Issue Date
April 26, 1996
Audit Case Number
96-CH-205/218-1007
TO: David M. Kellner, Director, Public Housing Division, Ohio State Office
Donald J. Jakob, Director, Multifamily Housing Division, Ohio State Office
FROM: Dale L. Chouteau, District Inspector General for Audit, Midwest
SUBJECT: Capital City Community Urban Redevelopment Corporation
HOPE 1 and HOPE 2 Grant Programs
Westerville, Ohio
We completed a review of the Capital City Community Urban Redevelopment Corporation's
HOPE 1 and HOPE 2 Grant Programs. The objectives of the review were to determine whether
Capital City: (1) charged costs to the HOPE 1 and HOPE 2 Grants that were reasonable,
necessary, and adequately supported, and (2) complied with Grant Agreements and other Federal
requirements. HUD's Ohio State Office requested the audit.
The rehabilitation work was in process at the time of our review. The completed rehabilitation
work was acceptable. Capital City essentially complied with the Davis Bacon Act and with
resident training requirements.
Capital City incorrectly used $75,713 of the HOPE 2 project's sales proceeds. The funds were
used to pay for realty services that Adrian Inc., an identity-of-interest firm, was to provide as part
of Capital City's match to the HOPE 2 Grant. Capital City also charged the HOPE Grants
$51,902 of unsupported and ineligible costs. As a result, fewer funds were available to help
improve the conditions of the intended beneficiaries, low-income persons.
Within 60 days, please give us a status for each recommendation. The status should show: (1) the
corrective action taken; (2) the proposed corrective action and the date to be completed; or (3)
why action is unnecessary. Also, please furnish us copies of any correspondence or directives
issued because of this audit.
If your staff have any questions, please contact me at (312) 353-7832.
Management Memorandum
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96-CH-205/218-1007 Page ii
Executive Summary
We completed a review of Capital City Community Urban Redevelopment Corporation's HOPE
1 and HOPE 2 Grant Programs. HUD's Ohio State Office requested the audit. The general
objectives of the review were to determine whether Capital City: (1) charged costs properly to
the HOPE 1 and HOPE 2 Grants; and (2) complied with the Grant Agreements and other Federal
requirements. The specific objectives were to evaluate the quality of the rehabilitation work, the
quality of realty services, the sale of units, compliance with Davis Bacon Act, and the quality
of resident training; and to determine whether costs and management fees were reasonable,
necessary, and supported.
The rehabilitation work was in process at the time of our review. The completed rehabilitation
work was acceptable. Capital City essentially complied with the Davis Bacon Act and with
resident training requirements.
However, as the findings show, Capital City did not fully comply with the Grant Agreements and
other Federal requirements. Specifically, Capital City did not provide required realty services
in selling units and incorrectly used sales proceeds; and charged inadequately supported and
ineligible costs and management fees.
Capital City did not provide realty services and incorrectly
Capital City did not
used $75,713 of the HOPE 2 project's sales proceeds to pay
provide required realty
for realtor services. The Grant Agreement for Hickory
services and incorrectly
Ridge Townhomes required Adrian Inc., an identity-of-
used sales proceeds to
interest company, to provide realty services as part of
pay for realtor services
Capital City's match to the HOPE 2 Program. The
Agreement also required Capital City to use sale proceeds
for the benefit of low-income people. The commitment by
the President of Capital City to provide realtor services
influenced HUD's decision to award the Grant to Capital
City. Capital City, however, contracted with another realtor
to sell the units and paid the contract realtor from sales
proceeds. The President of Capital City contracted for the
realtor's services because Adrian Inc. had been unsuccessful
in selling rehabilitated units at Hickory Ridge. Because
Capital City contracted for realtor services, it did not
provide the required services without cost to the Grant.
Further, because of Capital City's incorrect use of $75,713
for realty services, these funds were not available for low-
income persons.
Page iii 96-CH-205/218-1007
Executive Summary
Capital City charged inadequately supported and ineligible
Unsupported and
costs totaling $42,053 to the HOPE 1 and HOPE 2 Grants.
Ineligible costs of
It also overcharged the Grants for an undeterminable
$42,053 charged to the
amount of salaries and related costs. The Grant Agreements
HOPE 1 and HOPE 2
require costs charged to the Grant to be reasonable,
Grant Programs
supported, and eligible. Capital City had ineffective
management oversight that allowed unsupported and
ineligible costs to be charged to the Grants programs.
Because of these incorrect charges, Capital City had less
Grant funds to spend on eligible activities for the benefit of
the intended beneficiaries, low-income families.
Capital City charged Hickory Ridge Townhomes, the
Capital City charged
HOPE 2 project, $9,849 for excess management fees it paid
Hickory Ridge
to Adrian Inc. over three years. The Grant Agreement
Townhomes $9,849 of
permitted a maximum fee of 5.5 percent of residential
excess management fees
income collected and required the owner to obtain HUD
approval for any changes. Contrary to this requirement,
Capital City and Adrian Inc., identity-of-interest firms,
agreed to a 7 percent fee without seeking HUD approval.
The President of Capital City and Adrian, Inc. said he had
forgotten about the management certification limiting the
management fee to 5.5 percent.
We made several detail recommendations in our findings to
Recommendations
correct the deficiencies reported. We recommend that
Capital City repay the HOPE 2 Program $75,713 for the
incorrectly charged realty services. We also recommend
that Capital City repay other ineligible costs and provide
support for unsupported costs or repay the Grant programs.
We discussed our findings with Capital City's President
throughout the audit. We held a closeout conference on
April 4, 1996.
We gave Capital City our draft findings, and it provided us
written comments. We considered the replies in preparing
our final report. Excerpts with our evaluations are in the
findings. Appendix B includes Capital City's comments in
their entirety, except for attachments that were not used for
the final report.
96-CH-205/218-1007 Page iv
Table of Contents
Management Memorandum i
Executive Summary iii
Introduction 1
Findings
1 Capital City Did Not Provide Required
Realty Services and Correctly Use
HOPE 2 Sales Proceeds 3
2 Capital City Charged Unsupported and Ineligible
Costs To The HOPE 1 And HOPE 2 Grants 11
3 Capital City Charged Hickory Ridge Excess
Management Fees 21
Internal Controls 25
Follow Up On Prior Audits 27
Appendices
A Schedule of Unsupported and
Ineligible Costs 29
B Auditee Comments 31
Page v 96-CH-205/218-1007
Table of Contents
C Distribution 41
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96-CH-205/218-1007 Page vi
Introduction
On November 28, 1990 a set of initiatives called HOPE -Homeownership and Opportunity for
People Everywhere was signed into Law. The HOPE Initiatives were to dramatically expand
homeownership and affordable housing opportunities to help low-income persons to obtain self
sufficiency.
HOPE 1 provided homeownership for low-income persons living in public or Indian housing and
single family properties next to other single family public housing properties. HOPE 2 provided
homeownership for low-income persons in multifamily properties insured, owned, or held by
HUD, Veteran's Administration, Resolution Trust Corporation, Farmer Housing Administration,
or State and Local governments.
Capital City Community Urban Redevelopment Corporation was formed in 1988 and became a
tax-exempt, non profit organization in June 1991. Capital City's mission was to preserve
affordable housing and to promote urban investment/revitalization.
HUD awarded Capital City a $2,425,483 HOPE 1 Implementation Grant effective March 29,
1993. The Grant was for the conversion of 101 units at Poindexter Towers into condominiums
for senior citizens. Capital City had five years to rehabilitate and sell the units.
HUD awarded Capital City a $3,852,000 HOPE 2 Implementation Grant effective April 30, 1993.
The Grant was for conversion of 96 units at Hickory Ridge Townhomes into condominiums for
families. Capital City had six years to rehabilitate and sell the units. Both projects were in
Columbus, Ohio
The Executive Director and President of Capital City was Charles L. Adrian. Capital City's
records and books were at 787 South State Street, Westerville, Ohio.
The general objectives of the review were to determine
Audit Objectives
whether Capital City: (1) charged costs to the HOPE 1 and
HOPE 2 Grants that were reasonable, necessary, and
adequately supported, and (2) complied with the Grant
Agreements and other Federal requirements. The specific
objectives were to evaluate: the quality of the rehabilitation
work, the quality of realty services, the sale of units,
compliance with the Davis Bacon Act, and the quality of
resident training; and to determine whether costs and
management fees were reasonable, necessary, and
supported.
We conducted the review at the HUD Ohio State Office and
Scope and Methodology
at Capital City. To find out HUD's concerns and obtain
Page 1 96-CH-205/218-1007
Introduction
background information, we reviewed HOPE 1 and HOPE 2 program materials, guidelines,
Grant applications, Grant Agreements, and other program requirements. We reviewed
monitoring records and correspondence. We also interviewed key Ohio State Office staff.
To evaluate Capital City's operations, we reviewed Capital
City's general ledgers, cash payment and receipt records,
contracts, closing statements, payroll records, indirect cost
plan, and 1993 and 1994 certified financial statements. We
also interviewed Capital City's staff. To determine whether
the rehabilitation work was satisfactory, an Ohio State
Office architect and OIG auditors inspected Poindexter
Towers and Hickory Ridge Townhomes.
Our audit covered the period from April 1, 1993 through
August 31, 1995. We extended the audit period as
necessary. We did the field work between September 1995
and April 1996. We conducted the audit following
generally accepted government auditing standards. We
provided a copy of this report to Capital City's President.
96-CH-205/218-1007 Page 2
Finding 1
Capital City Did Not Provide Required Realty
Services and Correctly Use
HOPE 2 Sales Proceeds
Capital City did not provide realty services and incorrectly used $75,713 of the HOPE 2 project's
sales proceeds to pay for realtor services. The Grant Agreement for Hickory Ridge Townhomes
required Adrian Inc., an identity-of-interest company, to provide realty services as part of Capital
City's match to the HOPE 2 Program. The Agreement also required Capital City to use sale
proceeds for the benefit of low-income people. The commitment by the President of Capital City
to provide realtor services influenced HUD's decision to award the Grant to Capital City.
However, Capital City contracted with another realtor to sell the units and paid the contract
realtor from sales proceeds. The President of Capital City contracted for the realtor's services
because Adrian Inc. had been unsuccessful in selling rehabilitated units at Hickory Ridge.
Because Capital City contracted for realtor services, it did not provide the required services
without cost to the Grant. Further, because of Capital City's incorrect use of $75,713 for realty
services, these funds were not available for low-income persons.
The HOPE 2 Grant Agreement incorporated the Grant
HUD Requirements
Application and the January 14, 1992 Program Guidelines.
The Agreement provided for buying, rehabilitating, and
selling multifamily properties held or owned by
Government (Grant Agreement, introductory paragraph).
The Agreement required Capital City to complete all work
items in the Grant Application within the HUD-approved
budget. The work items included all services necessary for
the performance of program activities in the Application
and Agreement (Article II.(a)).
The Agreement also stated that only the HUD Grant Officer
had authority to approve changes from the Agreement and
Application. The Grantee was at risk for any unapproved
deviations and related costs (Article II.(c)).
The Agreement required Capital City to match part of the
Grant funding. Adrian Inc. was to provide basic realtor
services and sell the units. Seven percent of the sales price
Page 3 96-CH-205/218-1007
Finding 1
of each units sold would be counted toward the match
(Application Exhibit 22, Paragraph 7).
The basic realty services Adrian Inc. was to provide
consisted of the following: prepare Real Estate Purchase
Contracts and other necessary forms; provide assistance to
the buyers; order credit reports, final title reports, title
policies, and inspections; assist potential buyers in finding
financing; provide copies of required documents; handle
buyers' complaints and concerns; and advertise and sell the
properties (Application, Exhibit 22).
The HOPE 2 Agreement required sales proceeds to be used
for the benefit of low-income people such as, for business
opportunities and support services for the homeownership
program (Guidelines, Section 725).
Capital City did not donate realty services as required for its
Capital City did not
match and did not use the sales proceeds for the benefit of
provide required realty
low-income people, as required. Instead, without HUD's
services and incorrectly
permission, Capital City contracted for the realty services
used sales proceeds from
and used sales proceeds to pay the contract realtor.
Hickory Ridge to pay a
realtor
Adrian Inc. was unable to sell Hickory Ridge's rehabilitated
units. So on June 17, 1995, Capital City executed three
contracts with a realtor to sell the properties. The contracts
were with the realtor's three identity-of-interest firms.
The contract realtor was to provide essentially the same
basic realty services that Adrian Inc. was to provide. The
three contracts together provided that Capital City would
pay the realtor a total of $5,000 for each unit the realtor
sold.
As of April 4, 1996, the contract realtor had sold 14 units at
Hickory Ridge. The realtor received a total of $75,713 or
$5,408 a unit. If Adrian Inc. had provided the realty
services and sold the units, Capital City would have been
allowed $27,790 as part of its match (sale prices x 7 percent
commission).
We interviewed seven of the 14 buyers. The buyers said
that the contract realtor provided services such as: ordering
credit reports, helping clean-up credit histories,
96-CH-205/218-1007 Page 4
Finding 1
accompanying buyers on property inspections, and
informing buyers of payment amounts. These were
essentially the same services that Adrian Inc. was to
provide.
Capital City paid the realtor from sales proceeds. The use
of sales proceeds for this purpose was not in conformity
with Section 725 of the HOPE 2 Guidelines incorporated
into the Grant Agreement. Section 725 required sales
proceeds to be used to benefit low-income people.
Examples included improvements to properties under the
program, business opportunities for low-income families,
support services for the homeownership program, additional
home-ownership opportunities, and other HUD-approved
activities.
Capital City's President said HUD designed the HOPE
Grant Programs to be flexible, and that Capital City can
provide its match in other ways. Further, Capital City's
President said he was allowed to pay for contract realty
services from sales proceeds.
Capital City informed HUD's Ohio State Office of its
intention to use a contract realtor to help sell rehabilitated
units. However, Capital City's President did not identify the
source of the funds used to pay the contract realtor. He did
say that the realtor would not be paid with Grant funds. The
Ohio State Office interpreted this statement to mean that
Adrian Inc. was going to pay for the contract realtor with its
own funds, since Adrian Inc. was to provide the realty
services as part of Capital City's match.
HUD's Ohio State Office staff said one reason Capital City
was awarded the HOPE 2 Grant was because of Adrian
Inc.'s substantial match of in-kind-contributions in the form
of realtor services. HUD did not authorize Capital City to
substitute a contract realtor for Adrian Inc.'s services.
In conclusion, Capital City did not provide the matching
contribution and therefore did not comply with the Grant
Agreement. Further, Capital City used sales proceeds to
pay for contract realty services. Therefore, $75,713 less was
available for low-income people.
Page 5 96-CH-205/218-1007
Finding 1
Auditee Comments The draft states that Capital City improperly used $75,713
of Hickory Ridge proceeds to pay for realtor services. This
statement is incorrect. The $70,000, not $75,713, of sales
proceeds spent by Capital City was for specific services
performed as defined by three contracts.
OIG Evaluation of We believe our amount is correct. We determined that the
Auditee Comments contract realtor was paid $75,713 from closing statements
and canceled checks obtained from the title company.
Capital City based its $70,000 on contracted amounts
($5000 x 14 units sold), not amounts actually paid.
Auditee Comments [The draft finding] states that Capital City is required to
complete all work items in the Grant application without
additional costs. Where as under normal circumstances this
might be true, the Hope 2 Grant is by no means a normal
circumstance.
OIG Evaluation of We disagree with Capital City's implication that it is bound
Auditee Comments only by the Grant Agreement under what it considers to be
normal circumstances. The Grant requirements apply under
all circumstances, unless HUD authorizes changes. And
Capital City did not request HUD authorization to contract
with another realtor.
Auditee Comments Capital City did inform the HUD office that a contract
realtor was going to help sell the rehabilitated units.
However, HUD must have misinterpreted when it comes to
[who was] paying compensation for [the contract realty]
services.
OIG Evaluation of After the close out conference, we checked again with
Auditee Comments HUD's Ohio State Office staff on what Capital City told
them. The HUD staff reiterated that the President never
told them that Capital City would use sales proceeds. The
President only told them that Grant funds would not be used
to pay the contract realtor. They assumed that Adrian Inc.
was going to pay for the services.
96-CH-205/218-1007 Page 6
Finding 1
Auditee Comments Capital City continues to maintain that the HOPE Program
is flexible and that the match can be provided in a number
of ways. Upon completion of the project, a final accounting
will determine any adjustment that may need to be made to
the match. By no means is it crucial that Capital City's
match be entirely made up of realty services.
OIG Evaluation of The HOPE 2 Grant may be flexible. Capital City, however,
Auditee Comments had agreed to provide specific realty services to fulfill its
match requirements. Capital City cannot disregard that
requirement and decide on its own what services it will
substitute for the match. Furthermore, Capital City's
substantial in-kind contribution was one of HUD's reasons
for awarding the Grant to Capital City.
Auditee Comments Please be aware that all Adrian Inc. receives is a nominal
management fee and fair rent for needed office space.
Further, Charles L. Adrian receives only $1,169.47 in total
each 2-week pay period. This salary of $30,000 is nominal
and should be more. It is obvious that we are dedicated,
love the work and the expected results, and are working for
a pittance. The point is that at no time are there any funds,
fees, profit, or anything coming from the grant or any other
source to Adrian, Inc. or Charles L. Adrian. No one could
assume Adrian Inc. would pay for anything.
OIG Evaluation of We did not question the reasonableness of the salary paid
Auditee Comments Capital City's President, nor his and his staff's dedication.
We do note, however, that Capital City benefits to the
extent that sales prices exceed costs. In addition, Adrian
Inc. is expected to earn income for managing the project
after sale of the units.
Auditee Comments The fact of the matter is that grant funds were not used to
pay for these services. Sales proceeds were used and
consistent with Section 725; since the monies were
delegated to assist with the project, they were properly
allocated.
Page 7 96-CH-205/218-1007
Finding 1
The agreements that were put in place with [the contractor
realtor's identity-of-interest firms] directly resulted in our
being able to market to the target identified by the Grant.
It is our feeling that by subscribing to these services we not
only were able to sell 14 units, we were also able to
contribute to an increase in the quality of life for these grant
participants by affording them the luxury of
homeownership. Payment for these services is allowed
under the grant.
OIG Evaluation of The Agreement restricts the use of sales proceeds for the
Auditee Comments benefit of low-income people. Using the proceeds to pay for
realtor services did not benefit low-income persons.
The contract realtor may have had some success in selling
units. But, the realtor provided essentially the same
services Adrian Inc. was to provide as part of its match.
These services included obtaining financing for potential
buyers and cleaning up their credit histories. Capital City
itself originated in its application the requirement that
Adrian Inc. would provide realty services as part of Capital
City's match.
Auditee Comments Whereas HUD [OIG] ..... states that Capital City received
more points because of the match, it is hard to imagine that
anything associated with the realty services ..... were
normal. We may have received more points because of the
match, but the additional work supports both the additional
points as well as the additional expense. What HUD fails
to understand is that there are three parts to closing these
deals: finding buyers, training and counseling, and finding
a lender. We have worked hard to market Hickory Ridge
and will continue.
OIG Evaluation of In the final analysis, Adrian Inc. did not provide the match
Auditee Comments as specified in the Grant Agreement and spent $75,713 of
sales proceeds without HUD approval.
Auditee Comments There continues to be a lack of understanding on HUD
[OIG's] part of what normal realty services consist of.
Capital City had the units listed with another realtor with
96-CH-205/218-1007 Page 8
Finding 1
absolutely no movement. Several lenders had been
contacted with virtually no commitments for financing.
The services provided by the realtor, mortgage brokerage,
and consulting company were far from the norm. Had these
been considered "normal" loans, anyone would have been
able to make them. This is a hard sell property and as such
requires a technician dedicated to and experienced with the
constituency to get the deals done. We needed that, and
employed it only because there was no other way to secure
sales.
The draft states that the seven buyers interviewed said that
the realtor provided no counseling or training other than
that which is considered normal realty services. Capital
City believed the mere fact that these deals got closed is
evidence enough that the services were performed. For
instance, the services of B and C lenders [lenders for
borrowers who do not qualify as high grade borrowers] had
to be secured, but even for those lenders, some credit issues
had to be resolved. And, realty services had to have been
performed or the loans would not have closed. Capital City
assisted the realtor in every way that we could, but
ultimately it was the expertise of the contracted companies
that provided the program with homeowners.
OIG Evaluation of Selling the units may have been more difficult than Capital
Auditee Comments City's President anticipated, and the contract realtor had
success in selling units. A key was the contract realtor's
ability to obtain financing for the buyers and to understand
the market.
The comments ignore two critical points. First is the fact
that Adrian was going to provide realty services as a match,
influenced the awarding of the Grants to Capital City.
Second, the contract realtor provided essentially the same
services that Adrian was to provide.
Recommendations We recommended that the Director of HUD's Ohio State
Office's Multifamily Housing Division, requires:
1A. Capital City to reimburse the HOPE 2 Program
for the $75,713 of ineligible costs paid for realty
services.
Page 9 96-CH-205/218-1007
Finding 1
1B. Allow Capital City a seven percent match of the
unit sales prices once Capital City has repaid the
$75,713 to the HOPE 2 Grant Program.
If Capital City does not pay back the HOPE 2 Grant for
ineligible costs totaling $75,713, the Director of the
Multifamily Housing Division should:
1C. Consider imposing administrative sanctions to the
full extent of the law.
96-CH-205/218-1007 Page 10
Finding 2
Capital City Charged Unsupported and
Ineligible Costs to the HOPE 1 and HOPE 2
Grants
Capital City charged inadequately supported and ineligible costs totaling $42,053 to the HOPE
1 and HOPE 2 Grants. It also overcharged the Grants for an undeterminable amount of salaries
and related costs. The Grant Agreements require costs charged to the Grants to be reasonable,
supported, and eligible. Capital City had ineffective management oversight that allowed
unsupported and ineligible costs to be charged to the Grant Programs. Because of these incorrect
charges, Capital City had less Grant funds to spend on eligible activities for the benefit of the
intended beneficiaries, low-income persons.
Both the HOPE 1 and HOPE 2 Grant Agreements
Grant Agreements
incorporated the Grant Applications and the January 14,
include Circular A-110
1992 Program Guidelines. The Program Guidelines stated
and A-122 and Program
that the grantee must comply with Office of Management
Guidelines
and Budget Circular A-110, Grants and Cooperative
Agreements with Institutions of Higher Education,
Hospitals, and Other Nonprofit Organizations; and Circular
A-122, Cost Principals for Nonprofit Organizations
(Section 510).
Specific requirements are discussed in the appropriate
subsections of the finding.
Capital City charged $42,053 of inadequately supported and
Unsupported and
ineligible costs to the Grant Programs: $35,227 was
ineligible costs charged to
inadequately supported and $6,826 was ineligible. The
Grants
following schedule shows the unsupported and ineligible
costs for each Grant.
Page 11 96-CH-205/218-1007
Finding 2
Amounts Overcharged
Description HOPE 1 HOPE 2 Totals
Unsupported Costs:
Equipment Rentals $ 8,523 $12,567 $21,090
Consulting services 12,130 12,130
Other 2,007 2,007
Total unsupported $20,653 $14,574 $35,227
Ineligible costs:
Video $ 3,356 $ 3,356
Duplicate payment 1,970 1,970
Salaries $ 1,250 1,250
Gift for Trustee 250 250
Total ineligible costs $ 1,500 $ 5,326 $ 6,826
Total unsupported
and ineligible costs $ 22,153 $ 19,900 $42,053
Capital City charged the HOPE Grants $35,227 for
Unsupported costs of
inadequately supported costs: $20,653 to HOPE 1 and
$35,227 charged to
$14,574 to HOPE 2.
HOPE Grants
Capital City charged the Grants an estimated $21,090 for
inadequately supported equipment rentals. We calculated
the overcharge based on a pro rata share of the total indirect
costs. The equipment consisted of computers, software,
desks, a phone system, filing cabinets, and a postal meter.
We requested Capital City to provide supporting documen-
tation for the costs and acquisition dates of the equipment.
In response, Capital City provided us a list of office
furnishings showing a replacement value totaling $65,305.
Capital City did not provide documentation to support the
amounts of the replacement values shown on the list.
Further, the list did not show the acquisition costs,
acquisition dates, or the useful lives of the equipment.
Therefore, we could not determine the amount of the
equipment rental that should have been charged by Capital
City.
96-CH-205/218-1007 Page 12
Finding 2
Capital City paid Adrian Inc. $12,130 for consulting
Capital City did not
services at Poindexter Towers. Capital City did not
adequately support
document the basis for awarding the sole-source contract
Adrian Inc. consulting
and for paying Adrian Inc., as required. Further, the
fees
invoices did not show the times and dates of the consulting
services provided.
Circular A-110 states that all procurement shall be
conducted in a manner to provide, to the maximum extent
practical, open and free competition. Circular A-110 also
states that procurement records must justify sole-source
contracts and that sole source contracts over $5,000 are
subject to prior approval of the Federal sponsoring agency
(Attachment 0, paragraphs 3.b. and 3.c.(6)).
At the closeout conference, the President said he switched
from a salary to a contract fee at the same rate as his salary.
He did it for personal reasons. He said he does not have
records showing what he did during that time, but he would
try to provide some documentation.
The remaining $2,007 in unsupported costs consisted of:
$1,000 paid to Capital City, $807 paid to Rescue Rooter,
and $200 in cash for the President of Adrian Inc. and
Capital City. No invoices or other documents describing the
services provided were in Capital City's files to support the
payments. Without adequate support, we could not
determine whether the amounts charged benefited the
HOPE activities.
Capital City incorrectly charged one employee's total salary
Excess salary costs
to the HOPE Grants although the employee also worked on
charged to the Grants
non-HOPE activities. The employee earned about $22,500
annually. Indirect costs were allocated to the Grant based
on the salary costs. Thus, excessive salary charges caused
an excessive allocation of indirect costs. Because of the
lack of accurate records we were not able to determine the
amount of the overcharges. Circular A-122 states time
reports must reflect actual activity (Attachment B paragraph
6.l.(2)(a)).
Page 13 96-CH-205/218-1007
Finding 2
Capital City charged ineligible costs totaling $6,826 to the
Ineligible costs of $6,826
HOPE Grants: $1,500 to HOPE 1 and $5,326 to HOPE 2.
charged to the HOPE
Grants
The $6,826 of ineligible costs included $3,356 in excess
charges for a video tape production. The video promoted
Capital City and four projects, the HOPE 1 and 2
Implementation Grants, the Rosa Parks HOPE Planning
Grants and a non-HOPE project. If the total production
costs of $13,426 had been split equally, each project would
have been charged $3,356. The two HOPE Implementation
Grants would have been charged a total of $6,712.
However, Capital City charged $10,070 to the HOPE 1 and
2 Grants, an excess charge of $3,356. Capital City correctly
charged $3,356 to Rosa Parks, but charged nothing to the
non-HOPE project.
Besides the videotape, Capital City charged the Grants
$1,970 for a duplicate payment for Hickory Ridge
rehabilitation, $1,250 for salaries paid to a construction
manager on a non-HOPE project, and $250 for a gift to a
Capital City Trustee.
Capital City charged ineligible and inadequately supported
Capital City's ineffective
costs to the HOPE Grants because of the lack of sufficient
internal controls allowed
management oversight. Proper management oversight
ineligible and
would have detected whether disbursements were
inadequately supported
adequately supported, the awarding of a sole source
costs to be charged to the
contract was documented, time records were maintained,
HOPE Grants
and costs were eligible.
Because Capital City charged $42,053 of inadequately
supported and ineligible costs to the Grants, fewer funds
were available to carry out the HOPE Grants' activities for
low-income persons.
Auditee Comments [Capital City submitted a response from its fee accountant
regarding the rental equipment charges. The fee accountant
said the following]. Adrian Inc. provided a list of
equipment ..... The total replacement cost purchase of the
equipment was more than $65,000. The office equipment
was used freely by Capital City personnel during the entire
Grant period under examination, March 29, 1993 to August
31, 1995. Equipment rent charged during this period
96-CH-205/218-1007 Page 14
Finding 2
totalled $750 x 29 months = $21,750. HUD is alleging that
$21,090 of this amount is ineligible and $660 is the
reasonable rent for this equipment for a period of 29
months.
In the absence of available historical cost records, it is an
acceptable practice to utilize fair market value as
established by appraisal to document the reasonable value
of equipment.
OIG Evaluation of We did not state or imply that the equipment costs were
Auditee Comments ineligible and that Capital City should be allowed $660 for
equipment rentals. We stated only that the equipment
rentals totaling $20,090 were not adequately supported.
We know of no provisions in OMB Circular A-110 or other
Federal requirements permitting the use of fair market value
as a basis for determining the reasonableness of equipment
rental charges. The documentation supplied by Capital City
does not provide a basis for determining the reasonableness
of the $750 a month charged for equipment rental.
Auditee Comments In addition to the fee accountant's response, I have also
included a quotation from a leasing company further
supporting the appropriateness of the charge. [The leasing
company stated the following]. Based on a $65,000 value
replacement costs, we will be willing to rent the equipment
discussed to you for $1,116 per month.
OIG Evaluation of Neither Capital City nor the leasing company provided any
Auditee Comments information for determining the basis of the replacement
value of $65,000. We reiterate that replacement value is
not a basis for supporting the reasonableness of rental costs.
Auditee Comments [Capital City said it understood Circular A-110 required
open and free competition and that HUD approval was
necessary for the sole-source consulting contract.] Prior to
the consulting contract Mr. Adrian was being paid a salary
for directing the implementation of the HOPE Grant. The
contract allowed payment for the same amount as the salary
Page 15 96-CH-205/218-1007
Finding 2
had provided. The total compensation for this short period
was equal to the salary. There was no harm done and none
intended.
OIG Evaluation of Capital City still did not provide any additional
Auditee Comments documentation to support the dates and times Mr. Adrian
held consulting meetings. Further, Capital City did not
justify entering a sole-source contract for the consultant
contract.
Auditee Comments The $1,000 to [Capital City] is currently unsupported.
However, the work was done. In the event Capital City
cannot provide appropriate documentation, the monies in
question will be returned to the grant.
OIG Evaluation of We agree with Capital City's proposed removal of
Auditee Comments unsupported costs from the Grant Program, if Capital City
cannot provide appropriate documentation.
Auditee Comments The $807.50 to Rescue Rooter was for the replacement of
a toilet and sump pump at Hickory Ridge. Enclosed please
find the proper documentation.
OIG Evaluation of A review of the documentation showed the invoice to be for
Auditee Comments maintenance and not rehabilitation. Consequently, Capital
City should have charged the cost of the repairs to the
Hickory Ridge operating account and not to the HOPE 2
Grant.
Auditee Comments There is no adequate documentation for the $200 stipends
paid for landscaping at Hickory Ridge. There is no doubt
that the service was performed. Since we do not have
timecards for this date we will reduce the next Hickory
Ridge drawdown.
96-CH-205/218-1007 Page 16
Finding 2
OIG Evaluation of We agree with Capital City's proposed action of removing
Auditee Comments the $200 from the Grant records.
Auditee Comments In addressing the $3,356 overcharge for the video tape
production, the video producer has determined the amount
of $1,115.07 represents a fair apportionment of the
production monies for the Lincoln Theater and Rosa Parks
segments of the video. Capital City will reduce the next
Hickory and Poindexter drawdown by the appropriate
amounts.
OIG Evaluation of We disagree with the producer's determination. The
Auditee Comments producer's estimates were based on the actual video time
showing the Lincoln Theatre and Rosa Parks projects. He
attributed none of the fixed costs of the production and the
time benefiting all projects to the Lincoln Theatre and Rosa
Parks projects. After the adjustment, the HOPE 1 and
HOPE 2 Grants would still be overcharged.
Auditee Comments Responding to the duplicate payment for Hickory Ridge
rehabilitation, it should be noted that this entry was booked
to the Grant but only drawn on once. Capital City will be
making an adjusting entry to remove the second entry from
the Grant records.
OIG Evaluation of We agree with Capital City's proposed action to remove the
Auditee Comments cost from the Grant.
Auditee Comments The $1,250 cited in the draft finding for salaries paid for a
non-HOPE project's construction manager was incorrectly
charged to the HOPE 1 Grant. The Financial Manager will
reduce the next Poindexter drawdown for the rehab line
item by the appropriate amount.
OIG Evaluation of We agree with Capital City's proposed action to remove the
Auditee Comments cost from the Grant.
Page 17 96-CH-205/218-1007
Finding 2
Auditee Comments The $250 cited as a gift for a Capital City Trustee was
actually a retirement party held in honor of the Trustee.
This charge was inadvertently applied to the Grant in error.
The Financial Manager will reduce the next Hickory
drawdown for the appropriate amount.
OIG Evaluation of We agree with Capital City's proposed action to remove the
Auditee Comments cost from the Grant.
Auditee Comments Capital City has estimated that the Grants were overcharged
a total of 16 hours per bi-weekly pay period for $190.37 for
payroll and taxes. Since the inception of the Grants, the
total charge is $14,658.49 through March 1996.
During February and March 1996, the Financial Manager
conducted a time study and determined that a total of 173
of her hours were worked on the Grants. Forty-five hours
a month were charged for her time. Therefore, 83 hours
will be charged back to the Grant for February and March,
1996. From the beginning, April 1994, the Financial
Manager has determined that, conservatively, she has
worked a minimum of 65 hours per month on Grant-related
activities. However, since October 1995 it is clear that an
additional 21.5 hours per month has been required to meet
the demands of the audit. The purpose of this paragraph
and these calculations are to rectify two situations: (1) the
overpayment of one employee's salary as you mentioned in
your letter of $14,658.49, and (2) the other is to show the
amount that Adrian Inc. undercharged for the accounting
person's compensation totaling $15,225.00 from April 1994
through March 1996.
OIG Evaluation of We agree that one employee had been overcharged to the
Auditee Comments Grants. However, Capital City did not explain how it
determined that 16 hours per pay period was the appropriate
adjustment from the inception of the Grants. Further, we do
not agree that Capital City can charge the Financial
Manager's salary to the Grants for 1994 and 1995 without
time records. OMB Circular A-122 states that payroll costs
must be supported by accurate time records.
96-CH-205/218-1007 Page 18
Finding 2
Auditee Comments In response to the statement that Capital City's ineffective
internal controls allowed ineligible and inadequately
supported costs to be charged to the HOPE Grants, I believe
that the Inspector General's Office is making a broad-based
statement based on very little evidence. Given the
thousands of entries, purchase orders, checks, balancing
exercises, to name a few, I feel that our staff, given its size
has done a Herculean job of maintaining the integrity of the
grant. The mistakes cited have been duly noted and
procedures implemented to prevent future errors. Of
significance is that the President of Capital City will review
and approve all journal entries prior to being booked.
OIG Evaluation of An improved system of internal controls may have
Auditee Comments determined that Capital City needed a better review of
disbursements to ensure that all disbursements were
supported adequately and charged to the proper accounts.
An improved system of internal controls would have also
ensured that all activities benefiting from purchases were
charged the appropriate amounts, and not charging all such
cost to the HOPE Grants. An improved system of internal
controls would have determined that sole-source purchasing
needed to be justified and proper approval obtained in
advance.
Recommendations We recommend that the Director of the Ohio State Office's
Public Housing Division requires Capital City to take the
following corrective actions:
2A. Provide adequate support for the $20,653 of
undocumented costs charged to the HOPE 1 Grant
program. If adequate documentation cannot be
provided, Capital City should be required to repay
the Grant program. These costs include the
following:
• Office equipment rental, $8,523; and
• Consulting services, $12,130.
Page 19 96-CH-205/218-1007
Finding 2
2B. Repay the estimated $1,500 of ineligible cost to the
HOPE 1 Grant. These costs include the following:
• Salaries for a construction manager at a non-
HOPE project, $1,250; and
• A gift to a Capital City Trustee, $250.
2C. Document the adjustments made to the HOPE 1
Grant for unsupported salary costs and the
associated indirect costs.
We recommend that the Director of the Ohio State Office's
Multifamily Housing Division requires Capital City to take
the following corrective actions:
2D. Provide adequate support for the $14,574 of
undocumented costs for the HOPE 2 Grant program.
If adequate documentation cannot be provided,
Capital City should be required to repay the Grant
program. These costs include the following:
• Office equipment rental, $12,567;
• Other unsupported costs, $2,007;
2E. Repay the estimated $5,326 of ineligible costs to the
HOPE 2 Grant. These costs include the following:
• Video production, $3,356; and
• Duplicate payment, $1970.
2F. Document the adjustments made to the HOPE 2
Grant for unsupported salary costs and associated
indirect costs.
96-CH-205/218-1007 Page 20
Finding 3
Capital City Charged Hickory Ridge Excess
Management Fees
Capital City charged Hickory Ridge, the HOPE 2 project, $9,849 for excess management fees
it paid Adrian Inc. over three years. The Grant Agreement permitted a maximum fee of 5.5
percent of residential income collected. Also, it required the owner to obtain HUD approval for
any changes. Contrary to this requirement Capital City and Adrian Inc., identity-of-interest firms,
agreed to a 7 percent fee without seeking HUD approval. The President of Capital City and
Adrian Inc. said he had forgotten about the management certification limiting the management
fee to 5.5 percent.
The HOPE 2 Grant Agreement incorporates the Grant
Grant Agreement limited
Application and the Management Certification between
management fee to 5.5
Capital City and Adrian Inc. The Grant Agreement
percent
required Capital City to complete all work items in the
Grant Application including services and all things
necessary for the performance of program activities set
forth in the Application and Agreement (Article II.(a)).
The Agreement further stated that only the HUD Grant
Officer had the authority to authorize deviations from the
Agreement and the Application. The Grantee was at risk
for any unapproved deviations and shall bear all costs
related to the deviations (Article II.(c)).
On May 15, 1992, Capital City and Adrian Inc. officials
agreed to a management certification that was incorporated
into the Grant Agreement. It required the parties to execute
a Management Agreement that limited Adrian Inc.'s
management fee to 5.5 percent of residential income
(Paragraph 1). The Certification also required the owner to
submit a new Certification to HUD before authorizing a
management fee different from the 5.5 percent authorized
in paragraph 1 (Paragraph 10).
On June 3, 1993, Capital City and Adrian entered into a
Management fee
Management Agreement calling for a management fee of 7
increased to 7 percent
without HUD approval
Page 21 96-CH-205/218-1007
Finding 3
percent of gross collections: Section 8 rent payments, rental income, and income from other
sources such as coin-operated laundry equipment.
Capital City did not submit a revised Certification with the
higher management fees to HUD, as required. The
President of Adrian and Capital City said he had forgotten
that the Management Certification limited the management
fee to 5.5 percent.
Because of the additional 1.5 percent management fee,
Hickory Ridge
Capital City charged Hickory Ridge excessive management
overcharged $9,849 in
fees of $2,342 in 1993; $3,929 in 1994; and $3,578 in
management fees
1995:
1993 1994 1995a>
Gross income $156,160 $261,934 $255,722
Approved fee rate .055 .055 .055
Fee earned $ 8,589 $ 14,406 $ 14,062
Management fee
charged 10,931 18,335 17,640
Excess fee $ 2,342 $ 3,929 $ 3,578
a> Amounts are as recorded in Capital City's
general ledger as of December 31, 1995.
For the three-year period, Capital City overcharged Hickory
Ridge $9,849 for the excess management fees paid to
Adrian.
Auditee Comments Regarding the "excess management fee" and reference to
the [Management Certification], it clearly states fees: 5.5
percent of residential income. Page 2 [of the Certification]
further analyzes the fee to be 5.5 percent of monthly gross
income of $37,335, for a monthly fee of $2,053.42. This
calculated income was based on occupancy of 90 percent
(96 units, 87 occupied) which was correct at the time of the
96-CH-205/218-1007 Page 22
Finding 3
survey was completed [about the time of application]. At
the time of acquisition, occupancy was 55 percent (96 units,
54 occupied). June 3, 1993 [was the] date the agreement
between Adrian Inc. and Capital City for a 7 percent
management fee [was signed]. This is the fee (7 percent)
charged since that date. You are correct to request Adrian
Inc. to pay the amount over 5.5 percent to the Hickory
Ridge operating account.
Adrian Inc. has conformed to your recommendations and
has paid the correct amount, calculated (as per audits) to be
$6,513.70.
OIG Evaluation of Capital City agrees that it incorrectly charged a 7 percent
Auditee Comments fee and that the correct fee should have been 5.5 percent.
However, it calculated the overcharge as $6,514 compared
to our $9,489, a difference of $2,975.
We stand by our calculation. Capital City determined its
calculation of fees paid based on unadjusted general ledger
balances. We based our calculation on amounts in the
certified financial statements submitted to HUD and the
certified public accountant's supporting working papers.
Auditee Comments Please accept this letter as a request to increase,
retroactively, the management fee from 5.5 percent to 7
percent. Please forward a copy to the HUD department
involved for their consideration.
However, if the request is granted, please allow the refund
of our returned payment as soon as possible.
Other management companies would require at least 8
percent to manage, but the original agreement of 5.5
percent is correct. The fact is, it was unintentionally
overlooked.
OIG Evaluation of We have forwarded the request for a fee increase to
Auditee Comments officials in HUD's Ohio State Office for consideration and
action. We did not express an opinion on the request.
Page 23 96-CH-205/218-1007
Finding 3
Recommendations We recommend that the Director of the Ohio State Office's
Multifamily Housing Division requires Capital City to take
the following corrective actions:
3A. Pay the $9,849 in excess management fees to
Hickory Ridge.
3B. Pay to Hickory Ridge any excess management fees
charged since December 31, 1995.
3C. Certify that it will limit fees to the HUD-approved
rate specified in the Management Certification.
96-CH-205/218-1007 Page 24
Internal Controls
In planning and performing our audit we considered internal control systems of the management
of Capital City Community Urban Redevelopment Corporation, to determine our auditing
procedures and to provide assurance on internal control. Internal control is the process by which
an entity obtains reasonable assurance on achievement of specific objectives. Internal controls
consist of interrelated components, including integrity, ethical values, competence and the
control environment that includes establishing objectives, risk assessment, information systems
control procedures, communication, managing change and monitoring.
We determined that the following internal controls were
Relevant Internal
relevant to our audit objectives:
Controls
• Management philosophy and operating style;
• Accounting system and controls;
• Segregation of duties;
• Management monitoring methods.
A significant weakness exists if internal controls do not
give reasonable assurance that the entity meets goals and
objectives; that use of resources 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.
Based on our review, we concluded that the following items
Significant Weaknesses
were a significant weaknesses:
• Management monitoring methods.
The lack of management oversight allowed $42,053 of
improperly supported and ineligible cost to be charged
to the HOPE 1 and HOPE 2 Grants (see Finding 2).
Page 25 96-CH-205/218-1007
Internal Controls
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96-CH-205/218-1007 Page 26
Follow Up On Prior Audits
This was the first OIG audit of Capital City Community Urban Redevelopment Corporation.
Capital City's last independent audit was for the year ended December 31, 1994. That report
contained no findings.
Page 27 96-CH-205/218-1007
Follow Up On Prior Audits
(THIS PAGE LEFT BLANK INTENTIONALLY)
96-CH-205/218-1007 Page 28
Appendix A
Schedule of Ineligible and
Unsupported Costs
Recommendation Type of Questioned Costs
Number Ineligible 1/ Unsupported 2/
1A $75,713
2A $20,653
2B 1,500
2D 14,574
2E 5,326
3A 9,849
TOTALS $92,388 $35,227
1/ Ineligible costs are costs charged to a HUD-financed or insured program or activity that the
auditor believes are not allowable by law, contract or Federal, State or local policies or
regulations.
2/ Unsupported costs are amounts charged to a HUD-financed or insured program or activity
whose eligibility cannot be determined at the time of the audit since such costs are not
supported by adequate documentation or there is a legal or administrative determination on
the eligibility of the costs. These costs require a future decision by HUD program Officials.)
Page 29 96-CH-205/218-1007
Capital City Community Urban Redevelopment, Westerville, OH
Published by the Department of Housing and Urban Development, Office of Inspector General on 1996-04-26.
Below is a raw (and likely hideous) rendition of the original report. (PDF)