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-212-1813 September 5, 1996 MEMORANDUM FOR: Beverly 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: Ada Throop Apartments Multifamily Equity Skimming Review Chicago, Illinois We completed an audit of the books and records of Ada Throop Apartments. We conducted the audit as a result of a survey of multifamily project conditions. Ada Throop Apartments is a multifamily project located in Chicago, Illinois. The Project has 60 units and is 100 percent Section 8 subsidized. During the period of our audit, the Project had a purchase money mortgage with HUD. Ada Throop Apartments, LTD, an Illinois Limited Partnership, owned the Project during the audit period. The managing general partner and 99 percent owner was Walt Marshall. MWS Associates, an identity-of-interest firm, managed the Project through February, 1993. Security Management was the management agent between March and June 1993. Insignia Management Group, LP, and its wholly owned subsidiary has managed the Project since June, 1993. The Project's books and records were located at 6950 South Vincennes, Chicago, Illinois and at Insignia's main offices in Greenville, South Carolina. The audit objectives were to: (1) assess the Owner and Agent's compliance with the Regulatory Agreement and other HUD requirements relating to the general physical condition of the Project; and (2) determine the causes of any physical deficiencies. The audit covered the period of January 1, 1993 through December 31, 1995. We extended the audit period as necessary. We performed the audit between January and May 1996. Audit Related Memorandum We concluded that Ada Throop Apartments, LTD, and it's Managing Agents: * Failed to maintain the Project in decent, safe, and sanitary condition. The Project owner, and its managing agents failed to: (1) implement preventive maintenance procedures; (2) conduct timely unit inspections; (3) ensure work orders were written and completed for inspection deficiencies; (4) establish controls over outstanding work orders: (5) ensure maintenance staff adequately completed work order repairs; (6) correct inspection deficiencies identified by HUD; and (5) ensure contract work was completed before paid. * Disbursed $16,720 of ineligible costs and $96,538 of unsupported costs from Project funds for miscellaneous expenses. The disbursements occurred when the Project was in a non- surplus cash position. Ineligible costs included: (1) $13,700 paid to MWS Associates, an identity-of-interest firm, for services that were not rendered to the Project or not rendered by the payee; (2) $1,800 for refinancing costs; (3) $630 for excessive accounting fees; (4) $339 for payments made in error and (5) $251 for an owner advance and miscellaneous fees. As a result, the Project was in deplorable condition, expenses were overstated, and fewer funds were available for normal operation and maintenance of the Project. Tenants lived in conditions that were not decent, safe, and sanitary and costs were charged to the Project for contract work that was not completed. Ada Throop Associates, LTD has completed the refinancing of its mortgage with a conventional loan. HUD discharged the purchase money mortgage on August 15, 1996. Since the refinancing was completed, HUD's sole interest in the property will be through a Section 8 Housing Assistance Payments Contract. This contract expires on September 17, 1997. As required by HUD's approval of the pre-payment of the mortgage, the owners have established a repair escrow account requiring HUD's approval for any withdrawals. They have also submitted a Management Improvement and Operating Plan to HUD that addresses their plans to correct the physical deficiencies in the building. However they have only deposited $181,371 of the $252,602 amount that HUD required into the escrow account. We recommend that the Office of Housing, Illinois State Office: (1) assure that the Project Owner repairs the physical deficiencies at the Project so that the Project is in full compliance with HUD's Housing Quality Standards; (2) abates Section 8 Housing Assistance Payments if the Project Owner fails to bring the Project into full compliance with HUD's Housing Quality Standards within a reasonable time frame as designated by HUD. The above recommendations will be controlled in the Department's Automated Audit Management System. Within 60 days, please provide 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 the audit. Should your staff have any questions, please have them contact me at (312) 353-7832. 96-CH-212-1813 Page 2 Audit Related Memorandum The Dwelling Units of Ada Throop are Substandard The dwelling units of Ada Throop Apartments are in poor physical condition. The project owner, Ada Throop Associates, LTD and its managing agents failed to: (1) implement preventive maintenance procedures; (2) conduct timely unit inspections; (3) ensure work orders were written and completed for inspection deficiencies; (4) establish controls over outstanding work orders; (5) ensure maintenance staff adequately completed work order repairs; (6) correct inspection deficiencies identified by HUD; and (7) ensure contract work was completed before paid. As a result, tenants lived in conditions that were not decent, safe and sanitary, and costs were charged to the project for contract work that was not completed. Exhibit 6 of the Project's Housing Assistance Payments HUD Requirements Contract, states HUD standards for decent, safe and sanitary housing will be followed in the Project. Owners are required to follow the Section 8 Housing Quality Standards found in 24 CFR, 886.307. MWS Associates, an identity-of-interest firm, managed Ada Three Management Throop Apartments between September 1988 and February Agents Operated the 1993. Security Management was the management agent Property between March 1993 and June 1993. In June 1993, Insignia Management Company purchased Security Management and management of the property transferred to Insignia. During our audit period, January 1993 to December 1995, the development had three different property managers. The lack of continuity in property managers prevented long-ranged planning to address project deficiencies. The Ada Throop Apartments were inspected by OIG during Units Selected for March and April, 1996. The purpose of the inspections Inspection were to determine if the units and common building areas met HUD's Housing Quality Standards; assess the general condition of the property; and ensure contractual repairs were properly completed. Page 3 96-CH-212-1813 Audit Related Memorandum The Ada Throop Development has 60 units. Twelve or 20 percent of the development's units were judgmentally selected for OIG inspection based on unit size. Two additional units were included in our inspection sample at the tenants' requests. The fourteen units were inspected to assess the overall condition of the property's dwelling units. To ensure completion and assess the quality of interior contract work an additional seven units were selected for inspection. The units selected were based on interior contract work that was recently completed and readily identifiable. The seven units were not inspected to determine the overall condition of the property's dwelling units. Ada Throop's dwelling units and common areas are in The Ada Throop substandard condition. The 14 dwelling units inspected by Development is in a OIG to assess overall project conditions did not meet Substandard Condition HUD's Housing Quality Standards. Some of the Housing Quality Standard deficiencies included: (1) deteriorating window conditions in 14 of the units; (2) chipping and peeling paint which could be lead based in 13 of the units; (3) missing, loose, and/or damaged floor tile in 12 of the units; (4) deteriorating walls and ceilings which need painting in 11 of the units; (5) deteriorating floor underlayment in 10 of the units; and (6) missing bath wall tiles in 3 of the units. The following picture is an example of the general deteriorating conditions found in the development's units: 96-CH-212-1813 Page 4 Audit Related Memorandum The window sashes are rotted. The sash frame trim is loose. There is also evidence of probable lead based paint. The general physical condition of the building is poor. Gutters and downspouts are in disrepair. This condition has allowed water to deteriorate the brick surface. Many areas of the exterior brick walls need tuckpointing. Bricks are missing, there are brick and mortar cracks and loose mortar areas. Several wood members of the porches, steps, and railings are rotted and/or missing. Exterior window frames and sills are rotted. There is chipping and peeling paint on the exterior wood surfaces which is probably lead based. The development's concrete walkways are hazardously broken, presenting a tripping hazard. The interior common hallways have outlets that are missing covers which expose the electrical wiring. The staircases are missing handrails. Interior exit signs are missing, not properly secured, or not lighted. The project owner and its former and current management Preventive Maintenance agents failed to implement preventive maintenance Procedures Were Not procedures. Insignia, the current management agent, has a Implemented written preventive maintenance policy which was not being followed. The only preventive maintenance performed at the development was the monthly rodding out of the drains and inspections of the boiler systems. The Property Manager said the structural condition of the Page 5 96-CH-212-1813 Audit Related Memorandum building did not lend itself to preventive maintenance. Maintenance of the development is reactive and the staff operates on an emergency basis. The Property Manager said the building needs total rehabilitation. An example of the building's deteriorating condition resulting from deferred maintenance follows: Masonry areas are in need of repair. Deterioration is mainly caused by the lack of preventive maintenance of the downspout. As described in the management agent's policy and procedures manual, preventive maintenance is the key to successful apartment operations. As a proactive program, it provides staff with reduced service requests, reduced equipment failure, and satisfied residents. The project's former and current management agents failed Unit Inspections Were to conduct annual Housing Quality Standards inspections Not Conducted Timely for all of the development units. We reviewed the last two inspection reports completed for the 14 units we inspected to assess overall project conditions. The 14 units inspected by us were also inspected by the current management agent in February 1996. However, six of the 14 units were not inspected in 1995 by the previous management agent. Since the current property manager was not the manager at the time annual inspections were to be conducted she was 96-CH-212-1813 Page 6 Audit Related Memorandum unable to provide an explanation as to why the inspections were not completed. Annual inspections are an integral part of the project's operations. The inspections allows management to assess the overall unit conditions of the property and schedule appropriate repairs. They provide management with a basis for prioritizing and scheduling major capital improvements. We compared the violations cited by Ada Throop's property Unit Violations were not management during their February 1996 inspections to Cited by Property those identified by OIG in March and April 1996. Many Management violations cited by OIG were not reported by Ada Throop's management. The property manager said the staff does not cite major capital improvement items such as the deteriorating conditions of the windows and the need for interior painting because they are already aware of the conditions and funds are not available for repair. In addition, the Property Manager realized she failed to cite some technical violations during the inspections since she has not received any Housing Quality Standards training. Technical violations that were cited by OIG, but not cited by property management included: outlets in close proximity to water were not GFCI outlets; defective refrigerator door gaskets; and rotted floor tile underlayment. Forty-seven violations cited by Ada Throop's property Violations Cited by management in February 1996 were not corrected when Property Management OIG inspected the units in March and April 1996. were not Corrected Management said work orders are written for inspection deficiencies. We were unable to determine if work orders were written for the 47 unit violations. Work order numbers and the completion dates were not referenced to the inspections. A listing identifying work order status was not maintained. Additionally, completed work orders were not always consistently filed. The Management Agent did not implement adequate procedures to ensure inspection violations were corrected. Property Management did not have written procedures for conducting Housing Quality inspections and correcting deficiencies. Written procedures provide a consistent basis for conducting inspections and correcting deficiencies. Page 7 96-CH-212-1813 Audit Related Memorandum 96-CH-212-1813 Page 8 Audit Related Memorandum Staff may use the procedures as a guide. As previously cited, the Management Agent did not Control Over Outstanding maintain a work order listing. Ada Throop's property Work Orders was not management did not have control over outstanding work Maintained items. The agent's written maintenance procedures do not address outstanding work orders. It is important to maintain control over work order status to ensure completion, satisfy residents, and evaluate the performance of maintenance staff. The Property Manager said she has implemented procedures to report the work order status at her other developments. She has not had the opportunity to implement the procedures at the Ada Throop Development. Our unit inspections revealed the maintenance staff did not Maintenance Repairs adequately complete repairs. For example, after plumbing Were Not Completed or roof leaks were repaired, the damaged walls and/or ceilings were not restored. Also, when floor tile was replaced, it was not correctly finished by the doorways which resulted in uneven flooring. We were unable to determine when the repairs were made. However, according to the residents who had plumbing leaks repaired, the wall and ceiling conditions have existed for at least two years. Water damaged walls and ceilings in the living room were not repaired after the roof leak was repaired. Page 9 96-CH-212-1813 Audit Related Memorandum The current Property Manager said she periodically inspects maintenance staffs' work to ensure proper completion. However, documentation is not maintained supporting her reviews. Additionally, she said she routinely telephones residents to ensure resident satisfaction. These calls are not documented. Inspection deficiencies cited by HUD's Illinois State Office HUD Inspection during 1992 and 1994 physical inspections were not Deficiencies Were Not corrected by Ada Throop Associates, LTD. and its' Corrected managing agents. After each inspection, HUD informed the project owner and the management agents of the inspection results. Ada Throop's management developed a Management Improvement Operating Plan in response to HUD's September 1992 inspection. The Management Improvement Operating Plan was submitted to HUD by Security Management, Incorporated, on June 24, 1993. It reported the corrections made and future plans of action for correcting the citations. Management did not respond to HUD's September 1994 physical inspection. The table below summarizes examples of the major deficiencies identified by the inspectors that were not corrected. Major Deficiencies Inspection Date Rating Not Corrected as of 3/26/96 9/29/92 Below Average Concrete knee walls in basement are cracked and need to be replaced. Window sills are damaged and need replacement. Unit walls and ceilings need to be painted. 9/16/94 Unsatisfactory Tuckpointing is needed Replacement of downspouts is needed. Windows need to be replaced. 96-CH-212-1813 Page 10 Audit Related Memorandum Ada Throop's management agents failed to ensure contract Contractors were Paid for work was completed before payment. We reviewed all Incomplete Work invoices for contract work from July 1993 through December 1995. Maintenance contract costs for the period of July 1993 through December 1995, totalled $95,425. We selected 19 contracts for review, based on the contract work which was readily identifiable and recently completed to determine if the repairs were completed and the workmanship was acceptable. The cost of the contract work selected for inspection, totalled $68,805. Of the 19 contracts selected for inspection, six either had work that was not completed or was unacceptable. The Project paid $28,926 for contract work that was incomplete or exhibited poor workmanship. During 1994, the Project paid $17,350 to re-roof the Ada building and the northside of the Throop building. The roofs were not installed correctly and quality materials were not used. The OIG inspector said the Project's roofs will have a short life span. The roofs have a six year warranty. The Property Manager has contacted the contractor to enforce the warranty. The following picture documents the condition of the Ada roof: Page 11 96-CH-212-1813 Audit Related Memorandum In October 1994, Ada Throop's prior management contracted to paint the development's exterior window frames. During our inspections it was found that the window frames of the Throop building were never painted and half of the frames of the Ada building were not painted. Those that were painted were not adequately scraped, caulked and painted as required by the contract. The Project paid $9,532 for work which was not completed or exhibited poor workmanship. In August and September 1995, Ada Throop's current management contracted to paint two units. The cost of the contracts was $1,514. During our inspection of the first unit we found that only the hallway, bathroom, and bedroom were painted. Also, the new paint was peeling and not adhering to the walls of the rooms painted. The OIG inspector determined that the second unit was not painted. This was verified with the resident who has lived in the unit for over thirteen years. The Project paid the contractor $1,514 for the work not properly completed. In December 1992, Ada Throop's management contracted to replace the electrical wiring in two fire damaged units. The cost of the contract was $2,560. The OIG Inspector determined that eight outlets and switches for one unit were not replaced as required. The OIG inspector said the project paid approximately $430 for the eight outlets and switches. The Project paid $3,765 to have a hot water heater installed. The contractor did not install a discharge line. HUD's OIG inspector said the Project paid approximately $100 for the discharged line. Ada Throop Apartments is 100 percent Section 8 The Development is 100 subsidized. The following table summarizes the Section 8 Percent Section 8 subsidy received between January 1, 1993 and December Subsidized 31, 1995: 96-CH-212-1813 Page 12 Audit Related Memorandum Year Subsidy Received 1993 $ 322,850 1994 338,819 1995 413,779 Total Subsidy Received $1,075,448 Based upon HUD and OIG's inspections it is apparent, HUD is paying large sums of money for units that are not decent, safe and sanitary. A HUD Physical Inspection Report dated October 6, 1994, estimates repair costs of $407,790 to bring the complex into good condition. OIG estimates that it will cost the Project Owner over $400,000 to correct the Housing Quality Standards deficiencies and bring the physical structures to good condition. Recommendation We recommend that the Director, Office of Housing, Illinois State Office: A. Assure that the Project Owner repairs the physical deficiencies at the Project so that the Project is in full compliance with HUD's Housing Quality Standards. B. Abate Section 8 Housing Assistance Payments if the Project Owner fails to bring the Project into full compliance with HUD's Housing Quality Standards within a reasonable time frame as designated by HUD. Page 13 96-CH-212-1813 Audit Related Memorandum Distribution Secretary's Representative, Midwest Director of Public Housing, Illinois State Office (2) Assistant General Counsel, Midwest Field Controller, Midwest (2) Director, Accounting Division, Midwest Public Affairs Officer, Midwest Assistant to the Secretary for Field Management, SC (Room 7106) Acquisition 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, HF (Room 5132)(3) Assistant Director in Charge, U.S. GAO, 820 lst St NE, Union Plaza Bldg. 2, Suit 150, Washington, DC, 20002 96-CH-212-1813 Page 14
Ada Throop Apts., Chicago, IL
Published by the Department of Housing and Urban Development, Office of Inspector General on 1996-09-05.
Below is a raw (and likely hideous) rendition of the original report. (PDF)