We audited the Federal Housing Administration-insured nursing home, Middlesex Health Care Center in Middletown, CT, because we identified profitability and solvency issues during ongoing work with the Section 232 program.  Additionally, the U.S. Department of Housing and Urban Development (HUD) identified the project as potentially troubled as of November 2017.  Our audit objective was to determine whether the project was operated according to its regulatory agreement and HUD requirements.

Although the owner, Athena Middlesex LLC, generally complied with the regulatory requirements tested, it did not operate according to its regulatory agreement and HUD requirements when it transferred or distributed funds from the project to affiliated healthcare facilities, and while the project was not in a surplus-cash position.  The owner’s regulatory agreement, sections 6(b) and 6(e), state that owners shall not assign, transfer, dispose of, or encumber any personal property of the project, including rents, or pay out any funds except from surplus cash, except for reasonable operating expenses and necessary repairs, and that owners shall not make or receive and retain any distribution of assets or any income of any kind of the project except from surplus cash.  This condition occurred because the owner treated the project the same as its other affiliated healthcare facilities that were covered under a master lease, which allowed available funds to be transferred between each facility.  However, the master lease did not include the project.  As a result, more than $1.1 million in project transfers or distributions made did not comply with the regulatory agreement and were not available to the project for necessary and reasonable expenses.

We recommend that HUD’s Director of Asset Management and Lender Relations require the owner to (1) repay the project the more than $1.1 million in ineligible distributions made to affiliated healthcare facilities and (2) implement controls to ensure that project distributions are made from surplus cash and comply with the regulatory agreement and HUD requirements.