We audited the City of Modesto’s Neighborhood Stabilization Program 2 (NSP2). We performed the review because it was part of the Office of Inspector General’s (OIG) audit plan to conduct audits of NSP2 under the American Reinvestment and Recovery Act of 2009. We selected the City because it received $25 million and HUD’s San Francisco Office of Community Planning and Development requested that OIG consider a review of the City.

Program funds were not always used for eligible costs to acquire and rehabilitate properties. Specifically, the City approved ineligible project management fees and unsupported expenditures totaling $56,130 during rehabilitation. In addition, a city council member and a principal of one developer violated HUD’s and the City’s requirements when a company they co-own collected a commission of $62,500 in an NSP2 property purchase transaction. Lastly, the City used program funds of $51,936 to pay inappropriate real estate commissions based on unsigned addenda to purchase agreements.

We recommend that the Acting Director of HUD’s San Francisco Office of Community Planning and Development require the City to (1) adjust the loan amounts and developer contribution amounts for each of the properties affected by the $47,976 in ineligible project management fees and the $8,154 in unsupported rehabilitation costs and (2) reimburse its NSP2 grant $51,936 using non-Federal funds for the ineligible real estate commissions paid based on unsigned addenda to purchase agreements.

We also recommend that the Director of HUD’s Departmental Enforcement Center take administrative action against the city council member for the conflict-of-interest violation.