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.
This guide explains what HUD surplus cash is, why HUD limits it and when for-profit owners can take distributions. It covers the rules, not the math.
Note: The twice-a-year distribution rules in this guide apply to properties with regulatory agreements signed before HUD Mortgagee Letter 2022-16, which HUD announced in September 2022. Properties that signed a new regulatory agreement after that letter can take monthly distributions. The letter does not apply retroactively, so check your agreement’s date before you plan a distribution.
Already know the rules and just need to run the numbers? Use our step-by-step for-profit surplus cash calculation.
Surplus Cash Overview
HUD gives for-profit projects with pre-2022-16 regulatory agreements two opportunities each year to distribute surplus cash to the property’s owners. These biannual distributions always depend on calculating the property’s surplus cash and must follow the guidelines established in the HUD regulatory agreement.
This calculation will vary by property, which means account eligibility will vary too. Below, we will expand on the following:
- Surplus cash cannot be calculated using a cut-and-dried formula. Our for-profit surplus cash template provides a framework to guide what accounts fall under which heading.
- Each entity’s regulatory agreement will determine how surplus cash is calculated.
- There are consequences to over- and under-distribution.
- HUD permits surplus cash calculations twice each year for older regulatory agreements and monthly for agreements signed after Mortgagee Letter 2022-16. To avoid miscalculations, our firm is happy to provide complimentary reviews and calculations.
- Before you calculate, our readiness checklist covers what you and your auditor will need to gather.
Ready to Dive Deeper? Let’s Define Surplus Cash!
Surplus cash is the cash that exceeds the amount of cash that is required for your day-to-day operations. Once you determine your surplus cash, you will want to maximize it by distributing the money. To gain a greater amount of surplus cash, you will want to reduce accrued expenses and other liabilities while generating as much cash as possible.
However, surplus cash is not found through a cut-and-dried formula that each property can simply plug in a few account balances to figure out. To navigate your surplus cash, our downloadable surplus cash spreadsheet has broad categories (i.e. accounts payable, accrued expenses, prepaid revenue, etc.) which allow owners/property managers to figure out which accounts fall under which heading.
Why does HUD restrict distributions at all? HUD insures or subsidizes the mortgage, so it wants the property to cover its bills, loan payments and upkeep before owners take cash out. Surplus cash marks the line between money the property needs and money owners can keep.
The Effect of Regulatory Agreements on Surplus Cash
Throughout the last decade, HUD has been adjusting the language they use in their regulatory agreements to new definitions and calculations of surplus cash. In older agreements there was an allowance for surplus cash to include total cash less other obligatory payments, which is no longer seen.
Today, newer definitions of surplus cash tend to be more restrictive. One restriction to be mindful of includes subtracting one month of mortgage payments, including escrows and replacement reserves. Regulatory agreements today also reduce the total amount of allowable distributions compared to older agreements.
Many older properties operate under Form HUD-92466, the Regulatory Agreement for Multifamily Housing Projects. Newer transactions typically use Form HUD-92466M, so check which version your property signed before you plan a distribution.
Over- and Under-Distribution Consequence
Highly motivated for-profit properties will likely strive to reduce their liabilities reporting as they calculate their surplus cash. While great in theory, it is important to understand the consequences of over-distributing.
If over-distribution is found, there will be a corresponding finding on your audited financial statements. Unless corrected or planned to be corrected, these findings can cause a default on your HUD loan agreement and a warning letter from HUD’s Departmental Enforcement Center (DEC). You may also have to pay back the amount you over-distributed. In many cases, though, our team can help the property resolve the finding without repaying it.
Unauthorized distributions lead our list of the most common HUD audit findings.
On the other end of the spectrum, under-distributing means that the property keeps more cash for operations. Depending on the for-profit property, this is neither good nor bad. If there is under-distribution, owners do not receive the full amount available to them. However, the amount saved can be used to beautify, upgrade, or simply maintain the property for tenants’ benefit.
When You Can Calculate Your Surplus Cash
HUD allows surplus cash calculations two times a year for properties with regulatory agreements signed before Mortgagee Letter 2022-16. The timeline is pretty easy to remember: once at yearend, which you will see included in your annual audit, and again six months prior to yearend.
Properties with a regulatory agreement signed after that letter can calculate and distribute surplus cash monthly. The monthly rules differ from the semiannual rules, so confirm which set your agreement follows.
HUD Handbook 4370.2 REV-1, Chapter 2 sets the rules for when insured multifamily projects may distribute surplus cash. It also bars distributions while the property is in default on its mortgage or regulatory agreement.
Sometimes properties miscalculate their distributions (leading to over- and under-distribution consequences) when they do it on their own. Because we understand this possibility, we offer complimentary reviews and calculations, separate from our audit as a value add. With an auditor’s review on calculations, you can be confident that you will receive the money your property has earned, without dealing with the potential hassle and fees of over-distribution.
Our affordable housing team runs these reviews for owners and management agents throughout the year.
A Checklist to Help Calculate Your Surplus Cash
If you already work with Donovan, we typically only need three items: your trial balance, your subsequent mortgage statement, and any HUD replacement reserve approvals (Form HUD-9250) for funds you have not yet received. If you’re new to Donovan, use the full checklist below.
With a plethora of ways available, we cannot guarantee that this calculation is exactly what HUD will require from your property. However, the checklist below can offer you a high-level overview of what you and your auditor will need prior to receiving distributions for the year.
- Your regulatory agreement. It defines what counts as cash and obligations for your property, and it differs for every property HUD finances.
- Period-end bank reconciliations. Gather reconciliations for your operating, petty cash and tenant security deposit accounts. Your auditor uses these in place of bank statements.
- Liability schedules. Pull your accounts payable aging, accrued expenses, prepaid rent and security deposit liability.
- Your mortgage statement. It shows accrued interest and next month’s principal, escrow and reserve payments.
- Escrow and reserve statements. These confirm you have no delinquent deposits, which could block a distribution.
- Replacement reserve approvals (Form HUD-9250). Include any HUD-approved reserve withdrawals where you have not yet received the cash.
With these documents in hand, follow our for-profit surplus cash calculation walkthrough, which includes a worked example with real numbers on the Form HUD-93486 line items. You can also download the for-profit surplus cash calculation template, which walks through each item and makes certain calculations automatically.
If you have figured calculations out on your own, great! We are always happy to review your surplus cash calculations to make sure you do not over- or under-distribute. Just give us a call or contact us and say you would like a complimentary review of your surplus cash calculation.
Work with Donovan’s Affordable Housing Practice
Donovan’s affordable housing practice helps for-profit HUD owners understand their regulatory agreements and distribute with confidence. If you have questions before your next distribution, start a conversation with our affordable housing team.
