oversight

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)

                                      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