HomeMy WebLinkAboutM-99-0910R M-qF 1,CE MEMORANDUM
Honorable Mayor andl r f November lh, 1999
Commission ' 415 It �3 ,
FOIE
WAL'fL,, J. rui:: -1AICI Audit of Miami Capital CITY CLERK
CITY OF MIAMI. FL Development, Inc.
FROM Ori -
City Manager REFERENCES
ENCLOSURES
At the City Commission meeting of November 10, 1999, the Commission directed that
an audit of the City's economic development loan program administered by the Miami
Capital Development Inc. (MCDI) and the Community Development (CD) department
be performed and presented to the City Commission on December 07, 1999. After a
Preliminary review of the controlling Codified Federal Register (24 CFR 570), audit
report issued by the US Office of Inspector General, and other pertinent Grant
agreements and documents, the Office of Internal Audit (OIA) have reached the
conclusion that an audit of the activities, operations and administration of the City's
economic development loan program cannot be properly planned, performed and
presented to the Commission by December 07, 1999. We were also informed that the
originals of some of the source documents relevant to this audit may have been
subpoenaed by a Federal law enforcement agency currently performing an investigation
of MCDI.
The Director of OIA has concluded after his preliminary review that the scope of the
audit engagement should include an analysis of financial (loan) transactions, review of
administrative/operational aspects of the loan program, and determination of
compliance with Single Audit requirements as mandated by the guarantor. OIA audits
are performed in accordance with Government Auditing Standards, issued by the
Comptroller General of the United States, and Standards for the Professional Practice
of Internal Auditing, issued by the Institute of Internal Auditors. These standards
require OIA to obtain, analyze and appraise evidential data as a basis for an informed and
objective opinion pertaining to the adequacy, the effectiveness, and the efficiency of
performance of the activities and/or programs being reviewed.
The field -work for this audit engagement has already started as directed by the City
Commission. We plan to conclude and issue an audit report as expeditiously as possible.
Please let me know if you have any additional directives and/or questions.
Thanks.
C. Victor Igwe, CPA, CIA, Director Office of Internal Audits
Walter Foeman, City Clerk
Alejandro Vilarello, City Attorney
r ;UR
CITY OF MIAMI OFFICE OF INTERNAL AUDITS
. . . .............................
-' 1��
'III
�.I N C 0 R I - 0
18, fie
REVIEW OF THE REPORT ISSUED BY THE CD
DEPARTMENT IN CONNECTION WITH THE
CITY'S ECONOMIC
DEVELOPMENT LOAN
PROGRAM ADMINISTERED B
i
AUDIT NO.00-002
Prepared By
Office of Internal Audits
z Victor I. Igwe, CPA, CIA
Director
STEVEN H. MARGOLIS, STAFF AUDITOR, PRINCIPAL
JULIET FALCON, CPA, STAFF AUDITOR
r
I
.
�)
DQTifij of ffl- (-^"I.
taint
VICTOR 1. IGWE, CPA,CIA
Director
Mr. Donald H. Warshaw
City Manager
444 S.W. 2nd Avenue
Miami, Florida 33130
��1Y r1R r�
I (�
r � n
November 23, 1999
DONALD H. WARSHAW
City Manager
Re: Review of the Report issued by the Community Development (CD) department in
connection with the City's economic development loan program administered by
Miami Capital Development, Inc. (MCDI)
At the City Commission meeting of November 10, 1999, the Commission directed that
the Office of Internal Audits (OIA) perform a review of the report issued by the CD
department in connection with the City's economic development loan program
administered by MCDI. As you are aware, the agreement between the City and MCDI
for the administration of this loan program expired September 30, 1999. The purpose of
OIA's review was limited only to the evaluation of the evidential data supporting the CD
department's audit findings in connection with the City's economic development loan
program administered by MCDI.
Sincerely,
Victor I. Igwe, CPA, CIA
a
�=r
Director
Office of Internal Audits
c: The Honorable Mayor Joe Carollo
..
Commissioner Tomas Regalado
Commissioner Wifredo (Willy) Gort
Commissioner Arthur E. Teele, Jr.
Commissioner Johnny L. Winton
Commissioner Joe Sanchez
OFFICE OF INTERNAL AUDITS
444 S.W. 2nd Avenue, Suite 715/tvI1,uni, FL 3 11-'HA305) 416-2040/FAX (.105) 416.2046
c Mailin , Address: P.C.). 8uti 110,7011 Miami Florida 3 $2 1 t.i170H
0
John F. Lindsay, Chief of Staff, City Manager's Office
Alejandro Vilarello, City Attorney
Walter Foeman, City Clerk
Juan A. del Cerro, President MCDI
Gwendolyn C. Warren, Director, CD department
Julie A. Weatherholtz, CPA, Director, Finance department
File
H
�i`
fry
REVIEW OF CD DEPARTMENT REPORT ON CITY'S ECONOMIC
DEVELOPMENT LOAN PROGRAM ADMINISTERED BY MCDI
FOR THE PERIOD ,TUNE 1,1998 THROUGH SEPTEMBER 30,1999
TABLE OF CONTENTS
ITEM
PAGE
INTRODUCTION
1
SCOPE AND OBJECTIVES
3
METHODOLOGY
3
RESULTS IN BRIEF
4
OIA RECOMMENDATIONS
5
REVIEW FINDINGS, AUDITEE RESPONSES AND ACTION
PLANS
8
THE CD REPORT ON THE REVIEW OF MCDI
I 1
THE OFFICE OF INSPECTOR GENERAL'S AUDIT REPORT
ON CITY LOAN PROGRAM ADMINISTERED BY MCDI
(EXCERPTS)
48
INTRODUCTION
At the City Commission meeting of November 10, 1999, the Commission directed that
the Office of Internal Audits (OIA) perform a review of the report issued by the
Community Development (CD) department in connection with the City's economic
development loan program administered by Miami Capital Development Inc., (MCDI).
The Office of Inspector General (OIG) for the department of Housing and Urban
Development in audit report No. 98-AT-241-1003, dated March 26, 1998, noted that (1)
the default rate of loans made by MCDI were excessive; (2) the CD department did not
require MCDI to substantially disburse program income prior to making additional
withdrawals contrary to the provisions of Title 24 CFR 570.504(c) and (b)(2)(i); (3) the
CD department did not require MCDI to remit interest earned on the revolving loan fund
as required by Title 24 CFR 570.500(b); and (4) MCDI made two loans totaling $501,849
which did not appear to provide sufficient public benefit as required by Title 24 CFR
570.209(b).
The CD department performed a review of MCDI records to assess the Agency's loan
processes, financial status, internal controls and compliance with federal regulations. The
CD department issued a report dated November 15, 1999, which noted that (1) interest
earned on federal funds were not remitted to the U.S. Treasury as required by Title 24
CFR 570.500(b); (2) non -performing loan rate and the loan default rates were excessive;
(3) significant percentage of program income was used for expenses; and (4) the source
documents supporting the approval and monitoring of 20 loan portfolios tested, disclosed
deficiencies such as failure to perform in-depth review of loan applications, deviation
from prescribed guidelines, failure to comply with conditions of loan approvals, improper
PP
documentation of public benefit, insufficient and/or improper documentation to support
compliance with City of Miami first source hiring ordinance, insufficient monitoring of
borrowers by sub -recipient, failure to document the liquidation of assets, failure in the
timely pursuit of legal remedies against borrowers, and insufficient monitoring of sub-
Lj recipient by funding source.
I
1
11
R
We have been informed that certain loan records have been subpoenaed b federal p y a law
enforcement agency currently performing an investigation of MCDI.
The purpose of OIA's review was limited to the evaluation of the evidential data
supporting the CD department's audit findings in connection with the City's economic
development loan program administered by MCDI.
2 c-�
R
SCOPE/OBJECTIVE OF REVIEW
The purpose of OIA's review was limited to the evaluation of the evidential data
supporting the CD department's audit findings in connection with the City's economic
development loan program administered by MCDI.
METHODOLOGY:
The review methodology included the following:
• Reviewed
the working papers including financial records, evidential data and
fl
other analytical worksheets supporting CD department's audit findings.
• Recomputed schedules and retested certain transactions to determine the
accuracy or lack thereof of CD department's audit findings.
• Interviewed CD department employees and the management of MCDI in
connection with the audit findings.
a•
Provided MCDI management with the opportunity to provide any evidential data
or document to contradict audit findings.
• Performed other procedures as deemed
P necessary.
Q
J
J
3 , C '
1 0 ,ki,.
iRESULTS IN BRIEF
• The CD department noted that a total of $98 87 _ , 3 of interest earned on federal
funds in the fiscal years 1995 through 1999, were not remitted to the U.S.
Treasury, as required by Title 24 CFR 570.500
(b). However, our review of
MCDI bank statements and other pertinent documents disclosed that the actual
total interest earned on Federal funds in the fiscal years 1995 through 1999 was
$101,417.
• The CD department noted that non -performing loan rate and the loan default rates
were excessive. Our review of loan documents and re -computations support these
findings.
+ The CD department noted that the percentage of program income used for
operating expenses was significant. Our review of loan documents and re-
computations support the percentage of program income expended on
administration as calculated by the CD department. However, we noted there was
no limit placed on how much of the program interest and income that can be used
to pay for administrative expenses in the Agreement between the CD department
and MCDI.
• The CD department's review of the source documents supporting the approval
and monitoring of 20 loan portfolios tested, disclosed deficiencies such as failure
to perform in-depth review of loan applications; deviation from prescribed
guidelines; failure to comply with conditions of loan approvals; improper
documentation of public benefit; insufficient and/or improper documentation to
support compliance with City of Miami first source hiring ordinance; insufficient
monitoring of borrowers by sub -recipient; failure to document the liquidation of
assets; failure in the timely pursuit of legal remedies against borrowers; and
insufficient monitoring of sub -recipient by funding source. Our review of the
source documents supporting 4 of the 20 loan portfolios confirmed most of the
4
qj �. V
r
deficiencies as reported by the CD department. In three instances
MCDI
Provided us with additional documents such as environmental study, interim
r financial statement, and life insurance policy, which were maintained in separate
files.
RECOMMENDATIONS
We recommend that the following actions and internal control s Yste S rns/procedures be
afully implemented before additional funding of MCDI can be resumed:
a• MCDI should repay the $101,417 of cumulative interest earned on Federal funds
in the fiscal years 1995 through 1999, to the City for remittance to HUD, as
required by Title 24 CFR 570.500(b).
• MCDI should aggressively pursue legal remedies against borrowers who default.
Based on MCDI's Aging Report dated November 19, 1999, we noted that MCDI
has initiated legal proceedings only on 9 of the 25 loans in default status (90 days
late and not charged off). The total value of the 9 loans which MCDI has
initiated legal proceedings is $652,680 as compared to the $1,551,483 of the total
value of the 25 loans in default status (90 days late and not charged off).
• MCDI should enhance its internal control systems/procedures to ensure that all
required documents are obtained and all prescribed federal guidelines, conditions,
and other loan requirements are satisfied prior to the approval and subsequent to
disbursement of loan proceeds.
• The Director of the CD department is currently a non -voting member of the loan
committee responsible for the final review and approval of all loan applications.
The Director's designee attended two of the loan committee meetings held during
�• the period July 1, 1998, through September 30, 1999, where two applications for
5
0�
tT'4�•c1 5l f t �'
r
golf+
pYil,�✓gLe�{,t(ti�tl}
't#
1
$208,000 loans were discussed, pertinent documents reviewed, and approved.
Those two loans later became delinquent. The Director of the CD department
should re-evaluate whether her/designee's continued participation in the activities
of the loan committee will pose any conflict of interest problems. If it is
determined that her participation will not pose such problems, we recommend that
she or her designee play a more active role by reviewing all pertinent source
documents to ensure that loan applications being considered for approval by the
committee, satisfied all prescribed federal guidelines, conditions, and loan
requirements.
aThe CD department should perform monthly on site monitoring visits to MCDI.
We were informed by a CD department personnel that only one monitoring visit
r
was made to MCDI during the period July 1, 1998, through September 30, 1999.
a
However, we were not provided with any document to evidence such a visit. All
monitoring visits, the frequency, and the issues discussed should be properly
documented for post audit.
Title 24 CFR 570.504(c), provides that, "the written agreement between the
recipient and the sub -recipient, as required by CFR 570.503, shall specify whether
program income is to be retained by the sub -recipient. Where program income is
to be retained by the sub -recipient, the agreement shall specify the activities that
will be undertaken with the program income and that all provisions of the written
agreement shall apply to the specified activities." Our review disclosed that the
agreement between the CD department (recipient) and MCDI (sub -recipient), as
required by CFR 570.503, allowed MCDI to use program interest and income to
pay for administrative expenses. However, there was no limit placed on how
much of the program interest and income can be used to pay for administrative
expenses. We recommend that any future Agreement include a specific limit on
how much of the program interest and income can be used to pay for
administrative expenses.
x 6 (I) —
^f,
+ We recommend that the CD department schedule and hold an exit
xit conference
with MCDI management at the end of each review and monitoring of MCDI
activities and operations. The MCDI management should be provided with the
opportunity to respond to all findings in writing prior to the issuing of any
monitoring or review report.
7
OIA REVIEW FINDINGS:
l . CD DEPARTMENT AUDIT FINDING
A total of $98,873 of interest earned on Federal funds in the fiscal years 1995
through 1999, were not remitted to the U.S. Treasury, as required by Title 24 CFR
570.500(b).
OIA REVIEW RESULT
Our review of MCDI bank statements and other pertinent documents disclosed
that the actual total interest earned on Federal funds in the fiscal years 1995
through 1999 was $101,417.
MCDI RESPONSE AND ACTION PLAN
MCDI concurs with our finding and has agreed to repay the $101,417 of
cumulative interest earned on Federal funds in the fiscal years 1995 through 1999,
to the City for remittance to HUD.
2. CD DEPARTMENT AUDIT FINDING
The non -performing loan rate and the loan default rates were excessive.
OIA REVIEW RESULT
Our review of loan documents and re -computations support the above findings.
8
a3
l
1 E �...
4„5rvy-
1 MCDI RESPONSE AND ACTION PLAN
The non -performing loan rate and the loan default rates were excessive because of
the type of clients that MCDI serve. MCDI personnel stated that MCDI is the last
resort for the majority of the clients that they serve, and due to high credit risk
associated with these clients, their application have been turned down by other
traditional lending institutions. MCDI agrees that it should aggressively pursue
legal remedies against those borrowers who are in default.
0 3. CD DEPARTMENT AUDIT FINDING
The percentage of the program income used for operating expenses was
significant.
OIA REVIEW RESULT
Our review of loan documents and re -computations support the percentage of
program income expended on administration as calculated by the CD department.
However, we noted that there was no limit placed on how much of the program
interest and income that can be used to pay for administrative expenses in the
Agreement between the CD department and MCDI.
MCDI RESPONSE AND ACTION PLAN
MCDI personnel stated that the funds were needed for the administration of the
loan program, and also there was no limit placed on how much of the program
interest and income that can be used to pay for administrative expenses in the
Agreement between the CD department and MCDI.
9
1 4. CD DEPARTMENT AUDIT FINDING
The CD department's review of the source documents supporting the . approval
and monitoring of 20 loan portfolios, disclosed deficiencies such as failure to
perform in-depth review of loan applications; deviation from prescribed
guidelines; failure to comply with conditions of loan approvals; improper
documentation of public benefit; insufficient and/or improper documentation to
support compliance with City of Miami first source hiring ordinance; insufficient
monitoring of borrowers by sub -recipient; failure to document the liquidation of
assets; failure in the timely pursuit of legal remedies against borrowers; and
insufficient monitoring of sub -recipient by funding source.
OIA REVIEW RESULT
aMCDI provided us additional source documents such as environmental study,
a interim financial statement, and life insurance policy, which were maintained in
separate files. However, our review of the pertinent source documents supporting
a the approval and monitoring of 4 of the 20 loan portfolios confirmed most of the
deficiencies as reported by the CD department.
aMCDI RESPONSE AND ACTION PLAN
MCDI concurs with this finding and has agreed to enhance its internal control
a procedures as they relate to compliance with Code of Federal Regulations and
contractual requirements.
u
F
I
10 e�
INTRODUCTION
The Department of Community Development has completed its review of Miami Capital
Development, Inc. (MCDI). The staff analysis includes a review of MCDI records to
asses.- the Agency's loan processes, financial status, internal controls and compliance
with federal regulations.
The staff review of MCDI was promulgated by concerns identified in the Audit Report
issued by the Office of the Inspector General (OIG), U.S. Department of Housing and
Urban Development (HUD), March 26, 1998. The OIG report raised the following three
concerns:
■ The loan default rate was excessive
■ Program income may not have been properly disbursed
• Insufficient public benefit received
Based on the staff review, there are significant concerns relating to the Agency's loan
processing procedures, loan default rates, public benefit resulting from the Agency
activities and the utilization of program income and interest. These findings mirror the
observations included in the OIG Report.
3
The analysis sections of the review completed by the Department of Community
Development are comprised of two sections. The first section focuses on a Review of
Financial Records and the second section centers on the Review of Loan Portfolios.
Following is the staff analysis of these two sections:
REVIEW OF FINANCIAL RECORDS
In its review of the MCDI financial records, the following findings were identified:
a
• Interest earned on federal funds was not remitted to the U.S. Treasury
• The Non performing loan rate and the loan default rates are excessive
Significant percentage of program income used for expenses
The following information provides the basis for each of the aforementioned findings
relating to MCDI financial activities:
Interest Earned on Federal Funds was not remitted to the U.S. Treasury
The Code of Federal Regulations (CFR), Title 24 CFR 570.504(c) and (b)(2)(I) require
that program income be disbursed from the revolving loan fund before additional cash
withdrawals are made from the U.S. Treasury for the same activity. Title 24 CFR
570.500(b) further requires that the revolving loan fund balance be held in an interest
bearing account and said interest earned must be remitted to HUD at least annually.
1 1 V �� r
F
IX.
(
A review of financial records indicates that a total of $98,873 of earned interest was
accumulated by MCDI from principal and interest resulting from City of Miami grants
for fiscal years 1995 through 1999. According to the MCDI bank account statements for
the aforementioned periods, the following table presents an overview of earned interest
by fiscal year:
In accordance with Title 24 CFR 570.500(b), the interest earned by MCDI as the result of
principal and interest program income should have been remitted to HUD at least on an
annual basis. The $98,873 cited above is the cumulative total of the interest earned for
fiscal years 1995-99 and does not reflect penalties which may result from the failure to
remit the interest to the federal government as required by federal regulations or interest
earned prior to FY'1995.
The Non -Performing Loan hate and the Loan Default Rates are excessive
This finding results from the analysis of the default rate on a loan by loan basis and
further expands this methodology in assessing the actual non-performance of funds as the
result of charged off loan amounts and/or loans in a default status (non-payment for more
than ninety days).
The loan default rate calculation includes all 254 loans approved and funded by MCDI
since the inception of the program. The default rate for these loans is 37%. This rate was
determined by comparing the number of individual loans that have been charged off
and/or the number of loans in a default status to the total number of loans made. The
following table provides an overview of the number of charged off loans, number of
loans in a default status and the total number of loans made that result in the 37% default
rate:
" TOTAL NUMBER OF LOANS IN PERCENTAGE OF
NUMBER OF DEFAULT STATUS (90 DAYS LOANS IN
NUMBER OF LOANS LATE AND NOT CHARGED DEFAULT
LOANS CHARGED OFF OFF STATUS
254 78 16
37%
It should be noted that eight of the 254 loans processed for funding by MCDI were
j entered into at the direction of approved legislation adopted by the City of Miami. All
eight of the Commission approved loans eventually were charged off. If the City
12
1jJ J_f
approved loans are not included in the loan portfolios used to determine the default rate,
this rate drops slightly to 35.701c.
The Review Team also analyzed the financial statements of the annual audit reports
prepared by Watson Rice, LLP, Certified Public Accountants, to determine the actual
percentage of non -performing dollars over the last four years. As a result of this analysis,
it was determined that an average of 27% of the dollars in that four year period from the
revolving Ioan fund were considered to be non -performing. The following table provides
the basis for this determination:
Significant percentage of program income used for operating expenses
A review of the funding history for the administration of MCDI over the last five years
indicates that in each of those years MCDI received approximately $250,000 for this
purpose. However, the City's direct allocation for administrative support represents only
38% of the City's total administrative contribution to MCDI. The other 62% is derived
from program income received as a result of the City's allocation of Community
Development Block Grant funds from the revolving loan fund. The following table
presents an overview of program income received and City related dollars contributing to
administrative expenses of MCDI:
Program Admin.
Fiscal Income Allocation
Year Received Ex ended
1995 $1,500,000 $250,361
1996 $1,564,300 $250,000
1997 $1,515,360 $245,460
1998 $1,877,175 $250,000
1999 $1,084,437 $250,000
Totals $7,541,272 $1,245,821
Program Income Total Expended
Expended for for
Administration Administration
$341,106 $591,467
$370,625 $620,625
$402,361 $647,821
$466,216 $716,216
$388,386 $638,386
$1,968,694 $7,541,272
% of Program
Income Expended
Administration
s�
` �.
39%6
40%
43%
38%
59%
43%
As evidenced by the table above, between 1998 and 1999 there is a significant decrease
in program income. While MCDI did implement a reorganization plan that reduced
administrative expenses from $716,216 in 1998 to $638,386 in 1999, the reduction of
171
9
0
program income resulted in an accentuated dependence on these funds to support
administrative expenses.
As currently structured, the language of the executed contract between the City and
MCDI allows MCDI to utilize program interest and income to cover administrative
expenses. Under the terms of the agreement, the City has basically given MCDI free
reign to determine how program income is used. In so doing, the City has also limited its
ability to maintain adequate internal controls to ensure the proper maintenance and
monitoring of program income. Proper monitoring of program income should have
identified the deficiency cited in Finding 1 of the financial analysis, including the
remittance of the $98,873 of earned interest to the federal government that was
maintained by MCDI.
14 a1 j i �.�
REVIEW OF LOAN PORTFOLIOS
The methodology used by the Review Team to analyze MCDI loan processes included a
random selection of loans from the total MCDI loan portfolio. It is important to note that
the loans chosen for review were analyzed on the basis of MCDI's Internal Lending
Policy, Terms of Loan Approval, and compliance with HUD requirements. The Review
Team reviewed a total of twenty loans from the following randomly selected applicants:
• Autosport Towing, Inc. (two loans)
■ Casa Panza (two loans)
■ Cajun & Grill of Bayside, Inc. (two loans)
■ Dona Arepa, Inc. (two loans)
• Kiddie Kop Childcare, Inc. (three loans)
• Marie Gil Associates, Inc. (two loans)
■ Stat Cleaners, Inc. (three loans)
■ Tropic Delight Corporation (two loans)
■ Tropical Marketplace of Bayside, Inc. (two loans)
The staff review of the randomly selected loans resulted in the following findings:
Insufficient depth of review - MCDI failed to perform an in-depth review of
documentation provided by loan applicants to support its decisions to approve
}
or decline proposed loans.
• Deviation from prescribed guidelines - The Loans reviewed deviated from the
prescribed guidelines. The core of this finding is based on a review of
MCDI's compliance with the policies cited in its Internal Lending Policy.
• Failure to comply with conditions of Loan Approvals - Upon: approval, a
letter is sent to the borrower advising of the Loan Committees decision. The
approval is subject to certain terms and conditions. In 100% of the loans
reviewed, the borrowers did not conform to terms and conditions specified in
the loan approvals or subsequent modifications, when applicable.
■ Improper documentation of public benefit - MCDI records do not document
the public benefit resulting from approved loans.
■ Insufficient andlor improper documentation to support compliance with
City Of Miami First Source Hiring Ordinance - In 100% of the loans
reviewed, there is no evidence in the record demonstrating compliance with
the City of Miami First Source Hiring Ordinance.
■ Insufficient monitoring of borrowers by Sub -recipient
04
n:
15
I
it]
D
INI
Lai
k,
• Failure to document the liquidation of assets - As a result, adequate
measures were not initiated to protect the interests of MCDI, the Citv and
federal funds.
■ Failure in the timely pursuit of legal remedies against borrowers - Again,
the result is that the interests of MCDI, the City and federal funds were not
protected.
■ Insufficient monitoring of Subrecipient by Funding Source - The Citv's
failure to adequately monitor the subrecipient contributed to the management
deficiencies identified in this report.
Following is a more detailed overview of each of the loans reviewed that resulted in the
findings listed above:
� J
16
0
F.
fl
E
k
J1.
C
AUTOSPORT TOWING, INC.
According to documentation in the file, loans for Autosport Towing were
seriously delinquent. On July 22, 1996 Borrower's principal advised MCDI that
operations were ceasing and that assets would be liquidated to satisfy the
outstanding loan balance. The Borrower provided a copy of the settlement
statement for the residential property owned by the principals and bills of sale for
two vehicles purchased through the proceeds of the MCDI loan. However, the
record reflects that the Borrower had purchased three vehicles. Records from the
State of Florida Department of Motor Vehicles confirm that the 1993
International, VIN 1HTSAZRM3PH530400, purchased approximately two and a
half years earlier, at a cost of approximately $46,000, was still titled to Autosport
Towing and MCDI is listed as the first lien holder. However, there is no
documentation in the file to support the liquidation of this asset despite the fact
that an aggregate total of $70,712.40 was charged off on this loan by MCD1 as a
result of default.
The equity goal/requirement of the Internal Lending Policy requires a 20%
minimum for Start -Up Ventures. This requirement is stated in several areas of
the Internal Lending Policy. However, documentation to support the required
investment into the business is, at best, inadequate. The Borrower is a start-up
business and did not report any assets. The Principals disclosed liquid funds in
the amount of $2,200. In its review, MCDI advises the borrower to provide
proof that the minimum equity requirement has been met. The Borrower
provided two invoices showing deposits for vehicles they planned to purchase.
However, the checks, which amount to over $20,000 and support the deposit
made on the vehicles, did not originate from the borrower or its principal. The
guidelines allow for funds acquired through loans during the prior year to be
used toward the transaction. However, there is no evidence to suggest that the
lender questioned the source of the funds and, if they were the proceeds of a
loan, the terms attached thereto.
The credit history of the Principals revealed collection accounts and a Chapter 7
bankruptcy in 1990. The principals provided an explanation, citing financial
problems due to Mr. Rodriguez' previous marriage and the ex -spouse's failure to
comply with her part of the financial responsibilities. However, the Loan file did
not contain copies of the Discharged Bankruptcy or divorce settlement showing
the distribution of financial responsibilities. These documents would have
supported the explanation provided by the Principals. There is no evidence
indicating that MCDI requested this documentation. Therefore, an in-depth
review of the principal's prior credit history was not performed.
Borrowers are required to provide certain financial reports produced by their
CPA. However, the borrower did not comply with this requirement and
information needed to monitor borrower's financial status was not available.
■ This loan required the creation of nine new jobs to comply with job creation
goals in effect at the time. The MCDI "Loan Compliance Review Report' dated
December 12, 1993, did not verify the information regarding employment. This
loan subsequently fell into default status in 1995 and the organization officially
ceased operating approximately one year later without MCDI ever confirming
public benefit.
The Internal Lending Policy Manual requires a Borrower with a loan amount
exceeding $100,000 to use the services of a CPA.. The file contains an
`a engagement letter regarding the "Review of Balance Sheet and Income
Statements", however there is no record of financial statements or 1120s for the
corporation in the file.
■ The file did not contain corporate bank statements or interim financial
statements. In addition, the projection based on a loan amount of $110,000 was
not .reconciled to the actual figures.
s Initially, only two jobs were scheduled to be created with the $110,000
investment, three jobs by the seventh month and six in the twelfth month. Under
the public benefits guidelines in effect at the time of the loan (a ratio of one jobn
for $5,000/15,000 of public assistance), this requirement would not be met.
There is no evidence that projections were ever evaluated or reconciled by
MCDI.
■ The file also contains an inconsistency of reporting on Page 1 of 5, Part II
"Appropriate" Determination Regarding Federal Financial Assistance To a For-
" Profit Business (MCDI form). The form dated June 3U, 1993 states that 5 jobs
are to be created, but the file also includes the same form (Number stamped
004) indicating 9 jobs would be created. The number 5 typed on the original
form has been replaced by a handwritten number 9. It is impossible to ascertain
how many people were actually employed at the end of two years since there is
no supporting documentation in the file to confirm numbers.
9
0
P
0
f
CASA PANZA
This loan was reviewed in detail by the Review Team for underwriting purposes. When
the City of Miami suspended loan activities of MCDI pending the completion of its
review, the Agency requested the City to authorize the closing of two loans that it
contended had been approved by the Loan Committee prior to the City suspension. In a
letter to the City Manager dated July 16, 1999, MCDI requested "authorization to
proceed with the loans that were in process of closing" prior to the City's suspension of
loan activities. The MCDI letter states, "These loans are not like the loans made in the
past. Your staff is fully aware of the controls we have recently placed in all aspects of
our handling of these loans." Upon approval of this request by the City, MCDI
identified two loans that met this criterion in a follow-up letter dated July 21", 1999. In
this letter, MCDI requested funding for loans "which were approved by MCDI's Loan
Committee prior to the City Commission decision: of June 22,1999 ".
It was anticipated that these loans would most accurately reflect changes and new
controls in loan procedures that had been established by the reorganized administration of
MCDI. However, the City's analysis still revealed inconsistencies with the prescribed
guidelines of the Internal Lending Policy.
The City of Miami agreed to this request with the condition that MCDI provide
documentation confirming that the request had been processed prior to the suspension
and that Department of Community Development must underwrite each of the loan
a applications under the terms and conditions of the existing MCDI Lending Policy
Manual guidelines. Failure of either loan application to comply with requirements of the
criteria included in the Lending Policy Manual would be grounds for the to disapprove
the funding of these loans. The Casa Panza loan application was one of the two loan
applications reviewed for closing.
• The file did not originally contain the bank statements required by the lender's
guidelines. The bank statements are necessary to assess the loan application and were
eventually submitted to the City for review.
■ The Loan request did not meet the criteria identified in the Miami Capital
Development Corporation Internal Lending Policy Manual.
■ Documentation included in the loan package does not support necessary collateral
needed to secure the loan.
■ The loan documents did not include life insurance policies from the applicant's
principal as required by the Miami Capital Development Corporation Internal
Lending Policy Manual.
■ The services of a CPA
$100,000 as stipulated
Lending Policy Manual.
were not engaged (a requirement for loans in excess of
in the Miami Capital Development Corporation Internal
0
19
eft
��V
0
2.
■ Inconsistencies were identified between the financial statements included in the loan
package and accompanying IRS returns (i.e. Approximately $9,000 of payroll taxes
payable were available while the U.S. Treasury requires any amount of payroll taxes
in excess of $1,000 be electronically remitted after reaching this threshold. The 1997,
IRS Form 1120, Schedule L reflects $76,976 in stockholder loans which are not on
the Balance Sheet for the same period; and the Borrower's bank statement from First
Bank of Miami shows the account overdrawn on several occasions, which suggests
the possibility of poor cash management and a lack of internal controls).
■ Terms of the approved loan do not conform to the terms indicated on the MCDI Loan
Program Fact Sheet included in the Internal Lending Policy Manual operations.
■ There was a lack of documentation to support the borrower's current number of
employees.
■ There was derogatory credit history within twelve months of the loan application
which has never been explained.
In an attempt to work with MCDI and the loan applicant, the City of Miami provided a
list of conditions that must be met before it would authorize the closing of the Casa Panza
loan. These conditions include:
I. Repayment:
Terms of repayment for Working Capital 5 years (60
Me months
■ No extension of terms will be considered without the
On receipt of a written request from the borrower, inclusive of
explanation and supporting documentation.
M Terms of repayment for Fixed Assets (Equipment) 7 years
(84 months)
�`. No extension of terms will be considered without the
receipt of a written request from the borrower, inclusive of
explanation and supporting documentation.
H. Insurance:
317 Life Insurance requirement for Principals of Business:
■ Life insurance policy for Mr. Jesus Lopez with a face value
of at least $125,000, or explanation as to why principal can
not comply.
20
Life insurance policy for Mrs. Carmen Lopez with a face
value of no less than $125,000. (Face value of policy in
file is only $10,000).
" Final Policies must show MCDI as loss payee in a first
collateral position.
Insurane r
_e�nts for Business:
" Amount of insurance for "Business Personal Property"
increased to $125,000.
III. Collateral & Contin encies:
Collateral stipulated
in March 31, 1999 Loan Approval
with the addition of:
• Second Mortgage on Residential Real estate located at
1308 Drexel Avenue, Ap
33139. t. 111, Miami Beach, Florida
Borrower to provide an appraisal, not older than 6 months,
on the above mentioned property showing a value o f no
less than $65,000 and having an equity of at least $22,000.
Appraisal shall be paid for by the borrower on behalf of
MCDI.
Assignment of Rents for real estate known as Units 111 and
109 of 1308 Drexel Avenue Miami Beach Fl.
33139
• Copy of U.S. Treasury Form 941 for the quarter ending
12/31/98 and State of Florida Department of Labor and
Unemployment Employer's Quarterly Wage Report with
supporting worksheet for period above stated.
IV. S19eciai Conditions.
` Borrower is to engage the services of a CPA as described in
MCDI's approval letter dated March 31'", 1999.
�Y Jlu
r
V. Licensi
Borrower must provide proof of current licensing (i.e.:
Occupational Licenses, Certificates of Use, etc.)
With the exception of the stipulations set forth above, all other terms and conditions
outlined in MCDI's commitment letter to Casa Panza remain the same. This information
was forwarded to MCDI in a letter dated August 31, 1999.
22
t; V
1
0
I
I
I
I
0
1;
�77
EJ
CAJUN & GRILL OF BAYSIDF, INC.
Exhibit 2 of the Internal Lending Policy states that the availability of funds on
reasonable terms through the use of personal credit and/or resources of the owner
is a reason for loan denial. Borrower Cajun & Grill of Bayside is owned by Mr.
Hoi Yeung and the Principal's financial statement discloses a net worth of
approximately $13 million. At the time of loan approval, the principal had
$190k equity in his personal residence and disclosed over $3 million in stocks.
Based on this information, this borrower and its principal had the ability to
finance the venture through other sources. The federally subsidized loan
program administered by MCDI is intended to assist struggling businesses to
crate jobs and stimulate the local economy.
• A review of the records further indicates that Cajun & Grill of Bayside is not the
only venture of the loan applicant financed by the lender. In addition to Cajun &
Grill of Bayside Inc., MCDI financed Teriyaki Temple of Bayside, Chinese
Cafes of Bayside and Ginza Sushi.
In accordance with the Lender's guidelines and the Loan Agreement, the
Borrower's Principal must devote "fulltime " to the management of the
borrowing business. According to the reports of the Florida Division of
Corporations, III corporate filings bear the name Hoi Sang Yeung, the Principal
in case, under the title of President, President Director or Director and 76 of
these corporations are reported to be active. MCDI had to be aware of Mr.
Yeung's involvement in at least several of these corporations since it had
approved loans for the businesses cited above. Mr. Yeung's corporate activity
suggests that he is a successful entrepreneur in a variety of fields, ranging from
fast food chains to real estate. As a result of these activities it is doubtful that the
Borrower's Principal can devote "fulltime" to the management of the Cajun &
Grill of Bayside. Taking this logic a step further, it is impossible to devote
"fulltime" management to each of the MCDI approved loans for different
businesses.
Throughout the application, approval process, and approval modification process,
the terms of this loan were changed four (4) times. Of particular significance is
documentation between the parties dated February 2, 1995 and March 8, 1995
regarding the payment of back taxes due to Dade County and the IRS by Bahia
Mar Fish and Chips. However, in MCDI's modification to the loan approval, the
back tax item previously cited in the correspondence is not addressed.
Monthly MCDI reports reflect two loans to Bahia Mar, Loan No. 051020335 in
the amount of $40,000 dated December 28, 1993 and Loan No. 051020192 for
$60,000 originated April 20,1989. The first loan is reflected in the MCDI records
as a "Charge off" with partial recovery. The $60,000 loan was satisfied in August
1995 at the same time that the Cajun & Grill closed.
2 3 � � � v� __
M .. - - 016, t i!",
-. .. SCi A4&:yd. fisVnfe•-wn+w�+rti. r'r ,.a-.: e -<� r.r- .yt�-. .
It is difficult to confirm the subject loan transaction without reviewing Bahia's
Mar's loan records and the acquisition agreement between Bahia Mar and Cajun
& Grill. The Review Team was able to ascertain that Bahia Mar's outstanding
balance totaled $48,503.79, but the MCDI documents reviewed due not reflect
which loan the stated balance represents. In accordance with the loan terms,
$25,000 from the proceeds of the loan to Cajun & Grill was scheduled to be
applied toward said balance and the remaining $23,593.79 would be collaterized
by mortgages on real estate owned by the Bahia Mar Principal. Therefore, it is
not clear why the MCDI records reflect that there was a "charge -off' of any kind.
A memorandum dated April 14, 1995 from Mr. Luis G. Cuervo, MCDI's lending
officer, to the members of the MCDI Loan Committee states, "MCDI is fully
collaterized in the event of debt restructure." In addition, equity in the collateral
property was estimated at $120,000.
■ As previously noted, the terms and conditions of the loan were modified on
several occasions. In a letter to Manny Nunez, a member of the MCDI Loan
Committee, the Borrower offers the replacement of collateral in the original
approval with assets of the Chinese Cafes of Bayside and the Borrower provided
MCDI the Balance and Income Statement for this business for the period April
1994 through February 1995. However, in examining the documents, the Review
Team determined that the Balance Sheet submitted is for Chinese Cafes of
Bayside, Inc. and the Income Statement is for Chinese Cafes of America, Inc.,
two separate and distinct corporations.
It was also noted that the "Year to Date Income" of $276,042.48 reported for the
Chinese Cafes of America is reflected as the cumulative Net Income on Chinese
Cafes of Bayside's Balance Sheet. Unless both companies experienced the exact
same income and expenses for the reported period, the probability is that the Year
to Date Income of one would match the Net Income of the other. As a result, The
Review Team questions the thoroughness of MCDI's review of this information
and there is no evidence in the record to suggest that the Lender identified or
questioned this discrepancy. It is important to further note that none of the
financial statements provided for this loan are executed by the Borrower's
Principal or the CPA.
■ The Loan Agreement requires the Borrower to provide Corporate Federal Tax
returns, personal Federal Tax returns, Last Interim Statements, Corporate
financial Statements, Employer's Quarterly Wage Reports, evidence of life
insurance on the Principal, and commercial insurance on the business. These
documents were requested on numerous occasions, but none of the requested
documents were found in the loan file. As a result, the review Team is unable to
confirm the public benefit resulting from the transaction or if the Borrower I
complied with the First Source Hiring Ordinance. j
Documentation included in the file record is insufficient to assess the full scope of
this transaction. There is no documentation to support the position of the selling
entity, such as estoppel letters, an inventory and appraisal of fixed assets or
r '
24
r:
1P � ?•. J4way��
documents to establish a monetary value on Bahia Mar Fish and Chips' assets.
The need for such documentation is accentuated by the numerous changes in the
loan terms and the proposed uses of the loan by the Borrower. There is no
documentation in the file to support or explain these revisions.
25
IDONA AREPA, INC.
• The proposed purpose for this transaction was for the expansion of the business.
Dona Arepa was originally located in the city of Hialeah. The Business Plan
stated the proposed expansion would house manufacturing and distribution.
However, the City of Hialeah reported that the business failed to pay the 1997-
1998 occupational license and another business currently occupies the location in
question. Details of the transaction were not verified. Verbal verification of the
municipal license would have not only revealed the expired status of the license,
but also the fact that the borrower only reported one employee for the company
when the Business Plan and other documentation reflects three. Documents such
as payroll registers and Family Income and Size Certification Forms that would
confirm the number of employees are not included in the official records.
■ According to the terms of approval, the Borrower and accountant are required to
provide quarterly financial statements and annual Financial Statements validated
by the .Internal Revenue Service Tax returns. The Personal Financial Statements
for the principals reflect gross earnings of $90,000. The 1996 IRS Form 1040s do
13 not support this income and the 1997 IRS Form 1120s do not support salaries to
officers as reflected in financial statements. In addition, these differences were
F1 not reconciled.
■ The Review Team also noted that neither the Borrower nor the accounting
professional executed the Financial Statements included in the fale.
In accordance with the guidelines of the Internal Lending Policy, if the
approved loan amount exceeds $100k, the borrower is required to secure the
services of a CPA. However, the Borrower received a loan in the amount of
$192k and used the services of "Contaduria Vidal" for its accounting needs prior
to the loan approval. The letter included in the Borrower's file confirms the
continued use of the firm even though neither the company nor its accountant(s)
maintain CPA status.
The appraisal for the residential collateral was more than six months old and the
appraiser's comments state that "the property is over -improved for the
surrounding area. The sale date found in the appraisal discloses that the
Principals purchased the property 1 1/2 years earlier at a price of $292,000.
However, the appraiser valued the property at $433,500, an appreciation in value
of 32% within the 1 1/2 years. There is no evidence in the record suggesting that
the appraisal was reviewed by MCDI.
Insurance certificates in the file are expired. Of particular concern is the fact that
the Borrower's life insurance has more than one collateral assignee. The
customer service division of Jackson National confirmed that, in the case of
death, the policy would be disbursed on the basis of the assignee's position.
0
�N 26
��
There is no documentation in the file to confirm MCDI's assignee position or if
this issue had been addressed with the Borrower.
• The Borrower's mortgage was modified to allow a maximum loan amount of
$300,000. This modification results in the Borrower maintaining a revolving
line of credit that allows a draw upon the reserve for a period of three years after
closing. However, the modification does not stipulate caps on draws or identify
a use for these funds. As a result, the draws may exceed the maximum $75,000
limit established in the Internal Lending Policy guidelines on such items as
working capital. The Review Team did not find the approval of the Loan
Committee for the aforementioned modification in the file.
27
P
P!
KIDDIE KOP CHILD CARE, INC.
The Source and Use of Funds Statement indicates that the original purpose of the
loan included the purchase and reconstruction of a building to provide 24 hour
day care services. Obviously, the completed rehabilitation of the facility was a
prerequisite to commence operations. Completion includes the securing of
appropriate licenses and inspections. Without approved licenses and inspections,
the business cannot accept clients or even determine the number of children that
can be served. These projections are essential in determining the applicant's
ability to repay the loan.
The Business Plan for this start-up business is based on a projected enrollment of
41 children. However, HRS only approved an enrollment of 23 children. The
reduction immediately placed the business in financial peril as it reduced the
borrower's projected income by almost 44%. Enrollment/capacity ratios should
have been thoroughly researched by the applicant and confirmed by the MCDI
prior to approval of the loan. The loans for Kiddie Kop Child Care are in a
default status.
■ The purchase and reconstruction was financed under a Small Business
Association Loan Program, however there is no heal Estate closing document in
the file.
y� The file also does not include information on how the property is legally titled
and this information is required since the MCDI loan funds are allocated for
building improvements.
Zi
41
■ The Loan Closing Statement for the MCDI loan dated December 5, 1999 is
incomplete and does not include the balancing of loan proceeds and
disbursements.
■ The first year financial Statement does not include a Statement of Source and
Application of Funds form as required. The Financial Statement does reflect that
$191,570 was provided for building improvements, but there is insufficient
information in the file to determine the source(s) of the contribution for this item.
■ Startup conditions for this loan require that an investigation and evaluation of the
building contractor's competency be examined. However, information in the file
indicates that insufficient investigation was conducted in the evaluation and
selection of a building contractor.
■ The Lending Policy ,Manual requires that construction payment draws must be
submitted, but there were no draws available in the files reviewed by the City.
There were several liens placed on the property by subcontractors and a threat of
lien for non-payment from the contractor.
28
0
The Borrower did not
meet the 20% equity requirement. Additionally, there is
conflicting information in the file regarding the Borrower's contribution, yet
there is no documentation in the record addressing these inconsistencies and,
therefore, public benefit cannot be established.
a• Documentation supporting the creation of jobs was not found in the file.
• Under the terms and conditions of the loan, at least two written bids are required
for the purchase and/or repair of machinery or equipment, but a second bid w
not included in the file. as
• Funds were used for leasehold improvements and bids required for work to be
performed were not found in the file.
• There is no record in the file of the escrow fund held by, the attorney.
29 �" 0-? 0
1 0
MARIE GIL ASSOCIATES, INC.
Although this loan was approved by MCDI, it was never closed due to a conflict of
interest issue raised as a result of the applicant's relationship with MCDI. However, the
mere fact that this loan was considered for approval and actually received a commitment
Q for approval is reason for concern. The City's review identified the conflict of interest
issue as definitive grounds for disapproval, but, for the purposes of the City's analysis, it
considered this loan on the merits of the application package, not withstanding the
obvious criterion for disapproval.
■ The Borrower's Principal was an active member of the MCDI "Loan
Committee" and this participation represents a serious conflict of interest
violation with Florida Statutes.
■ The Borrower's Principal Personal Financial Statement reflects income is
derived from her employment with Marie Gill Associates ($40k) and "business
investments in Jamaica" ($20k). However, a review of tax returns (IRS 1040)
for the years 1996, 1997 revealed that the foreign source income is not being
reported as required, and therefore cannot be relied upon as a valid source of
income.
�11
a
X
J
i
31B
Borrower's principal Personal Financial Statement states income from
employment with Marie Gill & Associates as $40,000 per year. However, the
application for the Business Loan, Part II. List of Current Employees, states that
Ms. Gill receives $60,000 as President of the Corporation. It should be noted
both forms were executed by Ms. Gill January 14 1999 Furthermore, Corporate
returns (IRS 1120) for years 1995, 1996, and 1997 do not reflect any amount
being expensed as "Salaries and wages."
■ Borrower's bank statement from NationsBank dated December 31, 1998 reflects
a $441.64 debit described as "Commercial Loan Debit". However, the Borrower
did not disclose this loan and there is no verification in file regarding amount,
terms and status of said loan.
The Balance Sheet for Marie Gill Associates prepared by Gary Aljoe, CPA,
dated December 31, 1998, shows a checking account balance of $4,520. The
NationsBank statement for the same period shows an ending balance of $2,296.
No explanation was found for this adjustment. The Balance Sheet also shows a
Savings Account, but bank statements were not found to support this entry. It
also reports Accounts Receivables in the amount of $6,400, but aging of
accounts was not found to support this entry.
The Balance Sheet shows $12,650 and $11,017 respectively for Office
Equipment, Furniture and Fixtures. A list was found that identifies equipment
acquired during last twelve months (undated). However, the 1997 1120s show
the acquisition of equipment in the amount of $4000 and $1,200 worth of
54ii, 3 0 SO— y e:D i 0
I
B
77
J
(
furnishings. There are no invoices or receipts to support purchases made in
1998.
• The Balance Sheet shows the acquisition of an "Auto" in the amount of $35,000,
but there was no invoice or documentation found to support this entry.
■ The Balance Sheet reflects a "Note Payable -- Bank" in the amount of $48,000.
However, there is no documentation to support this entry or explain if the debt is
a result of a purchase (Auto) or loan for working capital, etc.
■ The Income Statement also prepared by Aljoe.•CPA for the period ending
December 31, 1998 shows a "Consulting Income" for the 1998 year at $112,680.
The 1997 1120s for the corporation reflect $14,110 in sales and the difference
represents an 87.47% increase in revenues.
■ Furthermore, if the Borrower based its profit and loss projections and cash flow
for the next five years on the substantial growth experienced during the 1998
year, it would be prudent to request the Borrower to provide 1998 Corporate
returns and Audited Financial Statements by the CPA. Analysis of these
documents would provide the lender a higher level of confidence in the
projections made, especially since the company experienced such growth in a
relatively short period of time.
The Income Statement shows Payroll for the year at $37,848. This amount does
not confirm either of the amounts Borrower's Principal claims to be paid. In
addition, documents found in the file indicate that two (2 employees) were hired
within the last 6 months (document dated February 1999). Assuming that the
figures stated on the "Application for Business Loan" Part H. are accurate,
salaries reflected on Income Statement at end of 1998 should be approximately $
77,000, not the $37,848 reported.
■ The Income Statement shows an item entitled "Auto Lease", however, the
Balance Sheet depicts "Auto" as an asset, raising a question as to the number of
vehicles in service.
The Income Statement shows "Loan Payments" in the amount of $5,993, yet
there is no documentation in file to explain the purpose of this loan payment.
Therefore, the terms and collateral used, if any, remain unverified.
According to MCDI Loan Approval — Ref. (I..#54/99), an appraisal not older than
6 months must be provided on the residential property with a value of $105,000
and $41,000 of equity. However, said appraisal was not found in the application
package. The Loan Approval also requires the following insurance coverage:
Commercial for the business; Homeowners' and Flood for the residential unit.
Proof of insurance documentation was not included in the file.
31 1� pia
■ The Loan Approval further requires the Borrower's President, Marie Gill, to be
devoted "full time" to the management of the borrowing business as long as such
business is indebted to MCDI. Conversely, the approval states that Ms. Gill shall
not accept any outside employment, full or part-time, during the life of this loan.
The Borrower's Principal, Marie Gill, is currently employed as a part—time
instructor at Miami Dade Community College. This information was confirmed
June 29, 1999 by Mr. Alex Rodriguez, HR Specialist I, Human Resources
Department, Miami Dade Community College. A Corporate Inquiry made
through the Florida Division of Corporations revealed that Marie Gill is the
Registered Agent, President and Director for National Association of Caribbean
Business Women, Inc., a Non -Profit corporation established in 1997 and that
Marie Gill and Associates, Inc. is the owner of a Fictitious Name Registration for
"Dimensions
Cleaning & Maintenance Services." While the Review Team was
unable to determine if this business is in operation, the organization's registration
indicates that it is in an active status.
■ In the Business Profile prepared by MCDI, the back-up documentation used to
support the collateral is insufficient. The Business Profile identifies $39,336 of
corporate assets, inclusive of equipment, yet the Balance Sheet dated December
31, 1998 shows Total Assets in the amount of $112,846. The file does not
include support documentation reflecting the purchase of vehicles, equipment
Y=
and furniture and the corporate tax return (IRS 1120) for 1998, which would
reflect these acquisitions, is not in the file). The Business Profile also identifies a
second mortgage on Residential Property in the amount of $41,000, but there is
no appraisal in the file or rationale to explain how the equity was determined.
According to the Loan Proposal, the Borrower intends to use $15,000 from
"Working Capital" $1.5,000 to repay borrower's principal credit card debt
described as "used for business." Included in the reasons for denial in the MCDI
Internal Lending Policy is the use of the loan 'for the purpose of (a) paying off
a creditor or creditors of the applicant who are inadequately secured and are
in position to sustain a loss. "
After thoroughly examining the documentation and MCDI lending guidelines, the
Review Team determined that this loan should not have been approved under the
proposed terms and conditions even if there was no conflict of interest issue. The
substantial lack of supporting documentation, numerous inconsistencies in determining
the company's net worth and questions surrounding the Borrower's ability to repay the
' loan would have placed the lender at a significant risk of loss if the proposed transaction
had closed.
I
32 �' i► el a
0
STAT CLEANERS
' Upon resubmission of the loan application, CDIexercise due
in its review. The
first application was reject d beccau eothe financial statesmen is
of a Small Business Association loan
received on or about January 1993 were
not included in the loan package. According to incorporation documents
from
the State of Florida, Stat Cleaners, Inc. was administratively dissolved as of
October 21, 1992. Documentation from the Florida Division
of Corporations
confirms that Stat Cleaners, Inc. was reinstated as a legal corporation December
12, 1995. The file does not contain correspondence to support due diligence
review of the entity's corporate status at the inception
of the loan.
■ The
MCDI Fact Sheet provides guidelines to meet loan criteria, the
application does not reconcile issues
aLeverage
of job Retention vs. Job Re otcaRelocation
Goal - Private to Public, 4:1 that are identified as missing.
■ Since the Loan Applicant submitted conflicting sources of funds as its
contributory share to meet leverage
requirements, the applicant did not meet the
leveraging provisions of the Internal Lending Policy Manual.
■ The Lending Policy Manual requires the loan applicant to submit three denial
letters from other sources to qualify for assistance. This policy is intended to
ensure that loan applicants have
exhausted other funding possibilities. The file
contains one incomplete letter from Barnett Bank.
• The Lending Policy Manual requires the Loan Applicant to be located within
target
a
area and the loan intent is not to relocate jobs, but, rather, there must be a
potential to create jobs for target area residents.
While the expansion of a
business is a valid criterion for loan consideration, the businessrothis aa
a
support documentation in the file does not support the fact that is an
expansion of business. The intent of the applicant is to
a
relocate the business to a
new site. This intent does not disqualify an organization from loan
consideration, but the application must include a definitive
expansion plan with a
strategy to meet the creation of jobs criteria. However, the application does
include
not
such a strategy and there is no evidence to suggest that MCDI monitored
the progress of the applicant on
a continuous and frequent basis and the job
creation goals were not met.
■ Furthermore, the file does not include other documentation
required throughout
the loan term to support the creation of new jobs (i.e Federal
and State Payroll
Tax Reports, the test of ratio of new jobs to loan amount).
• Original documentation must include an investigation and determination by
MCDI that environmental impacts have been
met. There is no evidence in the
official record verifying that the Applicant maintains City
of Miami Business
33 �r
C
E
::.?
i
n
n
N
ho'.
5F
7'
Use and Occupancy Licenses, or meets Miami -Dade County
codes and national environmental restrictions on chemical usage.
environmental
PP
repayment of the MCDI loan.
The Alicant received an SBA loan allegedly to be used to support the
However, this is not permissible under the terms
and conditions of the SBA loan. In addition, income from Chez Moy Restaurant
and unidentified real estate income are identified as sources for loan repayment,
The immediate and past credit history in the file identifies late payments and/or
returned payments for NSF or ISE
' According to the Lending Policy Manual, loans will be denied if the purpose of
the loan funds is to replenish working capital funds previously used for such
Purposes. The loan file includes documentation to support that SBA funds in the
amount of $98,600 were received for this purpose. Accordingly, Stat Cleaners
identifies $20,000 of these funds to be included as part of the contributing share.
MCDI did not investigate or confirm this circumstance.
Funds were used for leasehold improvements, but bids required for work to be
Performed were not found in the file. building (Residential /Commercial), not Slat Cleaners purchased amulti-usean industrial facility. The approved
loan consisted of $50,000 intended to provide working capital, $65,000 to be
xed assets a
directed to find $160,000 for the acquisition of the building.
Proceeds from the sale of principal's other business paid off the working capital
and fixed assets portion of the loan. However, the Borrower still maintains the
real estate portion of the loan. It is significant to emphasize that the building is a
multi -use facility that includes three residential units. The MCDI Internal
Lending Policy identifies reasons for denial of loan applications. This manual
specifically states that if "the purpose of the loan is to finance the acquisition,
construction, improvement, or operation of real property which is, or is to be,
held for sate or investment" is a reason for denial. Since a portion of the loan
received from MCDI was dedicated to the improvement of the rental units,
additional HUD requirements pertaining to the use of federal funds for housing
Purposes must be met. There is no evidence in the file to support e
Borrower complied with HUD criteria for the rehabilitation/improvement of the
housing units.
' Borrowers are required to purchase and maintain life insurance for the principals,
commercial insurance covering assets and business for the borrowers, and
Property insurance for real estate used as collateral. Proof t insurance for Stat
Cleaners was missing in the loan files.
Loan approvals state that the borrower's president shall be devoted "full time" to
the management of the borrowing business as long as such business is indebted to
MCDI and the principal shall not accept
any or time, during the life of the loan. However, noloymenreviewing pthe fil sty the 1 rinciipal
P P
34
borrower for the Sa Cleaners loan was also l00kowner and stockholder o£
Ch z Moy, arestaurant he operated concurrent to the borrowing business.
- Borrowers are squired to Provide certain financial sport produced by their
CPA. However, the Borrower did not comply with this requirement and
information needed to monitor Borrower % financial stag was not available.
as`
2J— ,
TROPIC DELIGHT CORPORATION
r The Application for Business Loan, Part II, lists applicant's current employees at
10, but Part I of the same form reflects 17
employees.
Borrower's Business Plan (Rev.- 4) reflects several inconsistencies when
compared to other documents in the file.
a. Borrower reached an "Agreement" with Generic Packaging, which
confirms location of production facilities, storage and shipping, and
office space at its warehouse located in Miami Lakes.
b. Agreement also states employees would be included on the payroll for
Generic Packaging.
c. Projected costs for the venture from date of conception to production
were estimated to be $532,862.52. The Financial Summary states the
Borrower's Principals had contributed $356,067.52 towards the
venture as of March 1994. However, Financial Statements provided in
the application dated August 9, 1994 do not reflect the investment.
d.
Business Plan shows "Machines and Equipment" already owned b
Tropic Delight totaling $69,400, but, again, this figure is not
represented in Financials dated August 9, 1994.
e. Contract between Tropic Delight and Generic Packaging provides
Tropic Delight storage and shipping areas. Need for additional space
(proposed within Target Area) was not needed the time of closing.
Furthermore, leasehold improvements in the amount of $21,836.71
were made to the Miami Lakes warehouse.
■ Appropriate Determination Regarding Federal Financial Assistance to a For -Profit
,V
Business PartII shows Target Area as Edison / Little River. Part III Section A #2,
requires the Lease Agreement to be provided and this document was notfound in
the file. Part III Section C#lb requires "the firm commitment and availability of
all other sources of funds." At best, the Borrower was $40k short of the required
capital needed to start operations and documentation to identify the source of
funds was not found in the file.
■ As previously stated, the Business Plan for Compliance with Job Creation Goals
Part 1 lists the number of current employees at 17. Part 2 lists only ten, further
suggesting that some employees had more than one function. The Review Team
was unable to determine the accurate number of employees at time the form was
77 completed mainly because, in the contract between Tropic Delight and Generic
"y Packaging, the latter was to hire "employees" and place them in its payroll.
36
The Business Profile (prepared by MCDI) includes the following areas of
concern:
a. States that the Borrower will get products to consumers through
wholesalers and manufacturer's agents. No contracts, firm
commitments, or letters of intent were found to support this statement.
b. Reflects the Borrower's "Present location at 5601 N.W. 1591' Street"
and the "Proposed location at 6887-6891 N.E. P Avenue." The latter
was designated as the site for the "warehouse and distribution."
However, the facility in Miami Lakes provided storage and
distribution. The estimated time for occupancy of the "Proposed"
location is not addressed anywhere in the file.
c. Financial Analysis within the Profile identifies three stockholders as of
March 1994. The Business Plan prepared by the Borrower shows six,
yet this discrepancy is not addressed in the records.
■ The Borrower invested its Principal's time and resources in repairs to machinery
hrnery
belonging to Generic Packaging. These repairs were estimated to cost
approximately $25k. This expense was to be credited toward "rent, % of net
profit sharing ratio, etc." However, the Borrower's Business Plan states that rent
was not being paid and no amount was taken into consideration for projections.
• The Borrower is required to provide certain financia
l reports produced by its
CPA. However, the Borrower did not comply with this requirement and
information needed to monitor Borrower's financial status was not available.
■ The contract between the Borrower and Generic Packaging requires Tropic
Delight to split Net Profits at a 60/40 for
ratio a period of two years. This "split"
depletes earnings that could have been retained by the Borrower to solidify the
company's financial stability. (Please note that 40% of net, when based on the
forecasted net profit mentioned in the Business Profile prepared by MCDI would
�� T
result in $238,400 during the first year paid to Generic Packaging and
approximately $1,174,000 in the second year.
r`
■ Loan approvals require the Borrower to provide a "Landlord Subordination" if
premises are ]eased. In the case of Tropic Delight, the Borrower leased the
premises it occupied. The Tropic Delight file only contained a letter of intent to
lease and it was later discovered that Tropic Delight never occupied either of the
yj
proposed premises. The Loan Approval (MCDI) requires "An executed 7 year
lease between lessors and lessee at 6887-6891 N.E. 3`d Avenue". However, this
document was not found in the file.
■ The Loan Approval (MCDI) requires a commercial insurance' policy prior to
closing. The copy of the policy provided insured
never MCDI or its funding
{,
,t .
j
D
source and the Carrier was never requested to inclu
payee. de Miami Capital as a loss
' The Loan Approval (MCDI) requires homeowners
collateral
property in New York and a condominium belonging to insurance
OfeliaoDougherty.
However, the Review Team did not find this documentation in the Ole and, in the
case of loss, MCDI and its funding source would not be covered.
' The Ole did not include Payroll Register and Family Income and Size
Certification forms signed by each employee as required by the guidelines.
" The CPA did not re
P pare borrower's quarterly financial reports as required in
Loan Approval and mentioned in engagement letter.
' The approval letter clearly states that the Borrower is not to move the business
location from the designated Target Area. However, the Borrower never moved
into the designated area and City of Miami occupational license records do not
show a license being issued to Tropic Delight or that said business Occupied
Premises within the City of Miami limits. A search of records for Miami -Dade
County revealed that the Borrower was licensed at the Miami Lakes location in
October of 1995. When Miami -Dade County sent inspectors to the site Jun
1999, Tropic Delight was no longer occupying the premises and a new business
by the name of "On The Go Travel Accessories" was the new tenant.
The Financial Statements provided by the Borrower for the period of Janu
1994 through June 1994 contain the following areas of concern: ary
a. The Review Team found two Financial Statements for the period
ending May 31, 1994. The first statement was originated August 2,
1994 and the other is dated August 9, 1994. Inconsistencies between
the two are as follows:
-" I. August 2, 1994 Report —
$12,210.15. p "Repairs and Maintenance to Plant -
August 9, 1994 Report — Repairs and Maintenance to Plant -
$25,212.15.
II. August 2, 1994 Report -- Notes Payable to Nicholas, Duval, Denis
and Benjamin at $8,500,
August 9, 1994 Report — Notes Payable to Nicholas, Duval Denis
and Benjamin at $0.
38
�► �� "�
Q - Jti
.r
i
III. August 8, 1994 Report — Accounts Payables shows $280,221.22
owed to several entities and individuals. Significantly,
$212,192.00 is reportedly owed to Generic Packaging.
August 9, 1994 Report — Accounts Payables shows $0 owed.
■ The Accountant's Compilation Report for the year ending December 31, 1994
prepared by Rafael Rodriguez, CPA, does not support the figures provided in the
August 2 or August 9 reports. Furthermore, Mr. Rodriguez discloses in his letter
that he is not independent with respect to Tropic Delight Corp. The
relationship between the parties was not explained
ii ■ The Escrow Agreement between the Borrower, MCDI and its closing agent
requires certain steps to be taken regarding the release of funds in the payment of
equipment being purchased. The Borrower delivered to MCDI authorization for
the release of funds for purchases in the amount of $41,940. Part of this sum is
comprised of items described in Generic Packaging invoices for the Borrower's
Purchase Order Number CA300 in the amount of $9,600 and Purchase Order
Number CA150 in the amount of $15,240. Equipment being purchased from
Generic Packaging is identified by model and serial numbers. It was observed
that the items being invoiced by Generic Packaging and authorized for payment
1. by Tropic Delight are the same items in the Borrower's Business Plan described
as "Already Owned" As a result, the Borrower received over $24,000 for
property already owned.
■ It should be noted that a considerable amount included ion the invoices IM are in the
name of Bonilla Enterprises. These invoices justify the shareholder's contribution
�T to the business. However, it is impossible to determine what machinery was
repaired with the parts or if said equipment belonged to Tropic Delight or some
other entity.
■ In Field visits conducted by MCDI, the number of employees reported between
December 1994 to July 1997 never passed seven. However, a copy of the State of
Florida Wage Reports for the quarter ending June 30, 1996 shows gross wages in
the amount of $31,677.29. A breakdown of the gross earnings being reported
names forty-one employees, however the Review Team cannot determine which
document is accurate or, if the Borrower did employ 41 persons, whether or not
PR the "First Source Hiring" requirements were followed. The Review Team is
unable to determine if City of Miami residents benefited from the jobs created.
■ The "Field Visits" Reports reflect the 7260 N. Miami Avenue and 6330 N.E. 4`s
Court, Bay 1 (South) as the sites being visited during a four year period. A letter
from the Borrower dated July 22, 1994 to MCDI names two locations as possible
sites for the warehouse. However, the Borrower never moved into either site.
Furthermore, a letter from MCDI to the Borrower dated March 26, 1998 cites one
of the reasons for default of the loan was the result of the Borrower not complying
39
t
' r
with terms of the loan agreement to have the business within the Target Area.
Therefore the Review Team must question whether or not the "Field Visits" ever
took place.
The Borrower seems to have been experiencing difficulties in the early life of the
loan. Late payment notices were mailed four times in 1995, eight times in 1996
and in June 1997, the Borrower was 326 days in arrears.
• In July 1997, the Borrower received a Memorandum of Terms regarding a
revolving line of credit through Daughtrey Jones Corp. (Dade County). The
agreement would require the subordination of MCDI's position to inferior or
equal to priority on collateral (a.k.a.: pari-passu agreement). By memorandum,
MCDI recommended the moratorium of payments to assist in cash -flow
difficulties. The Moratorium Request prepared by MCDI contains grid valuing
collateral at $360k. The recommendation is based on lack of ability to repay loan
in short term, good collateral, credit record, and satisfactory payment history
among other reasons. The MCDI Loan Analyst, Senior Lending Officer and
Deputy Director executed the recommendation for Approval. It is important to
note that by August 13, 1997, the Borrower's Principal, Darbouze, had placed a
second mortgage on his primary residence and third on the investment property in
New York. The collateral position had been compromised by the time this
`
memorandum and recommendation was reviewed and approved. However,
collateral was still valued at $360k.
r..
MCDI issued a modification to the original Loan Agreement November 18, 1997.
This modification included the pari-passu clause with Miami -Dade County. The
Borrower accepted the modification December 1, 1997 and Daughtrey Jones
requested an executed pari-passu agreement from MCDI December 22, 1997.
MCDI rejected the confirmation to continue with the pari-passu requirements
`=
December 23, 1997. The response letter further states that MCDI was no longer
willing to commit to pari-passu requirements as it was not in its best interest,
since a search of title conducted for the review of the agreement revealed the
following facts:
a. Closing attorneys, Koppen & Watkins, had improperly filed mortgages
on collateral in Dade County Courts. None of the properties being
used as collateral were located within Dade County. (This allowed the
additional mortgages on the properties.)
b. Once the mistake was discovered mortgages
g ges were filed in the
appropriate court, but due to the error, Miami Capital's mortgage for
the Hollywood property is in third position.
c. During the time elapsed, Mr. Darbouze defaulted on the third
mortgage against the property in New York and it foreclosed. Miami
Capital's mortgage was in fourth position (filed January 1, 1998) and
Cj
may have been dismissed by the court. Public records show a
"Referee's Deed" being acquired by Bankers Trust January 19, 1999,
which subsequently sold the property to Mr. A. Watson (Current
holder of title). All
other mortgage holders were satisfied, however,
there is no evidence that the MCDI mortgage was paid.
■ A letter dated January 7, 1998 from MCDI to Luis S. Konski, attorney at the
offices of Becker & Poliakoff, discusses the issue that the closing attorney was
paid approximately 0,000 for legal services not performed.
■ A letter dated February 20, 1998 from Becker and Poliakoff, P.A., to MCDI,
provides an opinion that entering into a pari-passe agreement with Miami -Dade
may affect MCDI's ability to pursue its former counsel since there may be
insufficient funds after foreclosure to satisfy a deficiency judgment. Former
counsel may argue that, by entering into the pari-passu agreement, recovery
would be limited by the agreement. The Letter further advises that there may be
other avenues to explore prior to pursuing former counsel (i.e establishing if the
intervening loans were made with notice to the lenders). Finally, the letter cites
the statute of limitations in the State of Florida to file for legal malpractice is
generally two years and gives a deadline of December 1, 1999 to initiate such
5
action. There is no documentation in the file to suggest a decision has been made
regarding these issues.
■ A May 21, 1998 letter from Becker and Poliakoff, P.A., attorneys for MCDI,
notifies the Borrower that its firm has been retained to represent MCDI and that
its client demands full payment of both loans. This letter further warns that
failure to bring accounts current would result in foreclosure and liquidation of
collateral.
■ Correspondence dated January 20, 1999 from Becker and Poliakoff advises
MCDI that the Borrower (now Defendant) had counter -sued, claiming that MCDI,
among other things, committed fraud in failing to extend additional monies to
Tropic Delight. A review of the "Answer, Affirmative Defenses and Counter -
Claims" indicates the following:
a. The Plaintiff engaged in wrongful conduct precluding it from
recovering relief requested against the Defendants in the Plaintiff's
Complaint.
b. "As its sixth Affirmative Defense, the Defendants allege that all of
Defendants' obligations alleged in Plaintiff's Complaint are equitably
cancelled and satisfied due to Plaintiff's wrongful conduct as alleged
herein."
c. "Count V Cancellation - This is an action against Plaintiff for the
cancellation of the Note, the Second Note, the Mortgage, the
;. 41 n f
pja.
o1 �V
r� 1
Modification ��and' the Loan Agreement (collectively the "Loan
Documents ).
" The file did not include additional documents to determine MCDI's current
Position regarding legal actions against the Payroll
parties Register and Family
Income and Size Certification forms signed by each employee.
■ As per Miami Capital Development, Inc. Loan Approval to Tropic Delight
Corporation dated August 24, 1994:
"Borrowers receiving City of Miami's funds, shall, in the hiring of
employees, comply with the City
of Miami's First Source Hiring
Ordinance, as approved by the City Commission on July 24 h, 1986
via
Resolution No. 86-855. This First Source Hiring Ordinance
requires that
every employment opportunity first be given to the unemployed and
under -employed. More
specifically, all jobs created as a result of
contracts for facilities, services, and /or all receipts of Grants and Loans
are subject to being filed by
,first , participants in the City of Miami's
training and employment programs,
and or thereafter by other residents
of the City of Miami."
■
There is no documentation in file to confirm residents of the City of Miami
benefited from this transaction.
4
Summary
After thoroughly examining the documentation for this loan, ' the Review Team contends
that this loan should not have been approved and closed under the proposed terms and
conditions. Prior to approval, documentation should have been analyzed and areas of
concern
(i.e. Possible conflicts of interest with Generic Packaging and numerous
inconsistencies found in the documentation provided by the Borrower) should have been
satisfactorily addressed. Furthermore, funding should have been withheld until borrower
provided proof that location within Target Area had been secured. The Review furl
her
reveals that MCDI failed to ensure that the Borrower complied with conditions stipulated
in the "Loan Approval", placing MCDI and its funding source at significant risk of loss.
The collateral for the loan to Tropic Delight consisted of first security interest on
corporate assets, second mortgage on residential real estate in New York, second
mortgage on residential real estate in Hollywood, second mortgage o
land
Coral, and second Mortgage in residential real estate in Coconut Creek.Duento the
ape
Borrower's default, MCDI reviewed documents in file and realized that the mortgages on
the collateral property were filed in the wrong venue.
This error allowed the Borrower's Principal to secure additional financing against the
properties and the MCDI mortgage for the New York property w as eventually record
in 4 position. This property was foreclosed by the 3rd mortgagee and sold th oughea
r« _
0117 4 2 0 3 tit I�
4
111,
1-1
"Referee's Deed". Since it was in fourth position the
disrrussed. Likewise, the MCDI mortgage for the Holl MCDI mortgage was probably
When the Borrower vacated the warehouse in Food property is in 3`d position.
atni Lakes where the bus
supposedly operated (which, again, is located outside t e ), the
MCDI target area for loans mess
file did not contain documentation to account for the condition or whereabouts of
machinery and equipment purchased through the proceeds of the loan. It is the Cit 's
understanding that MCDI is in litigation with the Borrower, but intends to charge off the
loan.
4�
r�
61—)
TROPICAL MARKETPLACE OF BAYSIDE, INC.
The background relating to this loan parallels the Casa Panza loan previously discussed
in that the Review Team reviewed the Tropical Marketplace of Bayside loan for
underwriting purposes. MCDI requested the City to authorize the closing of this loan
because it had been approved by the Loan Committee prior to the City suspension. The
City of Miami agreed to this request with the condition that MCDI provide
documentation confirming that the request had been processed prior to the suspension
and that Department of Community Development must underwrite the loan application
under the terms and conditions of the existing MCDI Lending Policy Manual guidelines.
Failure to comply with requirements of the criteria included in the Lending Policy
Manual would be grounds for disapproval.
■ According to the documentation included in the loan package, the
applicant's net worth was determined to be approximately $13 million,
including $105,000 of liquid funds, $285,000 in equity from the
applicant's personal residence and just over $1 million in mortgage free
commercial properties (The principals of the Tropical Marketplace of
Bayside loan are the same as the approved Cajun & Grill of Bayside loan
previously discussed).
■ Based on this information, the applicant possesses adequate sources to
finance business operations.
■ Exhibit 2 of the Internal Lending Policy Manual identifies reasons for
loan denial. Under Number 1.) of this section, fund availability from
r
other sources on reasonable terms is a criterion for disapproval (the item
specifically cites funds from a private institution; the price of assets not
required of the applicant in its conduct of business; personal credit and/or
resources of the owner; and other known sources of credit). The City of
Miami denied approval of this loan request on the basis that the borrower
was capable of financing the venture through the credit of its principal
and other resources described in the Internal Lending Policy. The
Principal in the Tropical Marketplace of Bayside loan is Mr. Hoi Yeung.
As previously cited in this analysis, Mr. Yeung reports a net worth at
over $13 million in the loan application package and is also identified as
an officer in seventy-six active corporations, four which have received
financing through MCDI.
In accordance with the bender's Internal Lending Policy, the City of Miami did not
authorize funding of this loan. It must also be noted that, since this loan was being
reviewed for underwriting purposes, once the Review Team determined that this loan was
not fundable, it did not review the loan application in detail for thoroughness or
completeness.
44
E
lA9!
INSUFFICIENT AND/OR IMPROPER DOCUMENTATION TO SUPPORT
COMPLIANCE WITH THE CITY OF MIAMI FIRST SOURCE ORDINANCE
AND PUBLIC BENEFITS
MCDI has an internal document titled "Introductory Statement Objectives of MCDI and
Information on Loan Approval Process" that states: "MCDI is a not for profit
organization and, although our lending policy is to make loans we can collect (so
others like you will benefit), our goal is to provide economic development, capital
formation in the less developed areas of our community."
The City of Miami Commission approved the City of Miami First Source Hiring
Ordinance with the adoption of Resolution No. 86-July 24, 1986. The First Source
Hiring Ordinance requires that all jobs created as a result of contracts for City of Miami
funds are subject to first being filled by participants in the City of Miami's training and
employment programs, and/or thereafter by other residents of the City of Miami. The
intent of this legislation is to ensure that unemployed and underemployed persons are
given the first employment opportunity to fill these positions.
Borrowers receiving loans from MCDI are required to meet the conditions of the City's
First Source Hiring Ordinance. This includes a necessity to submit support
documentation to satisfy this requirement by providing MCDI with copies of payroll
registers and Family Income and Size Certification forms (supplied by MCDI) signed by
each employee on a yearly basis. The payroll register and the Family Income and Size
Certification forms must clearly show evidence that the borrower has retained a specified
number of jobs and/or created a specific number of jobs within a two year period from
the draw down date. Furthermore, it is required that 51 % of the jobs created must be
provided to low/moderate income persons and the borrower must provide training for any
position requiring special skills or education. None of the files reviewed contained
documentation to confirm that borrowing businesses complied with City of Miami First
Source Hiring Ordinance.
i
45
i
COMMENTARY ON LENDING PROCEDURES
The MCDI Internal Lending Policy currently being used to evaluate loan
applications has been formulated with a sound basis and provides a good foundation
for loan review and analysis. While there may be some need for update and
clarification of terminology in several areas, this is a document that meets industry
standards. However, it must be clearly understood that the effectiveness of
any
policy manual, regardless how comprehensive or thorough it may be, is contingent
upon the implementing body's ability to adhere to and follow the strict compliance
with these guidelines. Without this commitment, even the most detailed and best
formulated policy manual is the doomed to failure. The functions of the In -House
Loan Committee remain questionable, as evidenced by the fact that loans with
minimal or incomplete reviews were presented to the (final) Loan Committee for
approval.
The application file for a loan to Marie Gill & Associates clearly demonstrates this
principle. This file contains inconsistencies regarding Principal's income,
51
undisclosed loans, unsupported entries in the corporate balance sheet, i.e.: bank
balances,
fixed assets, and payables. Furthermore, the borrower's principal, Marie
Gill, was a member of MCDI's Loan Committee. Florida Statute 617.0834 prohibits
01,
loans to members of the Board of Directors. The MCDI Personnel Policies and
Procedures Manual prohibits employees or members of committees who exercise
any functions or responsibilities regarding MCDI to benefit from any loan contract
or subcontract arising in connection with the operation of MCDI while employed by
the organization and for one year after termination of employment. There is no
rational explanation as why or how this loan, which contains substantial
inconsistencies
regarding the application and supporting documentation, conflicts
with the MCDI employee manual and violates Florida Statutes, was even considered
for approval, yet was actually approved by both the "In -House Loan Committee"
and the "Final Loan Committee."
The post closing servicing of the loan is an integral part of the lending process. City
of Miami Staff reviewed eight files, six of which closed and were being serviced by
the lender. None of the files reviewed contained information to support the
Borrower's compliance with the City of Miami First Source Hiring Ordinance. The
MCDI "Loan Compliance Review Report" provides the mechanism to monitor the
Internal Lending Policy Borrower's progress in the creation and/or retention
Only two files contained these reports. However, of fobs.
s.-p P ,personnel who inspected the
businesses never verified the number of jobs by reviewing the Borrower's payroll
records. The Review Team questions the overall adequacy of accounting records
_ and if payments of FICA/Federal Taxes are current. None of the reports for Tropic
Delight or Autosport Towing answered these questions. If MCDI personnel had
reviewed accounting records and payroll tax records, they would have realized that
7. the Borrower was experiencing financial difficulties and, in the case of Autosport
Towing, the Borrower had failed to pay payroll taxes. Failure to adequately monitor
Borrowers resulted in the potential to create significant losses for the lender and its
.,. funding source.
1fx 46 0 e tl � V
The loans reviewed were originated between 1993 through 1998 and the findings
identified in the review of these were consistent in all loans. The records indicate
that:
' MCD1 did not follow its own Internal bending Policy in reviewing or
approving loans
' MCDI did not confirm compliance to conditions stated in the loan approvals
' MCD1 did not monitor the borrowers after closing to ensure public benefit
requirements have been met
In closing this section, it must also be stated that a lack of monitoring by the City of
Miami contributed to the deficiencies identified in this report. Closer scrutiny by the
City could have addressed many of the internal control weaknesses and issues that
would have provided an opportunity for MCDI to correct its internal deficiencies and
ensure that the lender complied with its lending policies. Corrective actions
implemented at the time of discovery would have prevented many of the
aforementioned situations from reoccurring.
As a normal course of business, MCDI systematically forwarded the City of Miami
' status reports regarding the organization's lending portfolio. The reports submitted
to the City included the "CITY OF MIAMI CHARGED OFF LOANS STATUS
REPORT." Sections of this report identify borrowers with charged off loans and the
amount of each charge off. The City of Miami had ample opportunity to review the
same files included in the sampling used to complete this report as well as all other
loans processed by MCDI. A conscientious review of the loan file records would
have identified trends or patterns that might have directed MCDI to adhere to
approved loan policy guidelines or explained the defaults. The City of Miami did
not pursue the necessary oversight to properly monitor, advise, and audit the lender
and its failure to do so allowed MCDI to establish operating patterns that place the
Agency and the City of Miami at significant risk of loss.
There is no question that an effective commercial loan program can be a catalyst to
stimulate business growth and development essential to revitalize the City of Miami
and create jobs for its citizens. An effective commercial loan program promises to
be an important vehicle to provide assistance to encourage the start-up and or
expansion of local businesses. However, it is also critical that the standards of the
lending institution reflect sound business standards and careful consideration should
be given to any funding commitment made in this respect in the future.
47
V . 't .i tJ
t
MAT•241.1003
If
J
9
Audit Report
District Inspector General for Audit
Southeast -Caribbean District
-241-1003
1
TO: Angelo Castillo, Director, Community Planning and Development Division,
Florida State Office, Coral Gables, Florida, 4DD
Nancy K\
District Inspector General for Audit-Southeast/Can'bbean, 4AGA
SUBJECT. City of ATami
Community Planning and Development Programs
ib iamL Florida
We completed a review of the City of Miami's Community Piaaarag and, Development (CPD)
Programs for the years 1995 and 1996. Our objectives were to determine whether the City: (1)
; 49m with : Feda�l : lavva; "Aepartment of Mousing and Urban Development (HLiD)
regulations, and other requirements; (2) )wd.adequrate controls to comply..with the requiz eaCs;
and (3) carried out its activities in an economical, efficient, and effective manner.
The City of Miami did not have adequate controls to ensure compliance with regulations or
properly manage its CPD fiords. As a resuh, the City spent�-S5,203,607_4)f_Community
Development Block Grant (CDBG) (mds -for grant administrative expels without proper
support. Also, the City spent $494,999 for ineligible grant administrative expense& In addition,
because the City did not efficiently and effectively manage its.Alvajo!
ro ,safeguard its assets, approximately 59.9 million of its outstanding loano 'o ddeffaa
Further, the City allocated S4.75 million of HOME Investment Partnerships (HOME) finds for
an affordable housing development that was not feasible.
Within 60 days, please give us, for each recommendation cited in this report, a status report on:
(14he. corrective action taken; (2) the proposed corrective action and the date to be completed;
of (3) why action- is considered unnecessary. Also, please furnish us awes of any
correspondence or directives issued because of the audit.
48 ��1.
5 �-�r-susro�ar
Further Study Needing
Issues
and Consideration
•Fz
During our review, other matters regarding the City's spacial economic development loon
program came to our attention that require correction or improvement. Miami Capital
' Development, Inc. administers the City's special economic deveopment loan program. • .
LOAN DEFAULT RATE WAS EXCESSIVE .
Based on Nfiami Capital Development's April 30, 1997, Loan Portfolio Status R M%
- - approximately 33 percent of the outstanding principal balance of loons was in default. The
defaulted loans represented about 32 Percent of the artstaading loons. At November 30, 1996,
about 21 percent of the outstanding balance was in default which represented 23 percent of the
loans. Thus, the default percentagCS have increased rather significantly over 15 month period.
We believe the increased defaults indicate a iw m s in hfiami Capital Developme Ws
peacetimes.
PROGRAM ENGOME MAY NOT HAVEBEEN PROPERLY DISBURSED ,
• Miami Capital Development, Inc. administered a revolving loan fmd used to provide ocwnomc
development loans In addition to receiving finding from the City to provide the loans, Mud
Capital Development also received program income in the form of loan repayments The low
repayments were required to be deposited into the revolving loan fund for use in matting new
loans.
According to Title 24 CFR 570.504 (c} and (b)(2xi� say program income should be disbiused
from the revolving loan find before additional cash withdrawals are made from the U.S.
Treasury for the same activity. We believe the City did not require bfuuni Capital Development
to substantially disburse program income prior to making additional withdrawals.
At April 30. 1997, Miami Capital Development reported a balance of $723,657 in the revolving
loan fund. This included about $389,000 of program income received from November 30, 1996,
to April 30, 1997, from loan principal payments. Daring the same period, Miami Capital
Development made: only four new loans which totaled 586.000. Even though Miami Caprtal
Development had a large balance in the revolving loan hand and made only SM,000 of loans is
5 months,' the City allocated Miami Capital Development an additional 5560.000 for flee
revolving loan fund,for the period July.1, 1996, to June 30,1997. The City also provided M�
ment•5250,000 for administrative expenses for the period.
Capital Develop
i
49
z.T cs .. T'T'"� .w.-,e..7
ws;.+n.a+ucr+m..aaa�,ua'a,:4-E'3:Eda72.K: i?nh .dJ«*�• t.W:;;N,r,Yr,,' •",,t`ik�:r.f'`p h"is..3 k�P`r.. t. 5 y
, 5
t
,S L
j..t;it kC r i 1
fr
au
I
i
9&Ar-241.1001
phhough Miami Capital Development needs to maintain funds in the revolving loan find to
provide loans, given the low loan activity, we do not believe a substantial balance is needed in
the revolving loan fund. Miami Capital Development should substantially use the revolving
finds to pay administrative expenses prior to the City withdrawing funds to pay dw" expenses.
Alternatively, unless the new loan activity increases, the City should reduce the amount of
funding to the revolving loan fund.
Further, the City did not require Miami ital Development to rennit interest earned on the
revolving loan fuasd. Title 24 CFR 570.59�+ the revolving loon fund dash beimce to
be held in an interest bearing account: Any intmot paid on the funds is considered ismea
earned on grant advances and must be remitted to HUD at least annually.
According to the City, interest earned on the revolving Ioen fiord was used to pay Miami Capital
Development's administrative expenses and to make new loons. The City was not anore the
interest should be remitted to HUD. Thus, the City did not require Miami Capital Devd;iopment
to remit the funds. Given the large cash balance in the revolving loan fund, the interest awoaae
may be significant.
] NSU1MCM4T PUBLIC BENEFIT RECEIVED
Miami Capital Development made loans whi da not appear to provide sufficient public;'
benefit. • According ft if to Title 24 CFR 570.209 the amount of CDBG aaaistaa w for an
individual activity exceeds $5000 for each peimmmt job rs+ate 1 or rdaint.4 the pubHo
benefit received is irauliidaeoL Therefore, the activity may der no coircum be w ' - I ed
with CDBG funds. Miami Capital Development made at least two Ioaa3s which did not p vW&
sufficient public benefit. .
On March 31, 1995, Miami Capital Development Iodcned $441,479 to 1830 F.nt. Teatro llierti.
As a result of the loan, only four jobs were created or retained. Thus, the average cost for each
job was $100,370. In addition, on October 30, 1996, Miami Capital Development loaned
5200,000 to Valparaiso Unite& The loan resulted in the creation or retention of two jobs. Thin,
the average cost for each job was 5100,000.
50
I
a
I
MCI
I
I
fE
Office of Internal Audits
444 SW 2"' Avenue
V-1
Miami, Florida 33131
0-1
(305) 416-2040
email: vigweCa)d.miami.fl.us
I
Oil