We conducted the audit of the Retreat at Santa Rita Springs (community), a Federal Housing Administration-insured multifamily property under the Section 231 of the National Housing Act, in response to a congressional request from Representative Gabrielle Giffords of the 8th Congressional District of Arizona. In November 2009, the owners of the community defaulted on its $29.9 million U.S. Department of Housing and Urban Development (HUD)-insured loan less than one month after final endorsement.

The community experienced huge operating shortfalls and eventually defaulted on the loan. The financial default was due to HUD’s inadequate technical review and monitoring, the lender’s failure to exercise due diligence in underwriting the loan, and the owners’ lack of financial commitment and guidance to its management agent. As a result, the community’s loan note was sold to an outside party for approximately $9 million, or more than a $20 million loss to HUD.

We recommend that the Director of HUD’s Office of Multifamily Housing Development update the MAP Guide to include rules and requirements for processing Section 231 loans and discontinue processing these types of loans until the MAP Guide is updated. We also recommend that the Director of HUD’s Region IX San Francisco Office of Multifamily (1) ensure that all conditions for underwriting are met in processing Section 231 multifamily properties and that there are clear roles, responsibilities and communication among the HUD offices when conducting reviews to minimize potential problems such as those mentioned in this report and (2) improve the regional field office’s property management and performance monitoring of Section 231 properties by beginning monitoring immediately upon occupancy to minimize potential financial, operational, and managerial problems related to the properties under the program.