HUD OIG Finds Serious Financial Management Deficiencies at Solis Gardens Apartments
By A.J. Johnson
HUD's Office of Inspector General has issued a June 16, 2026, audit report finding that Solis Gardens Apartments, a 62-unit FHA-insured multifamily property in Hayward, California, was not properly managed in accordance with HUD requirements or its regulatory agreement. The report is a useful reminder that HUD-insured multifamily properties are not simply private assets financed with favorable debt. Once FHA insurance is involved, the owner accepts ongoing restrictions on the use of project funds, distributions, reserves, accounting records, and overall financial management.
Solis Gardens Apartments is located at 145 Lund Avenue in Hayward, California. The property is owned by 145 Lund LP and is insured under HUD's Section 207/223(f) program. The owner obtained an FHA-insured mortgage in October 2019 in the original principal amount of $17.3 million. As of December 2024, the outstanding mortgage balance was approximately $15.4 million.
Because the property is FHA-insured, it operates under a HUD regulatory agreement. That agreement restricts distributions to ownership, governs the use of project funds, and requires the owner to comply with HUD financial and operational requirements.
HUD OIG selected the property for audit based on risk indicators, including negative surplus cash, missed or late mortgage payments, HUD's risk rating, and the absence of any HUD Management and Occupancy Reviews. The report notes that Solis Gardens had negative surplus cash at the end of fiscal years 2022, 2023, and 2024, totaling $95,131, $252,889, and $37,257, respectively. The property also failed to make timely mortgage payments during 2023, although the delinquency was cured in early 2024. As of April 2025, HUD rated the property as "potentially troubled."
HUD OIG concluded that the owner did not manage Solis Gardens in compliance with HUD requirements or the property's regulatory agreement. The report identified several categories of noncompliance: improper owner distributions, improper handling of Reserve for Replacement funds, improper accruals of asset management fees, excess property management fees, and incomplete or unreliable accounting records.
Collectively, HUD OIG found that these deficiencies reflected a failure to maintain transparent, HUD-compliant financial management and accounting practices. The report attributed the problems to insufficient owner oversight and owner-established policies that conflicted with HUD requirements.
One of the most significant findings involved owner distributions. Under the regulatory agreement, distributions are permitted only to the extent of surplus cash and only during the accounting period immediately following the computation of surplus cash.
According to HUD OIG, the owner transferred more than $1.5 million from the property's operating account to an owner-controlled bank account during 2023 and 2024, even though the property had reported negative surplus cash for the prior years. Specifically:
| Year | End-of-Year Surplus Cash | Cash Transfers Allowed in Next Fiscal Year | Cash Transfers Made in Next Fiscal Year |
|---|---|---|---|
| 2022 | ($95,131) | $0 | $789,019 |
| 2023 | ($252,889) | $0 | $767,303 |
| Total | $1,556,322 |
HUD OIG treated those transfers as ineligible distributions because the property had no prior-year surplus cash available for distribution. The report emphasizes that when project funds are moved into owner-controlled accounts, HUD's ability to monitor those funds is diminished, increasing the risk that project assets may be used for ineligible purposes.
HUD OIG also found that the owner improperly handled Reserve for Replacement reimbursements. HUD-approved Reserve for Replacement funds are intended to reimburse eligible capital replacement costs and should be deposited back into the property operating account from which the eligible expenses were paid.
Between January 1, 2023, and January 3, 2025, HUD approved four reserve reimbursements totaling $44,979. HUD OIG found that $35,979 of those reimbursements was improperly deposited into an owner-controlled account rather than the property operating account. The report treated that amount as another ineligible owner distribution.
HUD OIG also questioned whether $12,226 of the reserve disbursements was adequately supported. The unsupported items included duplicate invoices, routine maintenance items treated as capital repairs, and invoices with inconsistent or inadequate documentation.
This finding is particularly important because Reserve for Replacement accounts are restricted accounts. They are not general operating funds or owner funds. Even after HUD approves a reserve release, the owner must demonstrate that the funds were used for eligible project purposes and properly documented.
The report also found that asset management fees payable to ownership were not properly calculated under the applicable operating agreement. For 2023 and 2024, HUD OIG concluded that the property over-accrued asset management fees by a net amount of $25,210.
The calculation issue involved the formula for allowable asset management fees. According to the report, the annual fee was limited to 5.5 percent of effective gross income, less the property management fee paid. HUD OIG found a $34,470 over-accrual for 2024, offset by a $9,260 under-accrual for 2023, resulting in the net over-accrual of $25,210.
The lesson here is that owner and asset management fees must be calculated strictly in accordance with governing agreements and accurately supported in the property's financial records. Delegating calculations to accountants does not relieve the owner of responsibility for ensuring that the amounts are correct.
HUD OIG further found that the owner charged and recorded property management fees in excess of those permitted under the HUD-approved management agreement. The agreement limited management fees to the greater of 2.5 percent of effective gross income or $18 per unit per month. For both 2023 and 2024, the 2.5 percent calculation produced the higher allowable amount.
According to HUD OIG, the property paid $93,091 in management fees during 2023 and 2024, while the maximum allowable amount was $76,327. That resulted in excess management fees of $16,764.
The report also criticized the way these fees were recorded. Some management fees were posted as "management fees," while other portions were posted as "professional fees" or miscellaneous administrative expenses. HUD OIG concluded that this accounting approach masked the actual cost of management services and made the financial statements unreliable.
HUD OIG's accounting records finding may be the most broadly applicable lesson for owners and management agents. The report found that the property did not maintain a single, consolidated set of accounting records reflecting all property operations, as required by the regulatory agreement and HUD Handbook 4370.2 REV-1.
Instead, separate records were maintained by the owner and the management agent. HUD OIG found that the property's general ledger omitted fundamental accounts and activities, including the first mortgage, notes payable, interest expense, owner advances, affiliate loans, and Reserve for Replacement reimbursement activity. Mortgage payments and other owner-managed transactions were also excluded from the property's books and operating account.
The report noted that the audited financial statements included material balances, such as $307,025 in general partner advances and a $290,000 affiliate loan, that could not be reconciled to the property's general ledger or bank statements.
This is a critical point: HUD does not merely require annual financial statements. HUD-insured properties must maintain accounting records that allow HUD, auditors, and other reviewers to accurately trace project activity. Multiple bank accounts may exist, but all project activity must be captured in a single, complete set of books.
HUD OIG recommended that HUD's San Francisco Region Director of Multifamily Housing require the owner to take several corrective actions, including:
Appendix A of the report lists the total questioned ineligible costs of $1,634,275.
The owner agreed with some findings but disputed others. The owner disagreed that the $1,556,322 in transfers and the $35,979 in reserve reimbursements deposited into the owner-controlled account were ineligible distributions. The owner argued that both accounts were part of the property's cash-management structure and were used for project-related obligations.
The owner did agree to reimburse $8,751 of the questioned reserve costs, provide documentation for the remaining $3,475 in questioned reserve costs, reverse $25,211 in overstated asset management fee accruals, and reimburse $16,764 in excess property management fees.
HUD OIG, however, maintained its core concerns. The report states that the property's general ledger, initially provided to OIG, did not include the owner-controlled account, and that transfers to that account were recorded as "Distributions to Partners." OIG also emphasized that, while a project may maintain more than one operating account, all accounts and related activity must be included in a single set of books. Transfers between operating accounts should not be recorded as distributions.
HUD will resolve the disputed issues through the audit resolution process.
The Solis Gardens report is important because the findings are not limited to one property or one owner. They illustrate several recurring risks in HUD-insured multifamily operations.
First, surplus cash rules matter. Owners may not take distributions merely because cash is available in a bank account. The right to take distributions depends on the regulatory agreement and the property's computed surplus cash position.
Second, project funds must remain transparent. Moving funds into owner-controlled accounts, particularly when those accounts are not fully reflected in the project general ledger, creates significant compliance risk.
Third, reserve funds must be treated as restricted funds. Reserve for Replacement reimbursements should be tied to eligible, approved, documented capital replacement costs and deposited into the correct project account.
Fourth, fee calculations require oversight. Asset management and property management fees must be calculated in accordance with the governing documents and HUD-approved agreements. Owners cannot avoid responsibility by relying on accountants or management agents.
Finally, the property's accounting records must tell the whole story. HUD expects a complete, consolidated set of books that captures all property financial activity, including activity conducted through owner-controlled accounts, mortgage payments, affiliate loans, owner advances, reserve activity, and management fees.
The Solis Gardens audit is a strong reminder that HUD-insured multifamily properties operate under a regulated financial structure. Owners remain responsible for compliance even when they delegate day-to-day operations to a management agent or accounting firm.
For owners, agents, and asset managers, the practical takeaway is clear: maintain a complete general ledger, document all restricted-account activity, monitor surplus cash before any owner distribution, confirm that all management and asset management fees are properly calculated, and ensure that every project account is visible in the property's financial records.
In HUD's view, weak accounting controls are not merely a bookkeeping problem. They can lead to regulatory violations, questioned costs, and a threat to the property's long-term financial viability.
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