HUD surplus cash: the calculation, the timing and what blocks a distribution

The formula

Surplus cash is defined in section 13 of the regulatory agreement every owner signs at closing (form HUD-92466M). It is a balance-sheet test on a single date, not a measure of the year’s profit.

If the result is positive, that is the most the owner may distribute for the period. If it is zero or negative, nothing can be taken.

A worked example (illustrative numbers)

A 120-unit property closes its fiscal year with $410,000 in operating cash and $60,000 in a money market account. A $25,000 replacement reserve draw has been approved but not yet funded. Next month’s mortgage payment, MIP and reserve and escrow deposits total $118,000; tenant security deposits are $72,000; payables due within 30 days are $96,000.

Surplus cash = $410,000 + $60,000 + $25,000 − $118,000 − $72,000 − $96,000 = $209,000.

The surplus cash calculator runs the same lines with your figures.

When distributions can be taken

Two timing rules apply on every track. Surplus cash generated as of one period end is distributed in the next period: Handbook 4370.2 gives the example that distributions early in a fiscal year cannot exceed surplus cash as of the end of the prior year. And under section 14(d) of the regulatory agreement, a distribution must be taken in the accounting period right after the calculation and before the next one; money not taken in that window stays project property.

If an owner takes a mid-year distribution, the semi-annual HUD-93486 computation goes in with the annual financial statement along with the year-end one. See annual financial statements.

Monthly distributions under ML 2022-16

In September 2022 HUD allowed eligible borrowers to modify section 13 of the regulatory agreement and take distributions as often as monthly. The formula did not change. The conditions in the letter:

• Property type: no project-based Section 8 contract and no HUD-held note.
• Timing: only loans endorsed after the letter, with the election box checked in the regulatory agreement. HUD will not amend agreements on loans already closed.
• Track record: compliance with HUD business agreements, with no outstanding financial reporting violations and no more than one instance of non-compliance in the prior three fiscal years.
• Coverage: the property meets the program’s minimum debt service coverage on its latest annual statement.
• Physical condition: latest inspection score of 80 or above and none below 60 in the prior three fiscal years.
• Seasoning: two full fiscal years after final endorsement for new construction and substantial rehab, and after a transfer of ownership; one full fiscal year for a new 223(f), which experienced HUD owners can shorten.
• Paperwork: a signed monthly calculation with HUD’s false-statement warning, kept for inspection.
• True-up: if the year-end calculation is negative, the owner repays monthly distributions taken that year within 60 days of year end.

A violation can make the owner ineligible for monthly distributions for up to three fiscal years and can be referred to HUD’s enforcement center.

What blocks a distribution

Section 14 of the regulatory agreement bars distributions, whatever the surplus cash figure, when:

• they would come from borrowed funds, or the project is not yet complete;
• HUD has given notice of a violation of the agreement, or an event of default has occurred under the note or mortgage;
• the project is under a forbearance agreement;
• required services such as utilities, trash removal or security are not being provided;
• notices of physical deficiencies or code violations from HUD or local government remain unresolved, or the owner has been told of repairs it has not fixed.

HUD can let an owner place a distribution in escrow until a reinspection passes, and can allow distributions over minor or contested code issues case by case. Handbook 4370.2 adds that the first year’s distribution waits until required cost certifications are filed, and that distributions are allowed only while the owner complies with the whole agreement, including keeping the property in good repair. Physical condition is scored under NSPIRE.

What counts as a distribution

A distribution is any withdrawal of project cash or assets other than for reasonable operating expenses. Handbook 4370.2 lists supervisory fees to general partners and salaries or fees to the owner or sponsor, unless HUD approved them as necessary to run the property. Equity contributions cannot be paid back from project accounts without HUD’s written approval (section 14(e)), and owner advances may only be repaid with HUD’s approval or from surplus cash when distributions are allowed (section 15).

Nonprofit and limited-dividend owners

Under Handbook 4370.2, profit-motivated owners may distribute all available surplus cash. Older and subsidized properties can differ. Under Handbook 4370.2, nonprofit owners generally may not take distributions and deposit surplus cash into a residual receipts account; limited-dividend owners are capped at an annual amount and deposit the rest. Read the property’s own regulatory agreement and any subsidy contract before assuming the market-rate rules apply.