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CHAPTER SIX: PROGRAM MONITORING

SECTION 1: INTRODUCTION

6.1 GENERAL

This chapter provides basic guidance on monitoring management agent

activities to ensure that program requirements and procedures are

followed. It specifically focuses on how to apply HUD\'s monitoring

strategy in reviewing management agent performance. Where specific

instructions for carrying out individual monitoring activities are

provided in other HUD Handbooks, these documents are referenced.

6.2 OVERVIEW OF MONITORING ACTIVITIES

a.Types of Monitoring Activities. There are three basic types of

monitoring activities.

(1)Physical Inspections. To assure that properties provide

decent, safe, and sanitary housing, HUD regularly inspects

the physical condition of all HUD-insured and HUD-assisted

projects. Section 2 of this chapter discusses the use of

physical inspections to monitor property conditions.

(2)Management Reviews. HUD also conducts on-site visits to

review the management of HUD-insured and HUD-assisted

properties. Key management areas, such as occupancy

practices and on-site recordkeeping, are examined to ensure

that program requirements and procedures are properly

followed. Section 3 of this chapter describes the use of

management reviews in more detail.

(3)Financial Reviews. The financial management of HUD projects

is also regularly monitored. HUD staff review financial

statements and other documents to ensure that project funds

are handled properly. Financial reviews are discussed in

Section 4 of this chapter.

In addition to these regular monitoring activities, HUD will

check that owners/agents comply with all elements of rental

assistance contracts (e.g., HAP Contract) or Regulatory

Agreements governing the property that are not included as part

of the above reviews. These activities are outlined in Section 5

of this chapter.

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b.Applicability. The responsibility for carrying out individual

monitoring activities varies by activity and the type of project.

The responsibility for performing each type of review is

discussed in the sections below as part of the description of

each activity.

6.3 MONITORING GOALS

Broadly speaking, HUD\'s monitoring goal is to ensure the success of

its statutory mission to provide decent, safe, and sanitary housing.

Management agents and owners, as HUD\'s partners in this effort, each

have responsibilities in fulfilling this mission.

More narrowly, HUD seeks to protect the Department\'s interest as the

insurer of project mortgages and as the regulator of millions of

dollars in physical assets. HUD has a Congressional mandate to

oversee the provision of physically and fiscally sound housing, and to

protect the integrity of the resources that underwrite its production.

Last, HUD has a statutory obligation to monitor compliance with

housing program requirements as set out in rental assistance contracts

and Regulatory Agreements. Fulfillment of this goal requires HUD to

directly oversee owners\' and management agents\' activities through

periodic management, project, and documentation reviews. Within this

review process, HUD seeks to work objectively and in a professional

manner to identify strengths and weaknesses in project management, to

communicate findings openly with the owner and management agent, and

to find mutually acceptable solutions to management problems.

Monitoring and enforcing program compliance is a responsibility that

HUD takes very seriously. HUD also recognizes that this

responsibility is a component of its overall partnership with owners

and management agents in providing affordable housing. In carrying

out its monitoring activities, HUD will simply seek to assure that

owners and agents are fulfilling their responsibilities and at the

same time will respect the contribution of its partners.

6.4 HUD\'S MONITORING STRATEGY

To guide its monitoring activities, HUD uses a strategy known as

accountability monitoring. Under this strategy, HUD focuses the

majority of it\'s monitoring efforts on program participants who pose

the greatest risk to HUD\'s mission.

6.5 IMPLEMENTING ACCOUNTABILITY MONITORING

a.Monitoring Based on Risk. Decisions regarding monitoring reviews

and resources are made using a risk management process which

determines both

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the participants and areas to be reviewed based on the risk posed

to HUD\'s objectives. Under this approach, the frequency and

intensiveness of monitoring reviews increases as the risk posed

by a project or participant increase.

b.Monitoring Schedule. Schedules for monitoring activities will be

based on an assessment of the risks posed by projects within a

jurisdiction. A risk rating system has been developed to guide

the scheduling of monitoring activities. The rating system to be

used to schedule physical inspections (see paragraph 6.12) is

also used in scheduling other monitoring reviews.

(1)In developing their monitoring schedules, Loan/Asset

Management staff should schedule projects that fall near the

top of these ratings earliest in the schedule and consider

the potential need for follow-up reviews.

(2)Projects that pose lower risks should be scheduled after

higher risk properties.

c.Interrelationship of Monitoring Reviews. Although each type of

review is discussed separately, Loan/Asset Management staff

should conduct each review with an eye toward overall

performance. For example:

omany contract monitoring requirements directly overlap with

the financial review and management review requirements; and

omanagement reviews contain most of the steps required to

complete a financial review.

Loan/Asset Management staff not only need to complete an

individual monitoring activity, but also recognize the

implications of a finding in a particular area for other

functional areas, as well as for the project overall. The

following guidelines apply in all cases:

(1)Risk Assessment. After identifying the goal of their review

procedures, Loan/Asset Management staff should use their

knowledge of project conditions to identify and focus their

attention on higher-risk items. It is more efficient to

concentrate on areas where problems have been identified,

even at the risk of neglecting lower-risk areas, than to

spend equal time on all issues and not adequately cover the

highest-risk issues.

(2)Trend Analysis. Individual findings should be viewed in the

context of the project as a whole. Loan/Asset Management

staff should try to look \"behind\" an individual finding to

see if its cause lies elsewhere or is having a larger

effect. For example, if cash management controls are weak,

the problem may lie in the management agent\'s training

policies.

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Or, if a project is in poor physical condition, a reviewer

should consider whether its Replacement Reserve Account is

managed properly.

(3)Portfolio Analysis. Loan/Asset Management staff should

evaluate a management agent\'s performance by looking at all

projects that the agent manages, not simply at the project

currently under review. A pattern of findings at other

projects might suggest that a control weakness exists in the

project currently under review.

d.Adapting to Changing Conditions. Monitoring schedules should be

flexible to allow for periodic revisions based on changes in

monitoring objectives and available resources. For example, the

discovery of a series of unanticipated compliance problems during

the course of monitoring reviews may require Loan/Asset

Management staff to revise the monitoring schedule to account for

the presence of a previously unknown problem.

6.6 WHEN TO PERFORM NON-SCHEDULED REVIEWS

While individual monitoring techniques can follow different schedules,

there are situations where one or more reviews is immediately

appropriate. Loan/Asset Management staff should recognize that they

can and should use any of the monitoring activities discussed in

paragraph 6.2 when the need arises. The following paragraph outlines

situations in which each monitoring technique is appropriate. HUD

Handbook 4350.1 provides more detailed guidelines for using each of

these techniques.

a.Physical Inspections. Physical inspections should be performed

as soon as possible once the Loan/Asset Management staff

determine that a project is troubled or potentially troubled (see

Exhibit 6-1). Such projects are characterized by:

(1)Physical deterioration or specific substandard conditions

identified by a legitimate, representative resident

organization;

(2)Evidence of drug use, drug sales, or other criminal

activities;

(3)Financial stress; and/or

(4)A high level of significant resident complaints.

The Loan/Asset Management staff should also inspect the project

if it determines that the mortgagee inspection is inadequate or

if the project requests additional HUD financial assistance.

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b.Management Reviews. When physical inspections are required for

any of the reasons listed in paragraph (a), a management review

should also be performed. Loan/Asset Management staff may also

perform a management review when a physical inspection is not

necessary, but there is evidence of:

(1)Poor accounting, budgeting, and/or cost controls;

(2)Failure to submit required periodic reports, including

vouchers, in a complete and timely manner;

(3)Low rent collection or high accounts receivables;

(4)Complaints about or evidence of poor procedures for resident

screening and selection;

(5)High vacancy rates or turnover;

(6)Specific and verifiable evidence of project mismanagement or

harassment of residents or resident associations reported by

petition from a legitimate resident association;

(7)Other staffing/supervisory failures; and/or

(8)A high level of significant resident complaints.

c.Financial Reviews. Financial reviews should be performed when

the project management does not submit fiscal reports in a timely

manner. For example, a financial review is appropriate when

there are frequent requests for Section 8 special claims or

Reserve for Replacement withdrawals. The Loan/Asset Management

staff should also conduct a financial review if rent collections

are below expected levels and accounts receivables are

excessively high.

d.Resident File Reviews. Resident file reviews are conducted as

part of an on-site review to verify that the project manager is

complying with HUD resident screening selection, and other

occupancy policies. If remote monitoring suggests occupancy

problems at any project that the agent manages, Loan/Asset

Management staff should review a sample of files to assess the

extent of the problem and determine appropriate corrective

actions.

6.7 MONITORING LOBBYING ACTIVITIES

a.Pursuant to Section 319 of Public Law 101-121, all mortgagees,

mortgagors, and their agents participating in any multifamily,

assisted housing, or coinsurance program under Title II of the

National Housing Act are required to submit certifications and

disclosures regarding their lobbying activities.

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(1)The certification states that the recipient of

federally-appropriated funds does not, has not, and will not

use those funds for lobbying purposes.

(2)The disclosure form (Standard Form-LLL) reports any payments

made or agreement to make any payment from funds other than

federally-appropriated funds for the purpose of influencing

or attempting to influence any Executive of Legislative

personnel in connection with the award of HUD contracts,

grants, cooperative agreements, loans, or other form of

assistance.

b.Applicability. The certification and disclosure requirements are

triggered when contracts or grants exceeding \$100,000 and loans

or commitments exceeding \$150,000 are made. However, any attempt

to influence federal agency actions through the use of

federally-appropriated funds to this end is prohibited and such

actions which come to the attention of HUD staff must be reported

to the Office of Ethics.

c.Submission Requirements

(1)The Area Office is required to provide each applicant for an

insured/coinsured mortgage commitment or for other federal

assistance (e.g., contract, grant, loan, etc.) with the

standard certification and disclosure language, and a

Standard Form-LLL to report lobbying activities.

(2)When applicable, sponsors, mortgagors, and mortgagees must

submit certifications and disclosure forms in conjunction

with the following documents:

(a)Mortgage insurance application at any stage \--

HUD-92013, 92013-Hosp, 92013-NHICF, or HUD-93201, as

appropriate;

(b)Cost Certification forms HUD-92330 or FHA-2205A;

(c)Request for Final Endorsement of Credit Instrument \--

FHA-2023;

(d)Applications for Flexible Subsidy assistance;

(e)Requests for Loan Management Set-Aside assistance; and

(f)Applications for drug grants and other forms of

competitive awards.

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d.HUD Processing

(1)The Loan/Asset Management staff will review each

certification and disclosure for completeness prior to

issuing any commitment or award of insurance or financial

assistance

(2)The Area Office will send the original of any disclosure

form (Standard Form-LLL) immediately to the Office of Ethics

in Headquarters and will retain a copy in the application,

project, or program file.

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SECTION 2: PHYSICAL INSPECTIONS

6.8 HUD\'S PHYSICAL INSPECTION PROGRAM

Well-maintained projects are central to HUD\'s mission of providing

decent, safe, and sanitary housing. HUD will not accept deteriorated

conditions in housing under its jurisdiction.

a.Purposes. A comprehensive inspection program:

(1)Verifies the quality of housing provided to residents and

enables Loan/Asset Management staff to identify and correct

problems in project conditions and maintenance.

(2)Serves as a control for the quality of mortgagees\'

inspections of projects.

(3)Helps to safeguard the integrity of the FHA Insurance Fund

for HUD-insured and HUD-held projects.

b.Annual Inspections. The Loan/Asset Management staff is

responsible for ensuring that all multifamily projects under

HUD\'s jurisdiction are inspected yearly by HUD, a designated

Contract Administrator, a HUD-selected contractor, or by the

mortgagee. Loan/Asset Management staff should follow the

procedures set forth in Chapter 6 of HUD Handbook 4350.1 for

performing inspections of insured and non-insured projects where

HUD is the Contract Administrator.

c.Additional Funding or Funding Changes. Before approving

additional HUD funding or changes to HUD funding arrangements, a

physical inspection must be conducted if the most recent

inspection is more than 12 months old. Examples of additional

funding or funding changes include:

(1)receiving additional LMSA units;

(2)awarding Flexible Subsidy funding;

(3)awarding Service Coordinator funding; or

(4)conversion of a Rent Supplement contract to a Section 8

contract.

NOTE: Section 8 budget authority amendments are not considered

additional HUD funding

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6.9 MORTGAGEE AND CONTRACT ADMINISTRATOR INSPECTIONS

a.Mortgagee Inspections. The Loan/Asset Management staff must

ensure that mortgagees comply with the procedures outlined in the

Mortgagee Monitoring Handbook (HUD Handbook 4350.4), which sets

forth the requirements for mortgagees to complete physical

inspections.

(1)Loan/Asset Management staff must establish a tracking and

quality control system for mortgagee physical inspections.

(2)Loan/Asset Management staff must inspect a portion of the

portfolio sufficient to evaluate the reliability of

mortgagee physical inspections and to follow up where a

mortgagee inspection or other indicator identifies a project

as troubled or potentially troubled.

b.Contract Administrator Inspections. For projects with an entity

other than HUD serving as the contract administrator, Loan/Asset

Management staff must ensure that the administrator is performing

physical inspections. Loan/Asset Management staff must also

ensure that the physical integrity of the property is being

maintained as required in the applicable rental assistance

contract and under HUD Handbook 4350.5, Subsidy Contract

Administration.

(1)Loan/Asset Management staff must establish procedures for

ensuring that contract administrators are conducting

physical inspections as required.

(2)Loan/Asset Management staff must inspect a portion of the

portfolio sufficient to evaluate the reliability of contract

administrator physical inspections and to follow up where

such inspections or other indicators identify a project as

troubled or potentially troubled.

For more detailed instruction, see HUD Handbook 4350.5.

6.10 USE OF CONTRACTORS

Area Offices must not use contractors to conduct Physical Inspections

for projects with HUD-insured and HUD-held mortgages which are

troubled projects. Area Offices may use contractors to inspect only

the remaining portion of the insured and HUD-held portfolio which HUD

staff did not inspect during the year.

a.Contracting and Payment. Contractors will be paid with fee money

from the FHA Insurance Fund.

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b.Resource Utilization Strategy. Area Offices should include in

their resource utilization strategy the staff required to oversee

and review contract physical inspections.

6.11 INSPECTION STANDARDS

a.Housing Quality Standards. At a minimum, all assisted units must

comply with Section 8 Housing Quality Standards (HQS) and/or

local housing codes, whichever are more stringent. However,

inspectors should expect management agents to maintain the

projects at physical conditions above these minimum maintenance

standards.

b.Serious vs. Non-serious Deficiencies. The Loan/Asset Management

staff must develop criteria for classifying physical deficiencies

as serious or non-serious. Criteria may include:

(1)Whether the repair need was judged as \"immediate\";

(2)Whether the deficiency poses a health and/or safety threat

to residents and/or project staff;

(3)The cost to repair the deficiency; and

(4)Any other criteria the Area Office reasonably deems

appropriate.

Serious deficiencies will serve as the basis for the Area Office

Manager\'s determination of technical default. See paragraph

6.19.

6.12 PRIORITIES FOR SCHEDULING PHYSICAL INSPECTIONS

a.The Loan/Asset Management staff should use the priorities

described in Figure 6-1 to schedule physical inspections.

Exhibit 6-1 at the end of this chapter provides additional

guidance on indicators of \"troubled\" or \"potentially troubled\"

status.

b.Within each priority area, identify and rank projects in the

worst condition. These projects should be targeted for physical

inspection first, followed by the remaining projects within that

category. Sources of information include: mortgagee

inspections, management review reports, previous physical

inspection reports, and resident complaints.

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=======================================================

FIGURE 6-1

PRIORITIES FOR HUD INSPECTIONS

1\. Insured assisted troubled

2\. HUD-held assisted troubled

3\. Non-insured assisted troubled

4\. Insured unassisted troubled

5\. HUD-held unassisted troubled

6\. Insured assisted potentially troubled

7\. HUD-held assisted potentially troubled

8\. Non-insured assisted potentially troubled

9\. Insured unassisted potentially troubled

10\. HUD-held unassisted potentially troubled

11\. Insured assisted

12\. HUD-held assisted

13\. Non-insured assisted

14\. Insured unassisted

15\. HUD-held unassisted

=======================================================

6.13 CONDUCTING THE INSPECTION

a.Scope of Inspection. Each physical inspection must include:

(1)A physical review of the inside and outside of projects\'

housing units, buildings, grounds, commercial space, and

common areas for condition and maintenance.

(2)A visual check of all common areas (equipment rooms,

laundries, storage rooms, etc.).

(3)A review of at least 10 percent of the occupied units and

all vacant units. The Director of Multifamily Housing may

authorize or require a lesser or greater number of units to

be inspected, based on the number of units in the project,

to establish a reasonable sample size.

b.Identifying Deficiencies. For any identified deficiency, HUD

should work with owners/agents to estimate the cost of repairs in

order to provide as much useful information as possible to the

owner and/or management agent.

(1)Loan/Asset Management staff should conduct inspections of

troubled projects with the assistance of either the loan

servicer, a construction analyst, or an engineer who is

capable of determining the cost of the required repairs.

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(2)If this expertise is not readily available to the

Multifamily Housing staff, the Director of Multifamily

Housing and the Director of Housing shall coordinate to

provide either in-house resources or a third-party

contractor to produce the needed cost estimate.

c.Conducting Close-out Meeting

(1)The owner and manager must be notified of findings upon the

conclusion of the inspection so they can begin to address

the problems.

(2)Inspectors should stress that areas of concern identified

are not necessarily all-inclusive and that the final report

could include additional findings of deficiency based on the

analysis of the overall inspection.

6.14 DOCUMENTATION OF THE PHYSICAL INSPECTION AND FINDINGS

a.Format. The prescribed format for the documentation is the Form

HUD-9822, \"Physical Inspection Report,\" included in Appendix 5.

b.Contents. The written report of the physical inspection should

document:

(1)Detailed deficiency explanations, including locations of the

deficiencies and classification as \"serious\" or

\"non-serious\";

(2)Cost estimates for needed repairs;

(3)Recommended or required actions and time frames; and

(4)Overall conclusions on the physical condition of the

project.

c.Use of Photographs. Where practicable, inspectors should include

photographs with the Form HUD-9822 documentation to describe both

good and bad conditions. Any photographs used in the report

should be cross-referenced to their location in the report.

d.Report Conclusion. Each report must be signed, dated, and must

specify the recommended corrective actions specified by the

inspector. The report to the owner may summarize the

deficiencies, but Loan/Asset Management staff must retain

detailed descriptions of deficiencies and locations in the

project files for follow-up review.

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e.Time for Completion

(1)If HUD performs the inspection, HUD staff will prepare the

report once the field work is complete.

(2)If a contractor performs the inspection, the contractor must

deliver the report to the Area Office within the time frame

specified in its contract with HUD.

6.15 AREA OFFICE COUNSEL REVIEW

When inspection results reveal serious deficiencies, Loan/Asset

Management staff should submit the inspection documentation to Area

Office Counsel to determine whether the deficiency represents a

\"waste\" of assets or whether there has been a failure to maintain the

property in good repair. Area Office Counsel should provide the

program office with guidance regarding which documentation should be

retained.

See Handbook 4350.1 Chapter 6 for further instruction the on Area

Office Counsel review.

6.16 NOTIFICATION OF THE OWNER/MANAGEMENT AGENT

a.The Loan/Asset Management staff should send a completed physical

inspection report to the owner upon completion of the report by

HUD staff or contractors. Loan/Asset Management staff must also

send a copy of the report to the management agent and/or other

contacts identified by the owner.

b.The Area Office is not required to send any photographs with the

report unless such pictures are specifically referenced in the

report.

6.17 CORRECTIVE ACTION PLANS

Once HUD has notified the owner and management agent of the report\'s

findings, the owner/agent is expected to prepare a corrective action

plan to address any deficiencies. The Area Office shall not approve

the corrective action plan unless it provides for the final resolution

of all deficiencies.

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a.Time Frames for Owner Response

(1)When serious deficiencies are identified in the inspection

report, owners must:

(a)Meet with Loan/Asset Management staff within ten (10)

working days from the date of issuance of the report to

discuss the deficiencies identified during the

inspection, unless an alternate schedule is agreed upon

by HUD staff and the owner.

(b)At this meeting, provide a written report on all

actions taken since the report was issued to correct

the deficiencies noted.

(c)Provide a commitment within 20 working days of the

meeting outlining how and when the remaining

deficiencies will be corrected and provide a written

plan for addressing these deficiencies within a time

frame agreed upon by the Area Office. The owner may

use the Management Improvement and Operating (MIO) Plan

format, and must include a budget identifying the

source of funds used to implement corrective actions.

See HUD Handbook 4355.1 REV-1, Flexible Subsidy, for a

description of the MIO Plan.

(2)For deficiencies identified as non-serious, owners are not

required to meet with the Loan/Asset Management staff.

However, they must submit a plan to resolve those

deficiencies within 30 calendar days of the date of the

receipt of the report. Owners will be subject to all

monitoring and enforcement actions outlined in this

Handbook, and in accordance with HUD Handbook 4350.1,

Chapter 6.

b.Required Contents

(1)Corrective action plans for insured projects, including

those submitted for non-serious deficiencies, must be

appropriately formulated and organized so that they can be

monitored in the Area Offices.

(2)The action plan must be well-considered and specific. It

must include timetables for deficiency resolution and must

identify sources of funds necessary to bring the project to

an acceptable condition.

(a)If the project\'s cash flow is not sufficient, the owner

should provide a MIO plan covering how he/she proposes

to correct the problem or what savings he/she suggests.

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(b)The owner must make all reasonable efforts to secure

additional funding needed to implement corrective

actions.

(3)Where an owner requests increased HUD funding to pay for all

or part of the required repairs, the owner must present a

certification and supportive documentation that he/she has

made efforts to secure funding from non-HUD funding sources.

c.Area Office Counsel Review. When serious deficiencies exist,

Area Office Counsel must review the corrective action plan prior

to Loan/Asset Management staff approval. Area Office Counsel

will advise program staff on any legal issues raised within the

plans.

d.Corrective Action Plans for HUD-Held Projects will be included in

and made part of a workout plan,

6.18 MONITORING CORRECTIVE ACTION

a.Use of Monitoring Systems. If a monitoring system is not in

place, Loan/Asset Management staff in each Area Office will

develop a system to monitor planned and completed corrections.

The Early Warning System, when implemented, may aid in the

tracking of corrective plans.

b.Follow-Up Inspections

(1)Where serious deficiencies were identified during the

physical inspection, Loan/Asset Management staff shall

schedule a follow-up inspection within 30 days or less of

the meeting to assure satisfactory completion of all

corrections the owner indicates are completed.

(2)Follow-up inspections on completed tasks may be performed by

permanent staff, or by contract inspectors if the project is

HUD-insured or HUD-held.

(3)All follow-up inspections must be documented either through

a memorandum to the file or on a Form HUD-9822. Documents

must be clearly marked to show that the inspection is a

follow-up.

b.Addressing Noncompliance. Loan/Asset Management staff shall

notify the owner in the case of noncompliance with the plan.

(1)The owner must take remedial action immediately upon receipt

of notification and must provide an explanation of any

noncompliance. In addition, the owner must develop and

provide to the Area Office proposed revisions to the

corrective action plan.

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(2)The Loan/Asset Management staff will analyze any suggested

modifications to determine their feasibility and their

effect on the continued viability of the plan.

(3)If the Loan/Asset Management staff determine that the owner

and/or management agent is not making a good-faith effort to

bring the project into acceptable condition, or if the plan,

as revised, is no longer feasible, then they may impose

sanctions as described in Chapter 7 of this Handbook and, if

applicable, in accordance with Chapter 8, HUD Handbook

4350.1.

6.19 TECHNICAL DEFAULTS

If the owner does not remedy noncompliance with the corrective action

plan and the physical condition of the property has fallen to an

unsatisfactory level, Loan/Asset Management staff must determine

whether to declare default under the clauses of the Regulatory

Agreement or under the waste provision of the mortgage.

a.Recommendation of Default. If the Director of Multifamily

Housing determines that a declaration of default is appropriate,

the Director of Housing has the authority to approve or

disapprove the recommendation.

b.Notification. If the Director of Housing accepts the Director of

Multifamily Housing\'s recommendation, the Loan/Asset Management

staff must notify the owner of the intended action by certified

mail with return receipt requested, and must send a copy of the

notification to the management agent.

(1)The notification must be reviewed by Area Office Counsel and

signed by the Director of Housing before being sent to the

owner. Area Office Counsel must review and concur on all

notices of intent and all subsequent correspondence to the

owner.

(2)The Loan/Asset Management staff must inform owners in the

notification that they will be given thirty calendar days to

show sufficient cause why the default should not be

declared, or otherwise to provide a new or revised

corrective action plan, or to carry out the previously

approved plan.

c.Extension of Notice. The Director of Housing may extend the time

frame for declaration of default for specific cause on a

case-by-case basis. The Director must document such cause for

the record.

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12/946-16

4381.5 REV-2

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d.Declaration of Default. If the owner does not satisfactorily

show cause or comply with the Director of Housing\'s requests

regarding corrective actions within thirty days or the approved

time frame, the Area Office Counsel shall proceed with a written

request to the mortgagee to accelerate the principal balance of

the mortgage.

(1)For declarations of default under the waste provision of the

mortgage, the request shall require that, under the

authority provided the Secretary contained in 24 CFR

207.257, the mortgagee declare a Covenant Default and

accelerate the principal balance of the mortgage.

(2)For projects with HUD-held mortgages, the Director of

Housing Management must request the Office of Mortgage

Insurance Accounting and Servicing (MIAS) to accelerate the

principal balance of the mortgage and to declare the balance

immediately due and payable.

(3)If the housing condition is below acceptable levels, but the

documentation or the problem does not support a declaration

of default based on the Regulatory Agreement or the waste

provision of the mortgage, HUD should determine the

advisability of initiating immediate litigation against the

owner. Civil penalties should also be implemented where

appropriate to ensure compliance with the corrective action

plan.

e.Foreclosure and Mortgagee-in-Possession (MIP) Status.

(1)After the mortgagee has prepared the election to assign the

mortgage, or MIAS has completed the necessary steps for

HUD-held mortgages, the Area Office Counsel, upon

instruction from the Director of Housing, should take action

to obtain either voluntary or involuntary

mortgagee-in-possession status.

(2)The Area Office must request or begin foreclosure

concurrently with the commencement of MIP status. This is

imperative and must occur in all cases.

(3)When the Department is awarded MIP status, the Director of

Housing Management should authorize the management agent to

begin making the needed repairs to restore the project to

acceptable living standards as quickly as possible. The

repairs should be paid for out of project funds and the

Insurance Fund.

Refer to Handbook 4315.1, Multifamily Property Disposition \--

Management, for further instruction on foreclosure and MIP

responsibilities.

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6.20 NON-ROUTINE INSPECTIONS

a.Inspections for Funding Changes. In addition to

regularly-scheduled inspections, Loan/Asset Management staff must

ensure that a physical inspection has been carried out prior to

approving actions that entail funding changes, such as additional

subsidy approvals and workouts. Loan/Asset Management staff may

waive this requirement if:

(1)A physical inspection performed in compliance with this

Handbook has been completed within the past year; or

(2)Loan/Asset Management staff determine that project

operations will be imperiled if approval of the requested

assistance is withheld.

b.Ad-hoc Reviews. If time permits, HUD staff on official travel

should drive by any HUD-assisted and insured projects located

nearby their travel route or destination. Area Office staff

should observe the physical condition of the project with a quick

walk-through or drive-by inspection and assess whether the

project requires further inspection.

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12/946-18

4381.5 REV-2

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SECTION 3: MANAGEMENT REVIEWS

6.21 PURPOSE OF MANAGEMENT REVIEWS

a.Compliance. Management reviews are another integral step for

ensuring compliance with HUD program requirements. Management

reviews allow HUD to determine whether owners and management

agents are providing the services which HUD requires under its

Regulatory Agreements, Housing Assistance Payments Contracts,

mortgages, and general and industry standards.

b.Communication. Effective management of HUD-insured and

HUD-assisted multifamily properties requires adequate

communication between owners, managers, and residents.

Management reviews serve as HUD\'s primary means of assessing the

communication between owners, management agents, and residents

and resident organizations. Chapter Four of this Handbook

provides more detailed guidance on communication between owners,

management agents, and residents.

6.22 TYPES OF MANAGEMENT REVIEWS

There are two types of management reviews.

a.Comprehensive Management Reviews. A comprehensive review covers

all aspects of property operations and addresses all questions on

the HUD-9834 \"Management Review of Multifamily Projects.\"

Exceptions to the comprehensive review format may be granted in

writing by the Director of Housing Management on a case-by-case

basis.

b.Limited Management Reviews. Limited management reviews examine

only the key areas of project operations. These reviews use 17

of the questions on the HUD-9834, in addition to all questions

addressing the suspected or known problem area(s).

Refer to HUD Handbook 4350.1, Chapter Six for a full discussion of

comprehensive vs. limited reviews.

6.23 DETERMINING THE SCOPE OF REVIEW

a.Loan/Asset Management staff must conduct comprehensive reviews

for all physically or fiscally troubled projects.

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6-1912/94

4381.5 REV-2

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b.Loan/Asset Management staff may choose to perform limited reviews

for some projects. The Director of Multifamily Housing will

determine whether the scope may be limited or comprehensive.

Chapter 6 of HUD Handbook 4350.1 outlines the appropriate

circumstances in which to use limited reviews.

6.24 SCHEDULING MANAGEMENT REVIEWS

a.The Area Office should use the same priority standards shown in

Figure 6-1 to schedule management reviews. Loan/Asset Management

staff should ensure that assisted projects which are physically

or fiscally troubled receive first priority.

b.In addition to the normal review plan, Loan/Asset Management

staff must arrange to review projects at which there are serious

management problems or significant resident complaints.

c.When possible, Loan/Asset Management staff should schedule

management reviews to coincide with the project physical

inspection to minimize the impact on project operations and to

use HUD resources most efficiently.

6.25 STEPS FOR PERFORMING THE MANAGEMENT REVIEW

a.Preparation. Loan/Asset Management staff should review the

records, listed below, for each project scheduled for review to

determine whether the review is warranted and, if so, its extent.

Staff should keep in mind, however, that these records alone may

not fully indicate the project\'s needs and condition.

(1)The priority status assigned to the project.

(2)Any records of the agent\'s performance at other projects.

(3)Quality, scope, and results of previous HUD on-site reviews

(management or physical) and mortgagee physical inspection

reports.

(4)Results from FHEO reviews.

(5)Financial condition reports, including the Independent

Public Accountant\'s report.

(6)Early Warning System, MIPS, and TRACS printouts.

(7)Results of Occupancy Specialist desk reviews of subsidized

project resident certifications and vouchers.

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12/946-20

4381.5 REV-2

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(8)Resident comments and complaints.

(9)Local police reports, if available.

b.Documentation

(1)Format. The review will be documented on form HUD-9834,

\"Management Review of Multifamily Projects.\" See Appendix

4\.

(2)Contents.

(a)The report will summarize all identified deficiencies,

recommended or required corrective actions and time

frames, and conclusions. Area Office records shall

contain a detailed description of any deficiency.

(b)If the report refers to materials that are not

physically attached to it (such as annual financial

statements) it should clearly identify the location of

those materials.

c.Close-out Meeting. The owner and/or manager should be notified

of findings upon the conclusion of the review so they can begin

to address the problems. The reviewers should stress at the

meeting that the areas of concern identified are not necessarily

all-inclusive and that the final report could include additional

findings of deficiency based on the analysis of the overall

review.

6.26 FAIR HOUSING AND EQUAL OPPORTUNITY CONSIDERATIONS

a.Referrals to FHEO. During management reviews, Loan/Asset

Management staff examine resident records together with the

agent\'s resident screening and selection procedures for

compliance with the occupancy requirements established in HUD

Handbook 4350.3. If concerns about an owner/agent\'s compliance

with Fair Housing requirements arise during such reviews

Loan/Asset Management staff should notify FHEO of these concerns.

b.FHEO Reviews. FHEO staff conduct separate compliance reviews

based upon Loan/Asset Management referrals or the results of FHEO

risk assessments concerning the following areas.

(1)Management and administration;

(2)Equal employment opportunity and training;

(3)Outreach and affirmative marketing;

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6-2112/94

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(4)Occupancy reviews and resident data;

(5)Maintenance and facility management;

(6)The provision of services to persons with disabilities; and

(7)Procurement practices and the use of minority- and

women-owned businesses.

For additional information, see FHEO Notice 92-1, Implementing

FHEO Accountability Monitoring/Risk Assessment.

6.27 TIMEFRAME FOR COMPLETING REPORT

a.If HUD performs the management review, it will issue the report

upon completion of the field work.

b.If a contractor performs the management review, the contractor

must deliver the report to the Area Office within the time frame

specified in its contract with HUD.

6.28 NOTIFICATION OF THE OWNER/MANAGEMENT AGENT

The Loan/Asset Management staff must notify the owner of the results

of the review upon completion of the report by HUD staff or

contractors. Loan/Asset Management staff must also send a copy of the

report to the management agent and/or other contacts identified by the

owner and to the mortgagee if the property has an insured mortgage.

See HUD Handbook 4350.1 for specific procedures regarding owner

notification.

6.29 CORRECTIVE ACTION PLANS

a.Format. Once HUD has notified the owner and management agent of

the report\'s findings, the owner/agent is expected to prepare a

corrective action plan to address deficiencies. Like the

corrective action plan for a physical inspection, this plan may

use the MIO plan format. (See HUD Handbook 4355.1, Flexible

Subsidy Handbook.)

b.Time Frame for Response. Owners must provide the Area Office

with a corrective action plan addressing the noted deficiencies

within thirty 30 days of the date of notification.

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c.Appeals. The owner may appeal the findings of the management

review according to HUD Handbook 4350.1, Chapter 6. However, the

owner may not delay submitting the response or correcting valid

deficiencies that are not under appeal.

d.Monitoring Corrective Action.

(1)To monitor corrective action, Loan/Asset Management staff

may, as appropriate:

(a)Conduct discussions with owners, agents, and residents;

(b)Review the deficient area by performing a limited

management review using form HUD-9834; and

(c)Review desk reports and other documentation to verify

that management deficiencies have been corrected.

(2)Each Area Office must develop its own procedures and

timetables for monitoring management corrections given the

severity of the deficiencies and available staff resources,

but the following guidelines apply to all monitoring

activities.

(a)Follow-up. HUD staff must ensure that owners are

carrying out the required corrective actions. The

Loan/Asset Management staff will monitor the project

for as long as deficiencies are being corrected, and

will determine whether the owner is acting in a timely

and professional manner in carrying out the

corrections.

(b)Discovery of Additional Deficiencies. If new

deficiencies are revealed as a result of routine

monitoring or as a result of a subsequent review of

operations, Loan/Asset Management staff will repeat all

steps necessary to assure owner compliance.

(c)Follow-up System. If a follow-up system is not in

place, Loan/Asset Management staff shall establish a

follow-up and reporting system which monitors the

actions taken by the owner to cure existing

deficiencies.

6.30 ADDRESSING NONCOMPLIANCE

a.The Loan/Asset Management staff shall notify the owner in the

case of noncompliance with the corrective action plan. The owner

must take remedial action immediately upon receipt of

notification, and must provide an explanation of any

noncompliance.

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b.The owner also must develop and provide to the Area Office

proposed revisions to the corrective action plan within ten (10)

days of the notification. The Loan/Asset Management staff will

analyze any modifications to determine their feasibility and

their effect on the continued viability of the plan.

c.If noncompliance is caused by a management agent, Loan/Asset

Management staff should follow the procedures described in

Chapter 7 to enforce agent compliance.

6.31 TECHNICAL DEFAULTS

For properties with HUD-insured or HUD-held mortgages, if the

Loan/Asset Management staff determine that:

a.A good-faith effort is not being made to correct deficiencies

noted in the management review report;

b.A plan is not received; or

c.The plan, as revised, is no longer workable.

then the Area Office should pursue a declaration of default, under

either the waste provision of the mortgage or under the Regulatory

Agreement. See paragraph 6-19.

6.32 AGENTS MANAGING MORE THAN ONE PROPERTY

a.If the Loan Management or other Area Office staff are familiar

with the management agent\'s performance because the agent manages

more than one property under HUD\'s jurisdiction, the Loan/Asset

Management staff may perform a Limited Management Review. They

may also examine a sample of the more important management tasks

(cost controls and budgeting, resident screening and selection,

preventive maintenance, etc.).

b.If the Area Office has observed problems at one or more of the

agent\'s projects Loan/Asset Management staff should perform a

Comprehensive Management Review at all current projects.

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6.33 REVIEWS OF MANAGEMENT AGENTS\' CENTRAL OFFICES

a.In some cases, agents with more than one property perform certain

management functions from a centralized location. General

management functions, as well as financial management and

selected occupancy functions, are activities these agents often

choose to centralize. Loan/Asset Management staff must perform

management reviews of the agent\'s central office activities as

well as regular on-site reviews of functions carried out at the

projects. The purpose of the centralized review is to limit the

time spent reviewing individual properties. For example, once a

review is performed on the agent\'s central offices books,

records, and internal controls, they will not need to be

inspected at each individual property.

b.The HUD Super A Area Office covering the area in which the

management agent\'s central office is located has responsibility

for centralized reviews. They may solicit assistance from the

Area Office which is located closest to the Central Office

proposed for review. The Super A Area Office has the

responsibility for assuring the review is conducted, resolving

any outstanding findings, and forwarding a copy of the review to

other Area Offices with properties managed by that agent.

c.Central office management reviews should be performed at least

once every 18 months.

d.Whenever possible, a team of the appropriate HUD specialists,

rather than a single staff person, should perform these reviews.

An ideal team would consist of a Loan Specialist/Asset Manager, a

Financial Analyst, and an Occupancy Specialist, if staffing

permits. Additional members may be appropriate depending on the

size of operation and types of functions handled by the agent\'s

central office.

e.Central office management reviews follow a modified management

review format. Loan/Asset Management staff performing this type

of review should complete the following portions of the

Management Review Form (Form HUD-9834):

(1)Part B - Financial Management (All items)

\(2\) Part C - Occupancy and Tenant Selection (Those items that

correspond to activities handled at the agent\'s

central office)

(3)Part E - Drug Free Housing Policy (Items 33, 34, 36, & 37)

(4)Part F - General Management (Items 38 - 42 and 44- 45)

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In completing the review, Loan/Asset Management staff should assess

whether the agent\'s procedures allow HUD to examine the performance of

each project individually for all of the applicable items above.

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SECTION 4: FINANCIAL COMPLIANCE

6.34 OVERVIEW

a.Purpose. Management agents are charged with protecting the

financial viability of HUD-insured multifamily projects. The

purpose of financial reviews is to verify that owners and

management agents are in compliance with HUD Handbook 4370.2,

Financial Operations and Accounting Procedures for Insured

Multifamily Projects, and related HUD requirements and

guidelines. This section provides an overview of the financial

compliance review requirements for Loan/Asset Management staff.

Inadequate internal controls and procedures for financial

operations and accounting can result in

oinsufficient funds to pay for maintenance and emergency

repairs;

owillful misappropriation of project funds; and/or

oclaims and losses against the FHA Insurance Fund.

To prevent these occurrences, Loan/Asset Management staff are

responsible for determining that owners and management agents

observe HUD guidelines and maintain an effective set of reporting

systems and internal controls.

b.Applicability. All HUD-insured and HUD-assisted properties are

subject to some degree of financial review. HUD Handbook 4370.2

describes the review procedures that must be performed for

different types of projects and who is responsible for conducting

the review (i.e., HUD, the mortgagee, or Contract Administrators

other than HUD).

6.35 RELATIONSHIP TO MANAGEMENT REVIEW

Part B of the HUD-9834, Management Review of Multifamily Projects,

addresses financial management. Questions on Part B of the HUD-9834

relate directly to the following paragraphs. See Appendix 4.

6.36 REVIEWING ANNUAL FINANCIAL STATEMENTS

a.Purpose. Annual financial statements show the project\'s

financial condition. Loan/Asset Management staff may review the

statements, which are sent to the Area Office, to measure the

current and near-term financial stability of the

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6-2712/94

4381.5 REV-2

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project by using financial ratios and other indicators. (Reports

from existing MIPS applications may provide additional detail.)

Loan/Asset Management staff should determine whether project

assets and liabilities, rates of rent collection, accounts

payable, etc., appear reasonable given the project\'s size and

history. This information may suggest areas where increased

oversight is needed.

b.Review requirements. Loan/Asset Management staff must verify

that annual financial statements are prepared and submitted to

the Area Office in compliance with the following procedures and

with HUD Handbook 4370.2.

(1)Preparation

(a)Each annual financial report must be based on books and

accounts for that project only.

(b)The annual financial report must cover the project\'s

entire fiscal period under review.

(c)The annual financial report must be prepared on an

accrual basis.

(d)The annual financial report must be audited by an

Independent Public Accountant (IPA) who is a Certified

Public Accountant or who has been licensed or

registered on or prior to December 31, 1970.

(2)Submission. Chapter 3 of HUD Handbook 4370.2 REV-1 provides

a detailed listing of the required annual reports. Audited

financial statements must be submitted annually for each

project. The Regulatory Agreement requires submission

within 60 days following the end of each fiscal year.

6.37 ASSIGNING MANAGEMENT COSTS

a.HUD allows owners to charge certain management costs to the

project\'s operating account. However, other management costs may

be paid only out of the management fee. The assignment of these

costs is discussed in paragraphs 6.38 and 6.39. Asset management

costs for the project must be paid out of distributions to the

owner. The assignment of asset management costs is described in

paragraph 6.41.

b.In reviewing a project\'s financial statements, Loan/Asset

Management staff should follow the procedures in paragraphs 6.38

through 6.41 and in

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12/946-28

4381.5 REV-2

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Handbook 4370.2 to ensure that management costs have been

properly assigned.

c.Rather than maintaining separate payroll and separate fringe

benefits plans for each property, some agents consolidate payroll

and fringe benefit plans in order to reduce costs for the

properties. In such a system, all personnel for several

properties are listed under a single Federal Employer I.D.

Number. The salary and fringe benefits costs are prorated to the

various properties in the following ways.

(1)Salaries and fringe benefits of personnel performing

front-line duties are prorated among the properties served

in proportion to actual use.

(2)The agent may not impose surcharges or administrative fees

in addition to actual costs.

(3)The properties served may make reimbursement payments to the

consolidated employer upon issuance of payroll checks.

(4)Discounts, rebates, dividends, commissions, or other

recoveries of fringe benefits costs must be prorated among

the properties served in proportion to actual use during the

period to which the recovery applies.

6.38 MANAGEMENT COSTS CHARGED TO THE PROJECT\'S OPERATING ACCOUNT

a.Front-line Costs and Day-to-Day Activities

(1)Reasonable expenses incurred for front-line management

activities may be charged to the project operating account.

HUD Handbook 4370.2, Financial Operations and Accounting

Procedures for Insured Multifamily Projects, provides a

complete listing of allowable expenses. Front-line

activities include:

otaking applications;

oscreening, certifying, and recertifying residents;

omaintaining the project; and

oaccounting for project income and expenses.

Figure 6-2 provides examples of front-line management costs.

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6-2912/94

4381.5 REV-2

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Figure 6-2

Examples of Costs Paid from Management Fee and Project Account

===========================================================================

Costs Paid from Fee Costs Paid from Project Account

===========================================================================

The selection and establishment of Reimbursement of all costs related

an accounting system and internal to maintaining a centralized or

management control procedures. project-based accounting functions of

Visits to spot check performance of the project, including resident

on-site staff (e.g., reviews of certifications, worksheets, and

occupancy files, office monthly subsidy billings, as well as

procedures, etc.). monthly accounting reports required

by the owner or HUD. Includes

prorated costs on a per-unit basis

for centralized accounting systems,

including hardware, software and

technical support. Agent can be

reimbursed for the prorated cost

to the project of personnel

providing property-specific

accounting and computer services.

The cost to the project for such

services provided by the agent may

not exceed the cost of procuring

comparable services from an

independent vendor. Each year,

the agent must determine that these

costs are at or below the market

and maintain such evidence on-site.

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Fidelity bond coverage for the Fidelity bond coverage for front-line

agent\'s supervisory staff. employees and principal management

staff.

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Bookkeeping expenses attributable Costs of front-line project

to agent\'s company. operations \-- e.g., managers and

their apartments, legal and auditing

Overhead expenses (e.g., supplies expenses, bookkeeping and associated

and equipment, transportation and expenses, occupancy clerks, project

phone calls to projects, regularly management delinquency notices,

scheduled long distance calls from evictions, project checks, envelopes,

project to agent, office space, postage, air express delivery

data processing, etc). charges, copying, unscheduled long

distance calls to agent, costs of

IRS Section 401-K, 125, and 403-B,

and related retirement and health

plans for on-site staff so long as

they are comparable with industry

standards and in compliance with the

guidelines set forth in paragraph

6.38(e), and the salary of a

supervisory employee of the agent

designated to replace a project

employee for hours worked at the

project above and beyond the first

40 consecutive hours of the

assignment.

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Directing the investment of project Reasonable brokerage fees and

funds. interest costs incurred in

investing project funds

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Agent\'s travel expenses to visit Travel expenses incurred by

project and meet with owners. front-line staff\'s responsibilities

Training and travel expenses for (e.g., making bank deposits, meeting

agent\'s supervisory staff. with contractors, attending training,

etc.).

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Agent office phone lines not Dedicated line and modem for

dedicated to TRACs or the transmitting TRACs data (such lines

project, and automation can be shared with FAX machines).

equipment not required by HUD. Automation required by HUD (e.g.,

equipment for the implementation of

TRACs). Reasonable costs for on

site equipment, software, and

technical support necessary for

performing other front-line

activities of the project,

including FAX machines, automated

credit terminals, and other

telephones and electronic

transmission devices at the site.

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Recruiting costs for agent\'s staff, Recruiting costs for on-site staff.

including roving staff members.

===========================================================================

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12/946-30

4381.5 REV-2

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(2)If front-line management functions for several properties

are performed by staff of the agent operating out of a

single office, the following conditions apply.

(a)The agent must prorate the total associated costs among

the projects served in proportion to the actual use of

services. Allowable total associated costs include:

(i)Salaries and fringe benefits of personnel

performing front-line duties; and

\(ii\) Actual office expenses, fees, and contract costs

directly attributable to the performance of

front-line duties.

(b)The agent may not impose surcharges or administrative

fees in addition to actual costs.

(c)The cost of performing front-line management functions

off-site may not exceed the total cost of performing

these functions at the property.

(3)The salaries of the agent\'s supervisory personnel may not be

charged to project accounts, with the exception of

supervisory staff providing oversight for centralized

accounting and computer services for the project.

b.Agent Staff Performing Front-Line Functions

A management agent employing generalist staff members

specifically designated to assume front-line responsibilities on

an as-needed basis may bill the project\'s operating account for

time spent on front-line activities for the property if each of

the following conditions are met.

(1)Salaries of an agent\'s supervisory personnel may not be

charged to the project\'s operating account (See exceptions

to this rule in paragraph 6.39).

(2)The agent develops a job description for each generalist

position outlining the front-line and non-front-line

responsibilities of the position. The non-front-line

responsibilities in the generalist description may not

include supervisory functions.

(3)The agent develops a reasonable hourly rate, which will be

used to bill individual projects for time spent on

front-line functions. A reasonable hourly rate includes the

hourly salary for the position and an allocation

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6-3112/94

4381.5 REV-2

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for overhead expenses, and should not exceed the amount that

would be paid to an on-site staff member with similar

experience.

(4)An agent\'s generalist staff must document hours spent and

duties performed on front-line activities for each project

and those spent on the central office functions. Weekly

timesheets are an acceptable method of documenting hours

spent on front-line tasks.

c.Training Costs for Front-Line Staff

(1)Project funds may be used to obtain project related training

for front-line management staff.

(2)Loan/Asset Management staff may use the following guidelines

to assess whether amounts proposed for training are

reasonable.

(a)At a minimum, the budget amount should be sufficient to

allow one staff person from each functional area to

attend a minimum of one project related training

session per year.

(b)As a rule of thumb for most projects, a reasonable

training budget would not exceed the greater of \$5,000

or one half of one percent (0.005) of gross rents.

(c)Loan/Asset Management staff have the authority to

approve training budgets that exceed the guidelines in

paragraph (b) above if the owner/agent can clearly

document the conditions that necessitate more extensive

training for project staff.

d.Training Costs for Board Members of Resident-Owned/Co-op Housing

(1)Project funds may be used to provide project related

training for the Board of Directors of a housing

cooperative.

(2)Project funds approved by the Board may be used to pay for

each board member to attend one project related training

session or conference per year.

(3)The guidelines presented in paragraph 6.38c(2)(b) and

6.38c(2)(c) should be used in evaluating whether the amounts

proposed for training are reasonable.

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12/946-32

4381.5 REV-2

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**REVISIONS TO**

CHAPTER SIX: PROGRAM MONITORING

6.38 MANAGEMENT COSTS CHARGED TO THE PROJECT'S OPERATING ACCOUNT

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e\. Retirement Accounts for Front-Line Staff

> \(1\) Funding of retirement accounts for front-line staff can be paid
> out of a project\'s operating account. Retirement accounts for an
> agent\'s central office staff may be paid only out of the management
> fee.
>
> \(2\) HUD will allow employer contributions to retirement accounts for
> front-line staff to be paid out of project funds if the following
> requirements are satisfied.
>
> \(a\) The retirement account plan complies with all applicable
> federal, state, and local laws and regulations governing such
> programs.
>
> \(b\) Only permanent, front-line employees who work full-time at the
> project (i.e., more than [[20]{.underline}]{.mark} hours per week) may
> participate. [Temporary or part-time on-site employees are not
> eligible.]{.mark} Also, rotating employees working at more than one
> project are not eligible unless they qualify as a full-time employee
> at one project.
>
> [**Note:** The definition of full-time employment must be consistent
> with applicable federal and state law definitions of full-time
> employment, however in no event can it be less than 20 hours per
> week.]{.mark}
>
> \(c\) The projected cost of employer contributions to be paid out of
> project funds may not exceed [[ten]{.underline}]{.mark} percent of the
> base pay of eligible employees.
>
> [(d) The employee is to be vested ownership of no less than 20% of the
> employer's contribution each year until fully vested. Employees must
> be fully vested after five full years of employment.]{.mark}
>
> \(e\) Employees must remain 100 percent vested for all personal
> contributions to their account.
>
> \(f\) The actual cost of administering the retirement account plan
> will be prorated to the projects.
>
> \(g\) No commingling of employee accounts may occur.
>
> \(h\) The plan must be managed by a qualified outside entity with an
> established history of handling such programs.
>
> \(i\) Agents will make modifications to the plan as necessary to
> comply with changes in the laws and regulations governing such
> programs.

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6-33 6/06

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6-3312/94

4381.5 REV-2

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To further the plan\'s goals, the agent may make

modifications to the program without notice to HUD as long

as the program continues to satisfy the provisions of

paragraphs (a) through (i) above.

(3)Agents must certify to HUD that the retirement account plan

meets the requirements set forth in this paragraph before

any funds are charged to a project\'s operating account. In

addition, agents must include the additional cost in their

Budgeted Rent Increase request.

6.39 MANAGEMENT COSTS PAID FROM THE MANAGEMENT FEE

a.Expenses for services that are not front-line activities must be

paid out of management fee funds, except for centralized

accounting and computer services. Figure 6-2 above presents

examples of costs that may only be paid out of the management

fee.

b.Salaries, fringe benefits, office expenses, fees, and contract

costs for the following activities must be paid out of management

fee funds. These costs include:

(1)Designing procedures/systems to keep the project running

smoothly and in conformity with HUD requirements.

(2)Preparing budgets required by the owner or HUD, exclusive of

rent increase requests and MIO Plans.

(3)Recruiting, hiring, and supervising project personnel.

(4)Training for project personnel that exceeds the line item

budget for training expenses.

(5)Monitoring project operations by visiting the project or

analyzing project performance reports.

(6)Analyzing and solving project problems.

(7)Keeping the owner abreast of project operations.

(8)Overseeing investment of project funds.

(9)Ensuring that project positions are covered during

vacations, sickness, and vacancies.

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12/946-34

4381.5 REV-2

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c.The salaries of agent supervisory personnel must be paid from the

management fee unless one of the exceptions below is met.

(1)The cost of supervisory personnel providing oversight of

centralized accounting and computer services for a project

may be paid out of project funds.

(a)A prorated share of the salaries for such supervisors

may be charged to the project\'s account.

(b)The total charges to a project for centralized

accounting and computer services (including supervisory

staff costs) provided by the agent may not exceed the

cost of procuring comparable services from an

independent contractor.

(2)The costs of the salary for a supervisory employee of the

agent designated to replace a project employee on temporary

leave may be paid out of project funds after the first 40

hours of the assignment.

(a)The amount paid out of project funds to cover the

weekly salary of the replacement employee may not

exceed the lesser of:

(i)Twice the amount of the absent employee\'s weekly

salary; or

\(ii\) The actual amount of the replacement employee\'s

weekly salary.

(b)Project funds may be used to pay the allowable portion

of the replacement employee\'s salary for a period of up

to 90 days after the first 40 consecutive hours.

6.40 OFFSETTING AGENT\'S COSTS FOR PURSUING RESIDENT FRAUD

As part of HUD\'s efforts to reduce the incidence of resident fraud in

HUD-assisted projects, HUD will allow owners/agents to keep a portion

of the resident repayments they collect from residents who have

improperly reported their income at the time of certification or

recertification to help defray the cost of pursuing these cases.

Owners/agents should take the following steps when they become aware

that a resident may have provided inaccurate information about

household income during the certification or recertification process.

a.Follow the procedures in Chapter 5 of HUD Handbook 4350.3 for

investigating and correcting inaccurate information provided

during certification or recertification of resident income.

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6-3512/94

4381.5 REV-2

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b.If a resident supplies inaccurate income information and, as a

result, is charged less than the amount required by HUD\'s rent

formulas, the resident must reimburse the owner for the

difference between the rent the resident should have paid and the

rent he/she was actually charged. Chapter 5 of HUD Handbook

4350.3 describes HUD\'s requirements for resident repayment.

c.When residents submit inaccurate income information and are found

to have received overpayments of assistance, owners/agents are

required to reimburse HUD for any resident repayments received.

To help offset the expense of obtaining resident repayments,

owners/agents may retain up to a maximum of 20 percent of the

amount of resident repayments they actually collect from

residents who have provided inaccurate information about their

income to cover their actual costs. Owners/agents must reimburse

HUD for the remaining portion of resident repayments they collect

in accordance with the procedures in Chapter 5 of the 4350.3.

6.41 ASSET MANAGEMENT SERVICES

a.Asset management functions are those activities associated with

managing and protecting the assets of the ownership entity and

overseeing the management agent\'s performance. Asset management

activities include:

(1)Disbursing surplus cash.

(2)Periodic owner visits to the project to review the

agent\'s performance.

(3)Obtaining or providing tax advice to the ownership

entity or its principals and preparing the ownership\'s

tax return.

b.Asset management costs must not be billed to a project\'s

operating account. These costs may only be paid from funds

available for distribution to owners in accordance with the terms

of the Regulatory Agreement and HUD Handbook 4370.2.

NOTE: On limited distribution projects, any asset management

fees paid from project funds must be included in the

distributions-paid entry on Line 2C of Form HUD-93486.

Computation of Surplus Cash, Distributions and Residual Receipts.

c.Reasonable expenses for preparing the ownership entity\'s tax

return, and Schedule K-1 if the entity is a partnership, may be

charged to a project\'s operating account.

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12/946-36

4381.5 REV-2

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6.42 FIDELITY BOND COST ALLOCATION

a.The cost of the management agent\'s fidelity bonds must be

allocated as follows:

(1)The agent must pay fidelity bond costs for the agent\'s

supervisory staff.

(2)The agent may charge the project operating account for bond

costs for front-line employees and the agent\'s principals.

If a bond covers the front-line employees of several

projects, the bond costs applicable to those projects must

be allocated in direct proportion to the gross rent

potentials in effect for those projects at the time the bond

is purchased. Bond costs for the agent\'s principals should

also be prorated among all properties if the agent manages

more than one property.

b.When conducting financial reviews, Loan/Asset Management staff

should ensure that fidelity bond costs have been properly

allocated.

6.43 WORKER\'S COMPENSATION DIVIDENDS

a.Dividends received from Worker\'s Compensation insurance premiums

must be distributed in the following manner.

(1)If Worker\'s Compensation insurance for project staff is paid

for out of project funds, all dividends are returned to the

project.

(2)If Worker\'s Compensation premiums are paid by the agent out

of the management fee the dividends are paid to the agent.

b.In reviewing a project\'s financial statement, Loan/Asset

Management staff should identify the source of funds used to pay

Worker\'s Compensation premiums and verify that all dividends are

returned to the project when the premiums are paid out of project

funds.

6.44 PROJECTS NOT SUBJECT TO MANAGEMENT FEE REVIEWS

Owners of projects not subject to HUD review of management fees may

not inflate management fees to receive project funds monthly rather

than through semi-annual or annual distributions of surplus cash.

During all financial reviews of such projects, Loan/Asset Management

staff should examine management fee payments to make sure they have

not been inflated.

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6-3712/94

4381.5 REV-2

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6.45 CASH MANAGEMENT

a.Purpose. Loan/Asset Management staff must verify that the

management agent secures cash receipts and disbursement checks to

prevent unauthorized use of funds.

b.Review Requirements. Loan/Asset Management staff must review the

management agent\'s cash management controls in accordance with

Part B of the HUD-9834, Item 12 \-- Cash Controls, as part of the

management review.

See Chapter 2, Handbook 4370.2 REV-1, for details on Cash

Management Controls. Generally:

(1)All receipts must be promptly deposited to a federally

insured bank account held in the name of the project.

Security deposits should be held separate and apart from

other project funds in a segregated account.

(2)The management agent must obtain a fidelity bond in an

amount at least equal to potential collections for two

months. Blanket coverage must extend to all employees

handling cash.

(3)Receipts and disbursements should be controlled through

procedures for reconcilement of cash movements to banking

and accounting statements and vouchers.

(4)Cash instruments (e.g. blank checks) must be kept secure in

a locked drawer or safe with limited access.

6.46 DISTRIBUTION OF SURPLUS CASH

a.Purpose.

(1)Uses of surplus cash are governed by the Regulatory

Agreement. Loan/Asset Management staff must verify that

owners do not distribute surplus cash before satisfying all

obligations to mortgage repayment, payment of reasonable

project expenses, and replacement reserve accounts.

(2)Distributions may not be made when the project is in default

or under a forbearance agreement, and distributions to

owners may not be made on nonprofit projects.

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12/946-38

4381.5 REV-2

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b.Review Requirements. Loan/Asset Management staff must review the

Income Statement and Cash Flow Statement to verify that

distributions have been made in compliance with the Regulatory

Agreement and with the requirements of Chapter 2, Handbook 4370.2

REV-1. These guidelines include the timing as well as the amount

of the distribution.

6.47 MAINTAINING PROJECT FUNDS IN INSURED ACCOUNTS

a.Purpose. Given the size of most project accounts, it is vital

that they be held in a federally-insured bank. An

unreimburseable loss to any of these accounts would unnecessarily

burden the FHA Insurance Fund.

b.Review Requirements

(1)Loan/Asset Management staff must ensure that each project

maintains at least these bank accounts in a

federally-insured bank (descriptions of each account are

included in Chapter 2 of Handbook 4370.2 REV-1):

(a)Regular Operating Account;

(b)Replacement Reserve Account;

(c)Tenant Security Deposit Account (if the project takes

security deposits); and

(d)Residual Receipts Account.

(2)Loan/Asset Management staff must review the project\'s bank

account statements and verify that the bank is

federally-insured and that each account is established and

in use,

(3)Loan/Asset Management staff must verify that the project has

opened additional security deposit accounts in different

banks, if necessary, to ensure that the balance of each

security deposit account does not exceed the insurance limit

of \$100,000 per FDIC regulations. See Handbook 4370.2 for

further guidance.

6.48 MONITORING EXCESS INCOME FROM SECTION 236 PROJECTS

a.Purpose. Rents collected in excess of basic rental charges from

residents in a Section 236 project must be remitted monthly to

HUD. Excess rents is the amount by which the rent collected on a

dwelling unit exceeds the approved basic rent for that unit.

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6-3912/94

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b.Review Requirements

(1)Annual Review. The IPA should confirm the transfer of

excess rents for Section 236 projects with the Excess Rental

Income Office in Pittsburgh. Loan/Asset Management staff

should review the results of this confirmation.

(2)Mid-year Review. If Loan/Asset Management staff determine

it necessary to review excess rent transfers mid-year, they

should request copies of the project\'s forms HUD-93104,

Monthly Report of Excess Income and Accrued Unpaid Excess

Income and HUD-93104A, Schedule for Calculating Excess

Income and Report of Excess Income Delinquencies from the

management agent, and compare the recorded amounts to the

project\'s Monthly Accounting Reports.

(3)Paragraph 7-28 of HUD Handbook 4350.1 provides detailed

guidance on the specific actions loan management staff need

to take to properly monitor excess income from Section 236

projects.

6.49 MONITORING EQUITY SKIMMING

a.In reviewing a project\'s financial statements, Loan/Asset

Management staff must make sure that owners are not receiving

unauthorized distributions from the project. To ensure that no

unauthorized distributions have been made, also referred to as

equity skimming, Loan/Asset Management staff should compare the

amount of distributions paid during the period covered by the

annual statements to the amount of surplus cash available,

keeping in mind the distribution limitations imposed on limited

dividend owners. Proper distributions meet the following

conditions:

(1)No distributions are permitted for projects with a nonprofit

ownership entity.

(2)Limited dividend owners may pay both the annual distribution

earned (i.e. the 6 or 10 percent permitted by the

Regulatory Agreement) plus distributions unpaid from

previous years, but only up to the amount of surplus cash

available.

(3)Distributions may not be paid in excess of the surplus cash

available as of the end of the prior fiscal year.

Distributions may be paid semi-annually for certain projects

with HUD approval.

(4)Distributions may not be paid when:

(i)A project is in default under the mortgage;

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12/946-40

4381.5 REV-2

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\(ii\) The owner has agreed to waive payment of

distributions;

\(iii\) The project is in a non-surplus cash position; or

(iv)The project is not in \"good repair and condition\"

(a requirement of the Regulatory Agreement) based

on a mortgagee physical inspection, or a HUD

management review or physical inspection.

b.Loan/Asset Management staff should refer to HUD Handbook 4370.1,

and Chapter 8 of Handbook 4350.1 for more detailed guidance on

monitoring for equity skimming.

6.50 CONTRACTING GUIDELINES

a.When an owner/agent is contracting for goods or services

involving project income, an agent is expected to solicit written

cost estimates from at least three contractors or suppliers for

any contract, ongoing supply or service which is expected to

exceed \$10,000 per year or the threshold established by the HUD

Area Office with jurisdiction over the project.

b.For any contract, ongoing supply or service estimated to cost

less than \$5,000 per year, the agent should solicit verbal or

written cost estimates in order to assure that the project is

obtaining services, supplies and purchases at the lowest possible

cost. The agent should make a record of any verbal estimate

obtained.

c.Documentation of all bids should be retained as a part of the

project records for three years following the completion of the

work.

d.For further information on contracting guidelines and

requirements, see Chapter 5 of this Handbook.

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6-4112/94

4381.5 REV-2

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SECTION 5: PROVISIONS OF CONTRACTS AND REGULATORY AGREEMENTS

6.51 OVERVIEW

a.Purpose. When HUD is the Contract Administrator, the Loan/Asset

Management staff must verify that the project owner and

management agent are complying with their legal agreements

between the owner and HUD, and that the project owner is

providing decent, safe, and sanitary housing to assisted

residents in compliance with HUD guidelines.

When HUD is not the Contract Administrator, the Loan/Asset

Management staff should review the work of the Contract

Administrator (PHA, State Agency, etc.) to be sure that the owner

and management agent remain in compliance, and that the contract

administrator itself is taking all necessary steps to prevent the

opportunity for fraud, waste, and mismanagement in the operation

of the project.

b.Applicability. The following project types are covered under

this section.

\(1\) Section 8 Loan Management Set-Aside

\(2\) Section 8 Property Disposition Set-Aside

\(3\) Section 8 New Construction and Substantial Rehabilitation

\(4\) Section 515/8 Administration for Rural Housing and Economic

Development Services

\(5\) Section 8 State Agencies

\(6\) Section 236 Interest Reduction Payments for Rental Projects

\(7\) Section 221 (d)(3) Below Market Interest Rate (BMIR)

\(8\) Rent Supplement

\(9\) Rental Assistance Payment (RAP)

\(10\) Section 202 Projects for the Elderly or Handicapped

\(11\) Section 202 Nonelderly Handicapped Families and Individuals

\(12\) Project Rental Assistance Contract (PRAC)

\(13\) Project Assistance Contract (PAC)

\(14\) Flexible Subsidy Program for Troubled Projects

6.52 REVIEWS AND CORRECTIVE ACTION

The monitoring tasks described in this Section are similar to those

covered in Section 2. In the event that the Loan/Asset Management

staff identify waste, fraud or noncompliance while monitoring rental

assistance contracts and Regulatory Agreements, they should require

and monitor corrective action as described in Section 2 and/or pursue

sanctions as discussed in Chapter 7 of this Handbook and, if

applicable, Chapter 8 of Handbook 4350.1.

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12/946-42

4381.5 REV-2

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6.53 MONITORING RENTAL ASSISTANCE CONTRACTS

Owners and managers of subsidized projects agree to comply with the

procedures and practices stated in the rental assistance contract,

including (but not limited to) the maintenance of housing units to

meet Section 8 Housing Quality Standards. The contract administrator

\-- HUD, the PHA, or the State Agency \-- is responsible for ensuring

that the owner/agent complies with the clauses of the rental

assistance contract.

This paragraph summarizes the responsibilities of the owner/manager

and the contract administrator, and highlights some of the monitoring

tools that the contract administrator may use to fulfill its

responsibilities. A complete discussion of contract monitoring is

contained in HUD Handbook 4350.5, Subsidy Contract Administration and

Field Monitoring. Owners/managers and contract administrators are

reminded that the exact wording of HAPs can vary depending on the

project type and whether or not the project is HUD-insured; this

discussion is only a general overview of the administrative

responsibilities.

a.Under the HAP, the owner/agent is responsible for:

(1)Marketing units and selecting families in accordance with

HUD guidelines and applicable fair housing regulations;

(2)Maintaining and operating the project in a decent, safe, and

sanitary manner and in conformance with Housing Quality

Standards and industry practices;

(3)Verifying resident income and household composition on at

least a yearly basis to ensure compliance with occupancy

guidelines;

(4)Collecting resident rents;

(5)Establishing and maintaining project financial accounts and

records; and

(6)Obtaining the necessary insurance contracts, including flood

insurance for projects located in special flood hazard

areas.

b.The contract administrator will verify that the owner/agent is

fulfilling these responsibilities in a timely and professional

manner, and will also initiate any procedures to bring about

necessary corrective actions. Specifically, the contract

administrator will:

(1)Assess the project\'s operating policies and procedures

through on-site visits, interviews with the owner,

management agent, and project staff;

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6-4312/94

4381.5 REV-2

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(2)Review operations for evidence of waste, mismanagement, or

fraud, and take appropriate steps as outlined in this

handbook and in Handbook 4350.5 and 4350.1 to initiate

corrective action;

(3)Review the project\'s operating budget, Reserve for

Replacement withdrawal requests, and owner distributions for

propriety;

(4)Ensure that rent increase requests are submitted in a timely

and reasonable manner;

(5)Review rent collection procedures, including the tracking of

delinquencies;

(6)Determine whether the vacancy rate is comparable to other

projects in the area, and assess causes for high turnover if

any;

(7)Verify that owners/agents are screening and selecting

residents in compliance with HUD guidelines;

(8)Verify that the owner/agent is managing mandatory meals and

pet owner policies in accordance with HUD Handbook 4350.1;

(9)Review Section 8 utilization, including monthly vouchers,

special claim vouchers, rent rolls, and other project

records, to ensure that funds are being used properly and

that unused funds are returned to HUD;

\(10\) Verify that utility allowance adjustments are calculated

properly; and

\(11\) Review project property tax and flood insurance matters as

appropriate.

Additionally, the contract administrator must ensure that the

owner/manager is operating in compliance with the regulatory

requirements as listed in HUD Handbook 4350.5, Chapter 1.

6.54 MONITORING FLEXIBLE SUBSIDY CONTRACTS

Area Office instructions for evaluating and monitoring projects that

request or operate under Flexible Subsidy contracts are discussed in

Handbook 4355.1 REV-1, Flexible Subsidy, particularly in Chapter 6.

Flexible Subsidy contracts include both the Operating Assistance

Program (OAP) and the Capital Improvement Loan Program (CILP). The

following paragraphs provide an overview of the Loan/Asset Management

staff\'s responsibilities for monitoring Flexible Subsidy contracts.

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12/946-44

4381.5 REV-2

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a.HUD will review the project requesting a Flexible Subsidy prior

to approving an application to verify that the project is free of

significant or repetitive resident complaints and physical

problems, or that the owner/agent will rectify the cause of the

complaints and problems through the assistance. These reviews

may include any of the monitoring techniques discussed in Section

1\.

b.The Loan/Asset Management staff must determine that the Flexible

Subsidy will:

(1)Restore or maintain the project\'s physical soundness;

(2)Restore or maintain the project\'s fiscal soundness;

(3)Provide the least costly financing alternative that also

retains the low- and moderate-income character of the

project for the remaining term of the project mortgage;

(4)Be applied within the conditions of an approved Management

Improvement and Operating (MIO) Plan or Work Write-Up; and

(5)Be provided under competent project management, and that

project management meets satisfactory levels of experience

and ability as determined by the management review and other

monitoring processes.

c.HUD will not provide assistance until the owner/agent:

(1)Submits a plan to correct and remedy any deficiencies

documented by the Department, and

(2)Certifies and documents that he/she has taken steps to

secure funding from all possible sources.

d.After a Flexible Subsidy contract has been awarded, the Area

Office will receive from the owner on a monthly basis:

(1)A Monthly Accounting Report for the previous month (Forms

HUD-93479, 93480, and 93481);

(2)Form HUD-9835, Part II, Section A of the MIO Plan, covering

progress and payments for action items; and

(3)Any Requisition for Advance of Flexible Subsidy Funds, Form

HUD-9823a, processed during the previous month.

The Loan/Asset Management staff will verify that the forms are

complete and that all requests for funds are reasonable.

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6-4512/94

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e.On a quarterly basis, the Loan/Asset Management staff will

conduct an in-depth review of each Flexible Subsidy contract.

These reviews will include:

(1)Remote monitoring of submitted progress reports, budgets,

cost estimates, schedules, and invoices; and

(2)On-site visits to verify that work undertaken is being

completed in a satisfactory manner in compliance with

subparagraph b., above.

6.55 MONITORING REGULATORY AGREEMENTS

HUD requires different forms of Regulatory Agreements for different

project and owner types. In many cases, the Agreement specifies

owner/management agent responsibilities which the Loan/Asset

Management staff already monitors pursuant to other paragraphs in this

chapter. The guidance below covers general issues related to

monitoring Regulatory Agreements. More detailed guidance can be found

in Chapter 2 of HUD Handbook 4350.1.

a.Financial issues. The Loan/Asset Management staff will verify

that reports and other documents are submitted on required

schedules, confirm that these items are complete, and investigate

questionable transactions. These reports and documents include:

(1)The Annual Financial Statement and Budget.

(2)Monthly Accounting Reports.

(3)Evidence that the owner/management agent is utilizing the

Receipts Fund Account and, for nonprofits, the Residual

Receipts Fund Account in the required manner.

(4)Statements of Replacement Reserve Account use (deposits and

withdrawals), to verify that all transactions are

authorized.

(5)Vouchers, invoices, and other evidence that distribution and

expense payments are proper and authorized.

b.Occupancy and Resident Selection Issues. The management agent

will submit monthly reports on occupancy levels. In addition,

the management agent must provide, at the Loan/Asset Management

staff\'s request, information on its resident screening and

selection processes. The Loan/Asset Management staff should

review this information to determine that the management agent:

(1)Observes federal preferences for resident selection; and

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12/946-46

4381.5 REV-2

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(2)Admits income-eligible residents to achieve an overall

population that is at least 90 percent lower income.

In addition, the Loan/Asset Management staff should verify that

the management agent conducts income recertification annually or

more often if necessary. If such reviews reveal that the agent

may be in violation of civil rights statutes, or is possibly

discriminating against families with children or applicants of

any age, Loan/Asset Management staff should advise FHEO staff.

c.On-site Review Issues. The management agent must maintain the

property in suitable physical condition and must maintain all

records, books, accounts, documents, etc. in suitable condition

for on-site review.

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6-4712/94

4381.5 REV-2

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Exhibit 6-1

INDICATORS FOR TROUBLED/POTENTIALLY TROUBLED PROJECTS

A multifamily project may be considered troubled when it requires

assistance in order to meet its obligations and/or to provide the
quality

of housing and services to which its owner committed in the rental

assistance contracts and/or Regulatory Agreement. Potentially troubled

projects are those where critical information regarding the operation of

the project is not available or where the project may soon require

assistance if action is not taken to address existing or emerging

difficulties. Indicators such a situation include:

1.High or increasing vacancy rate.

2.A major system that requires replacement, major repair, or repair

beyond existing or potential project resources.

3.Persistent physical problems of a serious nature (such as health

and safety problems, security problems, deferred maintenance, or

lack of janitorial services or routine maintenance).

4.Improper or unauthorized distributions, as defined in HUD

Handbook 4370.2, Financial Operations and Accounting Procedures

for Insured Multifamily Projects, or unauthorized diversion of

project assets.

5.The Management Review or other financial analysis determined that

annual or monthly operating expenses exceed income potential and

will more than likely continue.

6.Project expenses are abnormally high or low compared to previous

years or comparable projects.

7.Project rents are abnormally low or in excess of authorized

limits.

8.The owner/sponsor has threatened or has declared bankruptcy.

9.There has been more than one request from the owner(s) to use

Reserve for Replacement Account money for the mortgage payment,

fuel, utilities, insurance, security, or for routine expenses for

which the account was never intended.

10.The Management Review reveals management policies or procedures

that jeopardize the project, as indicated by a below satisfactory

rating in one or more categories.

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12/946-48

4381.5 REV-2

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11.There are persistent, validated resident complaints of a serious

nature, including but not limited to: harassment, leasing

irregularities, improper certification, discrimination, or fraud

by the project management or owner.

12.The owner/agent has not met the contractual, statutory and/or

managerial obligations and has not developed programs to address

them.

13.Annual financial statements disclose significant irregularities,

such as: qualified auditor\'s opinions; negative cash throw-offs;

line items that are inconsistent with each other, with the prior

years, or with similar projects; under-funded General Operating

Reserves (GOR), Replacement for Reserves, or escrow accounts; or

increasing accounts payable, receivables, or bad debts.

14.Failure to provide required or requested data with respect to

fiscal items for significant matters involving the

management/operation of the project.

15.Physical inspection indicates serious emergency health and safety

hazards for which there is no acceptable plan of correction.

16.Section 8 units do not meet HQS and project funds are not

available to immediately correct the deficiencies.

17.Serious drug problems prevail in the complex or in the

neighborhood.

18.In the case of a non-profit, the Board does not meet the criteria

used when it was originally constituted.

19.The owner has threatened to abandon or has abandoned the complex.

20.Commercial space is unrentable, or is being rented at less than

market rents, causing a cash drain on the project, or commercial

space detracts from project liveability.

21.The mortgage is in default.

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6-4912/94