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We audited the U.S. Department of Housing and Urban Development’s (HUD) resident home-ownership program grant for Lakeview East Cooperative (project) based on the results of a risk assessment of multifamily housing programs in Region 5’s jurisdiction (States of Illinois, Indiana, Michigan, Minnesota, Ohio, and Wisconsin).  The audit was part of the activities in our fiscal year 2017 audit plan.  Our objective was to determine whether the Lakeview East Cooperative (Cooperative) and management agent operated the project in accordance with HUD’s requirements and HUD’s grant agreement with the 707 Tenants’ Association.

The Cooperative and management agent did not operate the project in accordance with HUD’s requirements and the grant agreement.  The Cooperative and management agent did not determine the fair market value of memberships to support that members did not pay more than the fair market value for their memberships and HUD’s secured interest in the memberships was appropriately valued.  Further, they could not provide sufficient documentation to support that (1) the payments to HUD from initial membership sales were accurate, (2) the Cooperative used its share of the proceeds from initial membership sales in accordance with the grant agreement, and (3) housing was affordable for all members.  In addition, they did not ensure compliance with other requirements of the program.  As a result, the Cooperative is at risk of having to reimburse HUD more than $18.1 million.

We recommend that the Director of HUD’s Multifamily Midwest Region require the Cooperative to resolve the issues and implement adequate procedures and controls to address the weaknesses cited in this audit report and make a preliminary determination as to whether the Cooperative is in default of the grant agreement.