David Lemler, CPA, CGMA – Partner, Director of Assurance Services
David leads Donovan’s Assurance Services team and brings over 25 years of audit experience to clients in HUD-assisted housing, nonprofit organizations, and closely held businesses. He specializes in turning complex audit and compliance requirements into guidance clients can actually use. Learn more about David.
Not-for-profit HUD properties can’t take surplus cash out as profit. A for-profit owner may distribute surplus cash within its regulatory agreement’s limits. A not-for-profit owner must instead deposit it into a residual receipts account that only HUD can release. The calculation also happens on a different schedule: a not-for-profit property calculates surplus cash just once a year, at year end with its audit.
Is your property for-profit? The treatment is different. See our HUD for-profit surplus cash calculation.
What Happens to Not-for-Profit Surplus Cash?
The HUD not-for-profit surplus cash calculation works the same way as the for-profit version. Only the destination changes: a for-profit owner can take the result as a distribution, while a not-for-profit owner sends it to residual receipts.
The timing differs, too. A for-profit property may calculate surplus cash at the end of each semiannual or annual period, depending on its regulatory agreement, because each calculation can support a distribution. A not-for-profit property calculates it only once, at year end, as part of the annual audit.
In short, a not-for-profit property gains nothing by ending the year with extra cash. The property gets one calculation per year, and it falls at the audit, after the books close. Every dollar of surplus leaves its control at year-end, which makes planning before the books close far more important than it is for a for-profit owner.
This account isn’t controlled by the property; management cannot allocate any funds from residual receipts without express permission from HUD. In practice, these funds are rarely used. HUD is far more likely to tell the property to use the replacement reserve account for additional, necessary expenses than the residual receipts account.
This means that not-for-profit HUD properties may need to create a strategy before their year-end date to avoid losing funds to the residual receipts account, from which they may never be able to make withdrawals.
HUD’s surplus cash rules for nonprofits appear in Chapter 25 of HUD Handbook 4350.1, and Housing Notice H 2012-14 explains when HUD will approve a residual receipts withdrawal.
Owners can request a withdrawal for needs such as capital repairs or improvements. HUD may also apply the balance toward future Section 8 housing assistance payments, which lowers the subsidy the property receives.
A missed deposit or an unapproved withdrawal ranks among the common HUD findings in affordable housing audits.
How to Calculate Surplus Cash
The template for calculating a property’s surplus cash is purposefully non-specific. HUD provides categories such as cash, accounts payable, and other obligations, and your auditor applies the relevant accounts to each category.
It helps to know the process, however, since your goal may be to minimize the amount of surplus cash you have, which means spending more money during the year, but from the right accounts.
- Examine the HUD regulatory agreement. There are many different types out there, and each one has a slightly different way of calculating surplus cash. Make sure you know what is eligible and ineligible for HUD’s calculation according to your specific agreement.
- Add the total amount in your cash accounts, including operating, savings, and security deposits.
- Add the total amount in eligible liabilities, which typically include security deposits, prepaid rent, mortgage principal and sometimes escrow payments.
- Subtract your liabilities from cash. Any positive amount left over is surplus cash, and may be earmarked for residual receipts.
Worked Example: Surplus Cash at a Not-for-Profit Property
The example below uses the same lines as our not-for-profit template, which takes its line numbers from Form HUD-93486, Computation of Surplus Cash, Distributions and Residual Receipts. Your regulatory agreement and your auditor decide which accounts belong on each line.
Picture a 96-unit not-for-profit property closing its books on December 31. Its petty cash, operating, investment savings and security deposit savings accounts hold a combined $199,000.
Security deposits appear on both sides of the calculation. The security deposit savings account adds to cash and the matching liability subtracts, so the two cancel out unless the account runs short.
You won’t see mortgage principal in the table. On Form HUD-93486, principal counts only when payments are past due, so a current loan adds nothing to the calculation.
This property ends the year with $139,000 in surplus cash. A for-profit owner could distribute some or all of it within its agreement’s limits. This not-for-profit owner owes the full $139,000 to residual receipts, which is why the template’s last line carries the same number.
Now suppose the approved budget included a $40,000 parking lot repair. If the contractor finishes in December, the invoice either reduces cash or lands in accounts payable, and surplus cash drops to $99,000. If the work slips to January, the full $139,000 goes to residual receipts.
That $40,000 doesn’t vanish once it reaches residual receipts. Getting it back means a written request to HUD, and HUD may tell the property to draw on its replacement reserve instead, as described above.
Timing questions like this drive much of the year-end planning our affordable housing team does with not-for-profit owners. Each line in the table matches a line in our template, so you can drop in your own year-end balances and compare.
Best Practices for Non-Profit HUD Properties
Monitoring surplus cash is extremely important for not-for-profit properties. The HUD project sets the operational and capital budget at the beginning of the year, but actual expenses may fall short of this amount. When this happens, the cash left unused by the property at the end of the year goes into residual receipts. In addition, HUD will re-evaluate the actual cost it takes to run the property, reducing the amount paid the following year, without considering anomalies like delayed expenses.
Because the official calculation happens only once, owners don’t see the number until it’s too late to change it. To help combat surplus cash miscalculations, owners can ask their auditor to calculate surplus cash amounts during preliminary work, or even perform the calculation themselves. Be careful, however, because if this calculation isn’t done correctly, the property may over-estimate its surplus cash and come up short after actual year-end expenses.
Though it won’t be a perfectly accurate projection, performing a surplus cash calculation early will still give you an idea of what extra cash your organization will have at year-end, and therefore what kinds of tenant improvements owners can make.
Guidance for Performing HUD Surplus Cash Calculation
Your auditor may already have a strategy in place to minimize your organization’s payment to residual receipts, but if not, feel free to contact us for a free conversation about your options. We’re happy to schedule a phone call with your organization to walk through how surplus cash affects your year-end strategy.
We’ve also built an interactive template that will help you calculate surplus cash on your own. Download the not-for-profit surplus cash calculation template to walk through each category of cash and liabilities to consider, with pre-built formulas that take care of some of the work for you.
If you’ve already calculated your own surplus cash, let us know! We’re always happy to review surplus cash calculations to make sure your organization operates with the full amount of funding possible.
Work with Donovan’s Affordable Housing Practice
Donovan’s affordable housing practice works with HUD properties on audits, surplus cash and residual receipts planning. Start a conversation with our affordable housing team before your books close to talk through your year-end surplus cash strategy.
