oversight

Great Atlantic Management CO., Inc. Multifamily Management Agent, Hampton, Virginia

Published by the Department of Housing and Urban Development, Office of Inspector General on 1996-02-16.

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

                                                                             I    s     s   u    e
                                         Date                                February 16, 1996
                                                                    Audit Case Number

                                                                         96-PH-214-1013




TO:            Charlie Famuliner, Director, Multifamily Division,
                Virginia State Office, 3FHM


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

SUBJECT:       Great Atlantic Management Company, Inc.
               Multifamily Management Agent
               Hampton, Virginia


We audited operations at Great Atlantic Management Company, Inc., management agent (agent),
to determine whether its management activities and oversight of HUD-insured projects were
administered in accordance with applicable HUD regulations and requirements.

The report identifies that project owners incurred ineligible and unsupported expenses, which the
agent had an opportunity to prevent, the agent prepared inaccurate reports of excess income for
three projects, and a project owner permitted unsanitary housing to exist for two residents.

Report issuance was delayed because of Federal government shut downs.

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 copies of any
correspondence or directives issued because of the audit.

If you have any questions, please contact Irving I. Guss, Assistant District Inspector General for
Audit, at (215) 656-3401.
Executive Summary
We audited the agent's operations to determine whether its management activities and oversight
of HUD-insured projects were administered in accordance with applicable HUD regulations and
requirements.

The agent generally managed HUD projects as required. However, deficiencies were identified
requiring corrective action in the agent's administrative oversight of projects.


                                    The owner, which has an identity-of-interest with the agent,
 Improper REIT costs paid
                                    paid $92,694 for evaluating the prospects of initiating a
 with project funds
                                    Real Estate Investment Trust (REIT) contrary to
                                    requirements. The REIT did not become effective and, as
                                    a result, funds were expended unnecessarily from
                                    operations of two projects.

                                    Review of agent and owner oversight of project operations
 Oversight of project
                                    identified several areas requiring corrective action. The
 operations can be
                                    agent has prepared inaccurate reports of excess income for
 improved
                                    three projects; the owner of Oak Ridge Gardens has paid a
                                    questionable retainer fee totaling $19,800; and the owner of
                                    Oakmont North Apartments I permitted unsanitary housing
                                    to exist for two residents. As a result, excess income
                                    reports cannot be relied upon, unsupported expenses were
                                    paid from project operations, and two units failed housing
                                    quality standards (HQS) inspections.

                                    We recommend: (1) ineligible REIT costs are repaid to the
                                    projects; (2) the project owner justify the questionable legal
                                    fees; and (3) the agent prepare and remit to HUD corrected
                                    excess income reports and remit excess income calculated
                                    that is due HUD.

                                    We discussed the draft findings with agent representatives
                                    during the audit. Where appropriate the agent's comments
                                    are summarized in the findings. The draft findings were
                                    provided to the agent and their response is included in
                                    Appendix B. The agent declined an exit conference.




                                             Page iii                                 96-PH-214-1013
Executive Summary




96-PH-214-1013      Page iv
                                                   Executive Summary




Table of Contents

Management Memorandum                                                 i


Executive Summary                                                     i


Introduction                                                          1


Findings

    1      Real Estate Investment Trust Expenses
           Were Paid From Project Funds                               3

    2      Corrective Action is Necessary in Several
           Areas of Agent and Owner Operations                        5


Internal Controls                                                     9


Follow Up On Prior Audits                                           11


Appendices

    A      Schedule of Ineligible and Unsupported Costs             13

    B      Auditee Comments                                         15

    C      Distribution                                             17


                               Page v                     96-PH-214-1013
Abbreviations
         HQS     H o u s i n g          Q u a l i t y          S t a n d a r d s

         HUD     Department of Housing and Urban Development
         OIG     Office of Inspector General
         REIT    Real Estate Investment Trust




96-PH-214-1013                          Page vi
                                                                              Table of Contents




Introduction
Great Atlantic Management Company, Inc., a Virginia Corporation, was founded in 1964 and is
wholly owned by Edwin A. Joseph. The agent is headquartered in Hampton, VA with regional
offices in Richmond, VA, Charlotte, NC, Fort Lauderdale, FL, and Tampa, FL.

The agent manages 98 projects, 19 are HUD-insured projects, 12 in Virginia and 7 in North
Carolina, Georgia, and Florida, totaling 3322 units.

Primary tenant records are maintained at project offices. Financial records are maintained at the
agent's office at 2 Eaton Street, Suite 1100, Hampton Virginia.



Audit Objectives                     The primary objective of the audit was to determine
                                     whether the agent managed HUD-insured projects in
                                     accordance with HUD regulations and requirements.
                                     Specific objectives were to determine if the agent is: (1)
                                     safeguarding project assets, and maintaining reliable
                                     accounting data; and efficiencies in operations, and
                                     promoting adherence to management's policies primarily
                                     relating to receipts and expenditures; (2) complying with
                                     the terms and conditions of management agreements, and
                                     regulatory agreements, and (3) assuring HUD assistance
                                     payments are correct and that the owners are complying
                                     with HQS standards.

Audit Scope                          We reviewed HUD, agent and project files and interviewed
                                     pertinent HUD and agent staff. We inspected 14 Section 8
                                     units at two projects, vacant units at five projects, and
                                     observed the physical condition and the common areas of
                                     the five projects.

Audit Period                         Our audit was performed between July 1995 and December
                                     1995, and covered the activities from January 1994 through
                                     June 1995. The audit period was expanded when
                                     appropriate.

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


                                              Page 1                                 96-PH-214-1013
96-PH-214-1013   Page 2
         Introduction




Page 3    96-PH-214-1013
                                                                                    Introduction




  Real Estate Investment Trust Expenses Were
            Paid From Project Funds

The owner, which has an identity-of-interest with the agent, paid $92,694 for evaluating the
prospects of initiating a Real Estate Investment Trust contrary to requirements. The REIT did not
become effective and, as a result, funds were expended unnecessarily from operations of two
projects.



                                     The owner improperly paid for evaluating the prospects of
 Improper REIT costs paid
                                     initiating a REIT for Crater Square Apartments and
 from funds of two
                                     Hollymeade Square Apartments which did not become
 projects
                                     effective. According to the 1994 audited financial
                                     statements for both projects, if the REIT did not become
                                     effective then the costs were to be allocated to the
                                     participating partnerships. However, the owner paid
                                     $40,229 and $52,465 from Crater Square Apartments and
                                     Hollymeade Square Apartments respectively due to the
                                     owner's improper use of projects funds.

                                     Crater Square Apartments and Hollymeade Square
                                     Apartments had $129,746 and $132,525 in surplus cash for
                                     1994 when most of the expenses for the REIT were
                                     incurred. The owner could have charged the REIT
                                     expenses as an entity expense and offset those expenses
                                     from available surplus cash.

                                     The Regulatory Agreement, paragraph 6(b), states that the
                                     owner may not obligate project funds to pay for costs other
                                     than those reasonable and necessary for the operation and
                                     maintenance of the project. Paragraph 6(e), states that the
                                     owner may not make, or receive and retain, any distribution
                                     of assets or any income of any kind of the project except
                                     surplus cash.

                                     HUD Handbook 4370.2 REV-1, Chapter 4-4 describes
                                     project accounts. Account 7000 series provides for
                                     mortgagor expenses and states that these expenses may be



                                              Page 3                                 96-PH-214-1013
Finding 1



                    charged against project operations only with prior written
                    approval of HUD.


                    The controller stated that the costs were project costs. We
                    disagree because these expenses were entity expenses and
                    not expenses necessary and reasonable to operate the
                    projects. Further, HUD never granted approval to the
                    owner to charge these costs to the projects.



Auditee Comments    The agent stated that they would reclassify the
                    REIT expense, $40,229 (Crater Square) and $52,465
                    (Hollymeade) from an operating expense to a
                    mortgagor expense and offset the expenses for the
                    REIT from available surplus cash.


OIG Evaluation of   The agent chose to implement the second option
Auditee Comments    stated in our draft recommendation, and assurance       of
                    implementation is necessary.



Recommendation      We recommend:

                    1A.    Your staff verify that the REIT expenses have been
                           reclassified from an operating expense to an
                           owner expense and have been offset from
                           a     v      a      i      l    a    b      l    e
                           surplus cash for both projects.




96-PH-214-1013              Page 4
                                                                                       Finding 1




     Corrective Action is Necessary in Several
      Areas of Agent and Owner Operations

Review of agent and owner oversight of project operations identified several areas requiring
corrective action. The agent has prepared inaccurate reports of excess income for three projects;
the owner of Oak Ridge Gardens has paid a questionable retainer fee totaling $19,800; and the
owner of Oakmont North Apartments I permitted unsanitary housing to exist for two residents.
As a result excess income reports cannot be relied upon, unsupported expenses were paid from
project operations, and two units failed HQS inspections.



                                     A. Inaccurate monthly reports of excess income submitted
                                        to HUD

                                     The Regulatory Agreement, paragraph 4(i), states that the
                                     owner must prepare a monthly report and pay the difference
                                     between the total carrying charges collected and the
                                     approved basic carrying charge for all occupied units.
                                     HUD Handbook 4350.5, Appendices 12 and 13, provides
                                     guidance on preparing the reports. Appendix 13 states that
                                     the report shall not include the basic carrying charge for
                                     vacant and non-income units and that a zero should be
                                     entered as the adjustment for units vacant the entire month.

                                     The agent has prepared inaccurate reports of excess income
 Excess income reports
                                     for Oak Ridge Garden Apartments, Churchland North
 incorrectly prepared for at
                                     Apartments, and Yorktown Square Apartments I. We
 least 20 years
                                     reviewed five reports of excess income, three for Oak Ridge
                                     and one for Churchland and Yorktown, respectively. Our
                                     review disclosed that the reports currently being prepared
                                     by the agent include a basic carrying charge for vacant and
                                     non-revenue units, contrary to HUD requirements. HUD
                                     requirements further state that adjustments must be made to
                                     basic rents for revenue producing units occupied for less
                                     than a full month. However, the agent is making
                                     adjustments for units vacant the entire month. The agent
                                     has used this method for preparing the reports of excess
                                     income for at least 20 years. As a result, the amounts



                                              Page 5                                 96-PH-212-1013
Finding 2



                             reported to HUD do not adequately reflect payments due or
                             a balance to be carried forward and cannot be relied upon.

                             B. Questionable retainer fees paid from project operations

                             The Regulatory Agreement, paragraph 6(b), states that the
                             owner may not obligate project funds to pay for costs other
                             than those reasonable and necessary for the operation and
                             maintenance of the project.

                             Retainer fees totaling $19,800 have been paid to the
 $100 monthly retainer fee
                             Attorney of Fact, Dentron Management Corporation, the
 not justified
                             General Partner of Oak Ridge Gardens LTD. An internal
                             letter dated February 10, 1978, directs the agent to
                             automatically pay $100 monthly starting March 1 to the
                             project's attorney and to continue until otherwise directed.
                             According to the agent's controller, the attorney handles all
                             legal issues for the project, however, no support for the
                             services performed have been provided and the $19,800 is
                             a questionable project expense.

                             C. Two units failed HQS inspections

                             The Housing Assistance Payments contract, Section 14a,
                             states that the owner will maintain and operate the project
                             so as to provide decent, safe, and sanitary housing.

                             The acceptable criteria according to 24 CFR 886.113,
                             paragraph (1) (2) for a unit to be considered sanitary is that
                             the unit and its equipment shall be free of vermin and
                             rodent infestation. Paragraph (f) (2) states that the
                             acceptable criteria for structure and materials is that the roof
                             shall be watertight.

                             We judgementally selected eight out of fifty five Section 8
                             units at Oakmont North I Apartments to inspect. Two of
                             the eight failed HQS inspections. The major violations
                             included roach infestation, fire damage and water damage
                             to a living room ceiling. The conditions identified during
                             the inspections of both units were brought to the attention
                             of the agent and your staff. As a result of the cited
                             conditions, tenants were not living in decent, safe and
                             sanitary housing.



96-PH-214-1013                        Page 6
                                                                      Finding 2



                    A letter received on November 8, 1995, by your office from
                    the agent, stated that both units had been exterminated, the
                    ceiling leak was fixed, and the kitchen cabinet had been
                    repaired.


Auditee Comments    In response to the draft recommendations the agent stated:

                    •     They will prepare and remit to HUD excess income
                          reports according to HUD Handbook 4350.5 for Oak
                          Ridge, Churchland North, and Yorktown.

                    •     The owner of Oak Ridge Gardens has repaid the project
                          for legal fees.

                    •     That documentation was forwarded to HUD regarding
                          the two units at Oakmont North.



OIG Evaluation of   The agent's response to draft recommendation 2A did not
Auditee Comments    comply with all elements stated. Verification by your staff
                    is necessary to assure legal fees have been repaid and HQS
                    violations have been corrected.             Therefore, the
                    recommendations remain as stated.


Recommendations     We recommend:

                    2A.      The agent prepare and remit to HUD excess income
                             reports according to HUD Handbook 4350.5 from
                             January 1, 1995 to date for Oak Ridge, Churchland
                             and Yorktown. From January 1995 forward, remit
                             excess income calculated that is due HUD. The
                             same procedure shall be completed for all 236
                             projects currently managed by the agent.

                    2B.      The owner of Oak Ridge Gardens provide
                             supporting documentation for the legal fees paid or
                             repay the project $19,800 plus additional payments
                             to date.




                              Page 7                                96-PH-214-1013
Finding 2



                 2C.   HUD staff verify that corrective action is completed
                       for the two units at Oakmont North I and the units
                       are decent, safe and sanitary.




96-PH-214-1013          Page 8
          Finding 2




Page 9   96-PH-214-1013
Internal Controls
In planning and performing our audit, we considered the internal control systems of Great
Atlantic Management Company, Inc. to determine our auditing procedures and not to provide
assurance on internal control. 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
 Internal controls assessed
                                   categories were relevant to our objectives:

                                   •      Accounting records and reports

                                   •      Cash receipts and disbursements

                                   •      Excess Income

                                   •      Tenant's security deposits

                                   •      Section 8 housing assistance payments

                                   •      Owner's compliance with HQS standards

                                   A significant weakness exists if internal control does not
 Assessment Results
                                   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:

                                   •      Cash disbursements

                                   •      Excess income

                                   •      HQS standards

                                   These weaknesses are detailed in the findings in this report.




                                            Page 9                                   96-PH-214-1013
Internal Controls




96-PH-214-1013      Page 10
                                                                         Internal Controls




Follow Up On Prior Audits
This is the first OIG audit of Great Atlantic Management Company, Inc.




                                           Page 11                            96-PH-214-1013
96-PH-214-1013   Page 12
                                                                       Follow Up On Prior Audits




                                                                                    Appendix A

Schedule of Ineligible and
Unsupported Costs
 Finding Number           Ineligible 1/               Unsupported 2/
         1                  $92,694
         2                                               $19,800
                            $92,694                      $19,800


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

2/ Unsupported amounts are not clearly eligible or ineligible, but warrant being contested for
various reasons, such as the lack of satisfactory documentation to support eligibility.




                                            Page 13                                  96-PH-214-1013
96-PH-214-1013   Page 14
                             Appendix A




                             Appendix B

Auditee Comments




                   Page 15   96-PH-214-1013
96-PH-214-1013   Page 16
                                                                     Appendix B




                                                                     Appendix C

Distribution
Director, Multifamily Division, Virginia State Office, 3FHML
Regional Comptroller, 3AF
Director, Housing Division, 3AH
Director, Field Accounting Division, 3AFF
Manager, Virginia State Office, 3FS
Assistant Secretary for Field Management, SC (Room 7106)
Comptroller/ALO, (Room 5132)
Acquisitions Librarian, Library, AS (Room 8141)
Director, Participation & Compliance Division, HSLP (Room 6274)
Director, Division of Housing Finance Analysis, TEF (Room 6274)
Chief Financial Officer, F (Room 10166)
Assistant Director in Charge, US GAO, 820 1st St., NE Union Plaza,
 Bldg 2, Suite 150, Washington, DC 20002




                                          Page 17                    96-PH-214-1013
Appendix B




                                        R       E       P    O      R       T                 N       A           M               E       :
                                        Great Atlantic Management Company, Inc.
                                        Multifamily Management Agent
                                        H     a    m      p  t    o   n    ,          V       i   r       g           i       n       i   a

                                        R       E       P          O       R      T                           N               O           :
                                        96-PH-214-1013
                                        I     S       S        U       E                  D       A               T               E       :
                                        February 16, 1996




                                       REGIONAL OFFICE (NON-OIG)
                 Director, Multifamily Division, Virginia State Office, 3FHML                                             1

                 Regional Comptroller, 3AF                                                                                1

                 Director, Housing Division, 3AH                                                                          1

                 Director, Field Accounting Division, 3AFF                                                                1

                 Manager, Virginia State Office, 3FS                                                                      1

                                        HEADQUARTERS (NON-OIG)

                 Assistant Secretary for Field Management, SC (Room 7106)                                                 1

                 Eleanor Clark, Comptroller/ALO, (Room 5132)                                                              3

                 Acquisitions Librarian, Library, AS (Room 8141)                                                          1

                 Director, Participation & Compliance Division, HSLP (Room 6274)                                          1

                 Director, Division of Housing Finance Analysis, TEF (Room 6274)                                          1

                 Chief Financial Officer, F (Room 10166)                                                                  2

                 Deputy Chief Financial Officer for Operations,                                                           2
                 F (Room 10166)

                                           HEADQUARTERS (OIG)
                 Director, Field Liaison Staff, GAP (Room 8180), Attn: Jim Martin                                         1

                 Director, Planning and Administration, GAP (Room 8180)                                                   1

                 Director, Quality Assurance and Audit Follow-up Staff, GAP                                               1
                  (Room 8180)

                 Director, Program Integrity Division, GFA (Room 8254)                                                    1

                 Central Files, (Room 8254)                                                                               2

                 Semi-Annual Report Coordinator (Room 8254)                                                               1

                                       DISTRIBUTION OUTSIDE HUD




96-PH-214-1013                                           Page 18
                                                                 Appendix B




Assistant Director in Charge, US GAO, 820 1st St. NE Union         2
Plaza, Bldg. 2, Suite 150, Washington, DC 20002
Attn: Mr. Cliff Fowler


Edwin A. Joseph, President, Great Atlantic Management Co, Inc.      1
Harbour Centre                                                     26
2 Eaton Street, Suite 1100
Hampton, VA 23669

From:
Edward F. Momorella, DIGA, Mid-Atlantic
Wanamaker Building, Suite 1005
100 Penn Square East
Philadelphia, PA 19107-3380




                                     Page 19                     96-PH-214-1013