Twice each year, for-profit HUD projects are allowed to distribute earnings to the owners involved in the property according to the guidelines established in the HUD regulatory agreement. These distributions have always depended on calculating the property’s surplus cash, but the accounts eligible for the calculation vary by property.
Surplus Cash Definition
For-profit HUD properties are eager to maximize the amount of surplus cash to distribute the most amount of money. This means reducing accrued expenses and other liabilities while reporting as much cash as possible.
However, surplus cash isn’t a cut-and-dry formula that each property can simply plug in a few account balances to figure out. Instead, HUD gives a broad list of categories and lets owners/property managers figure out which accounts fall under which heading.
How Regulatory Agreements Affect Surplus Cash
To add to the confusion, HUD has been adjusting the language in their regulatory agreements to new definitions (and calculations) of surplus cash over the past decade or so. Older agreements allowed surplus cash to include total cash less other obligatory payments.
However, newer definitions of surplus cash tend to be more restrictive, and includes subtracting 1 month of mortgage payments, including escrows and replacement reserves. Along with reducing the total amount of allowable distributions, this also makes the surplus cash calculation more confusing.
Over- and Under-Distribution
Because for-profit properties can tend to be highly motivated to reduce their expense reporting when calculating surplus cash, it’s worth noting the consequences of over-distributing.
First, over-distributing results in a finding on your audit report. Unless corrected or planned to be corrected, these findings can cause a default on your HUD loan agreement and a warning letter from the HUD Enforcement Center. You’ll also have to pay back the amount you overdistributed.
Under-distributing simply means the property keeps more cash than it used in operation, which for some for-profit properties, is neither good nor bad. Owners don’t make as much money, but the amount saved can be used to beautify, upgrade, or simply maintain the property for tenants’ benefit.
When to Calculate Surplus Cash
HUD allows surplus cash calculations twice each year: at year end and 6 months prior to year end. Surplus cash is included in your annual audit, but the mid-way calculation is up to your property management company.
However, sometimes properties miscalculate their distributions when they do it on their own, which is why we offer complimentary reviews and/or calculations during the year, apart from our audit. This way, you can be sure to get the money from your property you’ve earned, without fearing the fees and hassle of overdistribution.
How to Calculate Surplus Cash
Since there are several different ways to do this, we can’t guarantee that this calculation is exactly what HUD requires of your property. However, this checklist can give you an overview of what information you and your auditor will need before you can receive distributions for the year.
- Double-check your regulatory agreement before you begin. It will explain what can and can’t be included in your total cash and obligation categories, and is different for every property financed by HUD.
- Add up the balances in your cash accounts. This typically includes petty cash, tenant security deposits, and operating accounts.
- Add up the balances in liability accounts, including prepaid rent, accrued management fees (if payable in 30 days), and often mortgage and mortgage reserve payments.
- Subtract total liabilities from total cash. This is the amount you have available for distribution (if negative, you are not allowed to distribute any funds).
We’ve also built an interactive template that will help you calculate distributions. It walks through each item to consider and makes certain calculations automatically. If you’ve figured it out on your own, great! We’re always happy to complimentary review surplus cash calculations to make sure you don’t over- or under-distribute. Just contact us, and say you’d like us to review your surplus cash calculation.