City of Cieveiand Frank C. Jackson, Mayor Department of Community Deveiopment Tania Menesse, Director 601 Lakeside Avenue, Roam 320 Cleveland, Ohio 441 l4~1070 2 i 6/664?4000 January 18, 2019 John Hopkins Executive Director Buckeye Shaker Square Development Corporation 11802 Buckeye Road Cleveland, Ohio 44120?2621 SUBJECT: Cleveland New Homes LP Defauit Letter On-Site Monitoring Findings Dear John, Please be advised that this letter shall serve as official notice of default in the Buckeye Homes Project (Contract Numbers 49677 $475,000 HTF HOME Loan Contract No. 49728) and the Buckeye Homes ll Project ($175,000 HTF HOME Loan Contract No. 52211 and $125,000 HTF CDBG Loan Contract No. 52210). The notice of default has been initiated in response to the numerous findings described below related to the recent monitoring of Cleveland New Homes LP. Unless the events of default are cured in accordance with the Loan Documents and prior to the expiration of thirty (30) days from the date of this letter, The City of Cleveland shall pursue any and all rights and remedies under its loan agreements, promissory notes and open-end mortgages. The City of Cleveland performed an on~site monitoring review of Cieveiand New Homes LP, covering the contracts mentioned above. On October 17, 2018, Michiel Wackers visited the offices of Millennia Housing Management at 3501 93rd Street in order to have access to tenant files. At the visit, you were unable to provide access to the financial information requested. On October 17, 2018, Michiel Wackers requested in writing the financial information required for the monitoring and set a deadilne of October 26, 2018. incomplete information was provided on October 26, 2018. A subsequent request for clarification was sent on October 31, 2018 with a deadline of November 7, 2018. No response was provided to this request and efforts to reach you via email and phone were not successful. The following is a list of Findings and Concerns resuiting from the on-site visit on October 17, 2018 and subsequent information provided: An Equal Opportunity Empioyer Cleveland New Homes LP'Defauit Letter Gn-Site Monitoring Findings Page 2 FINDING #1 Failure to duty pay and discharqe ali taxes. Taxes - In reviewing the County Auditor Database, the total estimated delinquent unpaid tax bill on the projects is $121,000. Contracts require the foliowing: 3a. gem Borrower shall auly pay ane diaceaega all taxes, and governmental nhargee levied upon it or ageinet ice yropertiee prior to the date on which penalties would aataeh, except the: Borrower ehall no: he required to pay any itaxd or governmental charge whioh ie being conteeted by it in good faith and by appropriate an? timely proceedinge, provided that: Borrowes providee prior writtee notice to City as that conteet and proceeding: The City has not received any information in writing that these outstanding taxes are contested. The City has aiso not received a response to the October 30, 2018 request for additional information regarding why there are outstanding taxes. Corrective Action: Provide documentation of payment of taxes no tater than February 15, 2019. When this action is complete, this Finding wiil be closed. FINDING #2 Failere to comply with Uniform Administrative Requirements- internal Controls. FINDING #3 Failure to furnish City with reasonably requested records and information. i According to 2 CFR Part 200.62, adequate internal controls are required to ensure that ?transactions are properly recorded and accounted for? and to ensure ?funds, property and other assets are safeguarded against loss from unauthorized use or disposition?. The Cleveland New Homes LP 2018 2nd Quarter balance sheet indicates a decrease between December 2017 to June 2018 of $207,297. During this same period there was the creation of asset entry Buckeye Shaker Dev Corp?. Cieveiand New Homes LP Default Letter On?Site Monitoring Findings {351111 113111 11111111 31311111 111111 11111171433111 E11111 111111 2111 Page 3 111111 31 r1111 111111 4.1111; 11-11 511111111 1111 i 213%: i's- If . H, T1111 1131 1111151 11 ESE 11111.1 11 12111 1111111111111 111? 1:11:11 {1111131 {111111 1111 T111111 11111111 1111111 25,111 2131119 .. . 1 1111:; __111115111111 E11111 ?111 ?2111 ?11111 $111111: 111111 1111111 7 111,111 111,111 The City has not received any response to our October 30, 2018 request for more information regarding these two transactions. REPORTING 2 11131230132333 T13 MRFM 11111113: 111113. ?11111}: HUD 13: 1:11 the 1:11:11 11 1111111111 IEqueated 11 a form that 11 1111111111; 1111111111, 1111111, 1111 111 11111111111 perteiniag 11 matters 1111111 by :111 Egreemeat+ #2 #3 Corrective Action: Provide documentation for the above transactions, along with documentation to verify that adequate internal controls are in place, ?transactions are properly recorded and accounted for? and ?funds, property, and other assets are safeguarded against loss from unauthorized use or disposition?. Submit this information no iater than February 15, 2019. When this action is complete, this Finding will be closed. Cieveland New Homes LP Defauit Letter On-Site Monitoring Findings Page 4 #4 Failure to compiy with Uniform Administrative Requirements- Internet Controis for Asset Management. Three properties on your rent roll are listed as owned by other entities and not Cleveland New Homes: a. 9616 Sophie b. 10506 Crestwood c. 9716 Elizabeth The City has not received any response to our October 30, 2018 request for more information about these two transactions. According to 2 CFR Part 200.62, adequate internal controls are required to ?maintain accountability over assets? and to ensure ?funds, property and other assets are safeguarded against loss from unauthorized use or disposition? FINDING #4 Corrective Action: Provide documentation regarding the status of these properties no later than February 15 2019. The City wiil review the documentation to determine if there IS a violation of the Loan documents #5 Cleveland New Homes LP tacks the capacity to operate the Projects in accordance with the Loan documents. The City of Cleveland has serious reservation concerning the capacity for your organization to comply with contract obligations, regulatory requirements, fiduciary compliance to carry out the intent of the Lease- Purchase objectives of the project known as Cieveiand New Homes. As of the monitoring visit, none of the vacancies were rented to new tenants since the project transferred and no existing tenants were in the process or have purchased the units they reside in. Required financial documents were not available for inspection and questions about documents provided were not responded to. FINDING #5 Corrective Action: ln order for the City to make a determination that Cleveland New Homes has the capacity to manage a Lease-Purchase Affordable Housing project, the foliowing actions must be taken: - Within the next thirty (30) days assess the physical needs of the rental units and prepare a pian on how these wili be corrected in ninety (90) days - Within the next thirty (30) days prepare and implement a plan to address the vacant rental with the next year . Within the next thirty (30) days re~verify income for all rental tenants to determine compliance with HOME requirements. . Within the next thirty (30) days determine which tenants are interested in purchasing rental units and collect necessary income documentation to determine . All financial obiigations need to addressed within thirty (30) days, inciuding but not limited to payment of taxes and uputo?date financial reports and procurement of a services to prepare audit documents for the next two years. Cleveland New Homes LP Befault Letter Orr-Site Monitoring Findings Page 5 CONCERN #1 Failure to provide calculation for Depreciation of Project. Staff was unable to determine if the method used to determine depreciation conformed with one of the allowable methods outlined in 2 CFR Part 200.436. Absent information this concern ma be considered a finding in foilow up communication, ?ewta?ce ?ee: Ease ?eedinee Ere w?e??ng CONCERN Corrective Action: Provide documentation regarding method used to calculate depreciation, no later than January 15, 2019. City will determine if the method used is permitted. As previously stated, this ietter is notification of default under the Loan documents for the Buckeye Homes and Buckeye Homes ll Projects. Unless all Findings and Concerns and any additional items of default under the terms and conditions of the Loan documents are remedied within thirty (30), the City will enforce the Remedies permitted under the Loans. if you have any questions, please contact Michiel Wackers, Assistant Director, at 216- 664~4143. erely, "ania Mehesse Director of Community Deveiopment TM:pjm