Follow HUD Rules When Doing Business with IOI Contractors or Vendors

Like some sites, you might end up buying goods or services from an outside contractor or vendor that has close business ties to the site owner or managing agent. In these situations, the vendors or contractors are considered identity-of-interest (IOI) contractors.

HUD says that an identity-of-interest relationship exists between the site's staff and a vendor when the site's staff member, any officer, owner, or director of the vendor, or any person who directly or indirectly controls 10 percent or more of the site's voting rights is also:

• An officer, owner, or director of the vendor, or a person who directly or indirectly controls 10 percent or more of the vendor's voting rights; or

• Directly or indirectly owns 10 percent or more of the vendor.

For example, a site owner or managing agent might also be a partner or officer in the landscaping company or own over 10 percent of that company. While not illegal, these types of IOI relationships will trigger sharper scrutiny of a HUD-assisted site.

HUD has several rules you must follow when doing business with IOI vendors to make sure that the site owner or managing agent isn't unfairly profiting—by overcharging the site or funneling business to vendors it controls.

HUD auditors will want to make sure that a site owner or manager is not enriching itself, at the government's expense, by funneling business to companies it controls or has an interest in. If such IOI abuse is uncovered, the site owner or manager will have to repay the site operating account for any unreasonable expenses.

Case in Point

The scrutiny of IOI goods and services extends to relationships between owners and managing agents. That's what happened in 2008 to Bethany Housing, Inc., the owner of Bethany Towers Apartments in South Pasadena, Fla. Bethany Housing, established as a 501(c)(3) nonprofit charitable organization, acquired Bethany Towers in 1970, which was insured by HUD under the Section 236(j)(l)/202 Supportive Housing for the Elderly program. The project was owner-managed until July 2005, when the owner contracted with an identity-of-interest management firm to manage the project.

HUD found serious deficiencies in a February 2007 on-site review of the project. Based in part on the seriousness of deficiencies identified in the review, HUD required the owner to terminate the services of the IOI agent, although HUD was unaware that the agent was an IOI at the time. The firm resigned in March, and the owner selected an independent firm, which assumed management of the site in April.

At that time HUD requested an audit of the project, due in part to findings and concerns noted by its February review. The auditors found that the owner and its undisclosed IOI management agent didn't provide proper oversight and management of the project's financial affairs.

Specifically, the owner: executed an unauthorized agreement to sell the project; diverted $90,000 in project funds; allowed the purchaser to select an IOI agent to manage the project, which led to financial harm; incurred more than $16,000 in ineligible/inadequately supported costs; and didn't maintain adequate books and records. In addition, when filling out form HUD-9839B, Project Owner's/Management Agent's Certification, the owner and agent checked the box that no identity of interest existed [OIG Audit Report 2008-AT-1013].

Follow Two HUD Rules

Although HUD rules on doing business with IOI vendors are easy to overlook, the penalties for not disclosing and documenting transactions with IOI vendors can be stiff. Here are two rules to abide by when using IOI contractors and vendors:

Document costs. Start by documenting the cost and getting competitive bids from other unrelated contractors. Use the bidding principles covered in “How to Bid Out Landscaping Maintenance” in this issue. When you apply the principles found in the article to other goods and services used at your site, you can prove to HUD that the fee the IOI contractor or vendor is getting for the IOI-provided goods or services is reasonable when compared to an arm's-length transaction with an unrelated contractor or vendor. But there are other rules as well.

Disclose IOI vendors. Disclose the names of IOI vendors on your Management Entity Profile (Form HUD-9832) and annual financial statements.

> Financial statements. You should list all IOI vendors you used during the year in the site's annual financial statements. If you paid an IOI vendor more than $1,000 from site funds during your fiscal year, you must disclose this in the annual financial statements you submit to HUD.

According to HUD Handbook 4370.2 REV-1, Financial Operations and Accounting Procedures for Insured Multifamily Properties, you need to provide a schedule that specifies:

• The vendor's name;

• The services the vendor performed for the site; and

• The amount paid to the vendor during the operating period.

> HUD's Management Entity Profile. The form is available at http://portal.hud.gov/hudportal/documents/huddoc?id=DOC_35584.pdf. When filling out the form independent managers and IOI management agents must provide all the information requested.

Question 10 of the form asks the manager to describe any purchasing procedures implemented to control or reduce costs. Answers can include bulk purchasing, paying early to take advantage of discounts, cost comparisons, or bids.

Question 11a asks the site to list any companies that regularly supply goods or services to your site and have an IOI with the management entity or its principals, such as officers or general partners.

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