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The Owner and Former Management Agents Lacked Adequate Controls Over the Operation of Lake Village of Fairlane Apartments, Dearborn, MI

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We audited Lake Village of Fairlane Apartments as part of the activities in our fiscal year 2014 annual audit plan.  We selected the project based on a referral from the U.S. Department of Housing and Urban Development’s (HUD) Detroit Office of Multifamily Housing Programs.  Our objective was to determine whether the project’s owner and former management agents operated the project in accordance with HUD’s requirements and the regulatory agreement.

The owner and former management agents could not provide sufficient documentation to support that project funds were used for reasonable operating expenses or necessary repairs of the project.  Further, (1) other project funds were not used for reasonable operating expenses or necessary repairs of the project, (2) the project’s security deposit account balance did not equal or exceed the total obligations associated with the account, and (3) the project lost rental revenue by providing a household rent-free housing.  As a result, HUD and the owner lacked assurance that nearly $3 million in project funds was used for reasonable operating expenses or necessary repairs of the project and nearly $19,000 in additional rental revenue was not lost.  Further, nearly $8,000 in project funds and more than $10,000 in lost rental revenue were not available for reasonable operating expenses and necessary repairs of the project.  In addition, nearly $47,000 in security deposits was not available to (1) reimburse the owner for damages to project units, (2) pay the owner for unpaid rent, or (3) reimburse households.

We recommend that HUD require the owner to (1) support disbursements and that rental revenue was not lost or reimburse the project from nonproject funds, (2) reimburse the project for ineligible disbursements and lost rental revenue, (3) reimburse the project’s underfunded security deposit account, and (4) implement adequate procedures and controls to address the findings cited in this audit report.  We also recommend that HUD pursue double damages remedies, civil money penalties, and administrative sanctions against the responsible parties for their part in the violations of the regulatory agreement cited in the audit report.