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We audited Bay Vista Methodist Heights, San Diego, CA, to determine the full extent of the misuse of its trust funds. We selected Bay Vista for review based on a referral from the Office of Multifamily Housing, stating that Bay Vista violated its trust fund agreement with the U.S. Department of Housing and Urban Development (HUD) because the former chief financial officer transferred more than $3 million in restricted funds into Bay Vista’s operating account to meet general operating expenses rather than to develop, purchase, construct, preserve, and rehabilitate affordable housing.

Bay Vista violated its trust fund agreement with HUD. Specifically, it used more than $5 million in trust funds without HUD’s approval for ineligible operating expenses. In addition, Bay Vista could not support more than $1 million in expenditures on draw requests that were approved by HUD.

We recommend that the Acting Director of HUD’s Los Angeles Office of Multifamily Housing require Bay Vista to (1) repay more than $5 million to the trust fund from non-Federal funds; (2) support an additional $1 million or repay the trust; (3) replace the management agent with a non-identity-of-interest agent; and (4) implement policies, procedures, and controls to restrict the use of trust funds to only allowable expenses and ensure that the trust funds are not commingled with other funds.