oversight

Upfront Grant for Ridgecrest Heights Apartments CEMI-Ridgecrest, Inc. Washington, DC

Published by the Department of Housing and Urban Development, Office of Inspector General on 1998-09-24.

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

 Telephone: (202) 708-0351          http://www.hud.gov/oig/oigindex.html                Fax: (202) 708-7718



                                                     U.S. Department of Housing and Urban
                                                     Development
                                                     Office of District Inspector General for Audit
                                                     Capital District
                                                     Room 3154
                                                     451 7th Street, SW
                                                     Washington, DC 20410


                                        September 24, 1998
                                                                                      Audit Memorandum
                                                                                      No. 98-AO-219-1804

MEMORANDUM FOR: Charles W. Wehrwein, Deputy Assistant Secretary for Multifamily
                  Housing Programs, HM


FROM: David J. Niemiec, District Inspector General for Audit, Capital District, 3GGA

SUBJECT: Upfront Grant for Ridgecrest Heights Apartments
           CEMI-Ridgecrest, Inc.
           Washington, DC

        We completed a limited review on the upfront grant awarded to CEMI-Ridgecrest, Inc.,
for the construction of townhomes on the former site of the Ridgecrest Heights Apartments.
CEMI-Ridgecrest, Inc., is a nonprofit corporation consisting of Crawford Edgewood Managers,
Inc., (CEMI) and the Ridgecrest Heights Tenants Cooperative Association. The nonprofit
corporation was established to perform those acts necessary or appropriate to carry out the
obligations under the contract of sale for the Ridgecrest Heights Apartments and the upfront grant
agreement with HUD. Our objective was to determine whether HUD followed established
guidelines in awarding the upfront grant to CEMI-Ridgecrest, Inc.

        Based on our review results and existing HUD guidelines in effect when the upfront grant
was awarded, we believe HUD properly entered into a negotiated sale with CEMI-Ridgecrest,
Inc., for the Ridgecrest Heights Apartments. Furthermore, nothing came to our attention in the
HUD guidelines or HUD background clearance process that would have prevented the principals
of CEMI and the representatives of the Ridgecrest Heights Tenants Cooperative Association from
active involvement in either the sale, upfront grant, or redevelopment of the Ridgecrest Heights
Apartments. However, in order to ensure that the redevelopment effort continues to progress as
intended under the grant agreement, we are recommending that HUD: (1) become actively
involved in monitoring the sale of the townhomes to ensure that returning Ridgecrest Heights
Apartments’ tenants who qualified for homeownership in the new development are adequately
represented; (2) become actively involved in the establishment and monitoring of the Housing
Trust Fund for the future residents of the project; and (3) establish a mechanism for the repayment
to HUD of approximately $10 million from the sale of the townhomes. In addition, we are
recommending the recovery of an overpayment of $22,375 to the District of Columbia Housing
Finance Agency for a redevelopment loan paid with grant funds; the recovery from CEMI-
Ridgecrest, Inc., of $5,155 in interest earned on money market accounts established with grant
 Telephone: (202) 708-0351             http://www.hud.gov/oig/oigindex.html        Fax: (202) 708-7718


funds; and the transfer of the remaining balance of $40,058 from the Ridgecrest Heights
Apartments rental account to the Housing Trust Fund to be established for the new residents.

                                         BACKGROUND

        Ridgecrest Heights was a 331 unit apartment complex located at 800-843 Bellevue Street,
S.E., Washington, DC, that was acquired by HUD though a foreclosure sale in October 1995.
The Ridgecrest Heights Tenants Cooperative Association, representing over 51 percent of the
tenants who wanted to redevelop the property, consulted with Mr. H.R. Crawford, a developer
and property manager and President of Crawford Edgewood Managers, Inc., (CEMI) to propose
a plan to acquire the apartments and redevelop the site into new townhomes. In September 1996
HUD sold the property for $1 to CEMI and the Ridgecrest Heights Tenants Cooperative
Association with the agreement that both groups form a joint nonprofit corporation named
CEMI-Ridgecrest, Inc., to facilitate the redevelopment effort. In addition, tenants who decided
not to participate in purchasing a townhome were provided Section 8 vouchers or certificates and
were relocated. Mr. Crawford also arranged with the District of Columbia Housing Finance
Agency (DCHFA) for a 5-year tax relief for families who purchase units in the new development
and to provide housing purchasing assistance.

          In conjunction with the property sale, the HUD District of Columbia Office (DCO)
approved an upfront grant for $24.5 million to fund the Ridgecrest redevelopment. The upfront
grant agreement was signed in November 1996. The grant included requirements for the
construction of a job skills training center and day care facility, the renovation of a community
center, and the demolition and redevelopment of the property into 141 townhomes for mixed-
income families. In addition, the grant specified that 30 units would be available for qualifying
low-income families returning to purchase the new Ridgecrest development townhomes. The
grant agreement also provided that a Housing Trust Fund be established in the amount of
$1,937,215 to assist the new homeowners association in the operation of the Ridgecrest
development for a period of 10 years. The trust fund will be created from the proceeds of the
initial townhome sales. After the trust fund corpus is established, the proceeds from the
townhome sales are to be paid to HUD. The trust fund also reverts to HUD after the 10 year
period expires.

                             OBJECTIVE, SCOPE, AND METHODOLOGY

       Our objective was to determine whether HUD followed established guidelines in
awarding the upfront grant to CEMI-Ridgecrest, Inc. Our review concentrated on the selection
process, status on the property development, general operation of CEMI-Ridgecrest, Inc., and
HUD’s oversight in administering upfront grants.

        Our review period was December 1994, when HUD became the Mortgage-in-Possession
for Ridgecrest Heights Apartments, through December 1997. We visited and obtained
information concerning the upfront grant process from HUD Headquarters, the DCO, the HUD
Pennsylvania State Office Multifamily Housing Division, and CEMI’s corporate office. During
our site work at the CEMI office, we reviewed supporting documentation for the grant
drawdowns, as well as bank statements and canceled checks used to account for and disperse
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 Telephone: (202) 708-0351             http://www.hud.gov/oig/oigindex.html          Fax: (202) 708-7718


grant funds. We obtained and reviewed HUD’s correspondence and guidance memoranda; the
contract of sale; the upfront grant agreement; relevant laws and regulations; articles of
incorporation, bylaws, and meeting minutes for the Ridgecrest Heights Tenants Cooperative
Association and CEMI-Ridgecrest, Inc. We also met and interviewed current and former HUD
staff from it’s Offices of Housing, Budget, and General Counsel as well as representatives from
CEMI, and the Ridgecrest Heights Tenants Cooperative Association.


                                       REVIEW RESULTS

Grant Award Process

        We believe the DCO properly entered into a negotiated sale with CEMI-Ridgecrest, Inc.,
for the purchase of the Ridgecrest Heights Apartments and obtaining the related upfront grant.
We also believe that the Ridgecrest Heights Tenants Cooperative Association selected Mr. H.R.
Crawford and his company (CEMI) as the project manager to partner with in developing a
feasible plan to acquire the property from HUD and redevelop the apartment site into townhomes.
We found HUD staff were very involved with the tenants’ plans for the Ridgecrest development
and were aware of the residents’ selection of CEMI as the developer prior to accepting HUD’s
requirement to form a joint nonprofit corporation to facilitate the Ridgecrest redevelopment.

Selection of Participants

        We found nothing in the selection process that would have precluded representatives
from CEMI, or the Ridgecrest Heights Tenants Cooperative Association from being included in
the sale of the Ridgecrest Heights Apartments or the upfront grant transactions involving the
Ridgecrest development. We also noted through our review of HUD’s Form 2530, Previous
Participation Review process, that Mr. Crawford, his company CEMI, and the representatives
from the Ridgecrest Heights Tenants Cooperative Association have not been suspended or
debarred from participating in HUD programs. The DCO used the information obtained during
this clearance process to determine if all participants met the standards established to ensure that
all principal/participants in HUD projects will honor their legal, financial, and contractual
obligations.

Project Development Status

        Our review of CEMI-Ridgecrest, Inc.’s performance under the upfront grant agreement
was limited to the initial startup of the Ridgecrest development. We visited the site and held
discussions with DCO staff. We noted that the development was ahead of schedule, the majority
of the tenants were relocated, and the demolition of the existing structures was approximately 90
percent completed. Approximately $5.2 million had been drawn down and expended on the initial
redevelopment effort. Our review also found that the redevelopment costs included maintenance
of the property until the tenants were relocated and the apartments demolished, fees for the
developer, demolition costs, legal fees, architectural fees, and other miscellaneous fees related to
the startup of the project.

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Corporate Structure

        Our review of the CEMI-Ridgecrest, Inc., operations noted that Mr. Crawford is both the
President and the Treasurer in accordance with the approved articles of incorporation. We believe
the management structure gives the appearance that Mr. Crawford retains full operational control
over the corporation and the Ridgecrest Heights Tenants Cooperative Association has little
involvement. However, the DCO staff agreed to the organizational structure because
Mr. Crawford possessed the business knowledge and experience to develop the Ridgecrest Height
Apartments’ site. This also gave him the authority which he needed to act on behalf of the
corporation and to perform the day-to-day operations, such as negotiating and signing contracts,
making payments to vendors, etc. We also noted that the corporate bylaws gave Mr. Crawford,
as President, the authority and responsibilities to enter into contracts to perform services on behalf
of the corporation that are consistent with the terms and purposes in performing its obligations
under the HUD agreements.

Lack of Oversight

        There was no evidence of continuing HUD staff involvement in monitoring the upfront
grant process. However, we noted that a HUD contractor reviews the Ridgecrest project’s
vouchers and payments to CEMI-Ridgecrest, Inc. We believe HUD needs to continually oversee
the entire upfront grant process to ensure that former tenants are actively represented during the
homeownership phase of the redevelopment project.

       We also noted that the upfront grant provides for the establishment of a Housing Trust
Fund in the amount of $1,937,215 that will be created from the initial sales of the townhomes.
The funds will be used to assist the new homeowners association in the operation of the
development for a period of 10 years and then the money will revert to HUD. After the initial
corpus of the trust fund is established, the proceeds from the sale of the townhomes will be
remitted to HUD. However, we noted that there were no established mechanisms to create and
monitor the trust fund, no repayment procedures after the trust fund period is completed, and no
procedures for the remittance of the townhome sales proceeds to HUD. We believe HUD needs
to be more involved in the monitoring of this process to ensure the viability and financial
commitments of the project are met.

Predevelopment Loan Overpayment

       We found that Mr. Crawford, representing the Ridgecrest Heights Tenants Cooperative
Association, obtained a $200,000 predevelopment loan from the District of Columbia Housing
Finance Agency (DCHFA). The proceeds of the loan were used in developing the tenants
redevelopment proposal, subsequent modifications to the proposal, and other predevelopment
costs. The DCFO authorized Mr. Crawford to repay the loan proceeds from the upfront grant
when it was approved. Our review of the predevelopment loan drawdowns and charges showed
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 Telephone: (202) 708-0351           http://www.hud.gov/oig/oigindex.html        Fax: (202) 708-7718


that DCHFA was overpaid $22,375. We believe the overpayment occurred because the DCHFA
provided the loan funds on a reimbursable basis totaling $177,625 and not in a lump sum. When
the repayment was made from the upfront grant, a check was issued for $200,000.


Rental Account Funds Disposition

        We reviewed CEMI-Ridgecrest, Inc.’s checking accounting records and noted that the
Ridgecrest Heights Apartments rental account showed a remaining balance of $40,058. The
account was established to facilitate the maintenance on the Ridgecrest Heights Apartments prior
to demolition. We believe these funds should be transferred to the Housing Trust Fund
established by the upfront grant agreement to benefit the new homeowners association that will
replace CEMI-Ridgecrest, Inc., when the redevelopment and townhomes sales are completed.

Earned Interest Income on HUD Funds

         We found that CEMI-Ridgecrest, Inc.’s staff deposited grant drawdowns funds in interest-
bearing money market accounts and approximately $5,155 in interest was earned. We discussed
this issue with Mr. Crawford, President of CEMI-Ridgecrest, and he is now depositing the
drawdown funds in a non-interest bearing account. We believe the interest earned on upfront
grant funds should be returned to HUD.

                                      * * * * * *
        We provided our draft report to representatives of CEMI-Ridgecrest, Inc., on June 3,
1998, and received their written comments on August 7, 1998. We have included their comments
as an attachment to this memorandum. In general, CEMI-Ridgecrest, Inc., agreed with our
conclusions and provided their input to assist HUD in monitoring the development, resolving the
issues raised in this memorandum, and implementing our recommendations.


                                      RECOMMENDATIONS

We recommend that HUD:

1. Become actively involved in monitoring the sale of the townhomes to ensure that returning
   Ridgecrest Heights Apartment tenants who qualify for the home ownership in the new
   development are adequately represented.

2. Become actively involved in the establishment and monitoring of the Housing Trust Fund for
   the future residents of the project.

3. Establish and monitor a mechanism to ensure the repayment to HUD of approximately
   $10,000,000 from the sale of the townhomes.



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 Telephone: (202) 708-0351            http://www.hud.gov/oig/oigindex.html         Fax: (202) 708-7718


3. Recover an overpayment of $22,375 to the DCHFA for the repayment of the redevelopment
   loan.

4. Recover from CEMI-Ridgecrest, Inc., $5,155 in interest earned on money market accounts
   established by deposited upfront grant funds.



5. Require CEMI-Ridgecrest, Inc., to transfer to the Housing Trust Fund the $40,058 remaining
   balance in the Ridgecrest Heights rental account which is used to facilitate the maintenance on
   the Ridgecrest Heights Apartments prior to demolition .



                                          ∗∗∗∗∗
        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 this audit.

       If you have any questions, please contact me or Donald W. Cairns, Assistant District
Inspector General for Audit, at (202) 708-0351.


Attachments:
      A - Auditee Comments
      B - Distribution




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                                                                   Attachment A (page 1 of 4)
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                                                                   Attachment A (page 2 of 4)
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                                                                   Attachment A (page 3 of 4)
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                                                                   Attachment A (page 4 of 4)
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                                                                                    Attachment B
Distribution:
Secretary’s Representative, Mid-Atlantic District, 3AS
State Coordinator, District of Columbia Office, 3GS (2)
Director, Baltimore Multifamily Hub, Maryland State Office, 3BHM(2)
Director , Multifamily Housing Director, District of Columbia Office, 3GHM
Director, Administrative Service Center 2AA
Director, Field Accounting Division, 3AFF
Audit Liaison Officer, 3AFI
Assistant to the Deputy Secretary for Field Management, SDF (Room 7106)
Chief Financial Officer, F (Room 10164) (2)
Deputy Chief Financial Officer for Finance FF (Room 10164) (2)
Comptroller/Audit Liaison Officer, Office of Housing, HF (Room 5132) (5)
Assistant Secretary for Housing, H (Room 9100)
Deputy Assistant Secretary for Multifamily Housing Programs, HM (Rm. 6106)
Director , Housing Finance Analysis Division, REF (Rm. 8204)
Director, Housing and Community Development Issue Area, U.S. GAO, 441 G Street,
NW, Room 2474, Washington, DC 20548 (2)
The Honorable John Glenn, Ranking Member, Committee on Governmental Affairs,
United States Senate, Washington, DC 20515-4305
The Honorable Fred Thompson, Chairman, Committee on Governmental Affairs,
United States Senate, Washington, DC 20515-4305
Ms. Cindy Sprunger, Subcommittee on General Oversight and Investigations,
Room 212, O’Neill House office Building, Washington, DC 20515
Mr. Pete Sessions, Government Reform and Oversight Committee, Congress of the
U.S. House of Representatives, Washington, DC 20510-6250
The Honorable Dan Burton, Chairman, Committee on Government Reform and Oversight,
U.S. House of Representatives, Washington, DC 20515-6143