Fellowship Manor

Condition: Management failed to post prior year audit entries. Criteria: Agreed upon audit adjustments must be posted to the financial statements each year. Cause: The cause is undeterminable. Effect: The financial statement records did not contain all financial transactions of the property. Recommendation: I recommend management post audit entries to agree financial records to audit report.

The beginning balances of 2023 were not adjusted to the requested 2022 Audit Adjustment Entries received from the Auditor. We will record the adjusted journal entries of 2022 and 2023 in their respective periods

Condition: Management did not record utility accruals in the accounting records in the amount of $12K. Criteria: The accrual accounting method ensures transactions are recognized in the accounting period incurred, rather than paid, which follows the matching principle. Cause: The cause is undeterminable. Effect: Not recording accruals could have a material impact on both the balance sheet and the income statements. Recommendation: I recommend management post all accruals to properly reflect the financial position of the Project.

We will ensure that going forward utility accruals will be properly posted.

Condition: Management failed to make two required monthly deposits in the amount of $15,000 into the reserve for replacement bank account. Criteria: According to the Regulatory Agreement, “mortgagor will establish and maintain a reserve fund for replacements in a separate account in a bank…Concurrently with the effective commencement of rental assistance payments under the Project Rental Assistance Contract, the Mortgagor will deposit an amount…per month unless a different date or amount is approved in writing by HUD”. Cause: The cause is undeterminable. Effect: The Project did not comply fully with the HUD regulatory agreement. Recommendation: I recommend management adhere to the Regulatory Agreement as it relates to required monthly deposits into the reserve for replacement account.

Checks for the monthly reserve for replacement deposits for 12 months were generated in the entire year of 2023. We do admit that the deposit was deposited late. However, in October of 2023, management was notified by the banking institution where the Reserve for Replacement account is held that fraudulent activities had taken place with the reserve for replacement accounts. The banking institution closed all accounts and restricted all routine depository activity while they worked through the fraudulent activity. Because of this, the banking institution established new accounts in January 2024 at which time the held payments were deposited into the new account.

Condition: HUD 9250 funds were requested for use in operations in the amount of $229,388. Criteria: According to HUD 9250 requests, advanced funds were to be repaid within 60 days of receipt of HAP subsidy funds. Cause: The cause is undeterminable. Effect: The Project utilized funds from the reserve for replacement account and currently does not have funds to repay the loan. Recommendation: I recommend the Project remain in compliance with the HUD 9250 requests.

Due to the fraudulent activity with the reserve for replacement bank account in October of 2023, we were unable to return the borrowed funds to the reserve account until the new account was open and accessible.

2022?1 Reserve for Replacement Monthly Deposits Not Made Timely Condition: Management failed to make the required monthly deposits into the reserve for replacement bank account on a monthly basis. Criteria: According to the Regulatory Agreement, ?mortgagor will establish and maintain a reserve fund for replacements in a separate account in a bank?Concurrently with the effective commencement of rental assistance payments under the Project Rental Assistance Contract, the Mortgagor will deposit an amount?per month unless a different date or amount is approved in writing by HUD?. Cause: The cause is undeterminable. Effect: The Project did not comply fully with the HUD regulatory agreement. Recommendation: I recommend management adhere to the Regulatory Agreement as it relates to required monthly deposits into the reserve for replacement account.

2022-1 ? Reserve for Replacement Monthly Deposits Not Made Timely Condition: Management failed to make the required deposits into the Reserve for Replacement bank account on a monthly basis. Response: The Reserve for Replacement required deposits were not made in each current month throughout the year due to cash flow issues and the 5 month delay is receiving an approve budget and contract renewal. However, all required deposits were made prior to 12/31/2022. The project has complied with the replacement Reserve requirement as mentioned in HUD Handbook 4350.1 REV-1, Chapter 4-2. Though, the project was late in depositing payments this is not a significant violation of the HUD Handbook 4350.1 REV-1, Chapter 4-2 and the Regulatory Agreement. The requirement to fund and maintain the Replacement Reserve account was accomplished. The project must not be penalized for a delay in making a monthly payment. The defect was cured in a timely manner. Also, this is not a material weakness to raise it to the level of a reportable condition. We do not agree that this is an instance of material weakness to be elevated to a reportable condition.

2021-004

2021-1 Accruals Not Properly Posted Condition: Management did not record utility accruals in the accounting records. Criteria: The accrual accounting method ensures transactions are recognized in the accounting period incurred, rather than paid, which follows the matching principle. Cause: The cause is undeterminable. Effect: Not recording accruals could have a material impact on both the balance sheet and the income statements. Recommendation: I recommend management post all accruals to properly reflect the financial position of the Project.

We will ensure that going forward , all required utility accrual entries will be done timely.

2020-004

2021-2 Prepaid Insurance Not Properly Recorded Condition: Management failed to properly record prepaid insurance expenses. Criteria: Management is required to prepare financial statements in accordance with generally accepted accounting principles. Cause: The cause is undeterminable. Effect: Misrepresentation of prepaid expenses could have an impact on both the balance sheet and the income statements. Recommendation: I recommend management properly record prepaid insurance expenses

In 2021 we were recording prepaid expenses monthly as required and reconciling based on the policy renewal date of 7/12/2021. Going forward, we will reconcile and adjust the general ledger to match that of the prepaid expense schedule in June and at fiscal year-end in reconciliation of the same.

2020-002

2021-3 Property and Equipment not Capitalized Condition: Management failed to capitalize expenditures that yield benefits over an extended period of time. Criteria: Management is required to prepare financial statements in accordance with generally accepted accounting principles. Cause: Transactions were expensed in the accounting records. Effect: Misrepresentation of financial position of the Project. Recommendation: I recommend management properly capitalize property and equipment according to their capitalization policy

We disagree with this finding as Management reviewed invoices throughout the year capitalizing eight invoices totaling over $15,00.00. We are requesting specificity as to which item caused this finding.

2020-003

2021?4 Reserve for Replacement Monthly Deposits Not Made Condition: Management failed to make the required monthly deposit into the reserve for replacement bank account. Criteria: According to the Regulatory Agreement, ?mortgagor will establish and maintain a reserve fund for replacements in a separate account in a bank?Concurrently with the effective commencement of rental assistance payments under the Project Rental Assistance Contract, the Mortgagor will deposit an amount?per month unless a different date or amount is approved in writing by HUD?. Cause: The cause is undeterminable. Effect: The cash balance was overstated due to $30K in deposits that were never made to this account. The balance was corrected during the audit. Recommendation: I recommend management adhere to the Regulatory Agreement as it relates to required monthly deposits into the reserve for replacement account.

The property did not make the November and December of 2021 deposits due to a low operating cash balance after unexpected expenses. Management has since made these 2 deposits in February 2022 in addition to their regular monthly deposit. Going forward, we will ensure that all Reserve for Replacement remittances are issued by the 5th of the month.

2021?5 Reserve for Replacement Withdrawal Not Approved by HUD Condition: There was a withdrawal made from the reserve for replacement account totaling $24,489 that was not approved by HUD. Criteria: According to HUD, form 9250 must be completed and submitted for HUD approval prior to withdrawing from the reserve for replacement account. Cause: Management failed to send the HUD 9250 form to HUD for approval. Effect: The Project is not in compliance with HUD regulations regarding withdrawals from the reserve for replacement account. Recommendation: I recommend management adhere to HUD regulations.

We disagree with this finding and request its removal. The 9250 request was made for $24,488.81 and was approved and signed by Gwendolyn Thomas of HUD's Chicago office. The request and approval were uploaded to the auditor on 2/26/2022. We request that the auditor remove this finding.

2021?6 Collection of Tenant Accounts Receivable Condition: Management failed to collect monthly lease payments resulting in tenants accruing large amounts of past due rent. Criteria: Monthly tenant lease payments should be collected and payable according to the terms of the HUD model lease. Cause: Site managers did not carry out the terms of the HUD-model lease and collect rent due. Effect: Tenant accounts receivables included significant amounts of unpaid rent for current residents. Recommendation: I recommend management develop and implement a collection policy.

One Resident is in court for eviction for non-payment of rent which has caused a large amount of past due rent. Management has filed the eviction and is awaiting a court date. Due to the national and state-wide COVID-19 moratorium on evictions, Management could not initiate an eviction proceeding until it was lifted. Management took all steps available to them during the moratorium to assist the Resident in seeking rental assistance to avoid this eviction action and reduce the receivable, to no avail.

2020?1 Prior Year Audit Entries Not Posted Condition: Management failed to post prior year audit entries. Criteria: Agreed upon audit adjustments must be posted to the financial statements each year. Cause: The cause is undeterminable. Effect: The financial statement records did not contain all financial transactions of the property. Recommendation: I recommend management post audit entries to agree financial records to audit report.

Management agree that our previous account failed to post the prior year audit entries. Management?s recently hired accountant has been made aware of this issue and has proceeded to post the prior year entries and will post audit entries timely going forward.

2020-2 Prepaid Insurance Not Properly Recorded Condition: Management failed to properly record prepaid insurance expenses. Criteria: Management is required to prepare financial statements in accordance with generally accepted accounting principles. Cause: The cause is undeterminable. Effect: Misrepresentation of prepaid expenses could have an impact on both the balance sheet and the income statements. Recommendation: I recommend management properly record prepaid insurance expenses.

Management has reviewed this matter with our accounting team and will ensure that prepaid insurance is recorded properly going forward.

2020-3 Property and Equipment not Capitalized Condition: Management failed to capitalize expenditures that yield benefits over an extended period of time. Criteria: Management is required to prepare financial statements in accordance with generally accepted accounting principles. Cause: Transactions were expensed in the accounting records. Effect: Misrepresentation of financial position of the Project. Recommendation: I recommend management properly capitalize property and equipment according to their capitalization policy.

Management has reviewed this issue with our recently hired accountant who will ensure that going forward eligible expenses are capitalized. This matter was an oversite and not an intentional measure of misrepresentation of the financial position of the property

2020-4 Significant Expenses not Properly Accrued at Year-End Condition: Management failed to properly accrue $10K in salaries, and related payroll taxes at year end. Additionally, $38K of utility bills were not recorded in the accounting records. Criteria: Management is required to prepare financial statements in accordance with generally accepted accounting principles. According to these principles, expenses should be recorded when incurred. Cause: Management did not accrue salaries and utility bills at year end. Effect: Accounting records are not complete, thereby misrepresenting the financial position of the Project. Recommendation: I recommend management record all expenses in the according records for the proper period.

Management agree with this significant oversight and find it to be totally unacceptable and inexcusable, as this is general accepted accounting principles. Management has addressed this issue with our recently hired accountant. This issue will be corrected and will not occur going forward.

2019?1 Vacancies Not Reconciled Timely Condition: Vacancies are not reconciled throughout the calendar year. Criteria: Vacancies should be reconciled at the end of each month. Cause: The cause is undeterminable. Effect: Vacancies had to be reconciled during the audit process. Recommendation: I recommend management reconcile vacancies on a monthly basis.

Response: All vacancies in the General Ledger of ARMS agree to the reports of the tenant ledgers in our Leasing and Rents software. This reconciliation of vacancies is performed on a regular basis.

2019?2 Gross Potential Rent Not Reconciled Timely Condition: Gross potential rent is not reconciled throughout the calendar year. Criteria: Gross potential rent should be reconciled at the end of each month. Cause: The cause is undeterminable. Effect: Gross potential rent had to be calculated and reconciled during the audit process. Recommendation: I recommend management calculate and reconcile on gross potential rent on a monthly basis.

Response: The gross rent potential is reconciled throughout the year. However, interim and annual certifications of resident income, assets, and household composition may create adjustments to prior closed periods of rent and subsidy payments which are reflected in the current fiscal year. We will continue to ensure reconciliation of Gross Rent Potential on a monthly basis.

2019?3 Collection of Tenant Accounts Receivable Condition: Management failed to collect monthly lease payments resulting in tenants accruing large amounts of past due rent. Criteria: Monthly tenant lease payments should be collected and payable according to the terms of the HUD model lease. Cause: Site managers did not carry out the terms of the HUD-model lease and collect rent due. Effect: Tenant accounts receivables included significant amounts of unpaid rent for former residents. Recommendation: I recommend management develop and implement a collection policy.

Response: We will ensure, going forward, that our collection policy relating to former residents is adhered to.

2019?4 Management Agent Certifications Not Current Condition: Management Agent Certifications provided during the audit and approved by the Department of Housing and Urban Development (HUD) had a term of 8/7/2017 ? 6/31/2018. Criteria: According to HUD Handbook 4381.5, The Management Handbook, Paragraph 2.6, the owner and agent must complete HUD Form 9839-B Management Agent Certification. Cause: Management failed to obtain a current management agent certification approved by HUD. Effect: The accuracy of the management fee expense is undeterminable. Recommendation: I recommend the management company obtain current management agent certifications approved by HUD, upon expiration.

Response: The Management Agent Certification (HUD Form 9839-b) does not have an expiration date. An updated Management Agent Certification (HUD Form 9839-b) is required under the following conditions: a) Authorizing the agent to collect a fee different from the percentages fees and any special fees specified in Paragraph 1 of the existing Certification: b) Changing the expiration date of the Management Agreement. c) Renewing the Management Agreement. d) Permitting a new Agent to operate the project e) Permitting a new Agent to collect a fee. f) Undertaking self-management of the project. Therefore, we disagree with this finding as the Management Agent Certification provided that is signed and approved by the Owner, HUD, and the Agent, is valid.

2019?5 Move-In Inspection Form Incomplete/Not Signed Condition: Move in inspection form was incomplete and not signed by the tenant. Criteria: According to the HUD Consolidated Audit Guide 2000-4; Chapter 6 Move-In Inspection Requirements, before executing a lease, the owner and tenant must jointly inspect the unit. After the owner conducts a unit inspection, the inspection form must indicate the condition of the unit. Both the owner and the tenant must sign and date the inspection form. Cause: Management failed to provide a completed and signed the move-in inspection form. Effect: The Project is not in compliance with HUD leasing requirements. Recommendation: I recommend the Project maintain completed and signed move-in inspection forms required by HUD.

Response: The move in inspection form did not upload to the share file properly on two files and one date was obtained, all have been uploaded to the shared file.

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