Computation of Surplus Cash

Surplus cash is a HUD concept and calculation It is based on balance sheet information Surplus Cash equals “Total Cash” less “Total Current

Obligations” Why it’s done Is it required of all projects?

No, it is required on ALL submissions in REAC, but is not a requirement for compliance unless so indicated in the agreement.

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5 Surplus Cash Calculations/Methodologies

MF Old MF 2012 MF 2014 NH (232) Old NH (232) New

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Changes to Surplus Cash Calculation

Beginning Agreement issued in (HUD-92466M 2011) Owners are required to deduct the next month’s principal and R4R payments as other obligations in addition to interest

With 2014 Agreements (HUD 92466M 2014) we also includes escrows and MIP

For Section 232 projects no change in the calculation is required and only interest is deducted from the next month’s mortgage payment

However Section 232 distributions change significantly in the calculation is looking forward instead of back

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Surplus Cash

For Profit Motivated Projects: equals the amount available for distribution in the next fiscal period

For Nonprofit Projects: equals the amount due to the Residual Receipts Account

For Limited Dividend Projects: Part B of the Computation should be completed to determine distributions and residual receipts deposits

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Step One – Determining Total Cash

S1300-010 S1300-010 Cash = 1120 Cash – operations + 1170 Short

Term Investments – operations + 1191 Tenant/Patient Deposits Held in Trust.

The system performs a validation check on this number to ensure it matches the balance sheet totals.

1135 – Accounts Receivable – HUD This account is pulled directly from the Balance Sheet

and automatically populates the Computation of Surplus Cash.

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Step One – Determining Total Cash, continued

S1300-030 – Other Should include:

Reserve for Replacement withdrawals which have been approved by HUD but have not yet been received.

Medicare/Medicaid Receivables receipt expected within 60 days

Account 1165 Interest Reduction Payment Receivable

Flexibility exists for certain items received after year end, but which could have increased cash. For instance insurance receivable is usually not allowed, but could be included if pertained to the prior period and was received before report date. THIS DEPENDS A LOT ON AUDITOR FLEXIBILITY!

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Step One – Determining Total Cash, continued

S1300-030 – Other Should NOT include:

Entity/Construction Cash Accounts Tenant Accounts Receivable Accounts/Notes Receivable from Related Parties Insurance Receivables Escrow Deposits

Comment – see what I mean on the prior slide. It is true that no A/R should be shown. However, this depends entirely on timing.

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Step Two – Determining Total Current Obligations

S1300-050 – Accrued Mortgage Interest Payable Includes the following: Account 2131 – Accrued Interest Payable – First

Mortgage Account 2130 – Accrued Interest Payable – Section 236 Account 2132 – Accrued Interest Payable – Other

Mortgages if payable out of project operations

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Step Two – Determining Total Current Obligations, continued

S1300-060 Delinquent Mortgage Principal Payments This Account will equal S1000-010 – Required Principal

Payments less S1200-360 Payments made per the Statement of Cash Flows

S1300–070 Delinquent Deposits to Reserve for Replacements This Account equals S1000-020 – Required Deposits

less Account 1320DT Deposits Made unless Account 1320R Deposits Suspended or Waived

Indicator is Yes

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Step Two – Determining Total Current Obligations, continued

S1300-075 Accounts Payable – 30 days This account should include the portion of balance

sheet accounts due within 30 days. *MBI requires M2M entities to actually have paid

these within 30 days. This account should not include any Entity/

Construction Payables S1300-080 Loans or Notes Payable [within 30 days]

This account should not include Principal due on the Mortgage Loans or Notes payable out of surplus cash Owner Advances

Only Notes approved by HUD to be paid out of project operations should be included

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Step Two – Determining Total Current Obligations, continued

S1300-090 Deficient Escrow Deposits This should not include liabilities for taxes and

insurance This should include escrow deposits less the prorated

amount due at FYE (i.e. 3/12 of insurance premium if the premium is due 9/30 and project has 12/31FYE)

Should match the mortgagee’s escrow analysis.

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Step Two – Determining Total Current Obligations, continued

S1300-100 Accrued Expenses This account should include accrued expenses

expected to by paid within 30 days. This account should not include amounts escrowed

such as property taxes, insurance and MIP Entity/ Construction Payables should not be included

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Step Two – Determining Total Current Obligations, continued

2210 – Prepaid Revenue This account is pulled from the Balance Sheet and

automatically populates the Computation of Surplus Cash.

2191 – Tenant Security Deposit Liability This account is pulled from the Balance Sheet and

automatically populates the Computation of Surplus Cash

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Step Two – Determining Total Current Obligations, continued

S1300-110 Other Current Obligations This account may include

Bank Overdrafts Accounts Payable or Accrued Expenses not included above R4R Withdrawals not expended Insurance Proceeds not expended Delinquent Residual Receipts deposits Prior year delinquent R4R deposits 2011/2014 Mortgage Principal 2011/2014 R4R Deposit 2014 Escrows and MIP

This acct should not include any Owner Advances or Accounts Payable – Entity/ Construction

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Step Three – Calculating Surplus Cash

Surplus Cash Total Cash less Total Current Obligations For Profit Motivated Projects: equals the amount

available for distribution in the next fiscal period For Nonprofit Projects: equals the amount due to the

Residual Receipts Account For Limited Dividend Projects: Part B of the

Computation should be completed to determine distributions and/or residual receipts

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Step Three – Calculating Surplus Cash, continued

Mid-Year Computation of Surplus Cash Some Project Regulatory Agreements allow for

distributions every 6 months. These Projects may include a Mid-Year Computation of

Surplus Cash (it is not required unless the Owner takes a Mid-Year Distribution).

If a Limited Dividend takes a Mid-Year Distribution they must also make any required Residual Receipts Deposits.

The mid-year computation should be submitted electronically as it is subject to the same audit guidelines as other supporting data schedules

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Unauthorized Distributions

Per the Regulatory Agreement: ‘Owners shall not without the prior written approval of

the Secretary: Make, or receive and retain, any distribution of assets or any income of any kind of the project except surplus cash and except on the following conditions:’

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More on HUD’s Perspective

Any withdrawal or taking of cash for purposes other than the payment of reasonable & necessary expenses is a distribution (per HB 4370.2)

For REAC, this results in referral to either a HUD Field Office or the Enforcement Center and maybe to QASS as well

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OK to Take a Distribution When…

There is Surplus Cash available from the prior accounting period.

Construction has been completed. All cost certification submissions are complete. Project is in good repair & condition.

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Not OK to Take Cash When…

There is no Surplus Cash From borrowed funds Prior to completion of Project When the Project is in default While the Project is under a forbearance

agreement

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HUD Considers These as UAD

Unauthorized Distribution of any Project Assets Loans from Project Funds Acquisition of Liabilities Management Fees Withdrawals from Residual Receipt

Remember the Operating Environment

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Always a UAD Finding

If these are paid from the project operating account: Any Distributions Entity Expenses (e.g. legal fees, asset management

fees, syndication fees, general partner fees) Loan Payments on Notes whose terms restrict

payments to Surplus Cash

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Another Frequent Finding: Unauthorized Loans

Definition: An unauthorized distribution that appears on the balance sheet as a receivable.

Results in referral to either a HUD Field Office or the Enforcement Center and maybe to QASS as well

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HUD Takes an Extra Look at:

Overpayments of management fees & distributions Advances of project cash Loans to employees or owners Loans to other projects or businesses.

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Unauthorized Loans

What is the purpose of the receivable? OK if it’s from a

Reserve Release Insurance Settlement Grant Award Lawsuit Settlement Vendor Overpayment

Occasionally REAC can determine the reason from the Notes

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Unauthorized Loans

Receivables that are not OK Due from Related Parties Due from Other Projects or Businesses Due from the Management Company Due from Partners/Owners (unless it’s from

syndication or equity contribution)

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New Issues From HUD OIG on Surplus Cash

OIG Report 2014-KC-003 – HUD Did Not Always Enforce the Requirements of the Regulatory Agreements and HUD Handbooks Pertaining to Owner Advances and Distributions HUD Handbook 4370.1 Chapter 2 sets forth the policy

“A distribution is any withdrawal or taking of cash or any assets of the project other than for the payment of reasonable expenses necessary for the operation and maintenance of the project. Distributions paid in excess of surplus cash or in excess of the amount earned the previous fiscal year plus any distributions unpaid from previous years must be refunded to the project.”

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New Issues From HUD OIG on Surplus Cash, continued

“The Departmental Enforcement Center establishes general policies, procedures, and guidelines to be followed by its staff charged with enforcing statutory and regulatory requirements governing multifamily properties while processing financial referrals. These policies and procedures cover enforcement procedural requirements, such as issuing a notice of violation and the applicable timeframes, and reference the various available sanctions, such as debarments and civil money penalties, and their applicability. The Departmental Enforcement Center may pursue foreclosure, civil money penalties, double damages, or various other

d h l h d

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New Issues From HUD OIG on Surplus Cash, continued

“HUD did not always enforce the requirements of the property regulatory agreements and HUD Handbook 4310.1, chapter 2, when it allowed 10 of the 54 property owners reviewed to take more than $1.2 million in unauthorized distributions without requiring the owners to repay the money. Of the 10 property owners who took an unauthorized distribution, 5 exceeded available surplus cash and took distributions totaling over $1 million, and 5 were in a negative-surplus cash position and took distributions totaling $196,540. HUD did not pursue enforcement tools for any of the 10 property owners.”

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New Issues From HUD OIG on Surplus Cash, continued 31

New Issues From HUD OIG on Surplus Cash, continued

“HUD viewed the requirement for the repayment of the unauthorized distributions as a book-keeping exercise. The 10 properties ended the fiscal period with surplus cash in each instance in which an unauthorized distribution was taken. HUD stated that since surplus cash existed after the distribution, repayment of the unauthorized distribution would serve only to increase the amount of surplus cash available, and, therefore, the property owners could rightfully take the distribution the next fiscal period. Thus, requiring repayment was a book-keeping exercise, and the distribution did not need to be returned. However, h l d db k

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New Issues From HUD OIG on Surplus Cash, continued

Recommendations We recommend the Acting Director of the Office of

Asset Management and Portfolio Oversight 1A. Provide guidance to multifamily property owners on the requirements of HUD Handbook 4370.1, chapter 2, and regulatory agreements to ensure that distributions are taken only from available surplus cash.

1B. Develop and implement detailed operational procedures to ensure the repayment of unauthorized distributions and owner advances that are not referred to the Departmental Enforcement Center under existing protocol, including the pursuit of civil money penalties and other administrative procedures for owners with a pattern of unauthorized distributions or advances

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Okay, Is That All?

What happens for projects not subject to surplus cash? Complete the surplus cash portion of the REAC

template Include footnote disclosures that project is not subject

to surplus cash Spend money..

What if we over-distribute? Almost all over-distributions of surplus cash are

considered findings Very difficult to hide in the REAC template May be able to show a corrected finding (always a

preference)

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