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Report Fraud, Waste and Abuse
February 04, 2008
2008-BO-1005
ig0811005.pdf

We audited Vesta Windham Heights, LLC (Windham Heights), after completing an audit of the owners' related project, Vesta Moosup, LLC (Moosup Gardens). The Moosup Gardens audit (OIG Audit Report Number 2007-BO-1006) disclosed cost exceptions totaling more than $700,000 related to unauthorized distributions and repayments of owner advances while in a non-surplus-cash position and unreasonable payments to identity-of-interest (related) companies. Our audit objective was to determine whether the owners and/or management agent used project funds in accordance with the regulatory agreement. The owners did not use project funds in accordance with the regulatory agreement. We identified questioned costs and opportunities for funds to be put to better use totaling more than $2.8 million (see appendix A). These cost exceptions were due to weak internal controls, a lack of policies for related company transactions, and inadequate accounting procedures. Specifically, the owners and management agent (1) used more than $171,000 for services that were unnecessary and unreasonable to operate and maintain the project and when the project was in a non-surplus-cash position; (2) included unreasonable and unnecessary costs in their cost certification, causing the U.S. Department of Housing and Urban Development (HUD) to overinsure the mortgage by more than $598,000; and (3) repaid more than $800,000 in advances when the project was in a non-surplus-cash position. These violations, which included charging the project more than $1.3 million for unreasonable relocation services when the project was in a non-surplus-cash position, may subject the owners to monetary penalties.

We recommend that the Acting New England Hub Director for Multifamily Housing require the owners to (1) repay the project for ineligible use of operating funds for unreasonable and unnecessary costs charged to the project, (2) make a principal payment or establish an escrow with the lender from nonproject funds to pay down the amount of overinsurance, and (3) repay the project for ineligible repayments to their related companies.

Further, we recommend that HUD pursue sanctions as appropriate against the responsible parties for the unreasonable disbursements cited in this report.