Audit 389682

Statement of Condition – The Project used operating funds to make cash disbursements for non-Project costs. Criteria – The HUD regulatory agreement prohibits the use of Project funds for non-project purposes. Project funds must be used solely for the operation, maintenance and benefit of the HUD-insured and HUD-assisted property. Effect – The Project is not in compliance with HUD regulations. Cause – Management misinterpreted certain restrictions in the HUD regulatory agreement resulting in Project funds being used to pay for predevelopment costs associated with an expansion/new construction of an additional 29 units to the property. Amount – $285,552 Recommendation – Management should reimburse the Project for the predevelopment expenditures and all future predevelopment costs should be paid from non-project sources until the expansion is approved by HUD, in accordance with the regulatory agreement. Management’s Response – Based on legal counsel’s advice, and that the lender has an approved Concept Meeting Proposal with HUD, we believe HUD has approved our efforts to pursue predevelopment activities to add 29 units on the existing parcel using available cash from operations, while seeking formal approval and ultimately loan proceeds from a HUD-insured supplemental loan under Section 241(a) of the National Housing Act. Once the new loan is approved, we intend to use a portion of the proceeds from the HUD-insured supplemental loan to repay the Project’s Operating Account for funds used to cover predevelopment costs.