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We audited Coconut Grove Apartments due to concerns expressed by the U.S. Department of Housing and Urban Development’s (HUD) Office of Multifamily Housing Programs regarding the management of the project.  The main concern was that the owner may have diverted project funds for nonproject expenses.  Our audit objective was to determine whether Coconut Grove’s owner operated its Sections 223(f) and 241(a)-insured multifamily rental housing project in accordance with HUD rules and requirements.

HUD’s concerns about the project’s management were valid.  The owner did not always operate its multifamily project in accordance with HUD rules and requirements.  Specifically, it recorded unsupported transactions that were charged to the project, and disbursed funds for non-HUD-approved rental credits and a loan to an employee.  In addition, it did not obtain HUD approval for the management of the project.  The owner failed to maintain an adequate financial management system and submit required financial statements to HUD and secured loans that placed unauthorized liens on the project.  As a result, it did not ensure that at least $72,547 in unsupported transactions was used for eligible project expenses. 

We recommend that the Director of the San Francisco Office of Multifamily Housing Programs require the owner to (1) support or reimburse the project for the unsupported transactions and rental credits, (2) implement adequate written policies and procedures to address the finding cited in this report, and (3) obtain approval from HUD for its management.