We audited Schwenckfeld Manor because it was a high-risk multifamily project on our multifamily risk assessment for projects within our region and we had never audited it. Our audit objectives were to determine whether the project owner (1) disbursed project funds for costs that were reasonable, necessary, and supported for the operation and maintenance of the project; and (2) properly disclosed identity-of-interest relationships.
The owner of Schwenckfeld Manor (1) may not have disbursed project funds for costs that were supported as reasonable and necessary for the operation and maintenance of the project, and (2) did not disclose its identity-of-interest relationships to the U.S. Department of Housing and Urban Development (HUD). Specifically, the owner (1) used project funds to pay up to nearly $2.1 million in costs that may have been for its parent company’s benefit and the benefit of five other non-HUD housing entities the parent company owned, and (2) did not disclose to HUD its related parties as identity-of-interest entities on its management certification and paid nearly $403,000 in management fees to its parent company instead of the approved management agent for the project.
We recommend that HUD require the owner to (1) provide documentation to show that payroll and other direct costs totaling nearly $2.1 million were reasonable and necessary expenses for the operation of the project or repay the project from nonproject funds for any amount that it cannot support; (2) develop and implement controls to ensure that the project complies with the regulatory agreement and applicable HUD requirements; (3) submit a project owner’s and management agent’s certification for identity-of-interest agents and other required documentation for review and approval; and (4) request retroactive approval of the fees paid to the identity-of-interest entity totaling nearly $403,000 and if HUD does not approve the management agent retroactively, repay that amount or the amount not approved by HUD. We also recommend that the Director of HUD’s Departmental Enforcement Center pursue civil money penalties and administrative sanctions, as appropriate, against the owner and its parent company and their principals for their part in the violations cited in this report.