oversight

January 18, 1996
Audit Related Memorandum
96-SF-214-1803

TO:      Janet Browder, Director, Multifamily Division, 9AHM

FROM:        Mark J. Pierce, Senior Auditor, 9AGA

SUBJECT: DKD Property Management, Inc.
     Settlement of Audit Issues
     San Jose, California


Introduction

On behalf of the Department of Housing and Urban Development, the
Department of Justice entered into a settlement agreement with DKD
Property Management, Inc and related parties to resolve equity
skimming issues raised by an OIG audit. The audit found that the
management company gave the identity-of-interest developer of two
insured, multifamily projects -- while the mortgage loans were in
default -- $217,190 for development cost refunds from a sanitation
district. The developer paid $239,095 to the U.S. Government to
settle. $231,922 are to be returned to the projects' operating and
reserve accounts. The agreement also restricts allowable
distributions from the projects for two years. Thus, HUD needs to
obtain evidence that the monies are returned to the appropriate
project accounts and monitor future distributions for compliance
with the agreement.

Background

Gatewood Apartments (project 121-35794), Fremont-Heritage Village
Apartments (121-35826), and Woodcreek Apartments (121-35818) have
mortgage loans that are all insured under section 221(d)(4) of the
National Housing Act. The loans went into default in March 1993.
The defaults were corrected when the loans were refinanced in
September 1993 with new insured mortgage loans. DKD Property
Management, Inc., located in San Jose, California, oversees project
operations. Identity-of-interests exist among the three projects'
limited partnerships, the management company, and the projects'
developer Davidson, Kavanagh & Brezzo Development Co. because of
common general partners and stockholders.

In 1994 the HUD Office of Inspector General performed audit work at
DKD to identify possible misuse of assets of troubled HUD-insured
projects the company manages. The work identified $326,026
improperly distributed from Gatewood, Heritage and Woodcreek while
their mortgage loans were in default. The distributions involved
refunds received by the projects related to their construction and
loan refinancing:

Project   Construction Refunds       Refinancing Refunds

Gatewood                            $27,943
Heritage      $146,905                $63,009
Woodcreek       $70,285                 $17,884


The developer subsequently repaid the $108,836 of refinance refunds
in 1994. Only the Gatewood refinance refunds were repaid fully
prior to our audit. This occurred because the public accountant
performing Gatewood's 1993 annual financial statement audit
reported the distributions. The public accountant performing
Heritage and Woodcreek audits did not identify the violation of the
regulatory agreement. Between March and November 1994, however,
the developer advanced monies to Heritage equivalent to the
distribution of refinancing refund. Only after we questioned the
management agent on the Woodcreek distribution did the developer
return that project's refinancing refund.

The agent disagreed with the audit exception on the construction
refunds of $217,190 received from a sanitation district, arguing
that they were not project assets.

We distributed a draft finding on these issues to the agent and
HUD's asset management branch. We considered the agent's response
to the draft and, after consulting with asset management and
counsel, decided to approach the Department of Justice to seek com-
pensation under 12 U.S.C. 1715z-4a, the "double damages" statute.

The U.S. Attorney, Northern District of California, agreed to
represent HUD. In consultation with HUD counsel, asset management,
and OIG, the U.S. Attorney negotiated a settlement agreement
covering the outstanding audit issue on the construction refunds.

Settlement Terms

Appended to this memorandum is the settlement agreement entered
into November 27, 1995. The principal terms of the settlement are:
   The project developer will pay the United States $239,095.
   (This represents the total construction cost refunds plus
   imputed interest.) The government will retain $7,173 (three
   percent) and return $231,922 to be deposited to Woodcreek and
   Heritage project accounts as follows:

   Woodcreek: Reserve fund for replacements account $ 6,771
         Operating account               67,562

   Heritage: Reserve fund for replacements account $ 16,374
          Operating account               141,215

   The funds to be returned to the operating accounts are not to
   be distributed in calendar years 1995 and 1996.

We understand that the developer has paid the required funds to the
United States.

Recommendations

We recommend that the asset management branch:

A. Require the management agent to provide evidence that the funds
to be returned by Justice have been deposited to the appropriate
project accounts.

B. Review the 1995 and 1996 Heritage and Woodcreek audited financial
statements when available to monitor compliance with the agreement
to limit distributions.

Within 60 days, please furnish us a status report on the corrective
action taken, the proposed corrective action and the date to be
completed, or why action is not considered necessary for the first
recommendation. We are not controlling the second recommendation.


If you or your staff have any questions, please contact Melissa
Wong, Auditor, or Mark Pierce, Senior Auditor, on 415-436-8101.
.