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We audited Mary Scott Nursing Center (project) based on our analysis of risk factors related to the U.S. Department of Housing and Urban Development’s (HUD) multifamily nursing projects in Region 5’s jurisdiction (States of Illinois, Indiana, Michigan, Minnesota, Ohio, and Wisconsin).  The audit was part of the activities in our fiscal year 2017 annual audit plan.  Our objective was to determine whether the project’s owner and management agents operated the project in accordance with HUD’s requirements and the regulatory agreement.

The owner and management agents used project funds for ineligible expenses and did not provide sufficient documentation to support that project funds were used for eligible, reasonable operating expenses or necessary repairs of the project.  Further, the owner and management agents (1) did not ensure that rental revenue was collected for the residents, (2) could not provide sufficient documentation to support that the owner received market value for the sale of the operating rights for 10 licensed beds, and (3) were unable to provide documentation to support that the owner received approval from HUD before entering into agreements with the management agents.  In addition, the owner did not make payments on the project’s mortgage in a timely manner.  As a result, nearly $550,000 in project funds was not available for reasonable or necessary project operations and debt service, HUD and the owner lacked assurance that nearly $261,000 in project funds was used for eligible, reasonable operating expenses or necessary repairs of the project, and the owner did not receive nearly $391,000 in rental revenue.  Further, HUD is at risk of paying a claim of nearly $1.6 million on the mortgage.

We recommend that HUD require the owner to (1) reimburse the project from nonproject funds for inappropriate disbursements and disposal of resident charges, (2) support disbursements or reimburse the project from nonproject funds, and (3) implement adequate procedures and controls to address the weaknesses cited in this audit report.  We also recommend that HUD work with the owner to develop an action plan to prevent a claim on the mortgage.