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We audited the West Village Expansion Project in Durham, NC, a U.S. Department of Housing and Urban Development (HUD) Section 220-insured property, due to a citizen’s hotline complaint. The anonymous complainant alleged that the managing member of the project’s ownership entity spent an excessive amount of project funds on legal fees, transferred more than $500,000 to another entity owned by it, and failed to keep the mortgage current. Our objectives were to evaluate the merits of the complaint and determine whether the owner administered the project in accordance with its regulatory agreement with HUD.

The owner violated its regulatory agreement when it repaid $502,127 for previous advances from its managing member’s principals, paid $225,000 for unnecessary legal expenses, did not timely pay its mortgage, and underfunded the project’s replacement reserve account by $36,400. It took these actions without HUD approval at a time when the property had no surplus cash and the mortgage was delinquent. As a result, the project had fewer funds to operate, pay for future repairs, and keep the mortgage out of default, thus placing HUD at risk for the $54 million mortgage.

On July 20, 2012, a new investor provided funds to bring the mortgage and required escrows current as well as fund the unauthorized distributions cited in this report. Accordingly, all issues have been resolved, and our recommendations will be closed upon issuance.