Report: 1602 recipients allowed to profit in a 3-layered scheme
Allegations of Development Bank of American Samoa allowing recipients of the 1602 program to profit through a 3-layered scheme and that DBAS staff pressured recipients to use specific contractors and vendors are among the sixteen (16) peculiarities that need further review, according to the ‘revised on July 11, 2012’ draft report on the Section 1602 program, the same report cited in Thursday’s story.
It further notes that the most costly units of the project funded by Section 1602 funds was over $700,000 for only 4 units.
The draft report was prepared by the American Samoa Economic Stimulus and Recovery Office (ASESRO) 1602 Compliance Staff for ASESRO executive director Pat Galeai.
It reviews the Low Income Housing Tax Credit (LIHTC) Section 1602 program, which provides federal funds under the American Recovery and Reinvestment Act (ARRA) provision to finance construction or acquisition and rehabilitation of a qualified low-income building.
The local program is administered __by DBAS, which was approved to receive $30.77 million under the program.
The draft report, obtained by Samoa News is in ‘narrative’ form, and is an ‘ongoing’ report, which includes items the Compliance Staff are still reviewing or questions they are still seeking to answer. It also states that a final report on Section 1602 will be issued in early 2013. This would correspond with the final date of the program — Dec. 31, 2012.
Certain allegations for ongoing review, according to the compliance staff are found in a section of the draft report, under the header: “Other peculiarities which we feel warrant further review”. It cites 16 incidents.
For example, it states that “DBAS gave recipients virtually free 1602 buildings and allowed them to collect development and contracting fees for their own buildings.
“Some subawardees were given cash to construct buildings. They then hired themselves as developers and collected a fee as well. Then as developers, they hired companies which they themselves owned as contractors, sharing in another layer of profits.
“Finally, as contractors, they purchased materials — without evidence of paying market rates — from companies which they also owned, profiting yet again.”
Another incident cited in the report deals with placing advance orders with vendors in order to meet intermediate spending deadline targets — a direct violation of federal rules. The compliance staff notes that later the advance order was canceled, and the vendor ordered to make the necessary refund payment, leaving the vendor with excessive inventory.
The Compliance Staff under the header of ‘Refund of 1602 funds from vendors’: state that “according to the reports we requested from vendors, a total of $226,746.06 of 1602 funds was refunded to project owners, $802,559.62 was refunded to DBAS and $327,504.53 was refunded to other vendors.”
Warranted for further review, the draft reports also points out a mother and daughter receiving two separate subgrants. “They are believed to be of one household and only one project for a newly constructed 2-storey 4 unit building was actually built,” the draft report notes. “The other project for rehabilitation and converting an existing home to a 1602 unit was never touched, raising the question of what happened to the other grant.”
Additional allegations regarding DBAS staff noted as needing review are: staff pressuring recipients to use specific contractors and vendors ( the report notes this was not a typical allegation); pressuring recipients to pay for work prior to satisfactory completion — for certain favored contractors (was a common allegation); a DBAS inspector pressured a developer to release funds to a favored contractor for work not yet done “because the contractor really needs it”; a DBAS employee fraudulently altered paperwork signed by a developer to release a greater amount than originally authorized to that favored contractor; and DBAS employees received free merchandise from certain building material vendors that the bank pressured subawardees to patronize.
One of the peculiarities the Compliance Staff says needs to be further reviewed has to do with the “whole issue of the promissory notes in lieu of the 15% minimum investment to be made by the project owner is questionable,” the draft report states.
It explains that “promissory notes between the project owner and the contractor were accepted by DBAS as part of or all of the 15% minimum investment that is required for the project owner.”
However, the draft report says, “this kind of relief was never publicized, thus limiting the number of applicants that would have qualified but didn’t have the 15% investment.” The staff also wrote that the promissory note “leads to problems with cash-strapped individuals who do not have the liquidity to finish their buildings.”
Later in the draft report, it states that some project owners are invoicing the grant for the developer’s fees, payable to them and in some cases, the developer fee appears to be in lieu of the owner’s 15% investment share.
“We found no record of receipts issued to account for the developer’s 15% investment. Were any receipts issued for the developer’s 15% investment? And into what account were the deposits made?” the draft report asks, and included an e-mail reply from DBAS vice president Jason M. Betham Sr., who explained that the minimum 15% investment can be in different forms:
• Cash spent on materials or labor. Owners would maintain their receipts for expenses they paid for and submit them to DBAS prior to the developer fee being paid out. The developer fee is paid out last after the project is complete and all other cost overruns have been paid. Before paying out the developer fee, DBAS will certified the total cost of the project and that the grant funds received do not exceed 85% of the project cost. For owners using cash they would’ve had to provide proof of the case in their deposit accounts at the beginning of the project.
• Loans for either materials or labor. Owners may provide proof of a loan from a bank for the amount equal to their minimum 15% contribution to the project. This loan can then be used to either purchase materials or labor for the project. This is similar to cash. They may also obtain a loan in the form of a line of credit from a building supplier but would have to provide proof of such an arrangement at the beginning of the project.
• Promissory note from builder. In some cases, the builders are willing to make a Promissory Note — or loan to the project owner for what amounts to their 15% contribution to the project. The note will be paid according to its terms.
The draft report also states that some, though not all, project owners have indicated that they had to pay an additional 1% in order to process their subgrants. The draft report provided an explanation from Betham, who stated that the “1% Asset Management fee is not part of the 15% investment” but all project owners have to pay this fee which is based on the amount of the grant they are getting.
Betham said this fee is “to assist DBAS with overseeing construction, review of quotes and construction inspection.” He added that “DBAS tracks each 1% fee from each project as an Accounts Receivable needs to be collected in full before all grant funds are disbursed.”
Other peculiarities for further review listed are:
• husband and wife each received separate grants. The subgrants are for two projects under two separate applications, but ASESRO compliance staff “found this to be suspicious for one couple under the same household to each receive a subgrant.”
• another individual received two separate grants and one was for the repair of an existing house, while the other was for new construction.
• there was a lack of transparency and consistency in the award process.
• initial refusal by DBAS to allow ASESRO access to examine DBAS files further “exacerbated a deteriorating predicament”.
• DBAS approval of utility deposits, which is a non-expense for 1602 buildings was common.
• DBAS sales of blueprints to subawardees as a measure to capture award revenues.
COST PER UNIT
The draft report points out that “simple math dictates that by dividing the total award” of more than $30.77 million “by the total number of 501 units, one would arrive at the average of $61,434.13 costs per unit.”
And a review of the apportionment or distribution of funds shows an acceptable margin from $12,000 to $24,000 per unit for repairs/renovations for some of the existing buildings.
“However, a much, more exorbitant range of average cost per unit of $30,000 to $175,000 is true for 400 units,” the report says.
“This use spectrum in costs among the 1602 units is noncompliant with DBAS’ own estimated, authorized costs for constructing new homes, which are generally larger in size,” it says. “The most costly project was awarded $702,356.02 for four units.”
The report provides a breakdown by units of the 132 projects that were funded, including the six renovations:
• 22 one-unit projects awarded at price range of $18,153 to $107,268
• 31 two-unit projects awarded at price range of $14,025 to $138,426
• 13 three-unit projects awarded at price range of $34,850 to $93,271
• 39 four-unit projects awarded at price range of $15,810 to $175,589
• 3 five-unit projects awarded at price range of $44,797 to $91,556
• 3 six unit projects awarded at price range of 17,000 to $77,480
• 15 eight-unit projects awarded at price range of $23,083 to $108,012
• 3 ten-unit projects awarded at price range of $59,709 to $80,873
• 2 twelve-units; one renovating at $11,928 per unit; one new at $73,305 per unit.
• 1 fifteen-units at $72,112 per unit.
Samoa News will report more in Tuesday’s edition from the revised draft report, including the conclusions and recommendations of the ASESRO Compliance Staff.