As part of the Office of Inspector General's (OIG) annual audit plan, we audited Century Mission Oaks (project). Our objectives were to determine whether the project's owner-manager, Century Mission Oaks GEAC, LLC (owner), complied with the regulatory agreement with the U. S. Department of Housing and Urban Development (HUD) during fiscal years 2005 and 2006. Specifically, we wanted to determine whether the owner (1) adequately supported and documented that project expenditures were reasonable and necessary, (2) obtained HUD approval for any distributed funds, and (3) maintained the books and records to properly account for revenues and expenses.

The owner did not support and document that project expenditures were reasonable and necessary because it ignored HUD requirements, lacked the expertise and knowledge to operate a HUD-insured project, and displayed poor cash management skills. As a result, the owner could not support more than $2.9 million in expenses, incurred $65,524 in ineligible expenses, and improperly transferred $197,000 in project funds to an affiliate. As a result, fewer project funds were available for mortgage payments, and the risk to the Federal Housing Administration insurance fund was unnecessarily increased.

Further, the owner did not ensure that the project's books and records were properly maintained. Financial records were missing; general ledger entries were incomplete, misclassified, and/or unsupported with revenues and payroll expenses overstated; and there were conflicting records. As a result, HUD and other stakeholders could not accurately assess the financial condition of the project.

We recommend that the Director, San Antonio Multifamily Program Center, require the owner to (1) provide support for or make necessary adjustments to its financial records to remove $2.7 million in unsupported expenses and expense accruals recorded in its books, (2) provide support for or reimburse $272,753 in unsupported costs, (3) deposit $262,524 for the ineligible disbursements and unauthorized transfers, into the project's reserve for replacement account (4) correct and accurately maintain its accounting records, and (5) implement procedures and controls to ensure that future disbursements for project expenses comply with requirements. We also recommend that HUD's Regional Counsel in coordination with the Director of the San Antonio Multifamily Program Center and the OIG pursue double damages remedies against the responsible parties for the ineligible disbursements and unauthorized transfers. Further, the Acting Director of HUD's Departmental Enforcement Center should pursue civil money penalties and administrative sanctions, as appropriate, against the owner for its part in the regulatory violations cited in this report.