We audited Rainbow Terrace Apartments based on our analysis of risk factors related to multifamily projects in Region 5’s jurisdiction and the activities included in our fiscal year 2018 annual audit plan.  Our objective was to determine whether the project’s owner and management agent operated the project in accordance with the regulatory agreement and the U.S. Department of Housing and Urban Development’s (HUD) requirements.

The project’s owner and management agent did not always operate the project in accordance with the regulatory agreement and HUD’s requirements.  Specifically, the project’s owner and management agent did not always provide sufficient documentation to support that project funds were used for reasonable operating expenses or necessary repairs of the project.  In addition, (1) project funds were not used for reasonable expenses or necessary repairs of the project, (2) excess management fees and unsupported bookkeeping fees were charged to the project, and (3) tenants’ security deposits were not maintained in the project’s security deposit bank account.  As a result, HUD and the owner lacked assurance that more than $2.3 million in project funds was used for reasonable operating expenses or necessary repairs of the project.  In addition, more than $141,000 in project funds was not used appropriately.

We recommend that HUD require the owner to (1) support the reasonableness of or reimburse the project from nonproject funds for disbursements from the project’s operating account without sufficient documentation, (2) reimburse the project from nonproject funds for unreasonable operating expenses or unnecessary repairs of the project, (3) use the project’s security deposit bank account to deposit and disburse security deposits, and (4) implement adequate procedures and controls to address the findings cited in this report.

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