oversight

Seaview Arms Associates, Staten Island, New York

Published by the Department of Housing and Urban Development, Office of Inspector General on 1998-11-25.

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

                                                                   Issue Date
                                                                          November 25, 1998
                                                                  Audit Case Number
                                                                           99-NY-212-1003




TO:    Deborah Van Amerongen, Director, New York Multifamily HUB, 2AH


FROM: Alexander C. Malloy, District Inspector General for Audit, 2AGA
                                  New York/New Jersey

SUBJECT:       Seaview Arms Associates
               Multifamily Project Operations
               Project Number 012-44101
               Staten Island, New York


In response to a request from Congressman Vito J. Fossella, the U.S. Department of Housing and
Urban Development (HUD), New York/New Jersey District, Office of Inspector General (OIG)
conducted an audit of the books and records of Seaview Arms Associates (Mortgagor) regarding
Seaview Arms Apartments, Project Number 012-44101 (herein called the Project). The objectives
of our review were to determine whether Project funds were used for other than reasonable
operating expenses and necessary repairs and to determine whether the Project met the Housing
Quality Standards (HQS) as required by HUD. The audit generally covered the period between
January 1, 1997 and June 30, 1998, and where appropriate, was expanded to cover other periods.
The on-site audit work was performed between July 1998 and October 1998.

Our review disclosed that the Mortgagor generally complied with HUD regulations and
requirements regarding the use of Project funds for reasonable operating expenses and necessary
repairs. However, our review disclosed that the Mortgagor did not comply with HUD’s
regulations and requirements relating to the physical condition of the Project. Specifically, our
inspections of the units at the Project indicated that the Mortgagor was not maintaining the units
in a decent, safe and sanitary condition, and we estimate that it will cost $533,500 to make the
necessary repairs to meet HUD’s requirements.

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 target completion date; or
(3) why the corrective action is not considered necessary. Also, please furnish us copies of any
correspondence or directives issued related to the audit.
Management Memorandum


Should you or your staff have any question, please contact William H. Rooney, Assistant District
Inspector General for Audit, at (212) 264-8000, Extension 3978.




99-NY-212-1003                              Page ii
Executive Summary
We audited the books and records of Seaview Arms Apartments, a Section 236 Project located in
Staten Island, New York. The objectives of the review were to determine whether Project funds
were used for other than reasonable operating expenses and necessary repairs and to determine
whether the Project met the Housing Quality Standards (HQS) as required by HUD.




                                    Our review disclosed that the Mortgagor generally complied
$533,500 needed to                  with HUD regulations and requirements regarding the use
repair Project                      of Project funds for reasonable operating expenses and
                                    necessary repairs. However, in July 1998, the OIG in
                                    conjunction with a HUD appraiser inspected units at the
                                    Project in accordance with the HQS. The OIG appraiser
                                    inspected 57 of the 84 units, concluded that all of the
                                    inspected units failed the inspection and estimated that it
                                    would cost about $533,500 to correct all the deficiencies.
                                    We believe that this significant number of units failed the
                                    OIG inspection because the Mortgagor/Management Agent
                                    was deferring routine maintenance at the Project.

If repairs not corrected,           We recommend that HUD direct the Mortgagor to make the
HUD must take action                necessary repairs at the Project within a reasonable time
                                    period determined by HUD. We further recommend that
                                    HUD require the Mortgagor to provide HUD with a
                                    maintenance plan, so that HUD can be assured that the
                                    Mortgagor is performing routine maintenance. Also, we
                                    recommend that if the Mortgagor does not make the repairs
                                    to the Project within a reasonable time period, HUD should
                                    take the necessary steps to enforce the Regulatory
                                    Agreement and terminate the Housing Assistance Contract.

                                    The results of the audit were discussed with the Mortgagor
                                    during the course of the audit and at an exit conference held
                                    on October 21, 1998, attended by:

                                    Mortgagor

                                    Samuel Pompa, General Partner
                                    Seaview Arms Associates
                                    Christian Pompa, Management Agent
                                    Representative



                                            Page iii                              99-NY-212-1003
Executive Summary




                    Office of Inspector General (OIG)

                    William H. Rooney, Assistant District Inspector
                    General for Audit
                    Mary Rose Michaud, Senior Auditor

                    The Mortgagor generally disagreed with the deficiencies
                    mentioned in the finding. The Mortgagor’s comments are
                    summarized after the finding and included in its entirety in
                    Appendix A.




99-NY-212-1003          Page iv
Table of Contents

Management Memorandum                                                    i


Executive Summary                                                       iii


Introduction                                                            1


Finding

      Project Not Maintained In Accordance With HUD’s
      Requirements                                                       3



Management Controls                                                      9


Follow Up On Prior Audits                                               11

Appendices
      A. Auditee Comments                                               13

      B. Distribution
17

Abbreviations

HUD            Department of Housing and Urban Development
HQS            Housing Quality Standards
OIG            Office of Inspector General




                                         Page v              99-NY-212-1003
Table of Contents




                    (THIS PAGE LEFT BLANK INTENTIONALLY)




99-NY-212-1003                   Page vi
Introduction
The Project, Seaview Arms Apartments, was insured in January, 1972, under Section 236 of the
National Housing Act, Project Number 012-44101. The initial HUD insured mortgage was in the
amount of $1,870,000. The Mortgagor is Seaview Arms Associates, a New York State
Partnership. Because the Project was built on a sink hole, in July, 1992, the Mortgagor obtained
a second HUD insured mortgage in the amount of $987,600, the proceeds of which were used to
prevent the Project from physically sinking.

Seaview Arms Apartments consists of 85 dwelling units, of which 84 are eligible for subsidy
under Section 8 Housing Assistance Contract NY36-L000-059. The Management Agent for the
Project is P & L Housing Management Corporation, which has an Identity-Of-Interest with the
Mortgagor. The accounting books and records are maintained at the Management Agent’s office
located at 535 West 51st Street, New York City, New York, 10019.



Objectives                          The objectives of the audit were to determine whether
                                    Project funds were used for other than reasonable operating
                                    expenses and necessary repairs and to determine whether
                                    the Project met the Housing Quality Standards (HQS) as
                                    required by HUD.

                                    To obtain an understanding of the Project’s operations, we
Scope and                           reviewed the Regulatory Agreement, the Management
Methodology                         Agreement, and other applicable HUD guidelines, as
                                    follows: HUD Handbook 4350.1 REV-1, Multifamily Asset
                                    Management and Project Servicing, HUD Handbook
                                    4370.2 REV-1, Financial Operations and Accounting
                                    Procedures for Insured Multifamily Projects, and HUD
                                    Handbook 4381.5 REV-2, Management Agent Handbook.
                                    Also, we interviewed members of the HUD Asset
                                    Management staff as well as staff members of the
                                    Management Agent and the Project.

                                    To determine whether the Mortgagor ensured that Project
                                    costs were eligible and reasonable, we: (1) reviewed
                                    accounting records and traced transactions to supporting
                                    documentation; (2) interviewed officials of the Mortgagor
                                    and the Management Agent; and (3) interviewed HUD
                                    officials regarding the eligibility of costs.

                                    To determine whether the Mortgagor/Management Agent
                                    properly accounted for rents and other revenues, and
                                    whether revenues were deposited into the proper accounts,

                                              Page 1                             99-NY-212-1003
Introduction


                 we: (1) obtained and evaluated the Project’s rent collection
                 control and procedures, (2) reviewed cash receipts records
                 and compared the amounts collected to the subsidiary
                 ledgers; and (3) traced the total revenue collected into the
                 bank statements.

                 To determine whether the Mortgagor maintained the Project
                 in good repair and condition, we conducted 57 inspections
                 at the Project.

                 Our audit covered the period from January 1, 1997 to June
                 30, 1998, and was extended to include prior and subsequent
                 periods as considered necessary. The audit field work was
                 conducted between July and October, 1998.

                 The audit was conducted in accordance with generally
                 accepted government auditing standards.

                 A copy of this report has been provided to the Mortgagor.




99-NY-212-1003    Page 2
                                                                                         Finding




    Project Not Maintained in Accordance With
               HUD’s Requirements

When a Mortgagor signs a Regulatory Agreement and Housing Assistance Contract with HUD, it
agrees to maintain the housing units in decent, safe and sanitary conditions. Our inspections of the
units at Seaview Arms Apartments (Project) indicated that the Mortgagor was not maintaining
the units in the required conditions and we estimate that it will cost the Mortgagor $533,500 to
make the necessary repairs to meet HUD requirements.

Our review disclosed that the Project has a history of not being properly maintained. Over the
past 10 years, HUD generally rated the physical condition of the Project as either below average
or unsatisfactory. In June 1997, a contractor hired by HUD rated the Project as satisfactory; but
in the subsequent year when OIG and HUD inspected the Project, it was again rated as
unsatisfactory. We believe that these poor ratings resulted from the Mortgagor/Management
deferring routine maintenance at the Project.




                              Paragraph 7 of the Regulatory Agreement provides that the
 Criteria
                              Mortgagor shall maintain the mortgaged premises, accommodations
                              and the grounds and equipment in good repair and condition.
                              Paragraph 6 (a) of the Housing Assistance Contract provides that
                              the Mortgagor agrees to maintain the HUD assisted units and the
                              related facilities in a decent, safe and sanitary condition.
                              Furthermore, Title 24, Part 882.102 of the Code of Federal
                              Regulations (CFR) defines decent, safe and sanitary housing as
                              housing meeting the requirements of Title 24, Part 882.109
                              Housing Quality Standards (HQS). These HQS provide specific
                              criteria regarding the required acceptable conditions of housing
                              units.

                              In July 1998, the OIG in conjunction with a HUD Appraiser
OIG Inspection
                              inspected units at the Project in accordance with the HQS. The
                              OIG Appraiser inspected 57 of the 84, concluded that all the
                              inspected units failed the HQS and estimated that it would cost
                              about $533,500 to correct all the deficiencies. The OIG Appraiser
                              believed that the $533,500 represented items that should have been
                              repaired or replaced as part of the Project’s normal routine

                                                Page 3                               99-NY-212-1003
Finding


                  maintenance program. For example, almost half of the windows at
                  the Project are the original windows which were installed over 27
                  years ago. According to the OIG Appraiser, residential windows
                  are not manufactured to last beyond 20 years. Also, the OIG
                  Appraiser mentioned that most of the work could be completed
                  within a few months and all the work could be completed within
                  six months. In August 1998, we met with representatives of the
                  Mortgagor/Management Agent and provided them with the written
                  results of OIG’s inspection.

                  The Mortgagor claims that the Mortgagor,               through its
Management        Management Agent, loaned the Project significant amounts of
Agent’s fee not   money. Specifically, the Mortgagor’s Identify of Interest
paid              Management Agent, has not been paid all the fees that the
                  Management Agent is entitled to receive. Instead the fees are being
                  accrued on the Project’s books and records. According to the
                  Mortgagor, non payment of the management fees resulted in more
                  cash available to perform maintenance.

                  We do not dispute this fact because as of December 31, 1997, the
                  Project’s financial statements indicated that the Project owed its
                  Management Agent $390,166 and the Management Agent’s fee
                  averaged $60,000 per year for the last three years. However,
                  during our review, we observed that the Management Agent did
                  not have a site manager at the Project to monitor the Project’s day
                  to day operations. Similarly, we observed that the Project’s
                  revenues decreased about $37,000 over the last three years (1995
                  to 1997) from $837,000 to $800,000 and the Project’s accounts
                  receivable from tenants and bad debt expenses increased.

                  We believe that not having a site manager at the Project contributed
                  to the Project’s loss of revenues. For example, the Project’s tenant
                  representative told us that because a site manager was not
                  available, the tenants had to take a subway from the Project to the
                  Management Agent’s Office to perform their income
                  recertifications and this was a major inconvenience for those tenants
                  that had small children. Thus, the income recertifications were not
                  always done in a timely manner which resulted in an increase in
                  accounts receivable from tenants. In addition, the Project’s tenant
                  representative told us that in the absence of a site manager, the
                  Management Agent mailed delinquent rent letters to the tenants
                  from its Management Agent’s office and the tenant representative
                  noticed that these delinquent letters were simply discarded in the




99-NY-212-1003             Page 4
                                                                                              Auditee
Comments
                                   hallways of the Project. In essence, the delinquent tenants were
                                   ignoring the Management Agent’s effort to collect rent. 1

                                   Nonetheless, if the Management Agent’s fee continued to accrue on
                                   the Project’s books and records and if the Management Agent
                                   aggressively collected the delinquent rents, and used the revenue
                                   generated from these rents to make the necessary repairs to the
                                   Project, we would agree that the Mortgagor/Management Agent
                                   provided some monetary resources to assist the Project. However,
                                   we believe that not having a site manager to aggressively collect
                                   rents, has jeopardized the financial stability of the Project because
                                   not only have rental revenues decreased, but the Management
                                   Agent’s fee continued to accrue as a liability on the Project’s books
                                   and records.

                                   One objective of our review was to determine whether Project
High Debt Service                  funds were used for other than reasonable operating expenses and
Cost                               necessary repairs. During our review we did not find indications
                                   that Project funds were used for other than reasonable operating
                                   expenses and necessary repairs. However, we noticed that over 21
                                   percent of the Project’s revenue was used for debt service (principal
                                   and interest). This is a high amount compared to the debt service
                                   cost of other projects in the area. For example, we found that the
                                   annual debt service cost for three surrounding projects ranged from
                                   five to six percent of the projects’ annual revenue.

                                   As part of our review we determined why the Project used
                                   significant amounts of its revenue for debt service. We found in
                                   1992, that the Mortgagor obtained a $987,600 HUD insured
                                   second mortgage and the proceeds were used to prevent the Project
                                   from sinking. Apparently, in the early 1970’s, the Project was built
                                   on a sink hole and as the Project was sinking, its balconies and its
                                   window frames became distorted. For the Project to survive, the
                                   Mortgagor had to stop this situation. Therefore, the Mortgagor
                                   obtained a second mortgage and used most of the mortgage
                                   proceeds to take the necessary steps to prevent the Project from
                                   sinking further. According to the latest engineering studies, the
                                   sinking has subsided.

                                   We believe that the Mortgagor had to take this action; however, in
                                   doing so, the Mortgagor, with HUD’s approval obtained a 15 year
                                   second mortgage loan at 11.5 percent. It is obvious considering

1
 Subsequent to our visit to the Project the Mortgagor/Management Agent’s representative told us that
Management Agent personnel are visiting the Project at least once a week to assist with recertifications and
collection of delinquent rent.

                                                        Page 5                                  99-NY-212-1003
Finding


                    today’s low interest rates, that the Mortgagor should refinance this
                    loan. However, we found that the Mortgagor’s mortgage note
                    contained a prepayment provision that prevents the Mortgagor
                    from refinancing (prepay) the mortgage until January 2003.

                    As part of our review, we researched HUD’s legal files and we
                    observed that the Mortgagee holding the 11.5 percent second
                    mortgage, signed a Mortgagee Certificate which provided that in
                    the event of default, the Mortgagee will cooperate with HUD to
                    take reasonable steps in accordance with prudent business practices
                    to avoid an insurance claim. Although the Project’s mortgage is
                    not in default at this time, if the Mortgagor does not repair the
                    Project and HUD does not renew the Housing Assistance Contract,
                    it is likely that there will be a default. We believe that if the
                    Mortgagor could refinance this mortgage, any savings in the debt
                    service cost should be used for maintenance at the Project.

                    Historically, as projects age, there is a need for greater routine
Conclusion
                    maintenance, and if rental revenues are not available to conduct the
                    routine maintenance, Mortgagors are reluctant to use their own
                    resources to assist the projects. Therefore, Mortgagors defer
                    routine maintenance and projects eventually start to fall apart.
                    Nonetheless, Mortgagors sign a Regulatory Agreement and a
                    Housing Assistance Agreement agreeing to maintain projects in
                    good repair and condition. This Project has a history of not being in
                    compliance with HUD requirements. We observed that HUD has
                    performed at least ten physical inspections at the Project since
                    1988, excluding the joint inspection by OIG and HUD, and in eight
                    of the inspections, HUD rated the Project either below average or
                    unsatisfactory. Consequently, we believe that if the Mortgagor
                    does not comply with HUD’s maintenance standards within a
                    reasonable time that HUD should take the necessary steps to
                    enforce the Regulatory Agreement and terminate the Housing
                    Assistance Contact.


                    The Mortgagor contends that over the course of the last ten years it
 Auditee Comments
                    has replied to every HUD physical inspection and addressed the
                    various findings, including the more serious and recurring items
                    cited in some reports. Moreover, the Mortgagor notes that in June
                    1997, HUD rated the Project as satisfactory. Also, the Mortgagor
                    notes that since June 1998, efforts to improve the Project have been
                    accelerated, with virtually every recommendation and/or deficiency
                    noted by HUD corrected or a plan to correct the problem presented
                    to HUD. Also, the Mortgagor does not accept the OIG’s cost

99-NY-212-1003               Page 6
                                                                      Auditee
Comments
                    estimate to repair the Project because the cost was based on
                    extrapolation. Furthermore, regarding the Management Agent fee,
                    according to the Mortgagor, it has always sent representatives to
                    inspect and monitor the building staff. Finally the Mortgagor does
                    not believe that refinancing is a viable option.


                    The Mortgagor mentioned that in June 1997, HUD rated the
OIG Evaluation of   Project as satisfactory. In fairness to the Mortgagor, we included
Auditee Comments    this fact in the finding. However, as mentioned in the finding, the
                    majority of the ratings by HUD over the past 10 years were either
                    below average or unsatisfactory. More importantly, the joint HUD
                    and OIG inspection of the units carried out in July 1998 showed
                    that $533,500 was needed to bring the building and all the units up
                    an acceptable living standard. The amount represents items which
                    could be almost entirely classified as normal routine maintenance
                    which would reasonably be expected to have been carried out over
                    the normal course of time.

                    Regarding the OIG’s estimated cost to correct the deficiencies, the
                    Mortgagor objects to our use of extrapolation. We estimated the
                    cost to repair all 84 units based upon our estimate to repair the
                    inspected 57 units. It is immaterial to us how much it cost to make
                    the repairs, provided that the Project meets the HQS. Finally, we
                    believe that the Mortgagor missed the point regarding the
                    Management Agent fee not paid. The Mortgagor said that it has
                    always sent representatives to inspect and monitor building staff.
                    Our issue was that the Mortgagor did not have a site manager at
                    the Project and this contributed to a loss of revenue. Regarding the
                    option to refinance, our recommendation is a suggestion to HUD,
                    so that funds can be available for routine maintenance.



RECOMMENDATIONS:

                    We recommend that you:

                    1. Direct the Mortgagor to make the necessary repairs at the
                       Project within a reasonable time period determined by your
                       Office.

                    2. Require the Mortgagor to provide your Office with a
                       maintenance plan, so that your Office can be assured that the
                       Mortgagor is performing routine maintenance.


                                      Page 7                             99-NY-212-1003
Finding


                 3. Take the necessary steps to enforce the Regulatory Agreement
                    and terminate the Housing Assistance Contract if the
                    Mortgagor does not make the repairs to the Project within a
                    reasonable time period.

                 4. Explore the possibility of refinancing the 11.5 percent second
                    mortgage to a lower rate and any debt service savings obtained
                    from the refinance should be used for maintenance at the
                    Project.




99-NY-212-1003           Page 8
Management Controls
In planning and performing our audit, we considered the management controls of the Mortgagor
and Management Agent in order to determine our auditing procedures, not to provide assurance
on the controls. Management controls include the plan of organization, methods and procedures
adopted by management to ensure that goals are met. Management controls include the process
for planning, organizing, directing and controlling program operations. Also, they included the
systems for measuring, reporting, and monitoring program performance.




                             We determined the following management controls were relevant to
Relevant Management          our audit objectives:
Controls
                             •   Program Operations - Policies and procedures that management
                                 has implemented to reasonably ensure that a program meets its
                                 objectives.

                             •   Validity and Reliability of Data - Policies and procedures that
                                 management has implemented to reasonably ensure that valid
                                 and reliable data are obtained, maintained, and fairly disclosed
                                 in reports.

                             •   Compliance with Laws and Regulations - Policies and
                                 procedures that management has implemented to reasonably
                                 ensure that resource use is consistent with laws and regulations.

                             •   Safeguarding Resources - Policies and procedures that
                                 management has implemented to reasonably ensure that
                                 resources are safeguarded against waste, loss and misuse.


                            We assessed all of the relevant controls identified above.

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


                             Based on our review, we believe that significant weaknesses exist in
Significant Weaknesses       the following areas:



                                              Page 9                                99-NY-212-1003
Management Controls


                             •   Program Operations

                             The Mortgagor did not ensure that the units were maintained in a
                             decent, safe and sanitary condition.

                             •   Compliance with Laws and Regulations

                              The Mortgagor did not follow the Regulatory Agreement and
                              Housing Assistance Contract, by failing to maintain the mortgaged
                              premises, accommodations and the grounds and equipment in good
                      repair and condition.




99-NY-212-1003                        Page 10
Follow Up On Prior Audits
A prior audit of the Mortgagor was performed by an Independent Auditor for the twelve month
period ended December 31, 1997. The report contained two findings, neither of which affected
our current audit objectives.




                                            Page 11                             99-NY-212-1003
Follow Up On Prior Audits




99-NY-212-1003              Page 12
                               Appendix A


Auditee Comments




                   Page 13   99-NY-212-1003
Auditee Comments




99-NY-212-1003     Page 14
                     Auditee
Comments




           Page 15     99-NY-212-1003
Auditee Comments




99-NY-212-1003     Page 16
                                                                            Appendix B


Distribution
Secretary’s Representative, New York/New Jersey, 2AS
Director, Multifamily Housing Division, 2AHM (2)
Field Comptroller, Midwest Field Office, 5AF
CFO, Mid-Atlantic Field Office, 3AFI
Director, New York Multifamily HUB, 2AH (3)
Assistant to Deputy Secretary for Field Policy and Management, SDF,
     Room 7106
Director, Office of Housing/FHA, HF (Attn: Comptroller - Room 5156) (5)
Director, Office of Multifamily Housing Development, HMD, Room 6134
Acquisitions Librarian, Library, AS (Room 8141)
Deputy Assistant to the Secretary for Labor Relations, SL, Rm. 7118
Director, Office of Budget, FO, (Room 3270)
Chief Financial Officer, F (Room 10164) (2)
Deputy Chief Financial Officer for Finance, FFC (Room 10176) (2)
Director, Office of the Budget, FO (Room 3270)
Associate General Counsel, Office of Assisted Housing and Community
  Development, CD (Room 8162)
Director, Participation & Compliance Division, HSLP (Room 9164)
Director, Housing Finance Analysis Division, REF (8204)
General Partner, Seaview Arms Associates, New York, New York

Inspector General, G (Room 8256)
Public Affairs Officer, G (Room 8256)
Counsel to Inspector General, GC (Room 8260)
Internet Coordinator, GAA (Room 8172)
Assistant Inspector General for Audit, GA (Room 8260)
Deputy AIGA, GA (Room 8286)
Director, Research & Planning, GAP (Room 8180)
Director, Financial Audits Division, GAF (Room 8282)
Semi Annual Coordinator, GF (Room 8254)
Central Files, GF (Attn: Mary E. Dickens, Room 8266) (2)
SAC, OIG, 2GI (Room 3430B)
AIG, OIG, GI (Room 8274)

Director, Housing & Community Development Issue Area
US GAO, 44l G Street, NW, Room 2474
Washington, DC 20548
(Attention: Judy England-Joseph)




                                           Page 17                        99-NY-212-1003
Distribution


Subcommittee on General Oversight & Investigations
O’Neill House Office Building - Room 212
Washington, DC 20515
(Attn: Cindy Sprunger)


Director, HUD Enforcement Center
1240 Maryland Avenue, Suite 200
Washington, DC 20024

Honorable Pete Sessions
Government Reform & Oversight Committee
Congress of the United States
House of Representatives
Washington, DC 20510-4305

Honorable John Glenn
Ranking Member
Committee on Governmental Affairs
United States Senate
Washington, DC 20515-4305

Honorable Dan Burton, Chairman
Committee on Government Reform & Oversight
House of Representatives
Washington, DC 20515-6143

Honorable Fred Thompson, Chairman
Committee on Governmental Affairs
United States Senate
Washington, DC 20515-4305




99-NY-212-1003                      Page 18