Posted on Jul 6, 2017

Although a regular audit of financial statements and disclosures can help property managers prepare for a HUD-sanctioned management and operating review (MOR), there are some differences between HUD Audit Guidelines and the questions covered in a management review through HUD 9834.

There are rather obvious differences on HUD 9834, like lead-based paint compliance, vacancy monitoring, or receipts — by unit — of appliance purchases. Those questions aren’t included in HUD audit guidelines. However, items like documentation of outside contractors and the reconciliation of accounts payable seem like they should be similar for an audit or MOR. They aren’t exactly.

We have highlighted a few of the grey areas here that property managers of HUD-funded properties should be aware of when reviewing HUD 9834. Did your recent audit cover all the obvious and not so obvious questions you may be asked during an on-site review, or do you have some work to do?

1. Condition of the Property

  • Lead-based paint compliance – inspection, maintenance, abatement and protection of tenants and their belongings?
  • Repairs – paid consistently from right operating expense account and eligible items reimbursed by reserve?
  • Tools – satisfactory inventory system to account for them (and keys?)
  • Appliances – secured to prevent theft?
  • Maintenance backlogs – backlog of work orders?
  • Unit Readiness – assess occupancy readiness of vacant units?
  • Signage – clear and adequate for tenants and visitors?

2. Financial Health

  • Project operating costs – reasonable compared to a similar property?
  • Principals and Board – received HUD 2530 approval and meet regularly?
  • Mortgage – any past restructuring?
  • Owner – eligible for incentives?
  • Reserve and General Operating accounts – adequate to meet future needs?
  • Operating expenses – regularly reviewed to make sure property is paying best possible rates, including taxes and utilities?
  • Bad debts – procedure for write-offs reasonable?
  • Centralized accounting – approved by HUD?

3. Rent Increases

  • Requests – submitted promptly to HUD?
  • Reserve for Replacement analysis – performed before submitting budget-based rent increase?
  • Rent adjustments – documented last adjustments?
  • Special rent increases – previously approved?

4. Vacacy Rates

  • Vacancy activity – documented for the last 12 months and how many each month?
  • Rates – vacancy rates on the date of the MOR on-site visit?

5. Staffing

  • Vacancy – staffing issues impacting vacancy rates?
  • Vendors – maintain a list of outside contractors and bills paid in time to maximize discounts?
  • Enterprise Income Verification (EIV) – proper controls with regard to staffing access to sensitive tenant data in the EIV system?
  • Management – can staff adequately perform management and maintenance functions, and do they receive regular training?
  • After Hours – after hours and emergency phone numbers posted?
  • Supervision – process for field supervision of staff?
  • Tenant employment – efforts to employ tenants under Section 3?

6.  Tenants

  • Sex offender status – does application ask if applicant or any member of applicant’s household is subject to a lifetime of state sex offender registration?
  • Previous residence – does application ask about list of previous residences?
  • HUD 92006 – attached to application?
  • Application denial – different appeals reviewer than the person who denies the application?
  • Wait list – number of applicants listed for each type of unit?
  • Fees and charges – other charges assessed besides security deposits?
  • Tenant Rental Assistance Certification System (TRACS) – data secure and up to date?
  • Private information – tenant personal information stored according to HUD document retention guidelines and access limited to only certain personnel?
  • Unit size – unit sizes adequate for household composition?
  • Eligibility exceptions – exceptions granted to ineligible households?
  • Pets – pet deposits in acceptable range and payments allowed?
  • EIV – income discrepancies documented and resolved?
  • Utilities – certifications reflecting the correct utility allowances, and  reimbursements distributed within five days of receipt of housing assistance payments?
  • Intent to Vacate – notices received in writing?
  • Rejections – rejection letters inform applicants of the right to appeal and appeals documented and handled properly?

By paying attention to these particular questions at your properties — in addition to conducting a regular HUD audit — your ability to answer questions during a MOR desk review or on-site review will be stronger. For additional questions or concerns, talk to the Audit team at Cornwell Jackson.

Download a copy of the HUD 9834 or view the source list on the whitepaper for additional HUD forms and guides.

Download the whitepaper: Are You Ready for MOR? Affordable Housing Audit Tips to Meet HUD Standards

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 or 972-202-8000.

Posted on Jun 22, 2017

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 or 972-202-8000.

Posted on Jun 6, 2017

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.

In 42 states including Texas, HUD Management and Occupancy Reviews (MORs) have not been conducted on Section 8 properties since 2011. After a series of lawsuits and protests brought by the Performance-Based Contract Administrators (PBCAs) who perform MORs on behalf of HUD, it looks like things have been resolved for now. MORs will be conducted in these states once again. Some may have already occurred in the second half of 2016. They may be annual or more frequent, but they are always random and with little notice.

The purpose of a MOR includes:

  • Maintaining housing for target populations
  • Protecting FHA insurance funds
  • Ensuring satisfactory management
  • Ensuring good physical and financial health of properties
  • Reviewing compliance with HUD rules
  • Proper administration of subsidy contracts

At-risk projects are more likely to get notification of a MOR, but in many cases a PBCA has approval to conduct a review on 100 percent of the portfolio under its jurisdiction in the state. If your property or organization has not already received notification of a pending MOR, it still makes sense to prepare as though it’s already happening.

The reason for this is the extensive paperwork and reporting required during a MOR. However, if your organization has conducted a thorough financial audit, you already have much of the information available to prepare and share during a MOR. Some of the primary items include:

  • General physical appearance of property and security
  • Follow-up and monitoring of project inspections
  • Maintenance and standard operating procedures (SOPs) in place
  • Financial management and procurement processes
  • Leasing & Occupancy compliance
  • Tenant/management relations
  • General management practices

Prior to a MOR field visit, the PBCA will conduct what they call a Desk Review, which includes looking at the project’s previous MOR findings. Any issues with the physical property, timely reporting of financials or audit findings along with the history of operating expenses will be noted. In a side-by-side comparison of HUD’s primary MOR document, “Management Review for Multifamily Housing Projects”— known as HUD 9834 — the items listed for review are very similar to a general financial audit of a HUD-funded organization.

It, therefore, makes sense to prepare for a MOR not only by reviewing and answering the questions listed on HUD 9834, but also by reviewing and using your audit findings to make improvements. With some early preparation, you can be ready for MOR.

Continue Reading: Prepare for a Management & Occupancy Review (MOR)

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 or 972-202-8000.

Posted on Jul 10, 2015

The Supreme Court of the United States recently ruled on a case that may have a profound impact on a number of Americans.  No, not that one, or that one.  We’re talking about the case Texas Department of Housing and Community Affairs v. The Inclusive Communities Project (ICP).  Not quite the sizzle of other recent cases, but the effect it could have on businesses involved in real estate and mortgage lending is significant.  The ruling in this case held that disparate impact claims are recognized under the Fair Housing Act.  Unless you’ve been following this case closely, you probably don’t know what disparate impact is or what the significance of it is (until recently I counted myself in that group as well).  Let’s start by defining disparate impact and understanding how it applies to housing.

What is Disparate Impact?

The Fair Housing Act “prohibits discrimination in the sale, rental, and financing of dwellings, and in other housing-related transactions based on race, color, national origin, religion, sex, familial status, and disability”.  The simple interpretation of this is that it is illegal to intentionally discriminate against (or have policies that discriminate against) a person when it comes to housing.  Disparate impact is the idea that a policy can have a discriminatory effect even if it wasn’t created with an intent to discriminate.  Simply, it is the theory that an individual or organization can be held liable for unintentional discrimination when it comes to housing or mortgage lending.  This means that if someone can show statistical evidence of discrimination against a protected class, they can bring an anti-discrimination lawsuit against your business.  You then have to prove in a court of law that there is an important business objective to the policy that is causing the disparate impact.  If that sounds like guilty until proven innocent to you, then you have a good understanding of the new ruling.

Can you give me an example?
Laurie Goodman, director of the Housing Finance Policy Center gives a good explanation as it relates to the mortgage industry:

“You can only hold a business responsible for what they can control. For example, if a lender applies uniform underwriting standards to all applicants, it will likely result in more mortgage denials for black and Hispanic applicants than for white applicants, because there is a difference in income, wealth and credit experience between the groups. Businesses certainly have a responsibility to support, and at the minimum, not to stand in the way of government programs that push for greater equality of opportunity. But that is different than the disparate impact doctrine, which could hold the private sector guilty of discrimination if their policies resulted in a differential impact on different racial and ethnic groups, despite the fact that these groups have differences in income, wealth and credit experience.”

So let’s be reasonable.

If someone brought a disparate impact suit for the above reason, the mortgage lender could show that there is an important business objective to requiring a minimum credit score in determining whether an applicant is eligible for a loan.  It would be easy to show historical data proving a higher rate of default for customers with lower credit scores which negatively affects the profitability of the business.  The business could feel confident they would win this suit, but the issue is the fact that they would have to defend that suit in the first place, and that is what has business owners nervous.  One more example is the case of Magner v. Gallagher.  In this case, Multi-family property owners in the city of St. Paul argued that the city’s housing code which requires that landlords to maintain minimum maintenance standards for all structures and premises for basic equipment and facilities for light, ventilation, heating and sanitation; for safety from fire; for crime prevention; for space, use and location; and for safe and sanitary maintenance of all structures and premises caused them to raise rents and decrease the number of units available to African-American tenants (which were the majority of people renting their properties currently).  A district court granted a summary judgement for the City (Magner), but the Eighth Circuit held the respondents (Gallagher) should be allowed to proceed to trial because they presented sufficient evidence of a disparate impact on African-Americans.  Yes, the court just ruled that policies put in place to require landlords to maintain adequate living standards in their apartments in St. Paul were discriminatory under disparate impact.  This case was later settled, but it just goes to show how crazy disparate impact cases could be.  A policy whose sole goal was to provide better and safer living conditions for tenants could be made illegal because it theoretically discriminated against the tenants it was trying to help.

So now what?

No one is really sure.  It could turn out to not really be that big of a deal, or we could see a flood of lawsuits.  It is possible that if you own an apartment complex in a neighborhood that is 20% African-American, and only 5% of your tenants are African-American, then you could be slapped with a disparate impact lawsuit.  In the case that was before the Supreme Court, it was concluded that disparate impact was established based on the fact that the Housing Department approved low-income housing credits for 49.7% of units in neighborhoods that were 90 – 100% non-Caucasian while it only approved credits for 37.4% of units in neighborhoods that were 90 – 100% Caucasian.  The ICP asserted that the allocation of these credits caused “continued segregated housing patterns by its disproportionate allocation of tax credits, granting too many credits for housing in predominantly black inner-city areas and too few in predominantly white suburban neighborhoods”.  You can’t be sued on statistics alone, there has to be some evidence to suggest that the statistical discrepancy is caused by a policy you have in place.  That being said, the lack of evidence does not preclude someone from filing a disparate impact suit, it just means the case will be dismissed if the party bringing the suit can’t prove that “a challenged practice caused or predictably will cause a discriminatory effect”.  All we know for sure is that the boundaries of this law and its definitions will most likely be tested in the courts over the next few years.  If anything, it should be interesting.

If you would like to learn more about how this topic might affect your business, please contact Gary Jackson, CPA at or call 972.202.8000.