Finding Text
Finding 2025-003: Material Weakness, Material Noncompliance - Special Tests and Provisions, Mortgage Reserve Fund, Equipment Replacement Reserve Fund, and Special Escrows Federal Agency: U.S. Department of Housing and Urban Development Federal Program Name: Section 232 Mortgage Insurance for Nursing Homes Assistance Listing Number: 14.129 Award Period: January 1, 2025 through December 31, 2025 Criteria or Specific Requirement: The Organization is required, under the HUD Regulatory Agreement governing its Section 232 insured mortgage, to make monthly deposits into the reserve for replacement fund in amounts and at times prescribed by HUD. Reserve for replacement funds must be deposited timely and maintained in restricted accounts to ensure the availability of resources for future capital repairs and replacements. Condition/Context: During the audit period, Henry C. Nevins Home, Inc. did not make all required deposits into the reserve for replacement fund in accordance with the terms of the applicable HUD Regulatory Agreement. The required monthly reserve deposits were either not made or were made in amounts less than those required. Questioned Costs: $217,923 Cause: Cash flow constraints contributed to the failure to fund the reserve as required. Effect: The reserve for replacement fund is a mandatory, HUD restricted account intended to provide funding for major repairs and capital improvements and to protect HUD’s insured interest in the property. As a result of the failure to make required reserve for replacement deposits, the reserve account was underfunded and the Organization was not in compliance with HUD requirements under the Regulatory Agreement. Recommendation: We recommend that Henry C. Nevins Home, Inc., in coordination with the court-appointed receiver and HUD, establish procedures to ensure that reserve for replacement deposits are made timely and in accordance with the HUD Regulatory Agreement, or that appropriate waivers or modifications are obtained from HUD where compliance is not currently feasible. Views of Responsible Officials: Management acknowledges the audit finding related to the failure to make required deposits into the reserve for replacement fund in accordance with the HUD Regulatory Agreement. As disclosed in the notes to the financial statements, during the audit period the Organization was subject to a court-appointed receivership effective September 12, 2025 and is in default under its HUD-insured mortgages. As part of the receivership, control over substantially all cash management and financial decision-making activities was assumed by the court-appointed receiver. Management believes that the conditions giving rise to this finding are directly related to liquidity constraints. Given the complexities of the receivership and regulatory environment, a specific timeline for remediation is not able to be determined. As a result of the loan default, the mortgage was assigned to the U.S. Department of Housing and Urban Development. Since the appointment of the Receiver, responsibility for cash management, financial oversight, and debt service planning has transitioned to the Receiver. The Receiver and the Organization are actively evaluating available options to address the loan default which includes marketing the Organization for a sale. Interim corrective actions include enhanced cash-flow monitoring, prioritization of expenses required to continue operations, and ongoing communication with HUD regarding the sale process. Management believes that these actions will address the conditions identified and result in the satisfaction of the HUD loan.