We audited the Federal Housing Administration-insured nursing home, Riverside Health and Rehabilitation Center (the project), of East Hartford, CT, based on our risk assessment of nursing homes in the New England region.  Additionally, the U.S. Department of Housing and Urban Development (HUD) identified the project as potentially troubled as of January 9, 2017, and four physical inspections performed by HUD’s Real Estate Assessment Center, dating back to 2010, identified one or more deficiencies.  Our audit objective was to determine whether the project was operated in accordance with its regulatory agreement and HUD requirements.

Although the operator generally complied with the regulatory requirements tested, it did not operate in accordance with HUD requirements by not completing the required controlling documents.  The uncompleted documents included the management agent agreement and management agent certification with a related management agent.  The operator entered into a services agreement with the management agent, which did not have a fee structure that complied with HUD requirements.  In addition, the operator did not have a HUD-compliant operating lease with the owner because the required operating lease addendum was not completed.  These deficiencies occurred because the operator thought the services agreement it operated under was appropriate so it did not inform HUD that the project had a management agent, and the operator and owner were not aware that they needed to complete the operating lease addendum.  As a result, the operator paid more than $2.6 million in unsupported management fees in fiscal years 2015 and 2016.  Also, without the required management agent documents or a HUD-compliant operating lease, HUD and the owner may not have had the authority to hold the operator accountable, and the operator may not have had the authority to hold the management agent accountable for improper business associated with the project.

We recommend that HUD’s Director of Asset Management and Lender Relations require the owner to (1) require the operator to complete the management agent documents with the management agent or seek reimbursement for the more than $2.6 million in unsupported management fees paid in fiscal years 2015 and 2016 and (2) submit the operating lease for HUD review and complete the operating lease addendum in accordance with HUD requirements.