MBCDC VILLA MATTI, INC 066-EE111-WAHNon-Profit

SECTION II ? CURRENT YEAR FINDINGS AND RECOMMENDATIONS 2020-001 Ineligible Project Expenses Condition: In May 2021, HUD notified the Project that certain expenses reported in the September 30, 2020 Owner Certified submission were not eligible project expenses. The ineligible project expenses identified were the asset management fees and any audit fees charged to the Project that were not for the audit of the Project individually but a pro-rata share of the consolidated audit of the owning entity. Criteria: Only eligible project expenses approved by HUD in the annual operating budget may be charged to the Project. Cause: MBCDC provides various services to the Project, including financial administration, negotiation and forecasting along with insurance administration and negotiation, sales and marketing, fundraising and technical services as the Owner entity of the Project. These services are outside of the scope of the management agent, therefore MBCDC charged a management services fee to be compensated for its services. Previously, MBCDC and the management agent were one entity and compensation for these services was received in the form of the previous management fee and employee-related costs billed to the Project. The necessity for a separate billing was caused by the introduction of a third-party management entity. However, as the Owner did not receive approval from HUD prior to charging the Project for these services, the expenses were deemed ineligible by HUD. Effect: The Project paid MBCDC a total of $9,200 for ineligible expenses. Recommendation: The total of ineligible project expenses paid should be refunded to the Project and MBCDC should not charge any fees to the Project without prior authorization from HUD. View of Responsible Officials and Planned Corrective Actions: MBCDC has agreed to repay the funds withdrawn from the Project and acknowledges that these fees will not be charged nor will the Project pay for such fees in the future unless authorized by HUD. The financial statements have been adjusted to remove the asset management fees and audit expenses charged to the Project. The total of the expenses reversed for the year ended September 30, 2020 was $36,582 ($27,600 for asset management fees and $8,982 for audit fees allocated to the Project for the Owner entity audit). A portion of that amount was unpaid as of September 30, 2020 and therefore, the cash repayment owed to the Project as of September 30, 2020 was $9,200.

2020-002 (formerly) 2019-001 Replacement Reserve Account Condition: During our audit, we identified that the Project did not make five out of the twelve monthly deposits of $2,123 to the replacement reserve account thereby underfunding the replacement reserve account by $10,613 for the year ended September 30, 2019. Criteria: In accordance with the HUD regulatory agreement, the Project shall make a monthly deposit of $2,123 to the replacement reserve account. Cause: The months in which the deposits were not made were the months prior to the Project fully transitioning to the new management company. During this period, there was not effective oversight over the monthly deposits required. Effect: Failure to meet the regulatory requirements may result in default of the HUD regulatory agreement. Recommendation: The Organization should continue to monitor compliance with the replacement reserve deposit requirements and follow its plan for fully funding the replacement reserve account. Current year status: During the year ended September 30, 2020, there were twelve monthly deposits of $2,123 to the replacement reserve account. However, the replacement reserve account remained underfunded by $10,613, the amount of the prior year missing deposits as of September 30, 2020. Comment will be repeated. View of Responsible Officials and Planned Corrective Actions: Subsequent to September 30, 2020, the Project made an additional deposit of $10,613 to the replacement reserve account to cover the underfunding from fiscal year 2019.

SECTION II ? CURRENT YEAR FINDINGS AND RECOMMENDATIONS 2019-001 Replacement Reserve Account Condition: During our audit, we identified that management did not make five out of the twelve monthly deposits of $2,123 to the replacement reserve account thereby underfunding the replacement reserve account by $10,613 for the year ended September 30, 2019. Criteria: In accordance with the HUD regulatory agreement, the Project shall make a monthly deposit of $2,123 to the replacement reserve account. Cause: The months in which the deposits were not made were the months prior to the Project fully transitioning to the new management company. During this period, there was not effective oversight over the monthly deposits required. Effect: Failure to meet the regulatory requirements may result in default of the HUD regulatory agreement. Recommendation: The Organization should review the replacement reserve account each month to ensure required deposits are made to the account. View of Responsible Officials and Planned Corrective Actions: During fiscal year 2019, the Organization outsourced its property management and accounting and compliance services to a reputable third-party property management company in an overall effort to improve compliance with applicable compliance requirements and improve overall operational performance of the property. However, transitioning the property to the new management company and effectively implementing internal controls over compliance under the new management company required considerable time during which the Project experienced cash flow limitations that affected the Organization?s ability to make the required deposits to the replacement reserve account. Upon full transition and conversion to the new management platform, such cash flow limitations and refraining from making required monthly deposits are not expected to persist. Management will take necessary measures to ensure all required deposits are made.

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