We audited Luther Towers II because it was a high-risk multifamily project that received low inspection and financial assessment scores on our multifamily risk assessment for projects within our region and we had never audited it. Our audit objective was to determine whether the owner managed the project in accordance with its regulatory agreement and U.S. Department of Housing and Urban Development (HUD) requirements.
The owner of Luther Towers II did not manage the project in accordance with its regulatory agreement and HUD requirements. Specifically, the owner (1) could not show that it always used project funds for costs that were reasonable and necessary for the operation of the project because it commingled HUD funds totaling more than $1.7 million with its own funds and those of its other activities, (2) pledged up to $100,000 in project funds as security for its line of credit, (3) used project funds totaling more than $407,000 to pay its line of credit liability, (4) managed the project without a HUD-approved management certification and management entity profile, and (5) did not ensure that all tenant security deposit funds were deposited into the project’s security deposit bank account. These conditions occurred because the owner (1) lacked an understanding of the terms of the regulatory agreement and HUD’s requirements, (2) had poor record-keeping practices, and (3) did not have controls to ensure that the project was managed in accordance with the regulatory agreement and HUD requirements. As a result, disbursements totaling more than $2.1 million were unsupported, and up to $100,000 in project funds could be put to better use.
We recommend that HUD require the owner to (1) provide documentation to show that disbursements totaling more than $2.1 million were reasonable and necessary expenses for the operation of the project or repay the project from non-project funds for any amount it cannot support, (2) segregate project bank accounts from the owner’s bank accounts, (3) remove project bank accounts as security for its line of credit, (4) submit a management certification and other required documentation to HUD for review and approval, and (5) develop and implement policies and procedures to ensure that the project funds are used in accordance with its regulatory agreement and HUD requirements.
Recommendations
Housing
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Status2018-PH-1006-001-AOpenClosed$2,136,849.00Questioned Costs
Recommendations with questioned costs identify costs: (A) resulting from an alleged violation of a law, regulation, contract, grant, or other document or agreement governing the use of Federal funds; (B) that are not supported by adequate documentation (also known as an unsupported cost); or (C) that appear unnecessary or unreasonable.
Closed on Agosto 22, 2023Provide documentation to show that disbursements totaling $2,136,849 and any bank transfers to the owner’s non-project accounts that occurred outside of our audit period were reasonable and necessary expenses for the operation of the project or repay the project from non-project funds for any amount that it cannot support.
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Status2018-PH-1006-001-BOpenClosedClosed on Junio 25, 2020
Provide documentation to show that project funds are segregated in the project’s name, in accordance with the regulatory agreement and HUD requirements.
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Status2018-PH-1006-001-COpenClosed$100,000.00Funds Put to Better Use
Recommendations that funds be put to better use estimate funds that could be used more efficiently. For example, recommendations that funds be put to better use could result in reductions in spending, deobligation of funds, or avoidance of unnecessary spending.
Closed on Julio 15, 2020Take immediate action to remove project bank accounts as security for the owner’s line of credit and, thereby put up to $100,000 to better use.
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Status2018-PH-1006-001-DOpenClosedClosed on Julio 15, 2020
Submit a project owner’s or management agent’s certification, management entity profile, current budget and other required documentation to HUD for review and approval.
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Status2018-PH-1006-001-EOpenClosedClosed on Julio 15, 2020
Develop and implement controls to ensure that the project complies with the regulatory agreement and applicable HUD requirements, including but not limited to policies and procedures for maintaining project funds in separate bank accounts in the project’s name, using project funds only for necessary expenses of the project, and reconciling bank accounts to the project’s computerized accounting records.
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Status2018-PH-1006-001-FOpenClosedClosed on Julio 15, 2020
Provide training and technical assistance to the owner’s executive director and staff to ensure compliance with the terms of its regulatory agreement and applicable HUD requirements.