Finding Text
2023 – 001 Prohibited Loans or Advances to Affiliated Entities
Federal Agency: U.S. Department of Housing and Urban Development
Federal Program Name: Mortgage Insurance – Nursing Homes, Intermediate Care Facilities, Board and Care Homes and Assisted Living Facilities
Assistance Listing Number: 14.129
Federal Award Identification Number and Year: N/A
Award Period: N/A
Type of Finding: Compliance and Material Weakness in Internal Control over Compliance
Criteria or Specific Requirement: Paragraph 4(b) of the HUD regulatory agreement prohibits loans or advances to affiliated entities without HUD authorization.
Condition: The project made unauthorized transfers of funds to a related party, which are considered loans without HUD approval. The Loans reduced funds available to the Organization to carry on its operations.
Questioned Costs: $2,299,516
Context: The project made loans to a related party that was experiencing recuring losses from operations and persistent shortages of working capital and was in need of assistance to maintain its operations to avoid a significant disruption in the services it provides to its residents.
Cause: Management deemed the transfer to be a necessary last resort to assist a related party organization to sustain its operations for a limited amount of time.
Effect: The Project is not in compliance with the regulatory agreement regarding adherence to the transferring of funds between entities in the consolidated group.
Repeat Finding: Yes.
Recommendation: We recommended to Management that they continue to monitor related party transactions and request prior approval before any advances are made or considered to be made in support of other related parties in the future. Views of Responsible Officials: There is no disagreement with the audit finding. The unauthorized loan was due to an increasing intercompany balance due from an affiliated nursing home (Bethesda) who was losing money and unable to reimburse Norwood Crossing (the Project). Due to continued losses, Management realized this issue was unable to be resolved without disposing of Bethesda. The sale of Bethesda Home was set to be completed in 2022 but was delayed numerous times due to serious issues. The actual sale date occurred on July 1, 2023.
Bethesda tried the best it could and repaid $1,025,000 in May 2023 prior to the completion of the sale. On July 17, 2023, the remaining intercompany balance of $1,274,316 was repaid in full to the Project.