Over the past eight years and now into the era of the new Republican White House, scrutiny on affordable housing developers, owners and management companies has increased. Whether the reasons are to root out abuses of Section 8 funding or to justify cutting the US Housing and Urban Development budget, politics have put pressure on HUD inspectors to increase their review of funding recipients. Based on a recent presentation we attended on the return of the HUD Management & Occupancy Review (MOR), we outline ways that owners and managers of HUD-funded properties can prepare for a potential MOR.
Based on our experience with audits of HUD-funded properties and organizations, preparation and elements of a MOR are fairly similar. Let’s walk through the key areas of risk and review.
In the course of preparation, we recommend setting up a separate paper filing system and an online file to organize and store information relevant to a MOR, including a complete HUD 9834 form, your most recent REAC filing, audit of financial statements and disclosures, documentation on resolving any previous audit or MOR issues and general management documents such as leasing renewals (as requested in HUD 9834).
The top 10 risks that the MOR desk review will emphasize include:
- PASS Score (physical property conditions)
- FASS Score (financial condition)
- Loan Payment Status (late payments, etc.)
- Management Review Score (tenant complaints, staffing practices)
- SOA (sex offender audit issues)
- Overdue AFS (audit of financial statements)
- OHAP watch list (program restructuring notifications)
- FASS Referrals (financial restructuring)
- EH&S (health and safety violations)
- Management Condition (discrimination, falsification)
Any previous red flags, notifications or issues should be resolved — or documented as in process of being resolved —prior to another MOR. Findings that earlier issues have not been resolved can put a project/program/property on HUD’s radar as a bad partner. That puts future funding at risk.
After the desk review comes the on-site review. This review can include questions about transactions that occurred since the last MOR. If your project’s last MOR was in 2011, that’s a lot of ground to cover.
Even the best, well-run properties can experience grey areas that may be flagged. Items we have found during our financial statement audits include improper verification of income or handling of surplus cash. We have also noted contract issues in which an individual property or management company does not have its own separate HUD contract. Even wait lists can be scrutinized for possible discrimination.
The goal of any property should be to receive a “Superior” or “Above Average” MOR performance rating. This means the property/program is adhering to HUD policies and is operating a safe, fair and financially sound operation for providing affordable housing to the community. A “Satisfactory” rating means that there are some minor corrections to make. Anything below a rating of 70 is below average or unacceptable.
There are many good property management companies in the Dallas/Fort Worth area — whether for-profit or nonprofit — that run tight ships and schedule regular audits or reviews. Our recommendation to them is third-party validation. Have a CPA firm with knowledge and experience with HUD-funded properties walk staff through HUD 9834 documentation or at the least review their answers and addendums.
Continue Reading: MOR Questions Your Audit May Not Catch
Scott Bates, CPA, is a partner in Cornwell Jackson’s audit practice. He provides consulting to clients in real estate, including HUD-funded properties. Contact Scott at email@example.com or 972-202-8000.