Finding Text
FINDINGS - MAJOR FEDERAL AWARD PROGRAM AUDIT Department of Housing and Urban Development Finding, 2022-003: Major Program: Supportive Housing for the Elderly (Section 202 Capital Advance - Accumulated Balance), Federal Assistance Listing Number 14.157 STATEMENT OF CONDITION No required deposits were made to the Reserve for Replacement account. CRITERIA HUD Handbook 4350.3 Revision 1 for HUD Subsidized Multifamily Housing Programs requires owners to make monthly deposits to the Reserve for Replacement account based on the Project?s monthly deposit authorized by HUD. EFFECT OF CONDITION Management did not make any required deposits to the Reserve for Replacement account in 2022. CONTEXT During audit fieldwork, the Reserve for Replacement accounts were tested for compliance with required monthly deposits. No monthly deposits were noted on the bank statements. CAUSE OF CONDITION Management did not make monthly deposits to the Reserve for Replacement account due to cash flow issues during 2022 as a result of the Project not receiving a rent increase since 2019. RECOMMENDATION The auditor recommends the Reserve for Replacement be properly funded on a monthly basis. VIEWS OF RESPONSIBLE OFFICIALS AND PLANNED CORRECTIVE ACTIONS The Project has suffered dramatically from the results of COVID-19. During all prior years, the Reserve for Replacement has been in compliance. Although HUD did help with small COVID-19 grants, it was not sufficient to overcome the costs. Properties of 50-units and less suffered far more during COVID-19 than the larger developments due to the economies of scale. It should be noted that in addition to the Reserve for Replacement that was not funded in 2022, the property management firm was also not paid $25,781. Management has requested a substantial rent increase, however, being more than a 4.0% increase triggers a longer review time table, which the Project is awaiting. The Project submitted a rent increase on February 23, 2023 for 14.7% and is awaiting (i) a contract renewal, (ii) approval of the rent increase, and (iii) the approval of a new rent increase schedule so we can bill for the Section 8. Lastly, management will propose to HUD, after a substantial rent increase, to double the outstanding Reserve for Replacement payments to bring this development into compliance over the next two years.