oversight

Affordable Housing, LLC, d/b/a Aries Management, New York, NY

Published by the Department of Housing and Urban Development, Office of Inspector General on 1998-12-09.

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

December 9, 1998                                                               Audit Memorandum
                                                                               No. 99-NY-214-1801

MEMORANDUM FOR: Deborah VanAmerongen, Director, New York
                                  Multifamily HUB, 2AH


FROM: Alexander C. Malloy, District Inspector General for Audit, 2AGA


SUBJECT: Affordable Housing, LLC
         d/b/a Aries Management
         New York, New York

We conducted a review of Affordable Housing, LLC d/b/a Aries Management (herein called the
Agent) pertaining to its management of Columbus Manor, Project No. 012-11067 and Westwood
House, Project No. 012-11069. The Agent is also the Managing General Partner of the ownership
entities of both projects.

We limited our review to determining whether the Agent used project funds in compliance with HUD
regulations and requirements, and whether the Agent made necessary repairs to the projects, as
mandated by HUD. During our review we: (1) reviewed regulations, directives, and records of the U.
S. Department of Housing and Urban Development (HUD); (2) interviewed staff of HUD’s New
York State Office (NYSO) and the Agent; (3) examined the Agent’s policies, procedures and
records; (4) judgmentally tested financial transactions; (5) inspected both projects; and (6) assessed
management controls relevant to our audit objectives. We noted that the independent audits for both
projects covering the years ended December 31, 1996 and 1997, contained no findings.

We conducted our review in accordance with generally accepted government auditing standards. The
review covered the period from January 1, 1996 through June 30, 1998, and was performed during the
months of July and August, 1998.

                                            SUMMARY

Our review disclosed that the projects were in need of substantial repairs when the Agent took over
management of the projects in 1996. However, the Agent was slow in taking corrective actions in
response to HUD’s physical inspections conducted in April 1997, which rated both projects “below
average”. On April 1, 1998, after two follow-up visits by representatives of the HUD NYSO, the Vice
President of the Managing General Partner was notified that the projects were not maintained in good
repair and condition which is a violation of the Regulatory Agreement ( e.g roofs, balconies, elevators,
exterior walls and foundations, etc. were found to be deficient). The NYSO directed the Managing
General Partner to terminate its agreement with the Agent and to provide new management acceptable
to HUD. After an April 20, 1998 meeting with HUD, the Agent was granted temporary permission
to manage the projects contingent on compliance with numerous conditions, including the submission
to HUD of a revised Management Improvement and Operating (MIO) Plan and the satisfactory
completion of roof and elevator repairs.

A revised MIO Plan was approved by HUD in July 1998. We noted that the Agent is proceeding to
make the required repairs, which will be funded 50 percent by replacement reserves (until depleted) and
50 percent by owner advances. At the time of our review, the roof and elevator repairs were
progressing in accordance with the revised MIO Plan, and a bid package had been prepared for the
procurement of the required foundation and balcony repair work. We also noted that apartment unit
repairs were ongoing, and that the projects' building superintendents had established a positive rapport
with the tenants.

Regarding the financial management of the projects, our review disclosed that the Agent charged both
HUD-insured projects for the prorated salaries of its tenant certification clerks, contrary to NYSO
policy. As a result, $28,065.97 ($17,423.25 for Columbus Manor, and $10,642.72 for Westwood
House) are ineligible project costs. When we discussed this deficiency with the Vice President of the
Managing General Partner, he immediately instructed his bookkeeper to repay the amounts in question
to the projects. Details are provided in the Results of Review section of this memorandum.

We are recommending that your office verify that Columbus Manor and Westwood House were
appropriately reimbursed for the excessive management costs incurred. Since the salaries for the tenant
certification clerks were allocated to two other HUD-insured projects managed by the Agent
(Townhouse West and Highbridge House), we are also recommending that the Agent submit evidence
to HUD showing that all excessive charges to these projects have been reimbursed.

Our review also disclosed an issue that requires further study and evaluation by your office. The
general ledger for Columbus Manor shows that a total of $198,571 is owed to the project by former
partners. We believe that a legal determination should be made as to whether the current owners are
liable to the project for theses amounts or whether the receivables should be discharged and removed
from the project’s books and records.




                                          BACKGROUND


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The projects were built in the early 1970's, and are insured by HUD under Section 207, pursuant to
Section 223(f) of the National Housing Act, as amended. The mortgages are held by the New York
City Housing Development Corporation, and are subsidized through interest reduction payments under
HUD’s Section 236 Program.

The Mortgagors, Columbus Manor, Inc. and Westwood House, Inc., are housing companies organized
under Article II of the Private Housing Finance Law of New York State. The Jonathan Company, a
New York State limited partnership, is the owner of the beneficial interests in both projects; and
Affordable Housing, LLC d/b/a Aries Management, is the current Managing General Partner.

Affordable Housing, LLC d/b/a Aries Management purchased the managing general partnership
interests of Citi Equity Group, Inc. in 1995, by bidding on the partnership interests at a court ordered
Chapter 7 bankruptcy sale involving Citi Equity Group’s assets. HUD did not approve a Modified
Transfer of Physical Assets (TPA) prior to the bankruptcy sale; and as of the date of this review, the
TPA had not been approved. In 1996, Aries Management took over management of both projects
and is still operating without a HUD approved management certification.

Columbus Manor is a 31 story high-rise development with 203 units, and Westwood House is
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comprised of 124 units in eight stories. Both projects are located on 93 Street between Columbus
Avenue and Central Park West in New York City. The Agent’s office is located at the Columbus
Manor project.

                                    *     *    *       *    *     *

Within 60 days, please furnish this office, for each recommendation cited in this memorandum 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 not considered necessary. Also, please furnish us copies of any
correspondence or directives issued related to this audit.

If you have any questions, please contact me or Mark B. Klein, Assistant District Inspector General for
Audit, at (212) 264-8000, extension 3976.




Attachment:
      A - Distribution




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                                       RESULTS OF REVIEW


EXCESSIVE MANAGEMENT COSTS WERE CHARGED TO THE HUD-INSURED PROJECTS

Our review disclosed that the Agent received improper reimbursements from the HUD-insured
projects on a prorated basis for the salaries of its tenant certification clerks. This occurred because the
Managing General Partner was not aware that the certification clerks' salaries were considered costs
to be included in the maximum management fee allowed by the NYSO. As a result, Columbus Manor
and Westwood House were charged a total of $28,065.97 ($17,423.25 and $10,642.72, respectively)
in excessive management costs.

Criteria

In 1989,the HUD NYSO determined that the maximum allowable amount that management agents
may charge for management fees in high cost areas, such as New York City, was $59 per unit per
month (PUPM) plus an additional $3 PUPM for computer-related services. The policy stated that
these maximums included all costs that are managerial in nature, including management office staff,
office rent and overhead costs. In 1992, the NYSO elaborated on what types of costs should be treated
as managerial, and therefore, not to be paid with project funds. Among the items listed were costs for
recertification clerks and tenant assistance clerks.

Noncompliance With NYSO Policy

Our review of payments made to the Agent from project funds disclosed that Columbus Manor and
Westwood House were charged for the salaries of two certification clerks as well as the maximum $62
PUPM management fee. We determined that from January 1, 1997 through June 30, 1998, a total of
$17,423.25, was charged to Columbus Manor and $10,642.72 to Westwood House for the excessive
management costs.

The clerks’ salaries were prorated and charged to five projects managed by the Agent: the two projects
included in our review, two additional HUD-insured projects (Townhouse West-Project No. 012-
11070, and Highbridge House-Project No. 012-11027), and one non-Federal Mitchell-Lama project.
Since the clerks’ salaries should not have been charged to the four HUD-insured projects, the prorated
amounts of those clerks’ salaries that were charged to those projects are considered ineligible project
costs. The Vice President of the Managing General Partner was not aware of the NYSO policy
prohibiting the charging of costs for tenant certification clerks.

Mortgagor Agrees To Make Repayments

When we informed the Vice President of the Managing General Partner that the Agent was not entitled
to receive reimbursement for the clerks' salaries, he immediately directed the bookkeeper to repay each
of the projects with the Agent’s funds. While some reimbursement documentation was provided to us
before we left the audit site, complete and appropriate documentation was not provided for all four
projects. The Vice President agreed to provide all documentation evidencing the reimbursements to
the NYSO.
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RECOMMENDATIONS
We recommend that the Agent be instructed to:

1A. Comply with NYSO policies regarding allowable management costs.

1B. Provide you with documentation showing that Columbus Manor and Westwood House have been
    repaid a total of $28,065.97 ($17,423.25 and $10,642.72, respectively); and that the two other
    HUD-insured projects managed by the Agent, Townhouse West and Highbridge House, were
    also reimbursed for the excessive management costs incurred during our audit period.




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                                    MANAGEMENT CONTROLS


In planning and performing our audit, we considered the Agent’s management controls, in order to
determine our audit procedures and not to provide assurance on internal controls.

Management controls include the plan of organization and methods and procedures adopted by
management to ensure that resource use is consistent with laws, regulations, and policies; that resources
are safeguarded against waste, loss, and misuse; and that reliable data is obtained, maintained, and fairly
disclosed in reports:

We determined that administrative and accounting controls in the following areas were relevant to our
audit objectives:

                •   Maintenance
                •   Financial Compliance
                •   General Management Practices

 We assessed all relevant controls areas identified above.

 A significant weakness exists if internal controls do not give reasonable assurance that the entity’s goals
 and objectives are met; that resource use is consistent with laws, regulations, and policies; that
 resources are safeguarded against waste, loss, and misuse; and that reliable data is obtained,
 maintained, and fairly disclosed in reports. Based on our review, we believe that a weaknesses exists in
 the Agent’s compliance with the NYSO policy regarding management fees and costs (See Results of
 Review).




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                            ISSUE REQUIRING FURTHER STUDY

During our review we also noted that the general ledger for Columbus Manor included three receivable
accounts from former partners totaling $198,571 as well as offsetting allowances for doubtful
accounts. One account of $155,000 was recorded as "Advances Receivable" while the other two
accounts were shown as "Due from Partners" and totaled $43,571.

The project's independent public accountant was able to locate workingpapers that identified that the
accounts were recorded prior to 1993, and indicated that the advances may have been made to former
partners, whose partnership interests were purchased in 1986. The current Managing General Partner
indicated that he intends to remove the accounts from the books in 1998. We believe that a legal
determination may be necessary to determine if the current partners are liable to the project for these
amounts or whether their purchase of the general partnership interests at the bankruptcy sale
discharged the old receivables. If these receivables are discharged, then they should be removed from
the project’s books.




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                                                                       Appendix A
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 (2)
Assistant to Deputy Secretary for Field Policy and Management, SDF
       Room 7106
Acting Assistant Secretary for Housing/Federal Commissioner Designate, H
       Room 9100
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)
Associate General Counsel, Office of Assisted Housing and Community
Development, CD (Room 8162)
Director, Participation & Compliance Division, HSLP (Room 9164)
Director, Finance Analysis Division, REF (8204)
Managing General Partner, Affordable Housing, LLC., New York, NY


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)




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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




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