CITY AND COUNTY OF SAN FRANCISCO OFFICE OF THE CONTROLLER

Ben Rosenfield Controller Monique Zmuda Deputy Controller

MEMORANDUM
TO: Trent Rhorer, Director, Human Services Agency David Curto, Human Services Agency Scott Walton, Human Services Agency Brian Cheu, Mayors Office of Housing Ben Rosenfield, Controller Peg Stevenson, City Performance Director, Controllers Office Greg Asay, Performance Analyst II, Controllers Office Nikhila Pai, Performance Analyst II, Controllers Office Wynne Tang, Tenderloin Housing Clinic Christina Iwasaki, Human Services Agency March 23, 2012 Tenderloin Housing Clinic Review

FROM:

CC:

DATE: SUBJECT:

Based in San Franciscos Tenderloin neighborhood, Tenderloin Housing Clinic (THC) operates the Citys largest permanent housing program for single homeless adults and is a leading provider of legal services to low-income tenants. The organization currently leases almost 1,600 units in sixteen master-leased hotels. According to the Controllers Offices vendor payment database, THC received over $18 million in City funds in FY 2010-11. The Controllers Office and Human Services Agency performed a three-part review of THCs management and budgetary practices: 1. In response to the arrest and subsequent conviction of a THC employee for embezzlement, we reviewed THCs internal controls for the financial management of its properties. Our review found that THC, in response to this crime, has implemented sufficient internal controls for all of its properties. 2. In response to public concern regarding the Citys property tax assessment of a THC property on Innes Avenue, we found that the Assessors methodology for its valuation of the property to be reasonable. In addition, we found that there is no evidence that THC has used City funds to pay for property-related expenses. 3. In response to public concern regarding the possible use of City funds to pay for THCs Beyond Chron website expenses, the Human Services Agency (HSA) staff reviewed THCs budget and staff allocation plans. HSAs review found that there appears to be no indication that City funds are being use to support Beyond Chron.
415-554-7500 City Hall 1 Dr. Carlton B. Goodlett Place Room 316 San Francisco CA 94102-4694 FAX 415-554-7466

I. Internal Controls Property Management Background On October 12, 2011 the San Francisco Police Department announced the arrest of James Eugene Holland, a former THC employee, for allegedly embezzling over $29,000 from the agency in 2009. Mr. Holland was accused of taking rental payments from THC tenants at the Galvin Apartments and depositing the funds into his personal bank account. He was also accused of moving new tenants into the Galvin Apartments, without notifying THC, and depositing rent money from these units into his personal bank account. In media reports, Randy Shaw, THC Executive Director, said that Mr. Holland was fired two years ago after allegations of theft came to light. Mr. Shaw also stated that the alleged crimes did not involve any properties connected to City contracts for housing. Separately, a March 19, 2010 external audit by DZH Phillips, an independent auditor, identified significant deficiencies in the bank reconciliation and rent rolls/property management functions of THCs Modified Payment Plan (MPP) software. The auditor pointed specifically to limitations in the system that prevent the MPP software from preparing complete and accurate bank reconciliations or to generate a traditional rent roll. In response to the audit, THC management redesigned the MPP database. In its February 28, 2011 audit, DZH Phillips stated the MPP software upgrade addressed the previous years deficiencies. Findings In October 2006, THC opened the Galvin Apartments, a 56-unit apartment building at 785 Brannan Street serving very low income tenants. A local housing developer constructed and donated Galvin Apartments to THC in return for the Citys approval to upzone a market-rate project at another site. As a result, no City funds were used to build the project and, because rental revenue from the building pays for its expenses, no City funds are used for its operations. According to Wynne Tang, Director of Finance, because the Galvin Apartments are the only housing units owned by the organization and operated without public subsidy, THC decided not to integrate management of the units into THCs established protocols. Under these protocols, THCs Housing Division handles client intake and rent collection at the central office and according to established policies and procedures. Instead, THC managed the Galvin Apartments as a for-profit company would, with a property manager assigned to fill vacancies and collect rent. The property managers would then deliver rent to THCs Housing Division for deposit. In 2008 THC assigned the resident screening and rent collection responsibilities to Mr. Holland, then Director of Property Management for all 15 master-leased THC properties. According to Ms. Tang, in mid-2009 the finance team noticed a dip in revenue from the

Galvin Apartments. Upon further investigation, staff discovered that Mr. Holland had been depositing rent checks into his personal account and had filled two vacant units without notifying the central office. Mr. Holland was placed on leave during an internal investigation and fired one week later. Subsequent to his arrest in 2011, Mr. Holland pled guilty to the embezzlement crimes and is currently serving a jail sentence. As a result of the embezzlement, management of the Galvin Apartments has been integrated into THCs standard operating procedures. The process for filling vacancies and collecting rent mirrors the tenant intake process at THCs master lease sites. The centerpiece of these procedures is the Property Management Information System (PMI, also referred to as MPP), a database that tracks by client and lists funds collected, funds dispersed, account balance, and unit vacancies. All Galvin Apartments tenants and units are tracked in PMI. Tenants mail rent checks directly to THCs Housing Division, which itself has separate units for rent collection, accounting, and client interaction. An Associate Director of Supportive Housing and Property Management (SHPM) screens potential tenants and refers these potential tenants to the Housing Division for further review and processing. In the event that PMI shows a tenant behind on rent, THC sends a case manager not the property manager to speak with the tenant. A review of THCs written policies and procedures by Controllers Office staff confirms that THCs management of the Galvin Apartments has been integrated into the organization-wide practices. Unlike past practices during Mr. Hollands tenure at THC, no one person controls rent rolls, client screening, and rent collection at the Galvin Apartments. In particular: 1. THCs written policies and procedures detail adequate controls for its property management functions, including new tenant intake screening, rent payment and the processing of rent checks, nonpayment of rent, and tenant transfers. Multiple THC divisions are involved in these processes, and there are written records of actions taken throughout the process. 2. THCs policies and procedures require a joint review of the buildings rent rolls by an Associate Director of SHPS, Galvin Apartments case manager, and a housing counselor every other month. 3. Our review of the PMI database confirms Ms. Tangs description of its breadth of information and confirms the security controls to limit access to authorized staff only. HSA Oversight While distinct from our original scope of work, the Controllers Office reviewed the Human Services Agencys (HSA) practice of reimbursing master lease service providers, such as THC, based upon actual expenses incurred minus rents collected. In particular, the Controllers Office reviewed what controls are in place to prevent a service provider from underreporting rental income, thereby maximizing its HSA reimbursements.

According to David Curto at HSA, THC provides printouts of its rent rolls with its invoices, and HSA checks reported rental income against these printouts. However, Mr. Curto stated that THC is the only master lease service provider to submit printouts because it is the only service provider with the proper software. Accordingly, HSA does not check rent rolls against reported rental income for other master lease service providers. Mr. Curto suggested his department would be well served to reconcile the rent rolls of all master lease service providers quarterly to prevent any underreporting of rents. The Controllers Office agrees with this recommendation.

II. Innes Avenue Property Background A local housing developer transferred title to a 3.16 acre mostly-vacant lot located on Innes Avenue to THC in December 2007. According to a February 28, 2011 external audit by DZH Phillips, an independent auditor, the housing developer obtained an appraisal of the property at $20 million as of the date of transfer. Prior to transfer, the housing developer used the property as a staging area for its construction work but had submitted plans to the City for the development of over 200 condominiums on the property. At the date of transfer, these plans had not received City approvals. The DZH Phillips audit further stated that THC, upon receipt of title of the land, executed a space lease agreement with the housing developer in which development plans and permits were transferred to THC in lieu of rent. The lease expires five years from its signing or at commencement of construction on the property, whichever comes first. Both at public hearings before the Board of Supervisors and on its Beyond Chron website, THC staff have stated the organizations intention to build approximately 200 units of housing on the site, including units affordable to low-income households. Over four years have passed since the transfer of title, however, and the proposal has yet to receive City approvals. In addition, the property falls within the India Basin Shoreline Planning Area, formerly a joint project of the Citys Planning Department and the San Francisco Redevelopment Agency. According to Mat Snyder of the Planning Department, planning for that area is dormant. Findings According to Ms. Tang, the housing developer continues to use the property as a staging area for its construction work. Since taking title, THC has paid $65,454.15 in property taxes and insurance costs. THC also paid $765 to the City in FY 2011 for abandoned building registration. THC maintains that unsolicited donations and revenue surpluses from the law office and Galvin Apartments have covered the above costs. She states that no City funds have been used for these expenses.

A review of THCs profit and loss statements for June 30, 2008, June 30, 2009, and June 30, 2010 reveals adequate unrestricted, non-City funds to cover the above expenses. As such, the Controllers Office finds that there is no evidence that THC has used City funds to pay for property-related expenses. A Controllers Office review of the Assessors database reveals the property was reassessed by the City upon the transfer of title. The total taxable value of the property was $232,659 in 2006; in 2011 the total taxable value was $371,133. According to Michael Jine in the San Francisco Assessors Office, property assessments are based upon the highest and best use of the property. As no THC development proposals have been approved by the City nor has the City completed its planning process for the area, the Controllers Office believes that the Assessors Offices methodology for its valuation of the property is reasonable. Also, the Controllers Office notes that the property has not been recorded on THCs financials. Consequently the organizations assets are understated. In addition, as noted in the DZH Phillips audit, this omission in the financial statements constitutes a departure from U.S. generally accepted accounting principles (GAAP). The Controllers Office believes that this omission does not affect THCs ability to fulfill its mission nor does it affect the Citys contractual relationship with the organization. How the housing developer obtained a private appraisal of $20 million prior to transferring title to THC is beyond the scope of this memo.

III. Beyond Chron Website HSA conducted a review of some THC financial documentation in response to public complaints alleging that THC is using City funds to pay the salaries of THC staff Randy Shaw and Paul Hogarth to write articles for the Beyond Chron website. Beyond Chron is a website that is a wholly owned subsidiary of THC. THCs current FY11-12 agency-wide budget shows Beyond Chron as a separate and distinct program that is not funded by City sources. HSA reviewed THCs budget, staff allocation plans, payroll documents, and previously submitted invoices to verify the sources of funding for staff. HSA staff also met with Wynne Tang, THC Director of Finance. Based on this review, HSA found: 1. Randy Shaws salary is comprised of the following sources: 76% allocated to Indirect (City funds) 4% Rent Board (City funds) 20% Law Office (Non-City revenue - Galvin, law office profits) 2. Paul Hogarths salary is comprised of the following sources: 93.06% allocated to Property Management & Supportive Services (City funds) 6.94% to Beyond Chron (Non-City revenue - Galvin, law office profits)

THCs total budget for Beyond Chron for FY 11-12 is $10,999, with $6,750 of that total allocated for personnel expenses. Ms. Tang states that Beyond Chron is fully funded by profits from the THC-owned Galvin Apartments and from law office settlements. A review of THCs financial documents reveals adequate unrestricted, non-City funds to cover these expenses. HSA believes that there is no indication that City funds are being used to support Beyond Chron. Absent further forensic audit steps which are not indicated here, the Controllers Office concurs that THC has documented private funding sources sufficient to cover the cost of Beyond Chron activities.

Methodology This Controllers Office memo is based upon a review of THCs financial documents, policies & procedures, PMI system, and interviews with Ms. Wynne Tang, THC Director of Finance, and City officials. It also incorporates work performed by HSA.

Tenderloin Housing Clinic Tenderloin Housing Clinic is a San Francisco nonprofit organization located at 126 Hyde Street. Founded in 1980 as an all-volunteer agency, THC now operates the City's largest permanent housing program for single homeless adults leasing close to 1,600 units in sixteen hotels and is a leading provider of legal services to low-income tenants. In the current fiscal year, the organization receives City funding from Human Services Agency and Mayors Office of Housing. THCs mission statement is as follows: The Clinic's mission is to prevent tenant displacement, preserve and expand the City's low cost housing stock and to provide comprehensive legal assistance to low income tenants. The Clinic is successful in fulfilling this mission by providing free legal services, securing SRO units through the Master Lease program and offering comprehensive support services to our clients. In 1989 THC initiated its Modified Payments Program (MPP), a program in which tenants maintain their supportive housing through 3rd party rental payment assistance and money management. In 2010 THC was awarded a Human Services Agency contract to become the sole provider of City funded MPP services for 900 tenants living in private and non-profit run SRO hotels.