The U.S. Department of Housing and Urban Development's (HUD) Office of Inspector General audited the Lansing Housing Commission's (Commission) nonprofit development activities. The review of public housing authorities' development activities is set forth in our fiscal year 2007 annual audit plan. We selected the Commission because it was identified as having high-risk indicators of nonprofit development activity. Our objective was to determine whether the Commission diverted or pledged resources subject to its annual contributions contract (contract), other agreement, or regulation for the benefit of non-HUD developments.

The Commission defaulted substantially on its contract when it improperly pledged resources for the benefit of the Lansing Housing Commission Nonprofit Development Corporation (Corporation) and the Oliver Gardens Limited Dividend Housing Association Limited Partnership (Partnership), organizations created by the Commission without HUD approval. In May 2006, the Commission inappropriately and without conditions guaranteed the obligations of the Partnership's general partner, the Oliver Gardens Limited Liability Company, in a guaranty agreement. Further, the Commission executed another guaranty agreement in September 2006 that unconditionally and irrevocably guaranteed the full and punctual payment of a loan entered into by the Corporation. As of February 29, 2008, the Commission has placed $1.4 million in federal assets at risk by entering into the guaranty agreements which made it responsible for all operating deficits and potential judgements of the Corporation and Partnership. The Commission also inappropriately used more than $745,000 in Public Housing funds for two nonfederal developments, Oliver Gardens and The Abigail.

Lastly, the Commission managed and provided Section 8 housing assistance to the Oliver Gardens, a 30-unit senior housing project that the Partnership owns, and it performed unit inspections of the project's units, thus creating a conflict of interest.

We informed the Commission's executive director and the Director of HUD's Detroit Office of Public Housing of minor deficiencies through a memorandum, dated April 17, 2008.

We recommend that the Director of HUD's Detroit Office of Public Housing require the Commission to amend the guaranty agreements regarding the Corporation and the Partnership to remove the Commission's pledging of its federal assets, submit the amended guaranty agreements to HUD for review and approval to ensure that they comply with its contract with HUD, reimburse the applicable programs for the improper use of Public Housing funds and its receipt of Section 8 administrative fees related to Oliver Gardens, contract with an independent third-party to perform housing quality standards inspections of Oliver Gardens as required by HUD, and implement procedures and controls to address the findings cited in this audit report. We also recommend that the Director refer the Commission's substantial default of its contract to HUD headquarters and request appropriate action be taken against the Commission.