oversight

DB&B, Inc., Albany, Or

Published by the Department of Housing and Urban Development, Office of Inspector General on 1996-07-17.

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

                                                                  Issue Date
                                                                       January 26, 2006
                                                                  Audit Report Number
                                                                        2006-SE-1001




TO:         Renee' Greenman, Region X, Director, Multifamily Housing Hub, 0AH




FROM:       Joan S. Hobbs, Regional Inspector General for Audit, Region X, 0AGA

SUBJECT: Idaho Housing and Finance Association, Boise, Idaho, Did Not Monitor
         Subsidized Multifamily Projects in Accordance with Regulations or its Annual
         Contributions Contract with HUD


                                    HIGHLIGHTS

 What We Audited and Why

             At the request of the Region X Multifamily Housing Hub, we audited Idaho
             Housing and Finance Association (Idaho Housing) due to concerns that (1) it
             allowed excess owner distributions; (2) it did not properly administer projects’
             residual receipts and replacement reserve accounts; and (3) a conflict of interest
             exists because Idaho Housing acts as lender, owner, management agent, and
             Section 8 contract administrator. In addition, we were concerned that Idaho
             Housing did not properly review changes in management fees to determine
             whether they were reasonable.

             Our overall audit objective was to determine whether Idaho Housing monitored
             projects in accordance with its annual contributions contract with the U.S.
             Department of Housing and Urban Development (HUD) to ensure that project
             funds were expended appropriately.
What We Found


         Idaho Housing did not monitor its subsidized multifamily housing projects in
         accordance with federal regulations or its annual contributions contract with
         HUD. Idaho Housing inappropriately authorized $3,721,738 in owner
         distributions in excess of allowable amounts from project funds. Idaho Housing
         allowed nonprofit owners, who are not entitled to any distributions, to receive
         distributions of project funds and limited distribution owners to receive
         distributions of funds in excess of the limitations imposed by federal regulations.

         Idaho Housing also approved a duplicate request for reimbursement of $24,562
         from a project’s replacement reserve funds and approved $182,264 in
         disbursements from projects’ replacement reserves without obtaining adequate
         supporting documentation.

         In addition, contrary to the requirements of the Code of Federal Regulations, the
         housing assistance payments contracts, and its annual contributions contract,
         Idaho Housing allowed a conflict of interest situation to exist between itself and
         The Housing Company, a nonprofit owner of subsidized multifamily projects. A
         conflict of interest situation exists because Idaho Housing formed and holds
         substantial control over The Housing Company and is paid by HUD, under terms
         of its annual contributions contract, to monitor The Housing Company’s
         subsidized projects.

         Further, between January 1, 2001, and December 31, 2004, Idaho Housing
         approved revised management agreements for 10 projects. The revised
         agreements increased the management fees for these projects to $121,521 in
         excess of HUD’s residential management fee range for Idaho.


What We Recommend


         We recommend that the director, Region X Multifamily Housing Hub, require
         Idaho Housing to reimburse the projects $3,867,821 and to provide supporting
         documentation for $182,264 in unsupported costs or also return this amount to the
         projects. In addition, we recommend that HUD require Idaho Housing to comply
         with federal regulations and HUD guidelines when processing owner
         distributions, distributions from residual receipts and replacement reserves, and
         changes in management fees. We also recommend that the director, Region X
         Multifamily Housing Hub, require Idaho Housing take corrective action to
         dissolve the conflict of interest relationship or make a determination of default in
         accordance with paragraph 2.16(b)(2) of its annual contributions contract with
         Idaho Housing. If Idaho Housing is declared in default of the annual



                                          2
           contributions contract, we recommend the director assume the role of contract
           administrator or assign another contract administrator (including any associated
           administrative fee) over any projects that (1) are owned by The Housing
           Company, (2) receive Section 8 subsidy from HUD, and (3) are currently
           monitored by Idaho Housing.

           For each recommendation without a management decision, please respond and
           provide status reports in accordance with HUD Handbook 2000.06, REV-3.
           Please furnish us copies of any correspondence or directives issued because of the
           audit.


Auditee’s Response


           We provided Idaho Housing a draft report on December 13, 2005, and held an
           exit conference on January 6, 2006. Idaho Housing provided written comments
           on January 13, 2006. Idaho Housing agreed with much of the report in general,
           but disagreed with the inclusion of specific projects in the findings and
           recommendations. The complete text of Idaho Housing’s response, along with
           our evaluation of that response, can be found in appendix B of this report. The
           exhibits Idaho Housing supplied with its response are too voluminous to include
           in this report but are available upon request. We considered Idaho Housing’s
           response and exhibits and made changes to the report as appropriate.




                                            3
                             TABLE OF CONTENTS

Background and Objectives                                                          5

Results of Audit
        Finding 1: Idaho Housing Inappropriately Authorized $3,721,744 in Owner    7
        Distributions in Excess of Allowable Amounts from Project Funds
        Finding 2: Idaho Housing Approved One Duplicate and Other Unsupported      13
        Requests for Reimbursement from Project Replacement Reserves
        Finding 3: A Conflict of Interest Exists between Idaho Housing and The     16
        Housing Company
        Finding 4: Idaho Housing Approved Excessive Management Fees for 10 Idaho   19
        Projects

Scope and Methodology                                                              22

Internal Controls                                                                  23

Appendixes
   A.   Schedule of Questioned Costs and Funds to Be Put to Better Use             25
   B.   Auditee Comments and OIG’s Evaluation                                      26
   C.   Schedule of Excessive Owner Distributions (Finding 1)                      47
   D.   Unsupported Disbursements from Replacement Reserve Accounts (Finding 2)    49
   E.   Excessive Management Fees (Finding 4)                                      50




                                            4
                      BACKGROUND AND OBJECTIVES

Idaho Housing and Finance Association (Idaho Housing) is Idaho’s housing finance agency. Idaho
Housing does not receive state-appropriated funds for its operations. However, it funds its
programs from various sources, including the sale of tax-exempt mortgage revenue bonds. Its
mission is to provide funding for affordable housing opportunities in Idaho communities where
they are most needed and when it is economically feasible.

Idaho Housing participates in the development, finance, management, and tenant support for 59
projects under an annual contributions contract with the U.S. Department of Housing and Urban
Development (HUD). Under this agreement, it functions as the agent for HUD in performing tasks
in these areas as the Section 8 subsidy contract administrator. Idaho Housing’s subsidy contract
administration responsibilities include program compliance functions, to ensure that HUD-
subsidized projects are serving eligible families at the correct level of assistance, and asset
management functions, to ensure the physical and financial health of the projects. It processes the
monthly housing assistance payments and is responsible for asset management functions, housing
assistance payments contract (contract) compliance, and monitoring functions. It performs
compliance reviews on these developments, including physical inspections and occupancy
reviews. It holds and administers the replacement reserve, residual receipts, and all other
appropriate escrow accounts for these projects. It also processes the monthly housing assistance
payments.

The monthly housing assistance payments are based on contracts between the owner and Idaho
Housing. These contracts are categorized as either old regulation or new regulation. New
regulation projects are those with a signed agreement to enter into a contract on February 29, 1980,
or later.

Owners of old regulation projects are not limited as to the amount of distributions they may receive
from the project, except that the distribution may only be made after funds have been set aside or
payment has been made for all project expenses.

Pipeline projects are treated like old regulation projects with respect to distributions. Although
these projects are technically new regulation projects because the date of submission of the initial
application was during a time of transition for HUD regulations, HUD allowed the projects to opt
out of the limitation on distributions. Therefore, these projects, like old regulation projects, are
not limited with regard to distributions.

New regulation projects are of two types: nonprofit and profit-motivated. Owners of new
regulation nonprofit ownership projects are not entitled to distributions. Owners of profit-
motivated new regulation limited distribution projects may only receive 6 percent (projects with
elderly tenants) or 10 percent (family projects) of owner equity determined when the project was
constructed. Owners of profit-motivated projects that are family projects with 50 or fewer units
are exempt from the limitations on distributions. In this way, these projects are treated like old




                                                 5
regulation projects. Additionally, the contract for new regulation projects states that the contract
will remain in effect for at least 20 years, regardless of whether the mortgage is prepaid.

Our overall audit objective was to determine whether Idaho Housing monitored projects in
accordance with its annual contributions contract with HUD to ensure that project funds were
expended appropriately. We also wanted to quantify any inappropriate owner distributions,
disbursements from the residual receipts and replacement reserve accounts, and any excessive
management fees.




                                                 6
                                RESULTS OF AUDIT

Finding 1: Idaho Housing Inappropriately Authorized $3,721,738 in
           Owner Distributions in Excess of Allowable Amounts from
           Project Funds
Idaho Housing inappropriately authorized owner distributions in excess of allowable amounts
from project funds. It allowed nonprofit owners, who are not entitled to any distributions, to
receive distributions of project funds and limited distribution owners to receive distributions of
funds in excess of HUD’s limitations. In addition, Idaho Housing improperly allowed
distributions to be paid from the projects’ residual receipts accounts and replacement reserves.
This occurred because Idaho Housing did not properly implement federal regulations at 24 CFR
[Code of Federal Regulations] Part 883 and HUD guidelines regarding owner distributions and
use of residual receipts and replacement reserves. As a result, $3,721,738 in excessive
distributions is unavailable to use for the projects’ purposes. Of that amount, $747,776 disbursed
from the residual receipts accounts is not available to reduce housing assistance payments or for
HUD’s use to provide housing assistance to other low-income individuals upon termination of
the contracts.



 Projects Adopted Subpart G of
 24 CFR Part 883



               We reviewed owner distributions for 19 projects under Idaho Housing’s annual
               contributions contract with HUD. In 1988, owners of 11 of these projects
               amended their old regulation contracts and adopted 24 CFR [Code of Federal
               Regulations] subpart G, incorporating the limitation on distributions.

               Idaho Housing told us these amendments were entered into with the understanding
               that there would be no limitation on distributions, as provided in 24 CFR [Code of
               Federal Regulations] 883.105(b)(2). Under this provision, the agency, the owner,
               and HUD may agree to make the revised subpart G applicable to the project with or
               without limitations on distributions and execute the appropriate amendments to the
               contract. However, there was nothing in the amendments or other documentation to
               indicate any of the parties originally agreed to opt out of the limitation on
               distributions. Further, the regulatory agreement for each project already limited
               distributions from the time of the projects’ inceptions.




                                                7
           The owners of 9 of the 11 projects subject to the 1988 amendment later sold the
           projects to The Housing Company, a nonprofit owner/ management agent. This
           nonprofit assumed the prior owners’ regulatory agreements as well as the
           contracts and amendments. Another project was already owned by a nonprofit.
           According to 24 CFR [Code of Federal Regulations] 883.306, as nonprofits, these
           owners are not entitled to any distribution of project funds. Nonetheless, we
           found Idaho Housing inappropriately authorized distributions to these owners
           from 1994 through 2004.

Idaho Housing Did Not Require
the Projects to Use HUD’s
Surplus Cash Statement


           Idaho Housing implemented a distribution policy, effective January 1, 1994, that
           conflicts with the federal regulations and HUD guidelines in HUD-OIG
           Handbook 2000.04 and HUD Handbook 4381.5. This policy requires the use of
           its own form rather than the HUD-required surplus cash statement. Idaho
           Housing did not direct owners to complete the HUD-required surplus cash
           statement to determine surplus cash, the amount of allowable owner distribution,
           and the amount to be deposited to residual receipts. Instead, Idaho Housing used
           its own form, the partnership distribution worksheet. This worksheet often gives
           a different result than the required surplus cash statement.

           We calculated surplus cash for 16 projects from 2001 through 2004 using the
           required surplus cash statement. During this period for 11 of these projects, 31
           distributions allowed by Idaho Housing were greater than available surplus cash
           calculated using HUD’s surplus cash statement. For example,

              •   At the end of 2002, Aspenwood Apartments had a cash deficit according
                  to HUD’s surplus cash statement, but Idaho Housing authorized a
                  distribution of $70,826 in early 2003;

              •   At the end of 2003, Eagle Manor had a cash surplus of $169,371, but
                  Idaho Housing authorized a distribution of $187,010 in early 2004; and

              •   At the end of 2002, Westside Court had a cash surplus of only $2,579, but
                  Idaho Housing authorized a distribution of $143,565 in early 2003.




                                            8
    Idaho Housing Policy Allows
    Special Purpose Distributions



                    Idaho Housing’s 1994 distribution policy allows project owners distributions
                    equal to the limited distribution allowed, plus a distribution for projects that meet
                    Idaho Housing’s special purpose criteria. Idaho Housing’s senior compliance
                    manager confirmed that this policy is effective for new regulation limited
                    distribution and nonprofit projects. This is contrary to 24 CFR [Code of Federal
                    Regulations] 883.306, which allows only limited distributions to profit-motivated
                    project owners of elderly or large family projects and does not allow any
                    distributions to nonprofit owners. As a result, the owner of Riverside Senior
                    Housing, an old regulation nonprofit project subject to the 1988 amendment,
                    inappropriately received a $242,666 special purpose distribution.



    Owners Signed Perpetual
    Affordability Agreements



                    In 1994, Idaho Housing required some owners to sign a perpetual affordability
                    agreement in exchange for an equity takeout as part of a bond refunding.1 In
                    1997, Idaho Housing informed The Housing Company that distribution of “excess
                    reserves” was an option. However, projects that had not yet committed to
                    perpetual affordability would have to do so to receive distributions from the
                    “excess reserves.” The initial 1997 “excess reserves” distribution included the
                    sum of the replacement reserve balance, interest earned, and residual receipts
                    balance, less two months worth of operating budget and $3,000 per unit for
                    replacement reserves. Later distributions for projects with perpetual affordability
                    agreements also included operating cash on hand.

                    Idaho Housing’s distribution of “excess reserves” in exchange for commitments
                    to perpetual affordability is contrary to 24 CFR [Code of Federal Regulations]
                    883.306 for distributions to the owners of four new regulation limited distribution
                    projects and six old regulation nonprofit projects subject to the 1988 amendment.




1
    See audit report no. 2005-SE-1008 for information on the bond refunding.


                                                          9
 Idaho Housing Authorized
 Distributions to Be Paid from
 Residual Receipts and
 Replacement Reserves



             Of the excess distributions Idaho Housing authorized, $747,776 and $11,275 were
             disbursed from the projects’ residual receipts and replacement reserves,
             respectively. However, according to 24 CFR [Code of Federal Regulations]
             883.306(e) and 883.702(e), residual receipts are to be used only to reduce housing
             assistance payments or for other project purposes, and upon termination of the
             contract, the residual receipts balance must be remitted to HUD. In addition,
             according to 24 CFR [Code of Federal Regulations] 883.703 and the contracts,
             replacement reserves are to be established to aid in funding extraordinary
             maintenance and repair of the project or for replacement of capital items. The
             excess owner distributions did not meet these requirements since the funds were
             distributed to the owners and were not used for project purposes, extraordinary
             maintenance, repairs, or replacement of capital items.


The Rest of the Distributions
Were Paid From the Projects’
Operating Accounts


             The balance of the distributions were paid from the projects’ operating accounts.
             Federal requirements dictate that any funds in the operating account in excess of
             those required to fund project operations and allowable owner distributions must be
             deposited to the residual receipts account. Since the distributed funds were in excess
             of what was required to operate the projects, the funds should have been deposited to
             the residual receipts account.


 More Than $3.7 Million in
 Excess Distributions Is Not
 Available for Project Purposes

             Since Idaho Housing did not follow federal regulations and HUD guidelines
             regarding owner distributions, excessive distributions to 13 projects totaling
             $3,721,738 will not be available to use when or if funds are needed for project
             purposes. In addition, these funds are no longer available to reduce housing




                                              10
          assistance payments or for HUD’s use to provide housing assistance to other low-
          income individuals upon termination of the contracts. Appendix C details the
          excessive distributions by project.

          The average excess distributions from 1994 through 2004 total $316,279 per year.
          These funds could be put to better use over the next year if Idaho Housing stops
          allowing these excess distributions.


Recommendations


          We recommend that the director, Region X Multifamily Housing Hub,

          1A. Require Idaho Housing to reimburse the projects’ residual receipts accounts
          from nonfederal funds $3,710,463 for excessive partnership distributions that it
          inappropriately allowed (see appendix C).

          1B. Require Idaho Housing to reimburse the applicable projects’ replacement
          reserve accounts from nonfederal funds $11,275 for excessive partnership
          distributions that it inappropriately allowed from those accounts (see appendix C).
          However, if these replacement reserve accounts are fully funded, we recommend
          HUD require Idaho housing to reimburse the excessive distributions into the
          applicable projects’ residual receipts accounts.

          1C. Require Idaho Housing to implement procedures to ensure that nonprofit
          owners under new regulations (including 1988 amended projects) do not receive
          distributions of project funds and that limited distribution project owners do not
          receive distributions in excess of their allowed limited distributions. This will
          allow $316,279 in project funds to be put to better use over the next year.

          1D. Require Idaho Housing to implement procedures to ensure the residual
          receipts account is used only to reduce housing assistance payments or for project
          purposes and not for owner distribution.

          1E. Require Idaho Housing to implement procedures to ensure that replacement
          reserves are used only for extraordinary maintenance and repairs or replacement
          of capital items and not for owner distribution.

          1F. Require that Idaho Housing use HUD’s surplus cash statement to determine
          the surplus cash available for partnership distribution.




                                           11
1G. Require Idaho Housing to amend its distribution policy to conform to the
new regulations at 24 CFR [Code of Federal Regulations] 883.306 with respect to
owners’ distributions for all new regulation projects as well as for all projects
subject to the 1988 housing assistance payments amendment incorporating
limitations on distributions.

1H. Require Idaho Housing to discontinue use of the perpetual affordability
agreement as a basis for determining owner distributions.

1I. Obtain a formal legal opinion as to whether the 1988 housing assistance
payments amendments subject the owners of the projects to limitations on
distributions in accordance with 24 CFR 883.702(e) and take the appropriate
above actions based on that opinion.




                                12
Finding 2: Idaho Housing Approved One Duplicate and Other
           Unsupported Requests for Reimbursement from Project
           Replacement Reserves
Idaho Housing approved requests for reimbursement from project replacement reserve funds
without obtaining adequate supporting documentation. This occurred because Idaho Housing did
not always follow HUD guidelines and its own policies and procedures regarding expenditures
from the reserve for replacement accounts. As a result, one project’s replacement reserves were
used to make a $24,562 duplicate payment to a vendor, and $182,264 in expenditures from 13
project replacement reserve accounts was not adequately supported. Idaho Housing’s practices
provide little assurance that reserve for replacement expenditures meet HUD’s restrictions on the
use of reserve for replacement funds.



 We Reviewed Replacement
 Reserve Transactions for 21
 Projects


              Federal regulations at 24 CFR [Code of Federal Regulations] 883.703 and the
              contracts provide that a replacement reserve must be established and maintained
              in an interest-bearing account to aid in funding extraordinary maintenance and
              repair and replacement of capital items. We identified 21 limited distribution,
              nonprofit, or pipeline projects that are required to maintain this account under
              Idaho Housing’s annual contributions contract with HUD. We reviewed
              replacement reserve transactions for these 21 projects over the years 2001 through
              2004 and found that Idaho Housing staff did not always follow HUD guidelines
              or its own written policies and procedures.

 Twenty-Six Reimbursements
 Were Not Properly Supported



              HUD Handbook 4381.5 requires an invoice for payment, a written request, and a
              payment voucher in support of capital expenditures. Idaho Housing’s
              replacement reserve agreement requires an invoice for payment for expenditures
              from the reserve for replacement accounts. Idaho Housing’s new construction
              budget procedures also require that bids be submitted to Idaho Housing for all
              expenditures of more than $1,000. Nonetheless, from 2001 through 2004, Idaho
              Housing approved 24 reimbursements totaling $182,264 from projects’
              replacement reserve accounts without obtaining bids or invoices (see appendix
              D).



                                               13
           Idaho Housing’s compliance manager stated that Idaho Housing is not strict with
           regard to compliance with its own requirements for owners to obtain bids,
           especially with respect to smaller projects. He also said that, at times, a verbal
           approval for the projects not to obtain bids is acceptable.

One Reimbursement Was a
Duplicate


           Our review also disclosed one disbursement was a duplicate submission for
           reimbursement of $24,562 for parking lot paving at Lake Country Apartments.
           The first request for reimbursement for the paving was paid in May 2002. This
           package included an invoice from the vendor. The second request for
           reimbursement was paid in August 2002. This request was part of a larger request
           that included the authorization and purchase order for paving the parking lot but
           not the invoice.

Idaho Housing Could Not
Ensure Expense Payments
Were Proper

           Since Idaho Housing did not always require sufficient supporting documentation
           before reimbursement of expenses from replacement reserves, it did not detect the
           duplicate payment and cannot ensure that reserve for replacement expenditures
           totaling $182,264 complied with HUD’s and its own restrictions on the use of
           reserve for replacement funds.


Recommendations



           We recommend that the director, Region X Multifamily Housing Hub, require
           Idaho Housing to

           2A. Return $24,562 from nonfederal funds for the duplicate payment to the
           project’s replacement reserve account. However, if the replacement reserve
           account is fully funded, we recommend the reimbursement be made to the
           project’s residual receipts account.

           2B. Provide supporting documentation for the $182,264 in unsupported costs or
           return this amount to the projects’ replacement reserve accounts (see appendix D).
           If the replacement reserve accounts are fully funded, we recommend the director
           require the reimbursement to be made to the projects’ residual receipts accounts.



                                           14
2C. Comply with HUD guidelines and its own policies and procedures in
processing replacement reserve disbursements.




                              15
Finding 3: A Conflict of Interest Exists between Idaho Housing and
           The Housing Company
Contrary to HUD requirements, Idaho Housing allowed a conflict of interest to exist between
itself and The Housing Company, a nonprofit owner of subsidized multifamily projects. Idaho
Housing created and holds substantial control over The Housing Company; however, under
terms of its annual contributions contract, HUD pays Idaho Housing to monitor The Housing
Company’s subsidized projects. This occurred because management controls are insufficient to
ensure that Idaho Housing complies with federal requirements. Also, the close relationship
between Idaho Housing and The Housing Company exists in order for Idaho Housing to assist
The Housing Company to meet its operational needs for personnel and office space. However,
because of the close relationship, HUD has no independent assurance that projects controlled by
The Housing Company are operated according to program requirements. In addition, there is the
potential for The Housing Company or its projects to receive special consideration.



 The Housing Company Is an
 Affiliate of Idaho Housing


              The Housing Company was formed in 1990 by Idaho Housing to facilitate Idaho
              Housing’s mission to preserve affordable housing and develop new housing in
              underserved areas of Idaho. It is an affiliate of Idaho Housing. Two of Idaho
              Housing’s board members also serve on the board of The Housing Company.
              Idaho Housing’s president and executive director serves as the president of The
              Housing Company. The Housing Company’s employees are Idaho Housing
              employees who are subcontracted to The Housing Company. Idaho Housing and
              The Housing Company share telephone and Internet systems, and managers for
              both entities meet together weekly. In addition, if The Housing Company ceases
              operations, all of its assets become the assets of Idaho Housing.

              The vice president of The Housing Company is responsible for oversight of The
              Housing Company’s activities and supervises all project management and
              development. Her immediate supervisor, who performs her annual evaluation, is
              the president and executive director of Idaho Housing. Consequently, the
              president of Idaho Housing has a measure of control over The Housing
              Company’s activities.




                                              16
Idaho Housing Is the Contract
Administrator for The Housing
Company’s Projects

           The Housing Company owns 13 projects that receive Section 8 subsidies under
           Idaho Housing’s annual contributions contract with HUD. Idaho Housing is the
           contract administrator for these projects. In this capacity, Idaho Housing makes
           the monthly housing assistance payments to project owners and is required to
           perform various monitoring activities, including reviewing

              •   Οwner calculations of tenant payments,
              •   Owner financial statements,
              •   Expenditures to ensure costs are reasonable and necessary,
              •   Payments to owners to eliminate overpayments or underpayments of
                  Section 8 subsidies,
              •   Owner compliance with Section 8 requirements,
              •   Tenant files,
              •   Owner compliance with physical inspections, and
              •   Actions taken with regard to owner and tenant complaints.

           Idaho Housing is also responsible for reviewing and paying special claims for
           vacancy loss and unreimbursed tenant damages as well as for calculating owner
           distributions.

This Relationship Violates
Housing Assistance Payments
Contracts and the Annual
Contributions Contract


           In effect, Idaho Housing is both owner and manager of The Housing Company
           and its projects and monitors its own actions with respect to the Section 8
           assistance provided to these projects. This relationship violates requirements of
           Idaho Housing’s old and new regulation contracts with The Housing Company’s
           projects at paragraphs 2.18 and 2.11 respectively as well as its annual
           contributions contract with HUD at paragraph 2.18. These contracts prohibit
           members or officers of Idaho Housing from having a direct or an indirect interest
           in contracts during tenure or for one year after.




                                           17
Idaho Housing Does not Have
Controls in Place to Prevent
Conflicts of Interest


           We determined this conflict of interest relationship was allowed because Idaho
           Housing lacks the management controls to ensure that it complies with the
           requirements of the CFR [Code of Federal Regulations], its annual contributions
           contract with HUD, and its housing assistance payments contracts with project
           owners. Each of these include prohibitions against this type of relationship.



HUD Has No Assurance These
Projects Are Operated in
Accordance with Program
Requirements



           Since Idaho Housing is so closely tied to the ownership of The Housing
           Company, HUD has no independent assurance that The Housing Company’s
           subsidized projects are operated in accordance with the requirements of the
           Section 8 program. Additionally the potential exists for The Housing Company
           or its projects to be granted special consideration or concessions not available to
           other projects monitored by Idaho Housing.


Recommendations


           We recommend that the director, Region X Multifamily Housing Hub,

           3A. Require Idaho Housing take corrective action to dissolve the conflict of
           interest relationship. If Idaho Housing does not take the corrective action, we
           recommend the director make a determination of default in accordance with
           paragraph 2.16(b)(2) of its annual contributions contract with Idaho Housing. If
           Idaho Housing is declared in default of the annual contributions contract, we
           recommend the director assume the role of contract administrator or assign
           another contract administrator (including any associated administrative fee) over
           any projects that (1) are owned by The Housing Company, (2) receive Section 8
           subsidy from HUD, and (3) are currently monitored by Idaho Housing.

           3B. Require that Idaho Housing implement controls to ensure that any conflict of
           interest relationships will not be allowed in the future.




                                            18
Finding 4: Idaho Housing Approved Excessive Management Fees for
           10 Idaho Projects
Between January 1, 2001, and December 31, 2004, Idaho Housing approved excessive
management fees for 10 subsidized projects. This occurred because Idaho Housing did not
establish an appropriate management fee range and did not have a process for assessing the
reasonableness of requests for management fee increases. As a result, from 2001 to 2004, 10
projects paid $121,521 in management fees in excess of HUD’s residential management fee
range for Idaho. The excessive management fee payments could have been used for other
project purposes, deposited in the residual receipts account and used to reduce housing assistance
payments, or upon termination of the contract, revert to HUD to be used for other low-income
housing purposes.



 The Contract Administrator Is
 Responsible for Reviewing
 Management Fees


               Under HUD Handbook 4381.5, Idaho Housing is required to perform a
               management fee review when a project owner or agent requests an increase in the
               management fee percentage. This is to ensure that approved fees do not
               significantly exceed the amount that independent agents and owners would
               ordinarily negotiate for comparable services at projects in the same
               geographic/cost area, except as justified by conditions that require more time and
               effort on the part of the management agent.

               The maximum residential management fee range for projects in Idaho, as
               computed by HUD for 2001-2005, was $35 per–unit–per–month. Although Idaho
               Housing is not required to use HUD’s computed management fee range, it must
               use some range. It must follow the same procedures HUD uses to determine the
               maximum fee range (i.e., the procedures in chapter 3 of HUD Handbook 4381.5).
               Since Idaho Housing did not compute its own residential management fee range,
               it should have used HUD’s maximum residential management fee of $35 per–
               unit–per–month.

 Ten Projects Are Paying
 Excessive Management Fees


               New regulation limited distribution and nonprofit projects are required to
               maintain a residual receipts account. Deposits to this account come from project




                                               19
           funds in excess of the amount needed for project operations, reserve requirements,
           and permitted distributions. We identified 10 new regulation projects that have
           restrictions on their residual receipts accounts that also had a change in the
           management agreement between January 1, 2001, and December 31, 2004. Nine
           of these projects are owned by The Housing Company, an affiliate of Idaho
           Housing (see finding 3).

           We selected these projects for review since any excess funds beyond those needed
           for project operations and the allowable distributions would ultimately be remitted
           back to HUD. We compared the actual management fees paid for these projects
           to HUD’s computed maximum residential management fee of $35 per–unit–per–
           month. Only eight projects are identified in the chart below because The Housing
           Company has historically reported Meadowview and Pondside Gardens together
           as one project and Village Community Gardens and Village Gardens together as
           one project.


                            Briarw ood

                            Bristlecone

                          Lake Country                                HUD's calculation of
              Meadow view and Pondside                                reasonable fee per unit
                      Gardens                                         per month
                         Ow yhee Place                                Average per unit per
                                                                      month paid in excess of
                        South Meadow                                  the reasonable fee
              Village Community Gardens
                   and Village Gardens
                         Westside Court

                                          $0 $10 $20 $30 $40 $50
                                             Fee per unit per month




Excessive Management Fees
Could Have Been Used for
Other Low-Income Housing
Purposes


           We found that these projects paid $121,521 from 2002 through 2004 for
           management fees in excess of the amount they would have paid by using the
           maximum HUD-determined fee of $35 per unit per month. These excessive
           management fee payments are costing the applicable projects an average total of
           $41,707 per year. The excessive payments could have been used for other project
           purposes or deposited in the residual receipts account. The additional residual
           receipts could then be used to reduce housing assistance payments or, upon


                                                  20
           termination of the contract, revert to HUD to be used for other low-income
           housing purposes (see appendix E).



Lack of Management Controls
Contributed to the Excessive
Management Fees

           Idaho Housing’s lack of adequate management controls contributed to the
           excessive management fees. Idaho Housing does not have specific written
           policies and procedures to ensure management fees are reasonable. Idaho
           Housing did not calculate its own reasonable management fee range for
           multifamily units in Idaho or adopt HUD’s residential management fee range.
           Further, Idaho Housing did not assess requests for increases in the management
           fee percentage to determine whether the requested percentage was reasonable.


Recommendations



           We recommend that the director, Region X Multifamily Housing Hub,

           4A. Require Idaho Housing to reimburse the applicable projects’ residual receipts
           accounts from nonfederal funds for excess management fees of $121,521 paid
           (see appendix E).

           4B. Require Idaho Housing to adopt HUD’s residential fee range for
           management’s fees or calculate its own residential fee range for management fees
           using the process prescribed in Management Agent Handbook 4381.5, chapter 3.

           4C. Require Idaho Housing to instruct the owner/management agents for the
           applicable projects to immediately reduce the management fees to a reasonable
           amount to allow $41,707 in project funds to be put to better use over the next
           year.

           4D. Require Idaho Housing to prepare and implement a policy to review
           management fee percentage changes for reasonable assurance that management
           agents do not receive excessive fees.

           4E. Obtain a formal legal opinion as to whether HUD Handbook 4381.5 applies
           to these projects and take the appropriate above actions based on that opinion.




                                           21
                        SCOPE AND METHODOLOGY

To achieve our audit objectives, we reviewed applicable federal regulations, HUD handbooks,
Idaho Housing written policies and procedures, and project files for the 59 subsidized projects
administered under the annual contributions contract between Idaho Housing and HUD. In
addition, we interviewed local HUD staff and Idaho Housing staff. We performed audit work at
Idaho Housing’s offices in Boise, Idaho, and at HUD’s Office of Housing - Multifamily Hub in
Seattle, Washington, from November 2004 through October 2005. Our audit generally covered
the period January 1, 2001, through December 31, 2004, and was expanded as needed.

We performed our review in accordance with generally accepted government auditing standards.




                                              22
                              INTERNAL CONTROLS

Internal control is an integral component of an organization’s management that provides
reasonable assurance that the following objectives are being achieved:

   •   Effectiveness and efficiency of operations,
   •   Reliability of financial reporting, and
   •   Compliance with applicable laws and regulations.

Internal controls relate to management’s plans, methods, and procedures used to meet its
mission, goals, and objectives. Internal controls include the processes and procedures for
planning, organizing, directing, and controlling program operations. They include the systems
for measuring, reporting, and monitoring program performance.



 Relevant Internal Controls


              We determined the following internal controls were relevant to our audit objectives:

              •       Program operations – Policies and procedures that officials of the audited
                      entity have implemented to reasonably ensure that a program meets its
                      objectives and that unintended actions do not result.

              •       Compliance with laws and regulations – Policies and procedures that
                      officials of the audited entity have implemented to reasonably ensure that
                      resources used are consistent with laws and regulations.

              •       Safeguarding resources – Policies and procedures that officials of the audited
                      entity have implemented to reasonably prevent or promptly detect
                      unauthorized acquisition, use, or disposition of resources.

              We assessed the relevant controls identified above.

              A significant weakness exists if management controls do not provide reasonable
              assurance that the process for planning, organizing, directing, and controlling
              program operations will meet the organization’s objectives.




                                                23
Significant Weaknesses


           Based on our review, we believe the following items are significant weaknesses:

           •      Idaho Housing does not have controls in place to ensure that project funds
                  are used in accordance with federal regulations at 24 CFR [Code of Federal
                  Regulations] 883.0306 (See findings 1 and 4).
           •      Management controls do not reasonably prevent or promptly detect the
                  improper use of project resources (See findings 2 and 4).
           •      Management controls are insufficient to ensure that Idaho Housing complies
                  with the requirements of the CFR [Code of Federal Regulations], the
                  housing assistance payments contracts, and the annual contributions contract
                  (see finding 3).




                                           24
                                     APPENDIXES

Appendix A

               SCHEDULE OF QUESTIONED COSTS
              AND FUNDS TO BE PUT TO BETTER USE

 Recommendation           Ineligible 1/            Unsupported 2/           Funds to be put to
     number                                                                   better use 3/
      1A                         $3,710,463
      1B                            $11,275
      1C                                                                                $316,279
      2A                            $24,562
      2B                                                      $182,264
      4A                           $121,521
      4C                                                                                 $41,707
     Totals                      $3,867,821                   $182,264                  $357,986


1/   Ineligible costs are costs charged to a HUD-financed or HUD-insured program or activity
     that the auditor believes are not allowable by law; contract; or federal, state, or local
     policies or regulations.

2/   Unsupported costs are those costs charged to a HUD-financed or HUD-insured program
     or activity when we cannot determine eligibility at the time of audit. Unsupported costs
     require a decision by HUD program officials. This decision, in addition to obtaining
     supporting documentation, might involve a legal interpretation or clarification of
     departmental policies and procedures.

3/   “Funds to be put to better use” are quantifiable savings that are anticipated to occur if an
     Office of Inspector General (OIG) recommendation is implemented, resulting in reduced
     expenditures at a later time for the activities in question. This includes costs not incurred,
     deobligation of funds, withdrawal of interest, reductions in outlays, avoidance of
     unnecessary expenditures, loans and guarantees not made, and other savings.




                                              25
Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation   Auditee Comments




                         26
Comment 1
Comment 2




Comment 3


Comment 4




Comment 5




            27
Comment 6




Comment 7


Comment 8
Comment 2




Comment 9




            28
Comment 10




Comment 11




Comment 12




Comment 13


Comment 11
Comment 14




             29
Comment 15




Comments 11, 14




Comment 10




                  30
Comment 16




Comment 17




Comments 11, 15

Comment 18




                  31
Comment 19




Comment 19



Comment 15

Comment 15




             32
Comment 20



Comment 21


Comment 20




Comment 22




             33
Comment 23




Comment 28

Comment 20




Comment 24




             34
Comment 3

Comment 25


Comments 20, 22




Comment 26




Comment 27




                  35
Comment 6




Comment 28




             36
Comment 29


Comment 30




Comment 31




Comment 32

Comments 28, 29




                  37
Comments 28, 29


Comment 30


Comment 33




Comment 34




                  38
Comments 15, 20




Comment 30




Comment 30




                  39
Comment 35



Comments 28, 29




                  40
                         OIG Evaluation of Auditee Comments

Comment 1   The letter to which Idaho Housing refers also states that HUD made this
            acknowledgement subject to a review of the issue by the OIG.

Comment 2   Because of a disagreement with the Region X Multifamily Hub, we included
            additional recommendations that they obtain a formal legal opinion and take
            action based on that opinion (Findings 1 and 4).

Comment 3   OIG reviewed the documents provided by Idaho Housing in support of the
            duplicate payment and the unsupported payments and adjusted the unsupported
            amount identified in our report by $6,083 as a result.

Comment 4   Although Idaho Housing disagrees that replacement reserves for all projects we
            identified are subject to HUD restrictions, each project we identified is subject to
            these restrictions either because they are new regulation projects or because they
            adopted 24 CFR 883 Subpart G in 1988. Subpart G of 24 CFR 883 contains
            requirements for the replacement reserve accounts for these projects. These
            requirements do not exempt any projects except partially assisted projects.

Comment 5   The guidance to which Idaho Housing refers does not consider two very important
            facts. The executive director of Idaho Housing is also the president of The
            Housing Company. In addition, all assets of The Housing Company revert to
            Idaho Housing upon dissolution of The Housing Company. We believe this
            would have changed the opinion of HUD’s Portland Regional Office. Also, as
            stated in our report, Idaho Housing was told that it should not monitor its own
            performance as an owner/manager. Further, this guidance provided an alternative
            suggesting that HUD or a public housing authority could provide oversight over
            these projects.

Comment 6   In our exit conference with Idaho Housing, the Region X multifamily
            representative agreed that it wasn’t until about 2000 that HUD first noticed that
            there was such a close relationship between Idaho Housing and The Housing
            Company. In December 2004, HUD issued a legal opinion stating that Idaho
            Housing was in a conflict of interest situation. However, Idaho Housing has
            agreed to implement recommendations 3A and 3B in this report, which should
            resolve the conflict of interest issue.

Comment 7   Although Idaho Housing does not believe that HUD Handbook 4381.5 applies to
            these projects, the Handbook itself states that it applies to HUD-assisted projects
            that receive Section 8 assistance. In addition, the management agreement for all
            of The Housing Company projects specifically states that the owner will receive
            its management fee in accordance with HUD Handbook 4381.5.




                                             41
Comment 8     Since Idaho Housing does not have its own process to determine whether a fee is
              reasonable, it should have followed HUD’s process as found in the Handbook.

Comment 9     Whether the amendments were intended to limit the distributions is immaterial.
              The amendments themselves do not state that this provision will not apply.

Comment 10 The Region X HUD office agreed with Idaho Housing’s assessment of which
           projects were limited distribution projects under the new regulations subject to
           review of the issue by the OIG.

Comment 11 As stated in our report, there was nothing in the amendments to indicate any of
           the parties originally agreed to opt out of the limitation on distributions. Further,
           the regulatory agreement for each project already limited distributions from the
           time of the projects’ inceptions. It was not until after The Housing Company
           purchased the projects and entered into a perpetual affordability agreement that
           distributions were allowed to The Housing Company in excess of the limitations.

Comment 12 Each of the project owners that Idaho Housing contacted owned projects that now
           belong to The Housing Company. In addition, most of the projects for which
           Idaho Housing received these statements of intent were small, family projects that
           would have been exempt from limitations on distributions in accordance with the
           regulations.

Comment 13 These signed statements were received by Idaho Housing 16 years after the
           amendments were signed. As stated in our report, there was nothing in the
           amendments or other documentation to indicate that the owners originally
           intended to opt out of the limitations on distributions.

Comment 14 The projects purchased by The Housing Company were already limited as to
           distributions by the regulatory agreements between the owners and Idaho
           Housing. In addition, Idaho Housing then allowed no distributions to The
           Housing Company on these projects even after purchase, as is proper under the
           regulations. However, once The Housing Company entered into a perpetual
           affordability agreement, Idaho Housing began allowing distributions.

Comment 15 Since Subpart G of 24 CFR 883 incorporates the limitations on distributions, the
           owners of these projects should have made some reference in the amendment if
           they did not intend to limit the distributions. For example, the pipeline projects
           were allowed to opt out of the limitations on distributions because of the timing of
           the signing of the agreement to enter into housing assistance payments contracts.
           The owners of these projects, with Idaho Housing and HUD approval, crossed out
           the sections of the contract that dealt with limitations on distributions. This was
           appropriate. However, as noted before, the amendments are silent on the issue of
           whether the owners will opt out of the limitations.




                                               42
Comment 16 The regulatory agreement does not state or even indicate that it is, “…subject to
           revision by the Association without restriction for projects not subject to new
           regulation limitations on distributions.” In fact, section 13 of the regulatory
           agreement states that the agreement shall remain in effect as long as Idaho
           Housing is the holder of the mortgage loan or has any interest in the property.

Comment 17 When the owners of projects entered into the housing assistance payments
           amendment in 1988, the projects became required to maintain a replacement
           reserve account in accordance with 24 CFR 883.703. This is included in Subpart
           G. Therefore, regardless of whether these projects are held to limited distribution,
           unlimited distribution, or nonprofit status, they are still required to follow the
           rules for replacement reserves.

Comment 18 As stated in our report, Idaho Housing did not direct owners to complete the
           HUD-required surplus cash statement. In addition, during our review, we found
           of 16 projects, only one submitted a surplus cash statement for each year 2001 –
           2004 and only one project submitted a surplus cash statement for one year. None
           of the other 14 projects submitted a surplus cash statement. In fact, the notes to
           the financial statements for four projects stated that computation of surplus cash
           based upon HUD guidelines was superseded by the Idaho Housing distribution
           policy.

Comment 19 If the four projects to which Idaho Housing are referring are allowed to refinance
           at a lower rate, use the financing savings to repay the excessive distributions, and
           the change in rate is not used to lower the subsidy to the projects, then HUD, in
           effect, will be making the reimbursement instead of the owner or Idaho Housing.
           In addition, each of these four projects are subject to the McKinney Act and Idaho
           Housing would be required to reimburse HUD for one half of the savings
           attributed to a refinance.2

Comment 20 The finding does not deal with distributions, but with replacement reserves. As
           noted in comment 16, when the projects adopted Subpart G of 24 CFR 833 they
           became required to maintain a replacement reserve account for extraordinary
           maintenance and repair or replacement of capital items. Additionally, HUD
           Handbook 4381.5 states in paragraph 6.51 that HUD may not always be the
           contract administrator, but a state agency may be and that state agency Section 8
           projects are specifically covered under this section. The Handbook does not
           differentiate between old regulation and new regulation projects, nor does it
           differentiate between limited distribution, unlimited distribution, and nonprofit
           projects. Paragraph 6.53(b)(3) states that the contract administrator will
           specifically review replacement reserve transactions for propriety and will ensure
           that the owner/manager is complying with regulatory requirements. This chapter



2
    See audit report number 2005-SE-1008 for information on McKinney Act projects.


                                                        43
              further states that monitoring regulatory agreements requires verification that
              replacement reserve account transactions are authorized and that vouchers,
              invoices, and other evidence of distribution and expense payments are proper.

Comment 21 Replacement reserves are not to be used simply “…for the benefit of the
           projects…” but are only to be used, in accordance with 24 CFR 883.703(a), for
           extraordinary maintenance and repair and replacement of capital items.

Comment 22 Although 24 CFR 883 does not mandate that bids or invoices for withdrawals of
           reserves for replacements be obtained, Idaho Housing policies require both bids
           and invoices and HUD Handbook 4381.5 paragraph 6.55 states that vouchers and
           invoices should be reviewed to ensure that distribution and expense payments are
           proper.

Comment 23 Although HUD allows state housing finance agencies flexibility in monitoring the
           management and operation of these projects, the state housing finance agency is
           still required to follow the regulations and handbooks that apply to these projects.

Comment 24 Our analysis of the documentation does not show that the duplicate disbursement
           from the replacement reserve account was reimbursed to the same account. The
           documentation actually shows the following:

              •   There was a deposit to the replacement reserve account in June of 2004 in an
                  amount more than three times the amount of the duplicate reimbursement.
              •   According to the note written on the support, the deposit to the replacement
                  reserve account was to replenish the $132,000 requirement for replacement
                  reserves to be fully funded at $3,000 per unit and 44 units, not to reimburse
                  the account for a duplicate payment as stated by Idaho Housing’s executive
                  director and its attorney.
              •   The check for the deposit to the replacement reserve account came from the
                  project's operating account, not from the twice-paid vendor or the owner.

Comment 25 Our analysis of the documentation Idaho Housing provided for the Briarwood
           transaction at our exit conference revealed that it did not support the transaction.
           Further, some of the documentation appeared to have been altered. Idaho
           Housing then provided us with other documents to support this transaction. The
           documents from the vendor did not match the transaction and the work order
           again appeared to have been altered.

Comment 26 The purpose of the conflict of interest provision in the annual contributions
           contract and the housing assistance payments contracts is to avoid a conflict in
           activities performed to serve the public and those performed to promote one’s
           own interests and to prevent one from obtaining special benefits as a result of the
           close relationship. There is nothing in these provisions that state that the
           prohibition is only against a direct financial benefit. Although the executive
           director of Idaho Housing may not receive a direct financial benefit as a result of


                                               44
              his position as the president of The Housing Company, his actions in that position
              and the performance of The Housing Company would directly affect his
              reputation and could therefore indirectly affect his future financial position.

Comment 27 Idaho Housing is correct in its quote of HUD’s legal counsel in guidance provided
           by HUD’s Portland’s Office of OGC during 1990. However, Idaho Housing did
           not complete the quote in which HUD’s legal counsel cautioned very strongly
           against monitoring its own performance as an owner/manager. In fact, HUD’s
           legal counsel even offered a solution suggesting that HUD or a public housing
           authority could perform the contract administrator role with regard to these
           projects. In addition, HUD’s legal counsel explained that its guidance should not
           be taken as definitive answers. Therefore, since there was an apparent
           inconsistency in what was being said, Idaho Housing should have acted further to
           resolve the issue. Further, it is not apparent from the letter to which Idaho
           Housing refers that it informed HUD that the executive director of Idaho Housing
           would also be the president of The Housing Company or that the assets of The
           Housing Company would revert to Idaho Housing if The Housing Company was
           dissolved. We believe this information could have altered HUD’s legal counsel
           opinion in this case.

Comment 28 HUD Handbook 4381.5 states in chapter 1, paragraph 1.1 that the handbook
           applies to HUD-assisted as well as HUD-insured projects. Figure 1-2 shows that
           the types of properties and programs affected include rental assistance projects in
           the Section 8 multifamily program area. Although paragraph 1.2 states that a
           state or local agency may be responsible for oversight of management agent
           activities, nowhere in the handbook does it say that state housing agencies are
           exempt from using this handbook. Also, since Idaho Housing is the agent of
           HUD, it must follow these procedures.

Comment 29 Figure 3-5 of HUD Handbook 4381.5 shows that limited distribution and
           nonprofit projects, regardless of how project rents are set, are required to receive
           an after-the-fact review of management fees. Again, as stated above, nowhere in
           this chapter does it say that state housing agencies are exempt from the provisions
           of this chapter.

Comment 30 Idaho Housing states that it is responsible for approval of management fees and
           other management agent issues under its own procedures. However, by its own
           admission, it does not have any procedures in place by which to ensure that
           approved fees do not significantly exceed reasonable amounts as described in
           HUD Handbook 4381.5. In addition, the management agreement between the
           owner and the lender (Idaho Housing) for the projects owned by The Housing
           Company states that the owner will receive a management fee, “…in accordance
           with HUD Handbook 4381.5 Rev 2…” Therefore, Idaho Housing should have
           used HUD’s procedures to determine if the increase in management fees was
           reasonable.




                                              45
Comment 31 As stated in our report, the objective of HUD’s requirement that management fees
           be reviewed when a project owner or manager requests an increase in the
           management fee percentage is to ensure that those fees do not exceed that
           ordinarily paid in like circumstances between independent agents and owners.
           The authority for state housing agents to assume responsibility for these projects
           does not absolve them of the responsibility to review the management fees for
           reasonableness.

Comment 32 Idaho Housing did not properly monitor the increase in management fees for these
           projects. It simply approved the increases without any analysis of reasonableness.

Comment 33 Idaho Housing documentation did not show that it made its determination of
           reasonableness of management fee increases on a case-by-case basis. As stated in
           comment 30, Idaho Housing does not have a process in place to determine if a
           management fee is reasonable. In fact, the senior housing compliance manager
           told us that they just looked at the seven percent fee that was being requested by
           The Housing Company and decided it was reasonable.

Comment 34 HUD Handbook 4381.5 does not require any review of management fees if there
           has not been a request for a change in management fee percentage or a change in
           the management agent. This is to give the agent an incentive to maximize
           collections as well as to increase the agent’s fee yield to offset the effects of
           inflation. Therefore, we did not review management fees established at project
           inception. However, a management fee percentage must be reviewed if a change
           in the percentage or in the management agent is requested. According to this
           Handbook, the fee percentage should be reviewed when one of the above changes
           are made in order to determine if the per-unit-per-month dollar amount is
           reasonable. The Handbook also states, in 3.19 b. that the "[r]esidential fee yield
           used for establishing the range(s) must be computed by applying the residential
           fee percentage to the monthly rent potential for all revenue-producing units
           (adjusted to reflect a 95 percent collection rate)." In 3.19 b. (2), it states that
           "[y]ields must be computed on a per-unit per-month basis." In 3.20 c. it states
           that if the yield is not reasonable (in comparison to what was calculated above)
           the fee percentage may not be approved. As stated in our finding, HUD
           calculated a reasonable management fee in accordance with this Handbook.
           Idaho Housing allowed management fees for these projects to exceed that amount
           from $5 to $13 per-unit-per-month by approving a flat seven percent fee.

Comment 35 We believe the corrective action referred to may include repayment to projects or
           to HUD to correct the improper use of funds authorized by Idaho Housing.




                                              46
Appendix C

SCHEDULE OF EXCESSIVE OWNER DISTRIBUTIONS
(FINDING 1)
                                                                  Deficiencies
                           Ineligible
 Project                   amount           A        B        C        D         E      F       G
 Aspenwood                  $    43,186              X        X                  X      X
 Briarwood                      384,116      X                X                  X      X
 Bristlecone                    366,838      X                X                  X      X
 C Street Manor                  92,117              X        X                  X      X       X
 Eagle Manor                    168,808              X        X                  X      X
 Lake Country                   471,765      X                X
 Landmark Tower                 125,708      X                X                         X
 Meadowview/Pondside            330,004      X                X                  X      X       X
 Owyhee Place                   116,602      X
 Riverside Senior               979,693      X                X        X         X      X       X
 South Meadow                   273,769      X                X                  X      X
 Village Community
 Gardens/Village
 Gardens                        236,933      X                                   X
 Westside Court                 132,199              X        X                  X      X

 Total                      $3,721,738

A. 1988 housing assistance payments amendment - Owners of these projects signed the 1988
housing assistance payments amendment adopting subpart G of 24 CFR [Code of Federal Regulations]
883. Nonprofit owners should not have been allowed any distributions. Otherwise, distributions should
have been limited.
B. New regulation limited distribution projects - Under the new regulations, distributions to the
owners of these projects are limited to 6 percent on equity. The ineligible amount is the amount in excess
of that 6 percent.
C. Surplus cash statement not used - Owners of these projects received excess distributions in part
due to the difference between use of Idaho Housing's partnership distribution worksheet and HUD's
surplus cash statement.
D. Special purpose distributions - Idaho Housing allowed this owner to receive a special purpose
distribution under its policies even though the owner of this project is a nonprofit organization and is not
entitled to any distributions under the 1988 housing assistance payments amendment (see A. above).
E. Perpetual affordability agreement - Idaho Housing allowed owners of these projects excess
distributions after they signed a perpetual affordability agreement even though these owners are entitled
to only a limited distribution or to no distribution as nonprofit owners under the new regulations or the
1988 amendment.
F. Residual Receipts - Idaho Housing allowed owner distributions to be paid from residual receipts even
though these funds are required to be used to reduce housing assistance payments or for project
purposes only.




                                                    47
G. Replacement Reserves - Idaho Housing allowed owner distributions to be paid from replacement
reserves even though these funds are required to be used only for extraordinary maintenance and repair
or replacement of capital items. Specifically, Idaho Housing allowed a total of $11,275 ($8,325, $1,308,
and $1,642) to be paid from the replacement reserves of C Street Manor, Pondside/Meadowview, and
Riverside Senior.




                                                   48
Appendix D

UNSUPPORTED DISBURSEMENTS FROM REPLACEMENT
RESERVE ACCOUNTS (FINDING 2)
                        2001             2002                      2003              2004
Project           No bids    No    No bids    No             No bids     No    No bids    No
                           invoice          invoice                   invoice           invoice
Aspenwood                    9,490                                      1,558*   8,385
Briarwood                    1,693
Bristlecone                                                   19,726
C Street Manor                20,000                                                     15,000
Imperial                                              267
Lake Country                            10,091
McConnell
Building                       3,429                                                      5,800
Mill Creek          2,115     11,161                                             3,114
Owyhee Place                                                                     2,329
Payette Plaza                  4,188     4,011                         13,850
Riverside
Senior Housing                                      17,882
Silver Hills                                         1,455                                1,375
South Meadow                            13,000                 6,195
                                         6,150

Totals              2,115     49,961    33,252      19,604    25,921   15,408   13,828   22,175

*Information on the invoice was insufficient

Total 2001-2004 expenditures without required bids     $ 75,116
Total 2001-2004 expenditures without required invoices $107,148




                                               49
Appendix E

EXCESSIVE MANAGEMENT FEES (FINDING 4)

Project                               Mgt fee1     Mgt fee1   Mgt fee1 Maximum Excess
                                       2002         2003       2004    mgt fee2   mgt fee4
                                                                        per year
                                       a         b               c         d        e
Briarwood                            $ 21,624 $ 23,592        $ 23,705 $ 16,800 $ 18,521
Bristlecone                            15,484   17,899          17,515     12,600  13,098
Lake Country                           23,314   26,060          25,359     18,480  19,293
Meadowview and Pondside                22,940   26,153          26,152     18,480  19,805
        Gardens
Owyhee Place                             15,719      19,304     19,041     13,440     13,744
South Meadow                             20,939      23,334     23,675     17,220     16,288
Village Community Gardens and            26,814      31,405     32,573     23,940     18,972
        Village Gardens
Westside Court3                              -        -   14,400    12,600     1,800
        Total                        $ 146,834 $167,747 $182,420 $ 120,960 $ 121,521


1
  This is the actual management fee paid by the owner from project funds according to each
  project’s annual audited financial statements.
2
  This is the maximum allowable management fee based on 100 percent occupancy and HUD’s
  maximum $35 per-unit-per-month residential management fee range for Idaho. The amount
  shown for each project equals the number of units multiplied by the $35 fee multiplied by 12
  months.
3
  Westside Court did not have a change in management fee or management agent until 2004.
  Therefore, there is not a value listed in the table above for 2002 and 2003.
4
  For all projects except Westside Court, e=(a+b+c)-(d*3). Since Westside Court had no changes
  in management fees until 2004, e=c-d.




                                              50