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A non-profit corporation founded in 1966 by the late Grandison Phelps, Jr., pastor of St. Paul United Methodist Church for 37 years, has been called out by the inspector general's office of the U.S. Department of Housing and Urban Development for allegedly misusing $5 million in money that was supposed to have been held in trust for affordable housing development.

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The target of the May 14 audit is Bay Vista Methodist Heights, which built its first low-income housing project, a 268-unit, 13-acre Logan Heights complex, with a $3.6 million government insured loan in 1969.

Phelps served on the board of the non-profit until his death in August 1997, according to the corporation's website.

In July 2007, according to the audit, the units were sold for $21.4 million. As a condition of the sale, Bay Vista agreed to put $14.8 million of the proceeds into a trust fund "to be used to develop, preserve, construct, or rehabilitate affordable housing units with a production goal of 675 units."

Bay Vista purchased two properties with the trust funds: Hillside Park Apartments, located in Hemet, CA; and Estancia, located in Desert Hot Springs, CA.

It also purchased Tierra del Rey using the non-trust-fund portion of the apartment complex proceeds but rehabilitated the property using trust funds. In addition, Bay Vista used trust funds for the predevelopment cost of Lisbon Road, a 3.7-acre plot of land it owns.

According to the audit, in July 2011 Bay Vista's general counsel, "identified irregularities concerning the balance in the trust fund."

The chief financial officer was placed on administrative leave in September 2011 and later dismissed from Bay Vista. In August 2011, Bay Vista’s independent auditor, who prepared the fiscal year end 2008 to 2010 financial statements, was hired as chief financial officer.

He began to reconcile the balance of the trust fund and discovered unauthorized transfers to the Bay Vista operating account as well as unauthorized expenditures. He also determined that Bay Vista, Lisbon Road, and the Estancia properties were operating at a net loss and could not be sustained by the net operating profits at Hillside Park and Tierra del Rey, resulting in a significant cash shortfall of approximately $2.7 million.

His audit results were shared with an independent accounting firm that Bay Vista retained to determine the application of withdrawals from the trust account between February 2008 and August 2011. The firm determined that more than $3.3 million was withdrawn from the trust account and used toward operating expenses and not for the requested purpose. Shortly thereafter, the chief executive officer and treasurer resigned.

After the inspector general's office was called into the case, it discovered that the situation had worsened:

During our review, Bay Vista’s Estancia property fell under a receivership and is in foreclosure status.

In addition, its Lisbon Road property is still raw land, and Bay Vista is attempting to sell it or locate a joint contributor to assist in developing the land due to the lack of excess cash to develop the property.

As of the most recent HUD approved draw request, dated June 2012, the trust account had a remaining balance of $316,404 of the original $14.8 million, despite the acquisition of only 432 affordable housing units including the Estancia’s 120 units and the Lisbon Road property.

According to the audit:

The former chief executive officer admitted that he was lax in supervising the former chief financial officer because he “trusted the guy.”

We recommend that the Acting Director of HUD’s Los Angeles Office of Multifamily Housing require Bay Vista to (1) repay more than $5 million to the trust fund from non-Federal funds; (2) support an additional $1 million or repay the trust; (3) replace the management agent with a non-identity-of-interest agent; and (4) implement policies, procedures, and controls to restrict the use of trust funds to only allowable expenses and ensure that the trust funds are not led with other funds.

Responding to the auditors’ findings, officials for Bay Vista blamed its ex-CFO for the misappropriated funds, saying:

All withdrawals, transfers, etc., from the trust fund account were accomplished by the former CFO via the online Comerica site through the CFO's personal password protected assets.

Bay Vista wishes to emphatically note these withdrawals were never authorized by Bay Vista but were all completed by the former CFO of Bay Vista in the manner described above.

The Bay Vista response also complained of lack of guidance and procedural information from HUD officials in Los Angeles, to which the inspector general's office replied:

Although we cannot speak for the HUD LA Multifamily HUB office, it is our understanding that Bay Vista previously had a contentious relationship with HUD. However, Bay Vista could still have developed internal procedures and controls even if there were issues dealing with HUD.

In addition, when the new director was installed in January of 2009 and problems with the HUD LA Multifamily HUB office were alleviated, Bay Vista still did not establish adequate operating procedures and controls to prevent further misspending of trust fund monies.

Bay Vista cited the former chief financial officer as the cause for all the inappropriate transfers; however, he was not put on administrative leave until September 2011. Bay Vista had ample time to establish operating procedures prior to September 2011 to address its internal control weaknesses.

Reached by phone today, a spokeswoman for Bay Vista said that group’s responses provided in the audit accurately reflected the non-profit’s criticism of the report. The next actions are up to HUD administrators.

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