
require the owners to operate and maintain decent, safe, and sanitary
housing, to maintain the property and grounds, and to make repairs with
reasonable promptness.

To assure projects are adequately maintained, HUD performs inspections and
reports deficiencies which need to be corrected. Time frames for corrective
action are specified by the HUD State Office.

Since 1993, the Management Agent, HUD, and the projects' Mortgagees have
identified significant physical deficiencies at both projects. HUD
inspections identified weak maintenance practices as the cause for the
extensive repairs now required at both projects. The Management Agent
believes lack of funds was the main cause for the current conditions.

Evergreen Apartments

A 1993 Capital Needs Survey identified 26 items with a total cost estimate
of $2,742,900 to be repaired over a five year period. The most urgent
first year (1994) replacement or repair items totalled $1,794,713. The
five highest cost first year repair items were: Kitchen Cabinets($282,000);
Vinyl Siding ($262,000); Asphalt Paving ($200,000)

Window Replacement ($183,000), and Roofing Shingles ($166,000). Safety was
cited as a concern for the asphalt paving.

HUD's June 8, 1993 Physical Inspection Report for Evergreen Apartments
identified $1.1 million (65 percent) of $1.7 million in repairs requiring
correction within the first year. First year repairs consisted of:
Exterior Walls & Foundations ($280,000); Roofs, Flashing & Vents
($126,000); Walks, Steps & Guardrails ($76,000); Floors, Carpets and Tiles
($115,599); Refrigerators and Ranges ($62,895), and thirteen other repairs
(ranging from $2,000 to $60,000 each). Since the inspection, roof
replacement, to prevent deterioration of the units, has become one of the
most urgent priorities at the project. As of February 1995, corrective
action on urgent deficiencies had been limited. Roofs on only three of the
fourteen buildings have been replaced.

Evergreen Apartments' Mortgagee performed an inspection on July 20, 1994,
a year after the HUD inspection which also concluded the project physical
condition was "unsatisfactory." The Mortgagee's report indicated that the
project buildings were over 20 years old and showing signs of wear on the
exterior and interior.

Riverbend Apartments

A 1993 Capital Needs Survey identified 24 items with a total cost estimate
of $2,531,400 to be repaired over a five year period.The most urgent first
year (1994) replacement or repair items totalled $2,104,566. The five
highest cost first year repair items, were: kitchen cabinets ($399,000);
asphalt paving ($390,000); step replacement ($312,000); entrance Doors
($203,000), and vinyl siding ($192,000). Safety was cited as the reason
for asphalt paving and step replacement.

HUD's August 4, 1994 Physical Inspection Report for Riverbend Apartments
identified $851,000 of $1.7 million (50 percent) as repairs requiring
correction
within the first year. The only two first year high priority items, smoke
alarms and exterminating have been addressed. Among the low priority items
was $99,575 for "roofs, flashing and vents". Since the inspection, roof
replacement has become one of the most urgent priorities at the project.
Aside from the two first year high priority items, corrective action on
other deficiencies was limited. As of February 1995, roofs on only two of
the fourteen buildings, had been replaced.

Riverbend Apartments' Mortgagee performed an inspection on July 29, 1994
which also concluded that the project's physical condition was "below
average". Prior repairs required by HUD had not been completed.

Current project rents at both projects are well under the Fair Market Rent
(FMR) which could be charged, and in the case of Riverbend Apartments,
substantially below the market rents for the surrounding area, as
identified by HUD's Office of Economic and Market Analysis.

                Evergreen Apartments

Unit Size      Project Rents      Fair Market      Market Rent

            Effec. 9/94        Rent 9/95        2/95

 1 BR           $476             $534       $555
 2 BR           $550             $642       $663
 3 BR           $612             $805       $825

                Riverbend Apartments
Unit Size      Project Rents    Fair Market    Market Rent
            Effec. 8/94      Rent 9/95      2/95

 1 BR           $463            $534        $628
 2 BR           $561            $642        $805
 3 BR           $634            $805        $924

HUD has approved several rent increases during the last three years.
However, one rent increase in August 1993 for Riverbend Apartments was
insignificant. Two subsequent rent increases at each of the projects,
granted in October 1993 and August 1994, have produced substantial
increases in rental income. From 1993 to 1994, annual net rental income
increased at Evergreen by $97,458, and at Riverbend by $190,298. However,
these increases are still insufficient to address major repair needs in a
timely manner.

As of August 1995, Evergreen and Riverbend Apartments each have available
from a source of three Section 8 HAP contracts, committed contract
authority totalling $5,991,960 and $5,083,985 respectively. Available
Section 8 funds remaining at August 16, 1995 were $2.7 million for each
project. At the projects' prevailing rents, it is estimated that each
project will have at least 20 percent of their contract authority remaining
at the expiration of the HAP Contract. Considering an average monthly draw
down, Evergreen and Riverbend will have undisbursed contract authority of
$1.1 and $1.3 million respectively at the HAP contracts' expiration.

In order to obtain funds to make necessary repairs, the Rhode Island State
Office is simultaneously processing project rent increases and Section 241
(a) loan applications submitted by the Management Agent. The Section 241
(a) loan applications requested $2.1 million for Evergreen Apartments and
$2.3 million for Riverbend Apartments to be used exclusively for project
repairs and capital needs. These applications were submitted on February
24, 1995, however due to incomplete application packages, the State Office
temporarily suspended processing.

On September 20, 1995 the State Office advised that complete 241(a) loan
application packages have been received and processing would take
approximately two months, with four to six months for construction, and
four months after construction completion for commencement of amortization. HUD will
establish
a final hierarchy of replacement and repair needs pursuant to their approval of
the 241(a) loans.

The State Office has advised that project rents will be increased to support
the 241(a) loans. On September 20, 1995, the State Office estimated that
it will be a minimum of 61 days before the increases are approved and
implemented. Once approved, the increase will be deposited into the
reserve for replacement specifically to make required repairs. When the
241(a) loan is approved, budget modifications will be executed to reduce
the reserve for replacement deposit in the amount of the debt service.
In addition a plan has been developed that identifies and prioritized
capital repairs.

                        * * * * * *

Based upon the results of our review, we are not making any specific
recommendation. The Rhode Island State Office is initiating the appropriate
actions to optimize cash flow necessary to restore and maintain the projects'
physical condition, and protect HUD's interest.


Internal Controls

In planning and performing our audit, we considered the internal control
systems of the Management Agent.

Internal control is the process by which an entity obtains reasonable
assurance as to achievement of specified objectives, such as to ensure
that: its goals and objectives are met; that resource use is consistent
with laws, regulations, and policies; that resources are safeguarded
against waste, loss, and misuse; and that reliable data are obtained,
maintained, and fairly disclosed in reports.

Internal control consists of interrelated components, including integrity,
ethical values, competence, and control environment which includes
establishing objectives, risk assessment, information systems, control
procedures, communication, managing change, and monitoring.

We determined that internal controls were not relevant to our audit
objectives and accordingly we did not review the internal control systems
of the Management Agent.

                                                           Appendix A

Auditee Comments

                                                           Appendix B
Distribution

Secretary Representative, 1AS
Director, Office of Housing, 1AH
Audit Liaison Officer, New England, 1AAI
Office of Comptroller, 1AFF
Rhode Island State Coordinator, 1GS
Comptroller/ALO, Housing, HF, Room 5132
Acquisitions Librarian, Library, AS, Room 8141
Chief Financial Officer, Room 10255 (2)
Deputy Chief Financial Officer for Operations, Room 10166 (2