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)