Audit 414904

Criteria: The mortgagor (Company) is required to establish and maintain a replacement reserve to aid in funding extraordinary maintenance and repair and replacement of capital items. The replacement reserve funds must be deposited in a federally insured depository in an interest-bearing account. An amount as required by HUD ($42,684 annually) will be deposited monthly in the reserve fund. Condition: During our testing, we noted that the Company made only six of the twelve required monthly deposits to the replacement reserve account during the audit period. As a result, the replacement reserve was not funded in accordance with HUD requirements. Cause: The Company changed management agents during the fiscal year. Effective controls were not in place to ensure the required monthly replacement reserve deposits continued to be made and monitored during the transition. Effect: The Company did not meet the replacement reserve funding requirement under the Capital Advance Program Regulatory Agreement requiring monthly deposits. Identification as a Repeat Finding, if applicable: Not applicable. Recommendation: The Company should implement effective controls to ensure required replacement reserve deposits are made monthly in accordance with the Regulatory Agreement.

Criteria: Per 24 CFR Section 891.410(a), HUD requires the maintenance of a waiting list and the selection of applicants in chronological order of application date. Condition: During our review, management was unable to provide a waiting list or other records demonstrating that applicants were maintained and selected in chronological order as required by 24 CFR Section 891.410(a). Cause: The project changed property management agents during the fiscal year. Effective controls were not in place to ensure that the tenant waiting list records were maintained and transferred during the change in property management, resulting in the absence of documentation demonstrating compliance with HUD tenant selection requirements. Effect: Without a documented tenant waiting list, there is no support to demonstrate that applicants were selected and admitted in accordance with the established order or applicable program requirements. Identification as a Repeat Finding, if applicable: Not applicable. Recommendation: Project management should implement effective controls to ensure tenant waiting list documentation is maintained and retained in accordance with 24 CFR Section 891.410(a).

Criteria: Per 24 CFR Section 891.605(d), replacement reserve funds must be deposited with HUD or in a Federally-insured depository whose balances are fully insured at all times. Condition: At June 30, 2025, the Project’s replacement reserve balance totaled $544,946 and was held in a single account at one financial institution. Accordingly, $294,946 exceeded the applicable $250,000 federal deposit insurance limit and was not fully insured. Cause: Project management did not have procedures in place to monitor the replacement reserve balance and ensure the amounts held at a single financial institution remained within federal deposit insurance limits. Effect: The Project did not comply with the replacement reserve requirements of 24 CFR Section 891.605(d). In addition, the uninsured balance of $294,946 was exposed to potential loss in the event the financial institution was to fail. Identification as a Repeat Finding, if applicable: Not applicable. Recommendation: Project management should implement procedures to periodically monitor the replacement reserve balance to ensure funds remain fully insured at all times. This may include maintaining the funds in accounts at multiple federal insured financial institutions or using another HUD-approved arrangement that provides full insurance coverage.