oversight

Pine Hill Farms Apts., York, PA

Published by the Department of Housing and Urban Development, Office of Inspector General on 1995-11-27.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                                                                    Issue Date

                                                                         November 27, 1995
                                                                    Audit Case Number

                                                                         96-PH-212-1002




TO:           Sidney, B. Severe, Director, Office of Housing,
               Pennsylvania State Office, 3AH


FROM:         Edward F. Momorella, District Inspector General for
               Audit, Mid-Atlantic, 3AGA

SUBJECT:      Pine Hill Farms Apartments
              Multifamily Project Operations
              York, Pennsylvania


We audited the multifamily operations of Pine Hill Farms Apartments (Project). The purpose of
our audit was to determine if York Associates (Owner) operated the project in accordance with
the terms of the Regulatory Agreement and other applicable HUD requirements.

We determined that the Owner did not comply with Regulatory Agreement provisions pertaining
to cash distributions and tenant security deposits.

Within 60 days, please give us, for each recommendation made in the report, 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 with copies of any
correspondence or directives issued because of the audit.

Should your staff have any questions, please have them contact J. Phillip Griffin, Assistant
District Inspector General for Audit, at (215) 656-3401.
Management Memorandum




96-PH-212-1002          Page ii
Executive Summary
Pine Hill Farms Apartments was not operated in accordance with the terms of the Regulatory
Agreement and other applicable HUD requirements. Ineligible distributions were made from the
operating funds and the tenant security deposit account was underfunded.



                                   Ineligible distributions of $274,196 were withdrawn by the
 Ineligible costs were paid
                                   Owner from the operating funds of the project. The
 from project operating
                                   General Partner told us that he did not know that
 funds
                                   distributions could not exceed surplus cash. As a result,
                                   funds needed to pay the project's normal operating costs
                                   were not available.

                                   Contrary to the Regulatory Agreement, the security deposit
 Security deposit account
                                   account was underfunded by $17,608. This occurred
 was underfunded
                                   because all security deposit receipts were not deposited. As
                                   a result, security deposit reimbursements were paid from
                                   the project's operating account.


Recommendations
                                   We made recommendations to recover the ineligible costs
                                   cited in the report and to improve operations at the project.




Auditee Comments                   We discussed the draft findings with the General
                                   Partner at an exit conference on October 2, 1995. The
                                   General Partner submitted comments on the draft findings
                                   in which he agreed that prior management had
                                   misappropriated security deposits but current management
                                   should not be blamed for the actions of prior management.
                                   His response to the draft findings was considered and
                                   incorporated, where appropriate, in preparing the final
                                   report. A copy of the General Partner's comments is
                                   included as Appendix A.




                                           Page iii                                 96-PH-212-1002
Page v   96-PH-212-1002
Table of Contents




Table of Contents

Management Memorandum                                   i


Executive Summary                                      iii


Introduction                                            1


Findings

         1       Project Owner Improperly Withdrew
                 Project Funds                          3

         2       Agent Cannot Account For All Tenant
                 Security Deposits                      7


Internal Controls                                       9


Follow Up On Prior Audits                              11


Appendices

         A       Auditee Comments                      13

         B       Schedule of Ineligible Costs          15

         C       Distribution                          17




96-PH-212-1002                       Page vi
           Table of Contents




Page vii         96-PH-212-1002
Introduction
Pine Hill Farms Apartments (project number 034-35028) is a 120 unit multifamily housing
project located at 406 Piedmont Circle, York, Pennsylvania. The project is operated in
accordance with a Regulatory Agreement, between HUD and the Owner, dated February 29,
1984. The mortgage was endorsed by HUD for insurance under Section 221 (d)(4) of the
National Housing Act on March 1, 1974.

The project is owned by the partnership of York Associates, a New York limited partnership.
The original General Partners were Larry Nick, William Weissel, Tom Kaye, and Arnold Bruck.
Tom Kaye and Arnold Bruck no longer have a management interest in the project and William
Weissel died in July, 1994. Accordingly, Larry Nick is the remaining General Partner.

The project was managed by William Weissel of Cameo Management until his death in July,
1994. On August 1, 1994, Diner Development replaced Cameo Management and managed the
property until March 31, 1995. Effective April 1, 1995, Jordan Harris Management became the
management agent.

The accounting records for the project are maintained at the Management Agent's office at Five
Bayberry Close, Rye Brook, New York 10573.



Audit Objectives                    We reviewed the operations of Pine Hill Farms Apartments
                                    to determine whether the Owner operated the project in
                                    accordance with the terms of the Regulatory Agreement and
                                    other applicable HUD requirements. Specifically, we
                                    determined whether Pine Hill Farms:

                                    •   had costs which represent valid project expenses;
                                    •   collected and reported all project income and;
                                    •   maintained a security deposit balance which equaled or
                                        exceeded the liability for tenant's security deposits.

                                    We reviewed and analyzed pertinent project records
 Audit Scope and
                                    maintained by HUD and the Owner. Those records
 Methodology
                                    included the Regulatory Agreement, bank statements,
                                    supporting documentation for expenditures, and other
                                    management and financial records. We evaluated internal
                                    controls to the extent they related to the audit objectives. In
                                    addition, we interviewed the Agent, the Owner, HUD
                                    program staff, and the Independent Public Accountant and
                                    performed a physical inspection of the project.




                                             Page 1                                    96-PH-212-1002
Introduction




                 Our audit was conducted from January, 1995 through June,
                 1995 and covered the period January 1, 1991 through
                 December 31, 1994.

                 We conducted the audit in accordance with generally
                 accepted government auditing standards.




96-PH-212-1002           Page 2
                                                                                            Finding 1




  Project Owner Improperly Withdrew Project
                   Funds
The Owner withdrew $274,196 in ineligible distributions from project operating funds. The
General Partner stated he did not know that distributions could not exceed surplus cash. As a
result, funds needed to pay the project's normal operating costs were not available.



                                   According to the Regulatory Agreement,
 Criteria
                                   •   Owners shall not make distributions of assets or income
                                       of any kind except from surplus cash [Paragraph 6.(e)].

                                   •   Convey, transfer, or encumber any of the mortgaged
                                       property, or permit the conveyance, transfer or
                                       encumbrance of such property [Paragraph 6.(a)].

                                   Appendix G, item II.F. of HUD Handbook 4350.1 REV-1,
                                   Multifamily Asset Management and Project Servicing,
                                   states that notes evidencing secondary financing must
                                   provide that any payments from project income are made
                                   only from surplus cash.

                                   Paragraph 4-11 of HUD Handbook 4350.1 REV-1 states
                                   HUD strongly recommends that Owners target a minimum
                                   amount to be held in the Reserve Fund for Replacements
                                   account. The purpose of having a minimum amount is to
                                   have funds available for an emergency or unforeseen
                                   contingency.

                                   Improper cash distributions made from the Pine Hill Farms
 Ineligible distributions
                                   operating accounts are as follows:
 from project funds

                                                                 Second     Prior Year
                                       Year            Owner     Mortgage   Surplus Cash     Excess

                                       1991            $61,500   $36,000      $17,804        $79,696
                                       1992             30,500    36,960            0         67,460
                                       1993             21,000    47,520            0         68,520
                                       1994             11,000    47,520            0         58,520
                                                                                            $274,196




                                              Page 3                                       96-PH-212-1002
Finding 1



                          The project has not been in a surplus cash position since
 No surplus cash since
                          1992. When a project is in this situation, available funds
 1992
                          are to be used only for normal operating expenses unless
                          specifically authorized by HUD. Therefore, the Owner
                          cannot take cash distributions. Similarly, the second
                          mortgage payments, as provided in the HUD Handbook and
                          the amended sales agreement dated February 9, 1994, were
                          only to be made from surplus cash.               Therefore,
                          disbursements for the HUD approved second mortgage
                          were also ineligible because they exceeded the surplus cash
                          available.

                          The Owner disregarded HUD requirements. During 1994,
 Funds not repaid as
                          HUD requested the General Partner to establish a payment
 requested
                          plan to repay unauthorized distributions from previous
                          years. The Owner disregarded this request and has not
                          repaid the money. The General Partner told us that he was
                          not aware that distributions could not exceed the prior year
                          surplus cash.

                          The Owner has placed the project at financial risk and
 Project placed at risk
                          endangered HUD's investment as a result of the ineligible
                          distributions. Within the past year, the project has not had
                          sufficient funds to meet its operating costs. This has led to
                          a lien being placed against the project.

                          Pine Hill Farms did not always pay the sewer and refuse bill
 Normal operating
                          during 1994 resulting in an outstanding balance of $61,208.
 expenses not paid
                          The municipality currently has a lien on the property
                          totalling $4,695. According to a City official, steps will be
                          taken to increase the lien for the outstanding balance if the
                          account remains unpaid. Accordingly, HUD's financial
                          interest in the project is at risk. The Regulatory Agreement
                          prohibits the Owner from allowing the property to be
                          encumbered.

                          The November, 1994, mortgage payment plus late charges
 Mortgage payment made
                          totalling $23,647 was made from the Reserve Fund for
 from Reserve account
                          Replacements account. Correspondence from HUD to the
                          General Partner, dated December 9, 1994, noted that HUD
                          was extremely concerned about the financial condition of
                          the project due to the release of funds from the account.




96-PH-212-1002                     Page 4
                                                                          Finding 1



                         Our review of the Reserve Fund for Replacements account
 Reserve account below
                         balance disclosed that the required amount has been
 recommended amount
                         deposited to the account on a regular basis. However,
                         correspondence from HUD to the General Partner, dated
                         December 9, 1994, noted that the Reserve Fund for
                         Replacements account was below the recommended
                         minimum threshold.

                                   Based on the HUD guidelines, the balance of the
                                   Reserve Fund for Replacements account should
                                   be $144,000. However, the account balance as
                                   of June 15,1995 was only $46,621.

                                   The project would have had sufficient funds to
                                   meet these operating costs if the Owner had not
                                   made ineligible distributions.



Auditee Comments            The General Partner stated he was willing to address the
                                  issues brought forth in the audit. However, he
                                  said that the property and/or partnership are not
                                  able to repay the funds as discussed in the audit.


                                   Additionally, the General Partner stated:

                                   "...It is inconceivable that now, after eleven
                                   years of continuous and open activity, that the
                                   partnership should be called to task for these
                                   payments; especially in light of the stellar track
                                   record of the new team. A review of the audits
                                   should make it clear to your office that all funds
                                   are properly accounted for, the property did not
                                   suffer as a result of these payments, and, if
                                   calculated, these payments would have
                                   constituted surplus cash...."


OIG Evaluation of        The Regulatory Agreement requires that distributions of
Auditee Comments         assets or income shall not be made except from surplus
                         cash. Distributions exceeded surplus cash. Therefore, the
                         distributions are ineligible and the Owner must repay the




                                 Page 5                                  96-PH-212-1002
Finding 1



     money regardless of the property's physical or financial condition.




Recommendations                      We recommend that you require the Owner to:

                                            1A.        Reimburse the project $274,196 for
                                                       ineligible distributions during 1991 through
                                                       1994. The monies should be distributed as
                                                       follows:

                                                •      Pay the outstanding sewer and refuse bill;

                                                •      Remit $23,647 to the Reserve Fund for
                                                       Replacements account to cover the
                                                       November, 1994, withdrawal for the
                                                       mortgage payment;

                                                •      Increase the Reserve Fund for Replacements
                                                       account to the minimum threshold amount
                                                       ($144,000); and

                                                •      Place any remaining monies in the project
                                                       operating account.




96-PH-212-1002                                Page 6
                                                                                     Finding 2




        Agent Cannot Account For All Tenant
                 Security Deposits
Contrary to the Regulatory Agreement, the security deposit account was underfunded by $17,608.
This occurred because all security deposit receipts were not deposited. As a result, security
deposit reimbursements were paid from the operating account.



                                    Paragraph 6.(g) of the Regulatory Agreement requires the
 Criteria
                                    Owner to deposit and maintain security deposits in a trust
                                    account separate and apart from all other project funds.
                                    Further, the balance of this trust account must at all times
                                    equal or exceed the aggregate of all outstanding obligations
                                    under the account.

                                    Our review of the security deposit account for the period
 Security deposit account
                                    January, 1994, through December, 1994, disclosed
 underfunded
                                    shortages in the account. The security deposit balance
                                    ranged from $173 to $1,262 and averaged $474 for the
                                    period. The security deposit balance of $1,262 should have
                                    at least equaled the tenant security deposit liability of
                                    $18,870, but it did not.

                                    As of December 31, 1994, the project's security deposit
                                    account was underfunded by $17,608. According to the
                                    prior Agent, all security deposits were deposited into a
                                    separate account. We found no evidence to support this
                                    statement.

                                    The prior two Agents reimbursed outgoing tenants for their
 Security deposits
                                    security deposits from the project operating account. This
 reimbursed from project
                                    practice could have been prevented had the security deposit
 operating funds
                                    account been fully funded.

                                    Reimbursing tenants from the project operating account
                                    decreased available cash; thus, risking the tenant security
                                    deposits and the Project's ability to meet future operating
                                    costs.




                                            Page 7                                  96-PH-212-1002
Finding 2




Auditee Comments    The General Partner said that in a short time period they
                    will have a fully funded security deposit account. In the
                    meantime, they are once again funding a segregated
                    security deposit account.



OIG Evaluation of   The General Partner's actions address our draft
Auditee Comments    recommendations. However, the implementing actions are
                    uncompleted.     Therefore, we are repeating the
                    recommendation in the draft report.


Recommendations     We recommend that you require the Owner to:

                    2A.    Fully fund the security deposit account for Pine Hill
                           Farms.

                    2B.    Maintain the security deposit account in accordance
                           with HUD requirements.




96-PH-212-1002              Page 8
Internal Controls
In planning and performing our audit, we considered internal control systems of the management
of Pine Hill Farms Apartments to determine our auditing procedures and not to provide assurance
on internal controls. Internal control is the process by which an entity obtains reasonable
assurance as to achievement of specified objectives. Internal control consists of interrelated
components, including integrity, ethical values, competence, and the control environment which
includes establishing objectives, risk assessment, information systems, control procedures,
communication, managing change, and monitoring.



                                    We determined that the following internal control
 Control Categories
                                    categories were relevant to our audit objectives:


                                    Rental Collections
                                    Disbursements
                                    Owner Distributions
                                    Project Maintenance and Condition
                                    Tenant Security Deposits

                                    We evaluated all of the relevant control categories
 Scope of Work
                                    identified above by determining the risk exposure and
                                    assessing control design and implementation.

                                    A significant weakness exists if internal control does not
 Significant Weaknesses
                                    give reasonable assurance that the entity's goals and
                                    objectives are met; that resource use is consistent with laws,
                                    regulations, and policies; that resources are safeguarded
                                    against waste, loss, and misuse; and that reliable data are
                                    obtained, maintained, and fairly disclosed in reports. Based
                                    on our review, we believe the following items are
                                    significant weaknesses:


                                    (1) Owner Distributions (Finding 1)
                                    (2) Tenant Security Deposits (Finding 2)




                                             Page 9                                   96-PH-212-1002
Internal Controls




96-PH-212-1002      Page 10
                                                                        Internal Controls




This is the first OIG audit of Pine Hill Farms Apartments. The most recent Independent
Accountant report, for the fiscal year ended December 31, 1993 was issued on November 7,
1994. There were no findings in the report.




                                         Page 11                             96-PH-212-1002
                             Internal Controls



                                 Appendix A

Auditee Comments




                   Page 13        96-PH-212-1002
Appendix A




96-PH-212-1002   Page 14
          Appendix A




Page 15   96-PH-212-1002
Appendix A




96-PH-212-1002   Page 16
                                                                           Appendix A



                                                                           Appendix B

Schedule of Ineligible Costs

 Recommendation
 Number                          Ineligible 1/
  1A                                 $274,196
  2A                                   17,608
                                     $291,804


1/ Ineligible amounts are not allowed by law, contract, HUD or local agency policies or
   regulations.




                                         Page 15                            96-PH-212-1002
                                                                    Appendix B



                                                                    Appendix C

Distribution
Secretary's Representative, Mid-Atlantic, 3AS
Director, Internal Control and Audit Resolution, 3AFI
Director, Office of Housing, 3AH
Director, Field Accounting Division, 3AFF
Assistant Secretary for Field Management, SC (Room 7106)
Eleanor Clark, Comptroller/Audit Liaison Officer (Room 5132) (3)
Acquisitions Librarian, Library, AS (Room 8141)
Director, Participation & Compliance Division, HSLP (Room 6274)
Director, Division of Housing Finance Analysis, TEF (Room 8212)
Chief Financial Officer, F (Room 10166) (2)
General Counsel, C (Room 10214) (2)
Deputy Chief Financial Officer for Operations, F (Room 10166) (2)
Assistant Director in Charge, US GAO, 820 1st St. NE Union
 Plaza, Bldg. 2, Suite 150, Washington, DC 20002
 Attn: Mr. Cliff Fowler (2)




                                          Page 17                   96-PH-212-1002
Appendix B




96-PH-212-1002   Page 18