Written By: Joel Ungar
Sep 27, 2024
The August 2024 edition of Pease Bell CPAS Journal included Part 1 of this article, which discussed issues related to monthly lease payments, bank accounts, and loans and advances to and from related parties. This article discusses other aspects of having the mortgage on your leased nursing home insured by HUD under Section 232.
Owner Distributions and Surplus Cash
Most HUD Section 232 projects permit the owners to take distributions at any time during the year so long as calculated Surplus Cash at mid-year and year-end (generally June 30 and December 31) is positive. All owners should review their HUD regulatory agreement to determine the interval in which distributions can be taken.
Surplus cash is calculated on Form HUD-93486-ORCF for both mid-year and year-end and are included in the annual audited financial statements submitted to HUD. Below find examples of a surplus cash calculations.
Assume the following balances at December 31, 20xx:
Cash $100,000
Accrued interest payable (8,000)
Accounts payable (due within 30 days) (12,000)
Surplus Cash $80,000
Further presume the project distributed $250,000 to the owners during the six-month period ended December 31, 20xx. Since Surplus Cash is positive, the distributions are allowed.
In the next example, assume the same financial data as stated above but include prepaid revenue. Assume the tenant (nursing home operator) remitted the January lease payment of $90,000 in late December.
Cash $100,000
Accrued interest payable (8,000)
Accounts payable (due within 30 days) (12,000)
Prepaid revenue (90,000)
Surplus Cash $(10,000)
Since Surplus Cash calculated is negative, all distributions made during the preceding six-month period must be repaid to the project by the recipients immediately.
We recommend you forecast expected Surplus Cash before the June 30 and December 31 month-ends to avoid a deficiency.
While some property companies consistently maintain large balances, some do not. We recommend maintaining a bank slightly greater than the mortgage's first monthly interest payment. The bank balance will assist in maintaining positive surplus cash, since accrued interest decreases over the term of the. However, management should continually monitor accounts payable, prepaid revenue, or other liabilities to ensure the bank balance is sufficient to cover all liabilities when calculating Surplus Cash.
Required Escrows
HUD generally requires the mortgage company maintain the following escrows:
1. Mortgage Insurance Premium (MIP)
2. Real Estate Taxes
3. Hazard Insurance
At the start of the mortgage, HUD may require additional escrows such as a major repairs fund and a debt service fund. The major repairs fund generally funds required repairs identified during underwriting. The debt service fund is used when HUD wants to be sure you have sufficient cash to meet your initial mortgage payments and is generally refunded within the first one to two years of the mortgage.
The MIP payment decreases over time as the mortgage balance principal decreases. Real estate taxes and hazard insurance fluctuate depending on market conditions.
Reserve for Replacements
The regulatory agreement specifies an amount paid amount to the Reserve for Replacements. The property can then request reimbursement for specified repairs and maintenance from this fund. The request is made on Form 9250.
Summary
To avoid compliance issues with HUD, management should maintain surplus cash and fund its escrows according to the mortgage.
This article and the previous article list some of the main HUD compliance requirements.
If you have any questions, please reach out to the HUD team:
Beth Reimer: breimer@peasebell.com
Joel Ungar: jungar@peasebell.com
Lindsay Arcuri: larcuri@peasebell.com
