HUD Permits More Frequent Distributions for Certain Properties| Housing Finance Magazine

A topic for many Department of Housing and Urban Development (HUD) multifamily owners has been the need for more flexibility in declaring and handling profits—also known as “surplus cash.” HUD has taken a careful step toward providing greater flexibility but with verification steps as well. HUD issued Mortgagee Letter 2022-16 on Sept. 7, permitting more frequent surplus cash distributions from certain insured but unsubsidized multifamily projects. Typically, eligible borrowers are only permitted annual or semi-annual surplus cash distributions from HUD Federal Housing Administration (FHA)-insured multifamily projects.

Richard Michael Price

Eligible owners may be approved to calculate, declare, and take surplus cash distributions as frequently as each month. The formula for calculating the available surplus cash for distribution is not changing. This policy change will be reflected in the next edition of HUD Form 92466M.

It is important to remember that this policy is limited to certain new FHA-insured multifamily properties. Owners must apply for this change and amend their form Regulatory Agreement at closing. Only new unsubsidized FHA-insured multifamily mortgage loans are eligible. This policy change does not apply to HUD-held mortgages or properties with Section 8 project-based rental assistance contracts. To be clear, this is only available to loans endorsed after the effective date of the mortgagee letter.

David Hornstein
David Hornstein

Additional conditions must also be met, including:

· Must be in compliance with all other HUD requirements;

· Must meet program minimum debt-service coverage ratio in its program obligations;
· Most recent Real Estate Assessment Center (REAC) inspection score(s) must be 80 or above with no REAC score(s) below 60 during the three prior fiscal years;

· Must be two full fiscal years from the final endorsement of new construction properties, substantial rehabilitation properties, and transfer of physical assets properties;

· Must be one full fiscal year after Section 223(f) loan endorsement (unless the borrower has owned at least two FHA-insured projects for the prior five full fiscal years with no previous participation flags or regulatory violations during that time period);

· Must perform a surplus cash calculation monthly;

· Must continue to comply with annual surplus cash requirements; and

· This new release of surplus cash cannot adversely impact any outstanding surplus cash note(s).

Mortgagee Letter 2022-16 creates carefully planned surplus cash flexibility that should allow owners more timely access to capital. Looking ahead, FHA insurance applicants should consider whether seeking this distribution change will have a positive impact on their transactions.

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