Assistance Listing (Federal award identification number and year): LIHPRHA Capital Grant, Assistance Listing No. 14.122, 122-44641 and 1996; Mortgage Insurance Rental and Cooperative Housing for Moderate Income Families and Elderly, Market Interest Rate, Assistance Listing No. 14.135, 122-35766 and 2024 Auditor non-compliance code: J – Unauthorized management fees Finding resolution status: In process Universe population size: The universe population size is not applicable to the finding. Sample size information: The sample size information is not applicable to the finding. Statistically valid sample: N/A Name of Federal agency: U.S. Department of Housing and Urban Development Pass-through entity: N/A Questioned costs: $7,988 Statement of condition 2025-002: Management fees of $7,988 were prepaid at June 30, 2025. Criteria: In accordance with the HUD approved Management Agent Certification (HUD-9839-B), the management agent earns a fee based on an established rate of 8.77% of residential and miscellaneous income collected or $81 per unit per month, whichever is less, effective July 1, 2024 through July 31, 2024 and an established rate of 10% of residential and miscellaneous income collected or $69 per unit per month, whichever is less, effective August 1, 2025. Effect: The Corporation is not in compliance with the HUD approved Management Agent Certification. As a result, the Property's cash position at June 30, 2025 has been reduced by $7,988. This amount has been added to the computation of surplus cash, distributions, and residual receipts to not understate the Property's residual receipt deposit. Cause: The management did not consider the lesser of the per unit per month fee or the percentage fee when calculating the management fee due for the year ended June 30, 2025. Recommendation: The management agent should charge management fees as approved by HUD and should reimburse management fees of $7,988 to the Property. Management's response: Management disagrees. Upon checking with my attorney, he felt that there was a misreading of the 9839b. That document contains only one limitation: that the management fee is capped at 10% of actual gross rent that is defined on the form. The line item that contains the PUPM calculation merely determines the PUPM assuming a collection factor of 95% of gross income. The fee is not the lesser of 10% of gross or $69 PUPM. HDSI took over management in the winter of 2020. It took about 3 years to get the FHA loan and predevelopment work in place to for an initial endorsement, about the fall of 2024. I began work on trying to get the funds to repair the non-safe, decent or sanitary buildings in early 2021. This was after HDSI began repairing a few vacant units. The vacant units cost $15,000 per unit. The buildings did not have seismic security. They were being held up in some cases by deteriorated wood that did not touch the foundation. The window frames and some behind the wall boards were termite destroyed. The list of repairs goes on. From a management perspective, each of the 12 units that remained vacant would have cost an average of $15,000 to repair or $144,000. The units were scattered amongst the 5 properties. Each of the buildings had to be vacated during repairs which meant having residents relocated for an average of 5 weeks or 35 days. Each hotel night is approximately $180 per night or $6,300 for 35 days per unit. There is daily cost for food of about an average $75 per apartment or $2,625. Next there is the unit furniture packing, moving, storage and replacement of about $200 a unit. That totals an estimated $24,125 from the unit repair through relocation during construction x 12 or $289,500. This was a cost that the project could not afford prior to the FHA insured loan. The rent per unit was between $720 and $848 depending on an efficiency or a one bedroom. Taking an average $800 per month, the rental unit for 12 months brought in $9,600. The cost to repair, relocate, feed and replace is $24,125. That is a cash loss per unit of $14,525 x 12 or $150,300 over the 12 month period assuming full occupancy. The costs of a unit to repair, relocate, feed and replace were included in the $17.9 million FHA insured loan. A vacant unit would have only a project cost of an average $15,000 for the above example. That is a large cash saving for rehabilitating Hollywood West Apartments. Almost all vacant units were rented within a month after project completion of repairs. Additionally, management disagrees with the management fee applicable for the period July 1, 2024 through July 31, 2024. The statement indicates that the July 2024 management fee was $81 per unit per month (PUPM). However, at no time did management bill or collect a management fee of $81 PUPM for that period. According to the Management Certification Agreement on file, the fee was $59 PUPM. Effective August 1, 2024, the approved management fee increased to $69 PUPM. Management only started collecting $80 PUPM in April 1, 2026.