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We audited Marina Village Apartments as a result of the U.S. Department of Housing and Urban Development (HUD), Office of Inspector General’s (OIG) internal audit of HUD’s servicing of multifamily HUD-held mortgages and a risk analysis.  The objectives were to determine whether project funds were used in compliance with the regulatory agreement and HUD requirements and whether the project operated in compliance with its use agreement.

The owner did not use project funds in compliance with the regulatory agreement and HUD requirements.  The project paid $106,288 for related party loans, nonproject expenses, and an unauthorized reimbursement to a partner.  It took these actions when the project had no surplus cash or while the mortgage was in default.  The project also did not always follow procurement and contracting requirements.  Lastly, the project allowed overincome tenants to move into vacant units in violation of its use agreement.

We recommend that HUD require the owner to (1) make a $45,656 payment toward the HUD-held second mortgage from nonproject funds; (2) deposit $45,413 into the project’s reserve for replacement or a restricted capital account for the ineligible disbursements made to related entities; and (3) certify, along with the management agent, that it understands the requirements in HUD Handbook 4381.5.  We also recommend that HUD (1) monitor the project to ensure procurement is conducted in accordance with HUD requirements and (2) verify that the owner and management agent’s corrective action is effective in ensuring compliance with the use agreement.