We audited Vesta Mohegan, LLC (Mohegan Commons), after completing an audit of the owners' related project, Vesta Moosup, LLC (Moosup Gardens). The Moosup Gardens audit (OIG Audit Report Number 2007-BO-1006) disclosed cost exceptions totaling more than $700,000 related to unauthorized distributions and repayments of owner advances while in a non-surplus-cash position and unreasonable payments to identity-of-interest (related) companies. Our audit objective was to determine whether the owners used project funds in accordance with the regulatory agreement.

The owners did not use project funds in accordance with the regulatory agreement. We identified questioned costs and opportunities for funds to be put to better use totaling $1,194,242 (see appendix A). Specifically, the owners (1) used $58,342 in project funds for unnecessary and unreasonable operating costs; (2) included more than $593,000 in unreasonable relocation costs, and other questionable costs in the cost certification, causing the U.S. Department of Housing and Urban Development (HUD)-insured mortgage to be overinsured by $341,160; and (3) repaid $200,947 $259,804 - $58,857 reimbursed as of April 2007. in member advances when the project was in a non-surplus-cash position. These cost exceptions were due to weak internal controls, a lack of policies for related company transactions, and inadequate accounting procedures. These violations of the regulatory agreement may subject the owners to monetary penalties.

We recommend that the Acting New England Hub Director for Multifamily Housing require the owners to (1) repay the project for the questioned operating costs from nonproject funds, (2) make a principal payment or establish an escrow with the lender from nonproject funds to pay down the amount of overinsurance, and (3) reimburse the project from nonproject fund sources for the ineligible member advance repayments, and remove the unreasonable member advances accrued from the project's accounting records.