oversight

Barbara Jean Wright Courts, Chicago, IL

Published by the Department of Housing and Urban Development, Office of Inspector General on 1995-12-11.

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

Issue Date
December 11, 1995
AUDIT RELATED MEMORANDUM
96-CH-212-1804


MEMORANDUM FOR: Beverly E. Bishop, Director, Office of Housing,
       Illinois State Office
      Edward Hinsberger, Director of Multifamily
       Housing, Illinois State Office


FROM: Dale L. Chouteau, District Inspector General for Audit,
   Midwest

SUBJECT: Barbara Jean Wright Courts
    Chicago, Illinois

             INTRODUCTION/BACKGROUND

We completed a review of Barbara Jean Wright Courts located in
Chicago, Illinois. We conducted the review to assess and
determine the reasons for the Project's poor physical condition.
Our review covered the period of January 1993 through April 30,
1995.

Barbara Jean Wright Courts is a 272 unit residential apartment
complex. HUD insured the Project's mortgage under Section 236 of
the National Housing Act in August 1972. The Project is owned by
Wright Court, Ltd., an Illinois limited partnership. The Project
is managed by Central City Management Corporation.

Barbara Jean Wright Courts defaulted on its mortgage in 1981 and
the mortgage was assigned to HUD. The original amount of the
mortgage was $6,103,000 and the remaining principal balance at
April 30, 1995 was $5,923,237.

In 1984, HUD gave preliminary approval to a workout arrangement
to give the Project an opportunity to bring the mortgage current.
The completion of the workout arrangement was contingent upon
HUD's final approval of a change in ownership. HUD did not
approve the change in ownership because one of the principals
involved had been suspended from participation in HUD programs.

The workout arrangement provided that the owners would make
capital contributions to the Project totaling $900,000 in three
equal annual installments. These contributions were to commence
after HUD's approval of the change in ownership. However, the
owners have contributed almost $700,000 in advance of receiving
HUD's final approval. The preliminary workout arrangement also
provided that payments to the reserve for replacement fund would
be waived until completion of the workout agreement.

Rents for 108 units, or forty percent of the Project's units, are
Federally subsidized through HUD's Section 8 Program. HUD
provides additional rent subsidies through mortgage interest
reduction payments. Between January 1, 1993 and April 30, 1995,
HUD provided the Project with $1,128,938 of Section 8 subsidies
and $713,713 of interest reduction subsidies, for a total of
$1,842,651.

Under the mortgage interest reduction arrangement, some tenants
pay a HUD-approved basic rental amount in lieu of the market
rent. The Project's rental information follows:

Bedroom
Size        Basic Rent        Market Rent

  2          $501           $580
  3          $558           $645
  4          $616           $712

The Project does not have any one bedroom units.

HUD's Fair Market Rent limits for the Chicago area as of
September 1995 were: $716 for two bedroom units; $895 for three
bedroom units; and $1,003 for four bedroom units.


                    PROBLEMS

The Project currently needs approximately $5.3 million of funds
for project rehabilitation. However, because the Project has no
reserve for replacement or excess operating funds available, it
will become increasingly difficult for the Project's owners to
properly rehabilitate this Project.

Specific causes for the Project's lack of funds to properly
operate the Project are:
-   The Project has received only one rental increase in the
    past 6 1/2 years, due at least in part to a poor working
    relationship between the former HUD Asset Manager and the
    management agent. Also, as a result of a computer input
    error, HUD used incorrect information in considering the
    management agent's requests for rent increases. HUD
    believed the Project had 100 more four bedroom units than it
    actually had.

    HUD recently approved a modest (approximately $30 per unit)
    rental increase that became effective on September 1, 1995.
    However, this increase merely provided the Project's
    management agent with additional funds needed to cover
    operating costs. The increase did not provide any
    additional funds for rehabilitation work.

-   HUD's Multifamily Housing staff said the Project's annual
    insurance premiums of approximately $107,000 appear
    excessive. The Project's owner arranged for the insurance
    coverage through an affiliated company.

-   The Project had two units destroyed by fire in 1992 and
    1993. The two units are still not rehabilitated and income
    producing because of inadequate insurance settlements.
    These inadequate settlements resulted from a high deductible
    of $10,000, and settlement amounts that were substantially
    lower than bids received for the cost of the repairs. The
    management agent said the Project had no additional funds
    available to pay the balance of the repair costs.

-   The Project has been unsuccessful in dedicating its streets
    to the City of Chicago, due mainly to its lack of follow-up
    and communication with the City. Therefore, the Project has
    incurred costs for the upkeep of the streets and for snow
    removal. The Project eventually will also be responsible
    for major repairs of the streets and underground utility
    lines, all of which are twenty-three years old.

-   The management agent's annual fee of $114,000 is excessive.
    All expenses such as bookkeeping, on-site project
    management, and clerical staff are charged to and paid
    directly by the Project. The management fee essentially
    compensates the President of the management company for his
    part-time involvement in the management of the Project. The
    management company incurs virtually no overhead costs over
    and above the costs paid directly by the Project.

-   Until recently, major appliances and equipment (i.e.
    refrigerators, stoves, electrical boxes, furnaces,
    boilers, etc.) have not been replaced since the Project's
    inception. The Project's management began to replace these
    items in 1995 using the Project's scarce operating funds.

-   There has recently been an increase in vacancies (17 as of
    August 5, 1995), and a resulting decrease in rental revenues
    because:

    1)    A newly constructed project opened up in February 1995,
         about a block from the Project. The new project has
         comparable unit types and rents as Barbara Jean Wright
         Courts.

    2)    The former Project Engineer failed to ensure that
         vacated units were made ready for occupancy in a timely
         manner. He also did not advise the Project's
         management office when the units were available for
         occupancy.

    3)    The Project's waiting list (excluding Section 8
         prospective tenants) included many names that had not
         been purged for over three years. Therefore, filling a
         vacancy takes longer then it should because some of the
         prospective residents are no longer interested, no
         longer need an apartment, cannot be located, are not
         ready to move, or do not have funds available for the
         security deposit.

         The management agent's on-site Project Manager reviewed
         the waiting list for two bedroom units in August 1995.
         Based on her review, it appeared that only 30 of the 91
         names listed were still viable potential residents.
         The Project Manager has not reviewed the waiting lists
         for the three and four bedroom units.


         SURROUNDING AREA/PHYSICAL CONDITION

The Project is located in an area that is rapidly changing for
the better. For example, the University of Illinois at Chicago
recently acquired some land directly across the street from the
Project, and is in the process of developing it. Young urban
professionals are buying up and rehabilitating nearby areas.
Additionally, the Project is easily accessible to downtown
Chicago.

The Project appears to be adequately maintained. However, because
of the age of the Project, and its lack of substantive
rehabilitation over the years, both HUD's construction analyst
and an independent construction analyst concurred that the
Project currently needs approximately $5.3 million in
rehabilitation work. More than sixty percent of this required
rehabilitation was classified by the construction analysts as
"high urgency" and pertained to items such as:

           - Exterior walls and foundations
           - Roofs
           - Walks and guardrails
           - Doors and windows
           - Electrical, plumbing, and heating systems


                 CORRECTIVE OPTIONS AVAILABLE


Barbara Jean Wright Courts presents a unique situation that is in
need of a unique and immediate solution. Consequently, we
believe an untraditional solution will be needed to deal with
this Project. During our review, we considered different options
to address the situation. The options described below should not
be considered all inclusive, or mutually exclusive. Indeed, a
combination of options described, or other options not yet
considered may be better. The options considered were:

1)    HUD could maintain the status quo, not approve any change of
     ownership or significant rental increase, and not foreclose
     on the Project. However, this option does nothing to assist
     the Project with its financial problems. Therefore, OIG
     does not consider this option viable.

2)    HUD could approve one of the two recent changes of ownership
     proposed by the Project's owners. However, both proposals
     would cost taxpayers approximately $13 million through HUD's
     previous payoff of the Project's mortgage and future tax
     credits provided to the owners. Because of the cost to
     taxpayers, and the lack of assurance that the current
     situation would not recur, OIG does not consider this option
     viable.

3)    HUD could approve a significant rental increase in order to
     help alleviate the Project's financial problems. However,
     many current residents who pay either basic or market rents
     would probably move, thus possibly creating a net loss of
     total rental revenue. Conversely, assuming that all basic
     and market rate residents remained at the Project, even a
     significant rental increase would not provide the funds
     necessary for the needed rehabilitation. Therefore, OIG
     does not consider this option viable.

4)    HUD could foreclose on the Project; scatter Section 8
     residents via vouchers; and sell the Project as-is to an
     outside developer. The President of the Project's
     management agent and HUD's Chief of Multifamily Housing for
     the Illinois State Office did not disagree with our opinion
     that HUD could sell the Project for greater than the
     outstanding mortgage amount.

     The surrounding area is improving dramatically. The
     University of Illinois is developing the area immediately
     across the street, and young urban professionals are buying
     up and rehabilitating nearby areas.

5)    HUD could foreclose on the Project; scatter Section 8
     residents via vouchers; perform the required rehabilitation
     work; and sell individual units as condominiums to low and
     moderate income families for between $45,000 and $55,000 per
     unit.

     Priority for purchasing the units could be given to the 160
     current non-subsidized families who are paying market or
     basic rents. These owners' monthly mortgage payments
     (including estimated insurance, property taxes, and
     assessment fees) would be relatively comparable to their
     current rents, and these payments would remain relatively
     constant. Moreover, the mortgage payments would be
     affordable to both low and moderate income families. A
     comparison of the estimated monthly mortgage payments
     (including insurance, taxes, and assessment fees) and the
     Project's current basic rents is as follows:

      BEDROOM         EST.   EST. MONTHLY HUD APPROVED
      SIZE    MTG. AMT. MTG. PAY           BASIC RENTS DIFFERENCE

       2     $45,000    $ 659     $ 501       $158
       3     $50,000    $ 705     $ 558       $147
       4     $55,000    $ 751     $ 616       $135

     The estimated monthly mortgage payment is based upon a fixed
     interest rate of 8.375% for 30 years. We obtained the
     interest rate from a local bank. We estimated annual real
     estate taxes of $1,400 for a two bedroom unit, $1,500 for a
     three bedroom unit, and $1,600 for a four bedroom unit; and
     an estimated monthly management fee of $200 per unit.

     As of December 1994, HUD established the "low-income" level
     for a family of four in the Chicago area to be $40,200.
     Based on our estimated monthly mortgage payments, the
     following minimum yearly incomes would be required to
     accommodate a 30 percent housing payment:

             2 Bedrooms - $26,348
             3 Bedrooms - $28,202
             4 Bedrooms - $30,055

     Therefore all units would be available to low and moderate
     income families in the Chicago area.

6)    HUD could foreclose on the Project; perform the required
     rehabilitation work; and sell the Project as a cooperative
     to a mutual housing association consisting of low and
     moderate income families. Priority for membership in the
     cooperative could be given to the current residents - both
     market/basic and Section 8. The new owners' monthly housing
     payments should be relatively comparable to their current
     rents, and the payments would virtually remain constant.

7)    HUD could foreclose on the Project; scatter Section 8
     residents via vouchers; perform the required
     rehabilitation work; and then sell the units as condominiums
     to young urban professionals and other individuals - some of
     whom may be of low or moderate incomes - at market rates.
     Based on our casual observation of surrounding properties,
     we estimate that the units could sell for between $80,000
     and $100,000 per unit, with total sales proceeds of
     approximately $25,000,000.
The advantages of options 4, 5, and 7 are that they
would make HUD whole and help to achieve the Secretary's goal to
increase the number of homeowners in this country.

Option numbers 4, 5, and 7 discussed above include the scattering
of Section 8 tenants via housing vouchers. This is consistent
with HUD's Reinvention Summary. The Reinvention Summary states
that as contracts expire on existing Project-based Section 8
programs, the Housing Certificate Fund will become the vehicle
for providing portable subsidies for low-income Americans.

24 CFR Part 290 addresses the management and disposition of HUD-
owned multifamily projects and certain multifamily projects
subject to HUD-held mortgages. 24 CFR Part 290.5(a) states that
the purpose of the regulations is to manage and dispose of HUD-
owned multifamily projects in a manner that will, in the least
costly fashion among the other reasonable alternatives available,
further the goals of:

   1) Preserving projects so that they are available to and
     affordable by low and moderate income persons;
   2) Preserving and revitalizing residential neighborhoods;
   3) Maintaining the existing housing stock in a decent, safe,
     and sanitary condition;
   4) Minimizing the involuntary displacement of tenants;
   5) Minimizing the need to demolish multifamily projects;
   6) Maintaining the rental housing project for the purpose of
     providing rental or cooperative housing.

Option number 6, selling the Project to a cooperative, appears to
accomplish all of the above listed goals. However, since this
option would most likely involve a new HUD-insured mortgage, HUD
would again be at risk of financial loss in the event of loan
default.

While option numbers 4, 5, and 7 do not accomplish all of the
above listed goals, they do accomplish most of them. That is:

   Option number 4 (selling the Project as is to an outside
   developer), accommodates goals 2, 3, 5, and 6, but does
   not accommodate goals 1 and 4.

   Option number 5 (selling the Project as condominiums to low
   and moderate income persons), accommodates goals 1, 2, 3, 5,
   and 6, but does not fully accommodate goal 4.
     Option number 7 (selling the Project as condominiums at
     market rates), accommodates goals 2, 3, 5, and 6, but does
     not accommodate goals 1 and 4.

24 CFR Part 290.5(b) states that in determining the manner by
which a project shall be managed and disposed of, HUD may balance
competing goals relating to individual projects in a manner that
will further the achievement of the overall purpose of the
regulations. 24 CFR Part 290.11 states that upon completion of a
determination and finding of good cause, the Assistant Secretary
for Housing may waive any provision of the regulations in any
particular case subject only to statutory limitations.

Moreover, options 4, 5, and 7 each accomplish an increase in
homeownership, which is one of the seven principles in The
Legislative Plan to Reinvent HUD. Specifically: more families
must be able to buy their own homes because homeownership is
critical to creating and nurturing the fabric of a community, the
conditions for healthy family life, and the long-term economic
well-being of the Nation.


                       RECOMMENDATIONS

We recommend that the Director of Housing for the HUD Illinois
State Office:

A)     Develops and implements a strategy and plan for addressing
     the financial and physical condition of Barbara Jean Wright
     Courts, or divesting HUD of this Project.

If HUD does not divest itself of Barbara Jean Wright Courts, we
recommend that the Director of Housing for the HUD Illinois State
Office assures that the Project Owner:

B)    Procures the Project's property insurance coverage on a
     competitive basis.

C)    Provides a cost-benefit analysis to justify the $10,000
     deductible amount on the Project's property insurance
     policy. If the analysis does not justify the deductible
     amount, the deductible on the property insurance policy
     should be reduced.

D)    Continues efforts to dedicate the Project's streets to the
     City of Chicago;

E)    Provides justification to show that the management fee is
     reasonable in relation to the time and effort required and
     actual costs incurred by the management agent. If the fee
     is not adequately supported, the management fee should be
     reduced accordingly.

The above recommendations will be controlled in the Department's
Automated Audit Management System. Within 60 days, please give
us, for each recommendation made in this memorandum, a status
report on: (1) the corrective action taken; (2) the proposed
corrective action and the date to be completed; or (3) why action
is considered unnecessary. Also, please furnish us copies of any
correspondence or directives issued because of this audit.

Should you or your staff have any questions, please have them
contact me at (312) 353-7832.                                       Appendix A
.