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We audited Luther Towers II because it was a high-risk multifamily project that received low inspection and financial assessment scores on our multifamily risk assessment for projects within our region and we had never audited it.  Our audit objective was to determine whether the owner managed the project in accordance with its regulatory agreement and U.S. Department of Housing and Urban Development (HUD) requirements.

The owner of Luther Towers II did not manage the project in accordance with its regulatory agreement and HUD requirements.  Specifically, the owner (1) could not show that it always used project funds for costs that were reasonable and necessary for the operation of the project because it commingled HUD funds totaling more than $1.7 million with its own funds and those of its other activities, (2) pledged up to $100,000 in project funds as security for its line of credit, (3) used project funds totaling more than $407,000 to pay its line of credit liability, (4) managed the project without a HUD-approved management certification and management entity profile, and (5) did not ensure that all tenant security deposit funds were deposited into the project’s security deposit bank account.  These conditions occurred because the owner (1) lacked an understanding of the terms of the regulatory agreement and HUD’s requirements, (2) had poor record-keeping practices, and (3) did not have controls to ensure that the project was managed in accordance with the regulatory agreement and HUD requirements.  As a result, disbursements totaling more than $2.1 million were unsupported, and up to $100,000 in project funds could be put to better use.

We recommend that HUD require the owner to (1) provide documentation to show that disbursements totaling more than $2.1 million were reasonable and necessary expenses for the operation of the project or repay the project from non-project funds for any amount it cannot support, (2) segregate project bank accounts from the owner’s bank accounts, (3) remove project bank accounts as security for its line of credit, (4) submit a management certification and other required documentation to HUD for review and approval, and (5) develop and implement policies and procedures to ensure that the project funds are used in accordance with its regulatory agreement and HUD requirements.