Owner Mismanaged Its HUD-Insured Section 202 Site

HUD’s Office of Inspector General (OIG) audited a site because it was a high-risk multifamily project on its multifamily risk assessment for projects within the region. The audit objectives were to determine whether the project owner disbursed project funds for costs that were reasonable, necessary, and supported for the operation and maintenance of the project; and properly disclosed identity-of-interest relationships.

Auditors found that the owner may not have disbursed project funds for costs that were supported as reasonable and necessary for the operation and maintenance of the project, and didn’t disclose its identity-of-interest relationships to HUD. Specifically, the owner used project funds to pay up to nearly $2.1 million in costs that may have been for its parent company’s benefit and the benefit of five other non-HUD housing entities the parent company owned, didn’t disclose to HUD its related parties as identity-of-interest entities on its management certification, and paid nearly $403,000 in management fees to its parent company instead of the approved management agent for the project.

OIG recommended that HUD require the owner to: (1) provide documentation to show that payroll and other direct costs totaling nearly $2.1 million were reasonable and necessary expenses for the operation of the project or repay the project from non-project funds for any amount that it cannot support; (2) develop and implement controls to ensure that the project complies with the regulatory agreement and applicable HUD requirements; (3) submit a project owner’s and management agent’s certification for identity-of-interest agents and other required documentation for review and approval; and (4) request retroactive approval of the fees paid to the identity-of-interest entity totaling nearly $403,000, and if HUD doesn’t approve the management agent retroactively, repay that amount or the amount not approved by HUD.

OIG also recommend that the Director of HUD’s Departmental Enforcement Center pursue civil money penalties and administrative sanctions, as appropriate, against the owner and its parent company and their principals for their part in the violations cited in the audit report.

• HUD Audit 2017-PH-1006