oversight

                                                  U. S. Department of Housing and Urban Development
                                                  Office of Inspector General for Audit, Midwest
                                                  77 West Jackson Boulevard, Room 2646
                                                  Chicago, Illinois 60604-3507




                                                          AUDIT RELATED MEMORANDUM
                                                                         96-CH-212-1806

March 8, 1996

MEMORANDUM FOR: John E. Breuer, Acting Director, Multifamily Housing Division,
                      Grand Rapids Area Office


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


SUBJECT:     Forest Creek Apartments, Phase III
           Multifamily Equity Skimming
           Grand Rapids, Michigan

We completed a limited review of the books and records of Forest Creek Apartments, Phase III.
The review was based on a survey done at the Grand Rapids HUD office that indicated the
Project's funds may have been inappropriately used. Forest Creek Apartments Phase III is a 168
unit multifamily project. On February 8, 1980, HUD insured the Project for $3,185,900 under
Section 221(d)(4) of the National Housing Act. When the Project's current owners acquired the
Project on December 27, 1985, the mortgage balance was $3,100,153.

Forest Creek Apartments Phase III is owned by Forest Creek Associates Limited Partnership I.
The General Partner is Equity Interest Partners. Equity Interest Partners consists of the following
General Partners:

   •   John G. Dodgson, Managing General Partner
   •   Raymond A. Weigel
   •   Gregory E.V. Dodgson
   •   James E. Vantil
   •   Tony K. Knight
   •   Casimer Kay

Equity Interest Partners operates Forest Creek Phase III through its identity-of-interest
management agent, Equity Interest Management Company. Equity keeps the records for Forest
Creek Apartments in its office at 125 Ottawa, N.W., Suite 235, Grand Rapids, Michigan.

We reviewed Forest Creek's books and records to determine if the use of project funds was
reasonable and in compliance with the Regulatory Agreement and applicable HUD requirements.
We reviewed the HUD Grand Rapids Loan Management and the Project Owner/General
Partnership files and records to assess the appropriateness of expenditures made between
January 1, 1989 and January 31, 1995.

We concluded the Project Owners use of $360,000 in project funds did not fully comply with the
Regulatory Agreement and HUD's requirements. The Owner's disbursed funds for ineligible and
unsupported costs when the Project was in a negative surplus cash position and the Project
needed repairs. The Grand Rapids HUD Office estimated the Project needed repairs totaling
$339,950.

We provided our draft findings to the Managing General Partner and HUD's Grand Rapids Office
during the review. We held an exit conference on June 21, 1995. The Managing General Partner
provided written comments to our draft findings and recommendations.

The General Partner's comments disagreed with our findings and recommendations. At our exit
conference, the owners said they intended to sell the Project, but they did not provide concrete
plans that adequately protected HUD. Therefore, using procedures developed under Operation
Safe Home, we submitted the draft findings and management comments to the Assistant U.S.
Attorney for civil matters in Grand Rapids. The Assistant U.S. Attorney negotiated a settlement
with the principles involved.

Under the terms of the agreement the Project owners paid HUD $35,000 to show good faith and
provided HUD a $325,000 line of credit (Appendix A). The payment and line of credit are to
compensate HUD for the deferred repairs and accounts payable over 30 days old. If the project
is not sold, the HUD program office plans to use the funds to make repairs to the Project and
satisfy the accounts payable. If the Project is sold without HUD mortgage insurance, the funds
and line of credit will be returned to the owners when the HUD insured mortgage is completely
paid off. The program office plans to give the owners until May 1, 1996 to sell the Project.

If you or your staff have any questions, please contact me at (312)353-7832.




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                                 Appendix A

Line of Credit




                 Page 3   Audit Related Memorandum
                                                            Appendix B
Distribution
Secretary's Representative, Midwest District
Director, Office of Housing Management, Grand Rapids Office (2)
State Coordinator, Grand Rapids Office (2)
Director, Accounting Division, Midwest
Field Controller, Midwest
Assistant General Counsel, Midwest
Public Affairs Officer, Midwest
Assistant Deputy Secretary for Field Management, SC (Room 7106)
Acquisitions Librarian, Library, AS (Room 8141)
Chief Financial Officer, F (Room 10166) (2)
Deputy Chief Financial Officer for Operations, FO (Room 10166) (2)
Comptroller/Audit Liaison Officer, Office of Housing, HF (Room 5132) (3)
Director Participation and Compliance Division, HSLP (Room 6274)
Director, Division of Housing Finance Analysis, TEF (Room 8212)
Assistant Director in Charge, U.S. General Accounting Office,
 820 1st St. NE, Union Plaza, Bldg. 2, Suite 150, Washington, D.C. 20002 (2)




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