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 (THIS PAGE LEFT BLANK INTENTIONALLY) 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 (THIS PAGE LEFT BLANK INTENTIONALLY) 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 (THIS PAGE LEFT BLANK INTENTIONALLY) 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)