Diakon Frostburg Senior Housing, LLCState Government

Section III - Federal Award Findings and Questioned Costs Finding 2024-001: Significant Deficiency in Internal Controls Over Compliance - Residual Receipts Federal Program: Project Based Rental Assistance (PBRA) (Section 8 Project-Based Cluster) Assistance Listing Number: 14.195 Federal Agency: U.S. Department of Housing and Urban Development Pass-through Agency: N/A Compliance Requirement: Special Tests and Provisions, Residual Receipts Account Questioned Costs: N/A Criteria: Notice H-2012-14 (the Notice), issued by the U.S. Department of Housing and Urban Development (HUD) on August 3, 2012, states that residual receipts account balances in-excess-of $250 per unit must be applied monthly to offset HAP up to the full amount of the monthly subsidy request and must continue until the residual receipts account reaches a balance of $250 per unit. At the end of the project's fiscal year, all surplus cash remaining after payment of any permissible distributions must be deposited into the project's residual receipt account. Condition/Context: On April 1, 2024, the balance of the residual receipts account balance exceeded the $27,500 allowable based upon the Notice ($250 x 110 Units = $27,500) by $82,461. At that time, the Company was required to submit HUD-9250 forms requesting residual receipts account distributions to offset rent subsidy payments each month until the residual receipts balance did not exceed $27,500. The Company did not request the required HAP offsets until September 3, 2024, as a result, the Company received rent subsidy payments of $27,615 from HUD that should have been offset by excess residual receipts deposits in 2024. At December 31, 2024, residual receipts exceeded $27,500 by $55,066 of which $27,450 related to the bank failing to disburse HUD approved HAP offsets that reduced rent subsidies for December prior to year end. Effect: The Company received $27,616 of HAP payments from HUD that should have been offset by the excess residual receipts deposits in 2024. Additionally, the balance in the residual receipts account exceeded the $27,500 allowable at December 31, 2024. Cause: The internal controls established by the Company to monitor compliance with HUD compliance requirements failed to detect noncompliance with requirement of the Notice. In part, the internal control failure was caused by turnover of key employees during the year ended December 31, 2024. Recommendation: We recommend that management implement procedures to ensure that even when the Company experiences turnover of key staff, to ensure monitoring of compliance with HUD requirements continues. View of Responsible Officials: Management of the Company agrees with this finding.

Finding 2022-001: Significant Deficiency in Internal Controls over Compliance - Residual Receipts Federal Program: Mortgage Insurance for the Purchase or Refinance of Existing Multifamily Housing Projects (Section 223(f)/207) Assistance Listing Number: 14.155 Federal Agency: U.S. Department of Housing and Urban Development Pass-through Agency: N/A Compliance Requirement: Special Tests and Provisions, Residual Receipts Account Questioned Costs: N/A Criteria: Management has reviewed the Company?s active Section 8 Housing Assistance Payment (HAP) Contract (the Contract) and has determined that it is considered a new regulation contract subject to the requires in Notice H-2012-14 (the Notice), issued by the U.S. Department of Housing and Urban Development on August 3, 2012. In summary, the Notice states that residual receipts account balances in-excess-of $250 per unit must be applied monthly to offset HAP up to the full amount of the monthly subsidy request and that monthly offset must continue until the residual receipts account reaches the retained balance of $250 per unit. At the end of the project?s fiscal year, all surplus cash remaining after payment of any permissible distributions must be deposited into the project?s residual receipt account. Condition/Context: In April of 2022, the balance of the residual receipts account balance exceeded $27,500 allowable based upon the Notice ($250 x 110 Units = $27,500) by $20,847. As a result of the calculated excess, the Company was required to submit a form HUD-9250 to the contract administrator requesting a $20,847 distribution from the residual receipts account to offset May 2022?s housing assistance payment. The request for the required offset was never submitted by the company, as a result, the balance of the residual receipts account was in-excess of the allowable amount for the year ended December 31, 2022. Effect: The balance of the residual receipt account exceeded the maximum allowable balance of $27,500 by $20,847 from May 1, 2022 through December 31, 2022. As a result, the HAP payments for May 2022 were never offset by the amount of the calculated excess as is required by the Notice. Cause: The internal controls established by the Company to monitor compliance with HUD compliance requirements failed to detect non-compliance with requirement of the Notice. In part, the internal control failure was caused by turnover of key employees during the year ended December 31, 2022. Recommendation: We recommend that management implement procedures to ensure that even when the Company experiences turnover, monitoring of compliance with HUD requirements continues. View of Responsible Officials: Management of the Company agrees with this finding.