In an effort to align their multifamily insurance for unassisted projects with industry standards and make the loans more competitive, the Department of Housing and Urban Development (HUD) has announced a new election on new loans that will allow up to monthly distributions of surplus cash.

Historically, these types of projects were limited to distributions based on annual and potentially semi-annual computations of surplus cash. This new policy, announced in HUD Mortgagee Letter 2022-16, will provide borrowers with new loans with the election to potentially compute surplus cash monthly.

One item of particular note is that the letter specifically mentions that project loans closed before the letter’s effective date – September 7, 2022 – are not eligible. Further, HUD indicates that they will not consider amending existing Regulatory Agreements on existing insured projects.

At this time, clarification is required from HUD on certain areas around reporting and the role of the external auditor. We will provide more information as it becomes available.

Read on for an overview of eligibility and compliance requirements for the new election, and contact our team with any questions.

Eligibility

In the letter, HUD indicates that some specific types of projects will be ineligible to use this new election. This includes projects with:

• Section 8 project-based rental assistance payment contracts
• HUD-held mortgage note(s)
• Regulatory Agreements that don’t include the monthly distribution language

To be eligible to use the election, the following requirements apply:

• Only insured loans endorsed after the effective date of the letter – September 7, 2022 – are eligible.
• The borrower must have included in the Regulatory Agreement the election for monthly surplus cash distributions as a “Yes.” The question that is being added is as follows:
  Election for Monthly Surplus Cash Distributions [check “Yes” or “No”]
  Only Borrowers not subject to a project-based Section 8 Housing Assistance Payments Contract or a HUD-held note may elect Monthly Surplus Cash Distributions, the eligibility requirements for which are further governed by Program Obligations.
• The project must be in compliance with the Program Obligations (i.e., no outstanding violations of financial management and annual financial reporting obligations) and HUD business agreements. This includes late filing issues. In the three fiscal years prior to the current fiscal year, they can have no more than one instance of non-compliance with all HUD business agreements.
• The debt service coverage ratio needs to meet the minimum indicated in Program Obligations based on the most recent annual financial statement.
• The most recent REAC inspection score must be 80 or above, with no REAC inspection scores below 60 during the three fiscal years prior to the current fiscal year.
• “Newly endorsed construction and substantial rehabilitation properties and properties with transfers of ownership (TPA) require two full fiscal years seasoning from the date of final endorsement or transfer prior to permitting monthly Distributions,” the letter states.
• Newly endorsed Section 223(f) projects require one full fiscal year of seasoning prior to permitting monthly distributions.
  • There is an exemption if the borrower or its active principals own two FHA insured projects for the prior five full fiscal years and have no APPS flags or regulatory violations.
  • There is also the possibility of an exemption if the borrower or its active principals owned one FHA insured project for at least three of the last five prior full fiscal years, had no APPS flags or regulatory violations, and has an experienced management agent and independent auditor that HUD deems satisfactory; however, the HUD Regional Director will need to approve such exemptions.

Compliance

The compliance rules specified in the letter as it relates to the election for monthly surplus cash distributions are as follows:

• An annual computation of surplus cash for distribution as of the balance sheet date must be included in the audited annual financial reports that are submitted to HUD.
• The project can also decide to compute surplus cash for distribution on the last day of any other month they choose. This could mean the project makes 12 computations in a year for surplus cash.
• Each of these additional computations will need to be maintained by the project and signed by the borrower for potential inspection by HUD.
• Surplus cash distributions would be limited to the amount indicated in the prior month-end surplus cash computation.
• Upon the completion of the annual computation of surplus cash mentioned above, if surplus cash is shown as a deficit, then distributions in the amount of the deficit will need to be repaid to the project within 60 days of the fiscal year-end. Authorized payments made based on the prior fiscal year annual computation are excluded from the repayment requirement.

Contact

Travis Harrington, CPA, Director

301.907.2336