THE SHELBOURNE APARTMENT BUILDING, INC. 066-HD011Non-Profit

SECTION II ? CURRENT YEAR FINDINGS AND RECOMMENDATIONS 2020-001 Residual Receipts Account (Previously 2019-002) Condition: As of September 30, 2019, the Project?s surplus cash computation indicated a deposit of $2,264 should be made to the residual receipts account. However, the Project did not deposit the surplus cash within 60 days of the end of the fiscal year. In addition, during the year ended September 30, 2020, the Project withdrew $5,161 from the residual receipts account without prior authorization from HUD. Criteria: Surplus cash, as defined by HUD, must be deposited into the residual receipts account within 60 days after the Project?s fiscal year end. Withdrawals from this account may be made only for project purposes and the approval of HUD. Cause: Due to the change in management that occurred during fiscal year 2019, internal controls over compliance were not properly implemented to address compliance requirements around the surplus cash computation. The surplus cash computation was not completed by Owner as of September 30, 2019, and therefore, Owner did not identify that a deposit was required. In addition, Owner did not have an effective internal control(s) in place to ensure that withdrawals from the residual receipts account were not made without HUD authorization. Effect: Failure to make required deposits to the residual receipts account or to obtain HUD approval for withdrawals from the residual receipts account results in noncompliance with the HUD rental regulatory agreement. Recommendation: Owner should implement internal controls over compliance that specifically address adherence to the compliance requirements over the residual receipts account. Current year status: As of September 30, 2020, there was no surplus cash to deposit to the residual receipts account. However, during the year ended September 30, 2020, the Project withdrew $5,161 from the residual receipts account used for Project operating costs but without prior authorization from HUD. Therefore, this comment will be repeated. View of responsible officials and planned corrective actions: The Project experienced a cash flow deficit during fiscal year 2020 primarily due to the significant costs required for the reparation of the property and the relocation of its residents due to water damage sustained by the building that rendered the building uninhabitable. Owner used the funds from the residual receipts account to cover a portion of these costs. Owner will seek retroactive approval from HUD for the funds withdrawn from the residual receipts account. If not approved, then Owner will return the funds to the residual receipts account.

2020-002 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 $19,500 for expense not allowed by HUD. 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 $25,507 ($22,700 for asset management fees and $2,807 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 $19,500.

SECTION II ? CURRENT YEAR FINDINGS AND RECOMMENDATIONS (CONTINUED) 2020-003 Replacement Reserve Account (Previously 2019-001) Condition: During our audit, we identified that management did not make five out of the twelve monthly deposits of $1,150 to the replacement reserve account thereby underfunding the replacement reserve account by $5,400 for the year ended September 30, 2019. Criteria: In accordance with the HUD regulatory agreement, the Project shall make a monthly deposit of $1,150 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 transitional period, there was ineffective oversight over the monthly deposits required. Effect: Failure to meet the regulatory requirement may result in default of the HUD regulatory agreement. Recommendation: During the year ended September 30, 2020, all twelve monthly required deposits to the replacement reserve account were made. However, the replacement reserve account remained underfunded by $5,400, the amount of the prior year missing deposits, as of September 30, 2020. Comment will be repeated. Current Year Status: The Project expects to replenish the replacement reserve account for the underfunding from FY2019 and has developed a payment plan to be able to fund the reserve over a reasonable period considering the cash flow constraints of the Project.

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 $1,150 to the replacement reserve account thereby underfunding the replacement reserve account by $5,400 for the year ended September 30, 2019. Criteria: In accordance with the HUD regulatory agreement, the Project shall make a monthly deposit of $1,150 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 ineffective oversight over the monthly deposits required. Effect: Failure to meet the regulatory requirement may result in default of the HUD regulatory agreement. Recommendation: The Organization should ensure that the new management company employs effective oversight over the applicable compliance requirements of the property including maintenance of the replacement reserve 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.

SECTION II ? CURRENT YEAR FINDINGS AND RECOMMENDATIONS (CONTINUED) 2019-002 Residual Receipt Account Condition: The Project generated surplus cash as defined by HUD. However, the Project did not deposit the surplus cash as required within 60 days of the end of the fiscal year. Criteria: As required by HUD under the terms of the rental regulatory agreement, any surplus cash as calculated in the HUD Surplus Cash Computation, must be deposited within 60 days after the Project?s fiscal year end. Cause: Due to the change in management that occurred during fiscal year 2019, internal controls over compliance were not properly implemented to address compliance requirements around the surplus cash computation. We noted that the computation was not completed by the current management and this resulted in the surplus cash not being deposited within 60 days after year end. Effect: Failure to compute the surplus cash at the end of the year result in failure of identifying the amount (if any) that is required to be deposited into a qualifying bank account after year end. This could result in noncompliance with the HUD rental regulatory agreement. Recommendation: Management should implement internal controls over compliance that specifically address adherence to the compliance requirements over the surplus cash computation. View of Responsible Officials and Planned Corrective Actions: During fiscal year 2019, the Organization transitioned its property management and affordable housing compliance to a reputable third-party management company with robust internal controls over compliance and will work with the current management to establish proper internal controls over compliance with respect to the surplus cash computation.

SECTION II ? CURRENT YEAR FINDINGS AND RECOMMENDATIONS (CONTINUED) 2019-003 (previously 2018-004) Tenant Eligibility Records Condition: Out of the 5 tenants selected for testing during FY 2019, we observed three tenant files that were missing evidence of FY 2019 recertification and 2 out of the 5 recertifications were not performed timely. Criteria: Eligibility criteria is set forth in the OMB Compliance Supplement. Cause: Management failed to exercise effective oversight over the processing and maintenance of records related to tenant information. Effect: Failure to report the correct tenant income may cause errors in the determination of HUD subsidy and tenant rent amounts and noncompliance with the HUD rental regulatory agreement. Recommendation: Management should employ sufficiently competent personnel to remediate conditions existing in the tenant files and exercise more effective oversight over the tenant eligibility process for both new tenants and for re-examination of existing tenants. View of Responsible Officials and Planned Corrective Actions: During fiscal year 2019, the Organization transitioned its property management and affordable housing compliance to a reputable third-party management company with robust internal controls over compliance. However, given the timing of the transition and the volume of tenant records involved in the overall transfer of the MBCDC affordable housing projects to the new management company, there were some delays in processing the annual reexaminations of tenant eligibility. Management does not expect to encounter these delays moving forward as all tenant files have been uploaded to the management system where internal controls are in place to ensure timeliness of reexaminations, including automated system reminders at least 60 days prior to the tenant?s annual renewal date.

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