oversight

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)

                                                                       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