In response to a request from the U. S. Department of Housing and Urban Development (HUD), we audited Cypress Ridge Apartments' use of HUD-insured mortgage loan proceeds and property operating funds governed by a regulatory agreement. William Commercial Property Management (agent) was the management agent and general contractor for the multifamily rehabilitation project under taken with funding insured under Section 221 (d)(4) of the National Housing Act.

The audit objective was to determine whether the agent used project and operating funds consistent with the regulatory agreement and HUD regulations. Specifically, we wanted to determine whether the agent (1) used loan proceeds for other than reasonable project expenses, (2) used operating funds to pay other than reasonable operating expenses and necessary repairs, and (3) paid distributions from other than surplus cash.

The agent obtained and used funds contrary to the regulatory agreement. It received loan proceeds totaling $356,400 without construction cost documentation to support the release of proceeds. From the operating account, it paid related entities and others $386,007 without required justification for payments. As a result, the agent drew and paid out amounts without assurances that it used the funds for legitimate expenditures. This condition put HUD at a greater risk of loss on the mortgage loan insured by the Federal Housing Administration (FHA). The owner did default on the loan with a resulting loss of $3.75 million to FHA .

We recommended that the Acting Director of the Office of Multifamily Housing, Kansas City hub, require the owner to either support or repay HUD more than $356,000 for loan proceeds it received and support or repay HUD more than $386,000 paid out of the operating account. We also recommended that HUD's Acting Director of the Departmental Enforcement Center take appropriate actions against the ownership and management agent for violating the project's regulatory agreement.