| ID | Status | Date | Public/Private | Industry | AHACPA Contact |
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| #14974 | Closed | public | Multifamily | Les Sparks |
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Les, We have been engaged to audit a project that operates under a HUD regulatory agreement for Multifamily Housing Projects under Section 223(f) of the National Housing Act. The entity received two consecutive failing REAC Inspection scores. The entity then received a pre-penalty notice from HUD stating that HUD viewed the failed inspections of the Company of 55c on 1/30/2020 and 38c on 10/25/2018 as evidence that the Project owner had failed to maintain the Project in accordance with the Regulatory Agreement. The client contested this matter, submitting documentation to indicate they had been properly maintaining the property. The matter was settled with HUD with a formal settlement agreement in August 2020. Does the receipt of the two consecutive failing scores require listing a finding on the Schedule of Findings and Questioned Costs? Again, this entity only has a HUD-insured mortgage and does not receive any other form of assistance from HUD. Thank you for your time. Let me know if you need any further documentation or clarification to respond to our question. |
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From Les Sparks: Such scores do not automatically equate to a finding in your report. It does, however get reported in the Schedule of Prior Audit Findings. Further, it affect your risk assessment. Based on that risk assessment you might increase your procedures related to inspections/maintenance. If as a result of those procedures, note issues, that would result in a finding. Findings are the results of detecting noncompliance as a result of our own testing. We do not write findings as a result of others testing. For this reason HUD requires us to report those issues in the schedule of prior audit findings. Now, one items that is a result of those scores is that distributions cannot be taken until the project has corrected those scores to HUD’s satisfaction. That is a specific result of those scores per the Regulatory Agreement. Here is that guidance. 14. DISTRIBUTIONS. Borrower shall not make or take, or receive and retain, nor allow any Affiliate or Principal to receive or retain any Distribution of assets or any income of any kind of the Project, except from Surplus Cash or in accordance with Program Obligations. Distributions are governed by the following conditions: a. No Distribution shall be made or taken from borrowed funds. Distributions shall not be taken prior to the completion of the Project. Distributions shall not be taken after HUD has given Notice to Borrower of a Violation under this Agreement or an Event of Default occurs under the Note or Security Instrument. Distributions shall not be taken when a Project is under a forbearance agreement. b. No Distribution shall be made or taken when either (i) necessary services (utilities, trash removal, security, lawn service or any other services that Borrower is required to provide) are not being provided on a regular basis, which failure Borrower should have known about in the exercise of due care; (ii) notices of physical repairs or deficiencies (including, but not limited to, building code violations) by Governmental Authorities and/or by HUD have been issued and remain unresolved to the satisfaction of the issuing public body; or (iii) Borrower has been notified by HUD, Lender or a Governmental Authority that physical repairs and/or deficiencies exist and Borrower has not corrected or cured the identified items to HUD’s satisfaction. Upon completion of the repairs, HUD may permit a Distribution to be placed in an escrow account until a subsequent inspection has been completed by HUD. If the Project passes a subsequent inspection, HUD may then authorize release of the funds in the escrow account to Borrower. HUD may also permit Distributions when there are minor or contested local code violations on a case-by-case basis. |