HUD Business Agreements & Sophisticated Legal, Tax and Accounting Issues
Distributions Partnership Agreement waterfalls –Based on available net cash flow –net cash flow defined in partnership agreement Distributions/Payments allowed in HUD projects –Subject to Surplus Cash calculation
Project vs. Entity Expenses Project expenses must be segregated from entity expenses Project expenses: reasonable and necessary to the operation of the project Entity expenses: attributable solely to the entity
Project vs. Entity Expenses Project Expenses: Audit Fees Fees for tax return preparation Legal fees on behalf of the project Bookkeeping fees for the project Costs to convert FS from tax basis to GAAP Entity Expenses: Officer salaries Federal and state taxes Tax prep fees for individuals and LPs Legal fees attributable to the project owner Amortization of organization expenses Consulting services
Project vs. Entity Expenses Entity expenses can only be paid from mortgagor contributions or surplus cash HUD Chart of Accounts includes a series of accounts (7105 through 7190) to account for entity revenues and expenses
Management Fees Management Agent Certification Fee received is expected to cover the cost of supervising and overseeing project operations
Management Fees Calculation excludes: –Section 8 special claims (e.g., vacancy loss, damanges, unpaid rents) –Excess rent charges for Section 236
Management Fees Calculation on Misc Income excludes: –Interest earned on invested deposits –Section 8 special claims –Flexible subsidy funds –Refunds from property tax or utility appeals –Recovered legal fees / court costs –Replacement reserve / residual receipts reimbursements
Mortgagors Cost Certification Required for new construction or acq/rehab of insured property Tips: –Organize, organize, organize! –Communicate, communicate, communicate!! –Use separate bank accounts for entity transactions
Mortgagors Cost Certification Lines of Communication: –Mortgagor (Owner) –Lender –HUD project manager –Accountant –Contractor –Attorney