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We completed a review of the Retreat at Santa Rita Springs (community), a Federal Housing Administration (FHA)-insured multifamily project under Section 231 of the National Housing Act. Our audit was in response to a request for audit from Representative Gabrielle Giffords of the 8th District of Arizona. The owner defaulted on the $29.9 million U.S. Department of Housing and Urban Development (HUD)-insured mortgage in November 2009, the month after final endorsement. Our objective was to determine whether the operations of the community complied with applicable HUD rules and regulations and other Federal requirements. We found that the community did not comply with applicable Federal rules and regulations and its regulatory agreement with HUD in the operation of the project. This included (1) resident security deposits converted to community fees and/or commingled with operating funds, and (2) prohibited management costs and erroneous and duplicative billings charged to the project. As a result, we recommend that the Director of HUD’s San Francisco Office of Multifamily Housing require the owner to refund former residents and prospective residents $11,000 in security deposits, and require the owner to reimburse the project $19,216 for ineligible and unsupported expenses.

Although funds were owed to the residents and the community, these violations were not material enough to be the primary cause of the project’s mortgage default. We plan to review the mortgage loan underwriting and approval as a separate assignment.