Durham, N.C., Project Didn’t Comply with Its Regulatory Agreement

HUD audited the West Village Expansion Project, a HUD Section 220-insured property, in response to a citizen’s hotline complaint. The anonymous caller claimed that the principals of L8, LLC, the managing member of the ownership entity, spent an excessive amount of project funds on legal fees, transferred more than $500,000 to another entity it owned, and failed to keep the mortgage current.

Auditors found that the owner violated its regulatory agreement by using project funds for unauthorized purposes. The owner repaid $502,127 for previous advances from its managing member’s principals, paid $225,000 for unnecessary legal expenses, didn’t pay its mortgage on time, and underfunded the project’s replacement reserve account by $36,400. It took these actions without HUD approval at a time when the property had no surplus cash and the mortgage was delinquent. As a result, the project had less money to operate, pay for future repairs, and keep the mortgage out of default, thus placing HUD at risk for the $54 million mortgage.

Before the auditors could make recommendations to HUD, a new investor provided funds to bring the mortgage and required escrows current as well as fund the unauthorized distributions. The auditors concluded, therefore, that all issues have been resolved.

• HUD Audit Report 2012-AT-1014: The Owner of the West Village Expansion Project, Durham, NC (7/27/12)