AUDIT RELATED MEMORANDUM 96-CH-222-1814 September 27, 1996 MEMORANDUM FOR: Frank Slezak, Chief, Contract Operations Branch, Illinois State Office FROM: Dale L. Chouteau, District Inspector General for Audit, Midwest SUBJECT: ERA Arbor III Realty Co., Inc. Single-family Property Disposition Program Noblesville, Indiana We com pleted an audit of ERA Arbor Realty III Co., Inc. as yo u requested in your memorandum, dated January 10, 1996. On Ap ril 23, 1991, HU D entered into a contract with ERA Arbor III Realty Co. , Inc. to ma nage and sell HUD properties assigned to it. Arbo r Realty was the exclusive listing agent for a two-county area i n Indiana. The contract was effective from May 1, 1991 throug h April 30, 1992. On July 19, 1991, HUD terminated the contract for the convenience of the Government. A formal settlement agreement was not ex ecuted. However, HUD continued to pay Arbor Realty commissions on the sale of assigned properties based on verbal agreements. On Febru ary 20, 1996, after HUD stopped the pa yments, Arbor filed a complaint with the Board of Contract Appeals claiming that HUD owed it $229,74 6 plus interest and damages. Our objectives were to determi ne whether HUD underpaid or overpaid commissions and bonuses to Arbor and whether the expenses claimed by Arbor were reasonable and supported. To accomplish our objectives, we reviewed the contract, applicable HUD regulations, settlement statements, purchase agreements , invoices, correspondence between Arbor Realty and HUD, and n otes on their meetings. We also interviewed the President of Arbor and HUD staff in the Indiana State Off ice and in the Illinois State Office who were involved with the Exclusive Listing Agent program. W e rev iewed every property in the Indiana State Office inventory t o determ ine whether HUD had assigned the property to Arbor an d whether it underpaid or overpaid Arbor for the sale of th e property. Appendix A shows each property we reviewed and th e results of our review. We als o reviewed expenses claimed by Arbor to determine whether they were reasonable and supported. During the term of the contract, the Indiana State Office' s inventory of single family properties totaled 412. HUD sele ctively assigned 94 properties to Arbor Realty during the course of th e contract. We con cluded that HUD overpaid Arbor Realty for commissions an d bonuses. We calculated the commissions at 9 percent, 7 percent , and 3 percent because of confl icting rates in the contract. Arbor Realty received $390,264 in commissions and bonuses for the sale of 209 properties. Based on a 9 percent commission rate, Arbor Realty receiv ed overpayments totalling $156,296. Based on a 7 percen t commission rate, Arbor Realty received overpayments totallin g $200,940. Based on a 3 percent commission rate, Arbor receive d overpayments totalling $290,227. Further, Arbor Realty could not adequately support its claime d exp enses. Arbor could not provide originals of cancelled check s and invoices for $113,093 in claimed expenses. Our audit period was May 1, 1991 through April 30, 1992. Th e coverage was adjusted as necessary. We performed our site wor k between March and August 1996 at the Indiana State Office. W e conducted our audit in accordance with generally accepte d government auditing standards. We kept Arbor Realty informed about our audit results throughou t the audit. We provided interim data on the underpayments an d overpayments and a draft of this audit-related memorandum. I n response, Arbor provided written comments. Arbor's comments to the draft of this audit-related memorandum are included in thei r entirety in Appendix E. We held an exit conference on Septembe r 13, 1996. We provided a copy of this audit-related memorandum to th e Presi dent of ERA Arbor Realty III Co., Inc. and HUD's Office o f Counsel. If you have any questions, please contact me at (312) 353-7832. Audit-Related Memorandum Page 2 Results of Audit HUD overpaid Arbor Realty between $156,296 and $290,227 for commissions and bonuse s under the Exclusive Listing Agent contract. The excess payments were for properties sold b y other realtors before and after the contract period, properties sold dire ctly by HUD, and properties never assigned to Arbor or never sold. HUD authorized the payments. The Chief, Single Family Disposition Branch, said the contracting officer verbally agreed to pay Arbor a commission on the sales of all properties that had been assigned to it. The commissions were to be paid o n closing of the sale s. The Indiana State Office paid a commission on assigned but unsold leased properties because they had been held off the market for an extended period. The HUD-Arbor contract provided that from May 1, 1991 Contract Terms through April 30, 1992, Arbor would be the exclusiv e listing and management service agent for HUD-owne d properties in a tw o-county area in Indiana. HUD would, at its discretion, assign the properties to be included in th e contract. The contract as amended was confusing as t o whether Arbor should receive 9 percent, 7 percent, or 3 percent of sales prices. At sales closing, Arbor was to receive commissions an d bonuses for sales of properties assigned t o him and listed by him and reimbursements for services such as securing , repairing, and winterizing the properties. The amoun t Arbor received in bonuses for each property depended o n the number of days elapsed between the da te HUD assigned the property to Arbor and the sales closing date. The contract was modified three times. Modification 1 , effective April 24, 1991, was issued to set the sale s commission rate at 7 pe rcent. The modification was issued as a compromise to settle the confusio n as to whether Arbor should have been paid at 3 percent or 9 percent of sales. HUD unilaterally issued modifications 2 and 3 . Modification 2, effective June 17, 1991, was issued as a clarification. The modification excluded from the contract properties with sales pending at the beginning of th e contract and properties sold by HUD. The validity of this unilateral modification is in dispute. Modification 3, effective July 19, 1991, terminated th e contract for the convenience of the Govern ment. There was no formal settlement agreement identifying the Page 3 Audit-Related Memorandum amounts to be paid to Arbor after termination. HUD , however, continued to pay Arbor Realty a commission for properties as they were sold, including properties sol d without any Arbor particip ation. These included properties sold before and after the contract period. The Chief, Single Family Disposition Branch, said th e contracting officer verbally agreed to pay Arbor a commission on the sales of all properties that had bee n assigned to it. The commissio ns were to be paid on closing of the sales. The Indiana State Office paid a commission on assigned but unsold leased properties because they ha d been held off the market for an extended period. We determined the allowability commissions and bonuses How We Determined the on assigned and unassigned properties for which a purchase Allowability of agreement was signed duri ng the contract period, including Commissions properties sold directly by HUD. We used the date th e purchase agreement was signed as the best determinant that Arbor was the listing a gent. We also allowed commissions on properties Arbor sold as the selling agent after th e contract period. We did not allow Arb or Realty a commission on sales with purchase agreements executed by another agent before o r after the contract period, regardless of when the sale wa s closed. As listing agent, Arbor Realty was entitled to a commission Commissions on Sales and bonus on the sale of an assigned property sold durin g Involving Arbor the contract period. After the contract terminated, Arbo r was entitled to a 6 percent commission on any property i t sold. Based on our review, Arbor was entitled to sale s commission on 88 sales. Arbor participated in the sales of each of the properties. Eighty-three of the sales occurre d during the contract period. Therefore, Arbor was entitled to a commission of 9, 7, or 3 percent (depending on how the contract is interpreted) on these 83 sales. The remainin g five sales were after the contract period. Consequently , Arbor was entitled to a commission of 6 percent on thes e five sales. Arbor Realty received $128,053 for participating in the 88 sales. At a commission of 9 percent Arbor was underpaid $105,746 at 7 percent Arbor was underpaid $61,103; and at 3 percent, Arbor Realty was overpaid $28,185. Ou r computations are summarized below. Audit-Related Memorandum Page 4 Payments at 9 Percent Commission Over/ Description No. Received Earned (Under) Assigned and sold during contract 83 $113,290 $221,793 $(108,503) Sales after termination 6% 5 14,763 12,006 2,757 TOTALS 88 $128,053 $233,799 $(105,746) Payments at 7 Percent Commission Over/ Description No. Received Earned (Under) Assigned and sold during contract 83 $113,290 $177,150 $(63,860) Sales after termination 6% 5 14,763 12,006 2,757 TOTALS 88 $128,053 $189,156 $(61,103) Payments at 3 Percent Commission Over/ Description No. Received Earned (Under) Assigned and sold during the contract 83 $113,290 $ 87,862 $ 25,428 Sales after termination 6% 5 14,763 12,006 2,757 TOTALS 88 $128,053 $ 99,868 $ 28,185 Appendix B shows the details for each property included in the above tables. Arbor received commissions and bonuses totaling $262,211 Commissions on Sales for the sales of 132 properties in which it did no t Not Involving Arbor participate. We did not allow the payments. Arbor received $237,835 for properties sold outside th e contract period: $22,215 for 13 properties sold before the contract period and $215,620 for 107 properties sold after the contract period. Of these properties, 59 had not bee n assigned to Arbor. Page 5 Audit-Related Memorandum Arbor Realty also received commissions totaling $16,89 7 for leased properties and properties sold directly by HUD. Arbor did not provide listing agent services for thes e properties; therefore, we did not allow Arbor listing agen t commissions for these properties. In addition, Arbor Realty received $7,479 in bonuses fo r sales in which it was not involved. HUD made the payment after receiving an invoice fro m Arbor. The invoice showed a lump sum due for bonuses. Appendix C lists the properties for which Arbor receive d commissions and bonuses for sale of properties in which it was not involved. At the request of the Office of Counsel, we prepare d Appendix D which shows the properties not assigned. Arbor Realty did not provide adequate support for it s Claimed Expenses Not revised claim for expenses totaling $1 13,093. HUD has not Supported paid this claim. The expenses were in addition t o commissions and bonuses claimed. Adequate suppor t includes cancelled checks, inv oices, and bank statements to evidence the purpose of the expense a nd that it was actually paid. Because of the lack of documentation, we canno t express an opinion on the allowability of these expenses. Arbor Realty did provide some piece meal documentation, but it was not sufficient. Arbor Realty did not provid e original checks and invoices for any of the expenses. I t provided some check register copies of checks totalin g $21,037 which had cleared the bank. It did not provide any documentation for the remaining expenses totallin g $92,056. The Office of Counsel and the Office of Inspector General repeatedly requested that Arbor Realty provide origina l documentation supporting its claim. In a letter dated April 15, 1996, the Office of General Counsel directed Arbo r Realty to produce all records pertaining to the contract and its complaint. We reiterated the request in severa l discussions and in a letter dated May 23, 1996. The letter itemized the claim and specified the documentation needed to support each amount claimed. The largest expenses co mprising $101,629 of the $113,093 were: commissions to Arbor Realty agents ($44,605) ; compensation for the pre sident and employees' salaries and Audit-Related Memorandum Page 6 commissions ($39,240); yard signs, office space rental, and computer software ($13,844); ERA regional fees ($2,940); and attorney retainer fees ($1,000). Some of the expenses may be reasonable. Regardless , some expenses are clearly ineligible because they wer e covered under the commissions. For insta nce, commissions and other compensation should be covered by commissions. In the absence of adequate supporting documentation, w e do not express an opinion on the allowability of thes e expenses. Auditee Comments This is in response letter to your Final Draft of the audi t report you have prepar ed. In your first paragraph you state that Arbor entered into a contract with HUD, "to manag e and sell HUD properties assigned to it." T his is an incorrect reading of the contract terms: terms that have taken o n special emphasis in your report. The actual words of th e contract are "SERVICES Part 1-B and SCOPE Part 1-C . "Management and disposition services for assigned HUD- owned single family properties...." Your interpretatio n would indicate that Arbor was contractually obligated t o "sell" HUD properties, while Arbor's duties in Sec. C . included only advertising, listing in the multiple listin g service, placing "For Sale" signs, and co-operating wit h other interested selling brokers. At no location in th e contract is Arbor required to sell or close any property o n which it has perform ed the required services, in order to be entitled to a commission. Arbor is only required t o perform the services under Section C, and at sales closing, it was to be paid the amount of 7%, (as amended). There is no requirement for the property to sell or close during th e term of the contract, and the auditor should not hav e attempted to re-write the contract or insert thei r interpretations in makin g determinations as to the propriety of payments. OIG Evaluation of Part I, Section C.4.c of the contract is entitled Listing/Sales Auditee Comments Service Requirements. Arbor's comments accuratel y describe some of its responsibi lities. However, the contract also states that the contractor shall put forth every effort to produce an acceptable purchase offer on each availabl e property. Arbor's proposal also stated that the sole purpose of th e contract was to sell HUD property. At the close-ou t Page 7 Audit-Related Memorandum conference, Arbor's pr esident agreed that "disposition" was synonymous with "sale". When the contract was terminated, Arbor was no longer the listing agent for unsold properties. Thus, HUD was n o longer obligated to pa y commissions to Arbor as the listing agent for any of the properties that sold after the contrac t was terminated. Auditee Comments You also draw a legal con clusion that "the contract was not modified to include a formal termination agreement" . Sufficient evidence has been presented to you to indicat e that a modification was, in fact, made in the form of a n agreement between Arbor and the HUD Contractin g Officer. Whether that agreement was formalized throug h the actions of Arbor and HUD is a matter o f judicial review, and exceeds the scope and purpose of an audit. You state that "HUD continued to pay Arbor Realt y commissions after the contract was terminated", as though a formal agreement was required to make such payments , though the Federal Acquisition Regulation 49-103 allow s settlement to occur by (a) negotiated settlement, (b ) determination by the Termination Contracting Officer, o r (c) costing out under vouchers. In addition, th e Termination Contracting Officer may exercise a Partia l Settlement, as allowed in Federal Acquisition Regulatio n 49.109.5. Your audit failed to investigate or report if an y other of these options were utilized by the Terminatio n Contracting Officer in authorizing payments, befor e concluding that the payments were not proper. OIG Evaluation of Our statement that no formal settlement agreement wa s Auditee Comments executed is accurate. The evidence Arbor presented consisted of letters from HUD's Indiana State Offic e describing the properties sold for which Arbor shoul d submit an invoice. We agree that HUD directed Arbor t o submit invoices to receive the commissions. We found no documentation explaining th e contracting officer's basis for authorizing payments. Auditee Comments You stated that HUD delivered 230 properties to Arbor on the date the contract was effective, yet only 59 propertie s bear the delivery date of 5-1-91 on the attached charts. Audit-Related Memorandum Page 8 OIG Evaluation of We discussed with HUD's Chief of Contrac t Operations and Auditee Comments HUD's Attorney in the Illinois State Office whether the list of properties attached to the contract was meant to be a property delivery order. They both agreed that th e attachment was not a delivery order. Therefore, w e changed our memorandum and appendices to show that the 230 properties were not delivered. Auditee Comments Your report does not d emonstrate how you determined that 70 properties claimed by the contractor were listed as "Not Delivered", when more than adequate HUD-generate d documentation was presented to you by the contractor t o prove that those properties were considered by HUD a s being in our assigned inventory. Even the Indiana Office's payment for these properties indicate that they knew tha t these properties had been assigned to us. Further, your repor t simply concludes that if a property did not receive an accepted bid or close during the contrac t period, that Arbor was not entitled to a commission, while as stated above, these re quirements are not contained in the contract. OIG Evaluation of During the term of the contract HUD assigned to Arbor 94 Auditee Comments of the 412 properties in its inventory. The propertie s assigned were identified in three separate delivery orders . We concluded that the 318 properties were undelivere d properties. HUD reserved the right to selectively assig n properties; therefore, HUD was not obligated to assign al l properties in HUD's inventory during the contract period. When the contract was terminated for the convenience o f the Government, Arbor no longer participated in the sale s as the listing agent. Therefore, Arbor would only b e entitled to commission for properties t hat sold (had a signed purchase agreement) during the contract period regardless of the date the sale closed. Auditee Comments As part of the "Results of Audit-Contract Terms" yo u mention that mod ification #2 was issued on June 17, 1991. This attempted modification was illegally drawn and no t accepted by the contractor and designed to deprive th e contractor of large sums of commissions already havin g been earned for a period of over a month and a half. This was a substantial material change of the terms of th e contract and not simply a "clarification". In an inter-office Page 9 Audit-Related Memorandum memorandum from Carol Smith to J. Nicholas Shelley, and dated June 24, 1991; and made a part of the Appeal Fil e under 49.4, the Contracting Officer states th at she was using authority granted under the clause "Changes with Alternate I". This Clause st ates "The Contracting Officer may at any time, by written order, without notice to the sureties if any, make changes within the general scope of this contract i n any one or more of the following: (1) Description o f services to be performed, (2) time of performance, or (3 ) place of performance. This amendment did not deal with any of these allowable changes and was not permissibl e under this clause, or any other part of the contract. Th e audit should have examined this amendment and th e surrounding issues before accepting it as a legal amendment and using it as a basis for determining commissions due to Arbor. OIG Evaluation of Modification 2 did not affect our calculation of th e Auditee Comments commissions earned by Arbor. We did not exclud e properties because they were covered in modification 2 from our calculation of commissions Arbor earned. Fo r example, we allowed Arbor commission for direct HU D sales during the contract period. We only exclude d properties if theyy were sold before or after the contrac t period. Auditee Comments The draft audit-related memorandum states that, "W e determined the allowability of the commission paid t o Arbor based on whether Arbor Realty participated in th e sale of a property." Participat ion in the sale of a property is not mentioned in the contract as a requirement for th e payment of commission to Arbor, and is not a permissible basis for the auditors to make a determination as t o allowability. Assignment o f a property to Arbor III and the performance of duties required in Section C. of the Contract are all that is required of the Contractor, and should hav e been all that the audit utilized in determining whether a commission was earned. The audit used the date on which a pu rchase agreement was signed as a determin ant that Arbor was the listing agent. If you mean the date on which the purchase agreement wa s signed and accepted by HUD, rather that signed by a potential buyer, then Arbor has no argument, that th e acceptance date could be used to determine when HUD' s liability to pay commission upon closing began to attach. Audit-Related Memorandum Page 10 OIG Evaluation of We modified our memorandum and appendices to allo w Auditee Comments Arbor commissions on all properties sold during th e contract period. The properties include those sold directly by HUD and in which Arbor did not participate in the sale of the properties. We also allowed commissions o n properties sold after the contract period for which Arbo r was the selling agent. We used the purchase agreemen t dates to determine whether the properties were sold during the contract period. This was to Arbor's a dvantage since we allowed a commission even if HUD's acceptances and the sales' closing occurred after termination. Auditee Comments The balance of the Audit report becomes irrelevant an d unusable when the contract and clau ses are applied as listed above. The number of errors and misinterpretation s contained in the charts (appendices) are to o numerous to list in the response, due to the misapplication of the auditors ' unresearched opinion an d conclusions as to applicable law, regulations, and terms of the contract. While the auditors were personable and polite in ou r discussion, I can onl y find that the audit was one-sided and designed to verify conclusions already impro perly drawn by the Chicago office p rior to ordering this audit. I restate my earlier position that the audit should have thoroughl y investigated the Indianapolis office and the actions of th e Chief Property Officer and the Contracting Officer in th e improper and incompetent handling of the contract, th e attempts to defraud the contractor of earned commissions, the true reason for the termination of this contract, th e settlement agreement reached between the office and th e contractor, and payments receive by the contractor as a result of that agreement. OIG Evaluation of We have evaluated Arbor's comments to our draft an d Auditee Comments revised our memorandum and app endices accordingly. We do not agree that we have misapplied the law, regulations, and contract terms. Our review was independent and not designed to verif y conclusions of the Illinois State (Chicago) Office. W e acknowledge that the Indiana State Office made errors i n administering the contract and its termination. However , we believe that the errors unjustifiably benefitted Arbor . Arbor offered no docu mentation supporting the charge that the Indiana State Office staff attempted to defraud Arbor. Page 11 Audit-Related Memorandum Appendix E Auditee Comments Audit-Related Memorandum Page 32 Appendix E Page 33 Audit-Related Memorandum Appendix F Distribution Secretary's Representative, Midwest Director, Single Family Division, Indiana State Office (2) Area Coordinator, Indiana State Office (2) Assistant General Counsel, Midwest Field Controller, Midwest 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 7106) (2) Administration, Audit Liaison Officer, PF (Room 4122) (3) Assistant Director in Charge, U.S. GAO, 820 1st NE, Union Plaza Bldg 2, Suite 150, Washington, DC Audit-Related Memorandum Page 34
ERA Arbor III Realty CO., Inc., Noblesville, In
Published by the Department of Housing and Urban Development, Office of Inspector General on 1996-09-27.
Below is a raw (and likely hideous) rendition of the original report. (PDF)