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At the request of the Director of the U.S. Department of Housing and Urban Development’s (HUD) Houston, TX, Office of Multifamily Housing Programs, we conducted a review of Yale Court Apartments (project).  Our objective was to determine whether the project owner used the project funds in accordance with its regulatory agreement and HUD regulations.

The former owner used more than $3.5 million of the project funds for ineligible and unsupported expenses.  Specifically, it (1) used $3.2 million for unauthorized distributions, transfers to non-HUD-insured properties, or repayments to the former owner for advances; (2) used several incorrect documents to support more than $88,000 in withdrawals from the repair escrow account; (3) paid more than $16,000 for other ineligible project expenses; (4) overpaid management fees by nearly $16,000; (5) underfunded the tenant security deposit account by more than $9,000; (6) made ineligible loans to employees; and (7) spent more than $160,000 in project funds for items that it could not properly support.  Further, the former owner did not maintain accurate financial information and did not submit annual audited financial statements as required.  These conditions occurred because the former owner did not implement adequate controls to ensure compliance with the regulatory agreement and disregarded the project’s regulatory agreement.  The former owner’s improper use of project funds reduced the amount available for physical repairs and payment of the mortgage, which resulted in the project being left in poor physical condition and contributed to HUD’s nearly $4 million loss when HUD resold the note in August 2012.

We recommend that the Director of HUD’s Houston, TX, Office of Multifamily Housing Programs flag the form HUD-2530 for all appropriate parties for the regulatory agreement violations in this report.  We also recommend that the Director of HUD’s Departmental Enforcement Center pursue civil money penalties and administrative sanctions, as appropriate, against the owner, operator, and/or their principals/owners for their part in the regulatory violations cited in this report.