LOW-INCOME HOUSING

LEASED HOUSING HANDBOOK

CHAPTER 5

\* CHAPTER 5. FINANCIAL CLOSE-OUT AND TERMINATION OF SECTION 23

LEASED HOUSING PROGRAMS

5-1. PURPOSE. This Chapter provides instructions to Public Housing

Agencies (PHAs) and HUD Field Offices for financial close-out

and termination of a PHA\'s Section 23 Leased Housing Program

when all units of the program: (1) are converted to the Section

8 Housing Assistance Payments (HAP) Existing Program; (2) are

acquired by the PHA under the Low-Income Public Housing Program;

or (3) are terminated outright.

5-2. BACKGROUND.

a\. When Section 23 units are converted to Section 8, Section

23 contract authority is redistributed to the Section 8

List and supplemented by additional Section 8 contract

authority to provide for the total cost of funding the

Section 8 program. Adjustments to the Basic Annual

Contribution (ABAC) are provided during the \"phase-out\"

period to cover Section 23 leases with owners, damages to

units for which the PHA is responsible, and expenses of

closing-out and terminating the Section 23 program, to the

extent that operating reserves and anticipated PHA

generated income are not adequate for these purposes. ABAC

replaces the funding formerly provided under the Basic

Annual Contribution (BAC), which is no longer available

once the Section 23 contract authority has been

redistributed to the Section 8 List.

b\. To the maximum extent possible, operating reserves shall be

utilized in place of ABAC during the \"phase-out\" period so

that cash remaining at the termination of the Section 23

program will be minimal.

c\. Allowable expenses for the close-out and termination of

the Section 23 program shall include items such as:

minimal administrative expenses necessary to accomplish

close-out and termination of the program (e.g., collection

of Tenants Accounts Receivable (TAR) and closing of the

Books of Account); an Independent Public Accountant (IPA)

audit (or prorated cost thereof); and the settlement of

claims and litigation against the PHA arising out of the

Section 23 program for which the PHA is under legal

obligation to pay. After expiration/termination of all

leases with owners and families, adjusting entries are made

to close the Books of Account. \*

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LOW-INCOME HOUSING

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5-3. DEFINITIONS.

a\. Lease with an Owner (Lease Agreement). An agreement

between the PHA and the owner in which a premises is

rented to the PHA subject to stated terms and conditions.

b\. Lease with a Family. An agreement between the PHA and an

individual family in which a unit is rented to the family

subject to stated terms and conditions.

c\. Total Conversion. Conversion of all the Section 23 units

of a PHA which are under the same Annual Contributions

Contract (ACC).

d\. Close-out and Termination of a Section 23 Program.

Withdrawal of all contract authority and units from a

Section 23 program and termination of all HUD obligation to

provide BAC or ABAC for those units. After a Section 23

program has been closed-out, there will be no remaining

assets or liabilities attributable to the program.

e\. Final Close-out. Final Close-out takes place when

adjusting entries are made to close the Books of Account

for the Section 23 program; a resolution is adopted by the

PHA Board of Commissioners and submitted to HUD certifying

that the closeout of the Section 23 program has been

completed in accordance with the instructions provided in

this chapter; and the Section 23 ACC is terminated or, if

appropriate, a consolidated ACC is amended to terminate the

Section 23 program.

f\. Conversion Budget(s). (l) The Section 23 Operating

Budget, Form HUD-52564, (see Low-Income Housing Financial

Management Handbook 7475.1 , Appendix l) or budget revision,

which is prepared subsequent to the approval for conversion

to Section 8. (This budget or revision reflects the

payment of ABAC to the PHA by HUD for Section 23 leases and

other expenses during the \"phase-out\" period and

replacement costs, if required.) (2) Operating Budgets in

subsequent PHA fiscal years, up to but not including the

PHA fiscal year during which final close-out and

termination of the Section 23 program will take place

(final fiscal year). \*

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\* g. Final Budget. The Final Budget contains the last

projected expenditures of the PHA with respect to the

Section 23 program. Any remaining claims and adjustments

relating to any creditors shall be included in total

operating expenditures. The final budget shall reflect the

use of all available operating reserves prior to approval

of ABAC to underwrite the approved operating deficit.

5-4. CONVERSION BUDGET(S).

a\. After HUD approval for the conversion of all or part of a

Section 23 program has been obtained and the Section 23 ACC

amended, a Conversion Budget shall be prepared for the

fiscal year in which the ACC is amended. This budget shall

reflect the estimated need for ABAC for replacement costs

and phaseout costs, where such costs are required. In

subsequent fiscal years, a Conversion Budget also shall be

prepared for each PHA fiscal year up to, but not including,

the PHA fiscal year during which final close-out will

occur.

b\. Where a Section 23 program will be converted over a period

covering more than one PHA fiscal year, the initial

Conversion Budget shall reflect the use of ABAC for any

phase-out costs associated with units approved in the

conversion application, even though some leases with

families may not expire or be terminated until a PHA fiscal

year subsequent to the one for which the budget is

prepared.

c\. The maximum operating reserve level approved in a

Conversion Budget shall be the minimum amount necessary to

cover estimated remaining close-out costs (such as

administrative expenses and claims against the PHA) to the

extent that these cannot be covered by operating income,

taking into consideration TAR and other receivables. If

the PHA\'s actual Section 23 operating reserve exceeds the

maximum established in the Conversion Budget, ABAC shall be

reduced and the deficit shall be funded by a drawdown of

the operating reserve. If the actual operating reserve is

less than that established in the conversion budget, ABAC

shall be approved as needed to cover budgeted expenditures;

however, the operating reserve shall not be augmented. At

the time of the final close-out and termination of the

Section 23 program, the balance of operating reserves shall

be as close to zero as possible. \*

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LOW-INCOME HOUSING

LEASED HOUSING HANDBOOK

CHAPTER 5

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5-5. NOTIFICATION BY THE PHA OF INTENT TO TERMINATE THE SECTION 23

PROGRAM. Within 30 calendar days following approval of the

PHA\'s conversion application, the PHA shall notify, in writing,

all owners, tenants and others, including those having a

financial interest in the units being converted, of its intent

to terminate the Section 23 program. Simultaneously, in

accordance with Section 882.123 of the Section 8 Housing

Assistance Payments Program - Existing Housing Regulations, the

PHA shall issue Certificates of Family Participation in the

Section 8 Existing Housing Program to families assisted under

the Section 23 program being converted. Where possible, a

Certificate of Family Participation shall be issued at least 60

calendar days prior to the expiration of a Section 23 lease with

a family for a unit being converted to Section 8. The PHA shall

require, through publication of a notice in an established

media of general circulation, that all parties having a

financial interest in units being converted submit claims

within 30 calendar days following the date of the

expiration/termination of the last lease with an owner. During

the period between the approval for conversion and the

expiration/termination of the last lease with an owner, actions

to be taken by the PHA shall include the following:

a\. The PHA shall settle claims and obtain a written release

from the owner(s) relieving the PHA of all obligations to

the owner(s) under the Section 23 program. If litigation

is required, the PHA shall pursue settlement as

expeditiously as possible.

b\. The PHA shall comply with the requirements of Section

882.123 of the Section 8 Housing Assistance Payments

Program - Existing Housing Regulations.

5-6. FINAL BUDGET. The final Operating Budget for the Section 23

program shall be prepared for the PHA fiscal year during which

it is expected that all remaining Section 23 leases will expire

or will be terminated, and all remaining claims against and

obligations of the PHA with respect to the Section 23 program

will be settled. The final Operating Budget shall include all

claims that have been filed with the PHA and verified by PHA

staff as legitimate, but not yet paid. This would include all

legitimate claims by owners, suppliers, etc. The final

Operating Budget also shall include, if necessary, estimated

remaining costs associated with close-out and termination of the

Section 23 program, such as the final IPA audit (or proration,

if applicable), administrative expenses of close-out and \*

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LOW-INCOME HOUSING

LEASED HOUSING HANDBOOK

CHAPTER 5

\* termination, and the cost of the services of a fee-accountant,

if needed, to close the Books of Account. The final budget

shall also reflect estimated income, if any, from disposition of

assets other than cash during the final budget year. The final

budget shall provide for a zero (0) operating reserve. If total

expenditures in the final fiscal year of the Section 23 program,

including expenses of close-out and settlement of claims, exceed

the actual amount of the operating reserve plus anticipated

PHA-generated income, HUD will approve ABAC to cover the

deficit.

5-7. DISPOSITION OF ASSETS OTHER THAN CASH. To the maximum extent

possible, assets other than cash, such as equipment and

inventories, remaining from a Section 23 program after

conversion to the Section 8 HAP Existing Program, acquisition by

the PHA under the Low-Income Public Housing Program or outright

termination, shall be transferred to the Section 8 program or a

Low-Income Public Housing Program (including Mutual Help and

Turnkey III), if these programs can exhibit a current or future

need for the assets. With prior written authorization from the

Field Office, the assets shall be transferred to these programs

at no cost. If a PHA justifies that a Section 23 asset is of no

use to either its Section 8 program or its Low-Income Public

Housing program, the asset shall be disposed of in accordance

with the PHA\'s adopted Disposition Policy. The PHA shall advise

the Field Office Manager/Supervisor, in a letter signed by the

Executive Director, of its proposal for the Disposition of

Section 23 assets. For Section 23 assets transferred to a

Section 8 or Low-Income Public Housing Program at no cost, the

letter shall include an agreement that no duplicate purchases

shall be made as long as the Section 23 assets are usable. The

Field Office shall review the PHA\'s proposal for compliance with

the requirements of this chapter and, if approvable, advise the

PHA in writing to proceed with the disposition of any remaining

Section 23 assets.

5-8. DISPOSITION OF CASH REMAINING AT TIME OF FINAL CLOSE-OUT. Cash

remaining at the time of final close-out of a Section 23 program

shall be used, with prior written authorization from HUD, to

offset amounts due the PHA from HUD, for either the Section 8

HAP Program or the PHA-Owned Rental Housing Program, as follows:

a\. If the Section 23 units are converted to the Section 8

Existing Housing Program, cash remaining from the Section

23 program shall be used by the PHA as an offset against

the annual contributions payable by HUD for the Section 8

program; \*

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LOW-INCOME HOUSING

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\* b. If the Section 23 units are acquired by the PHA under a

PHA-owned Rental Housing Program, cash remaining from the

Section 23 program shall be used by the PHA as an offset

against operating subsidies payable by HUD for the

PHA-owned Rental Housing program; and

c\. If the Section 23 program is terminated outright,

remaining cash shall be used as an offset against either

annual contributions payable by HUD for the Section 8 HAP

Program or operating subsidies payable by HUD for the

PHA-owned Rental Program, whichever is approved by the

Field Office.

When the PHA determines the amount of cash which will remain at

final close-out, it shall advise the Field Office Manager/

Supervisor, in a letter signed by the Executive Director, of its

proposal for the disposition of the remaining cash. The Field

Office shall review the PHA\'s proposal for compliance with the

requirements of this chapter and, if approvable, advise the PHA,

with a copy to the Regional Accounting Division (RAD), to offset

the correct amount. At the same time, the Field Office shall

reduce operating subsidies or annual contribution payments to

the PHA, as appropriate, by the amount of Section 23 cash being

offset. If, for some reason, cash remaining from the Section 23

program cannot be offset against HUD payments to the PHA for the

Section 8 HAP Program or the PHA-owned Rental Housing Program,

such cash shall be repaid to HUD and placed in the General Fund

of the U.S. Treasury.

5-9. ACCOUNTING ENTRIES FOR THE DISPOSITION OF CASH AND OTHER

ASSETS.

a\. Disposition of Assets Other than Cash.

\(1\) Transfer to a PHA-owned Project which is Under the

Same ACC as the Section 23 Program. If the assets

are transferred for use in a PHA-owned project which

is under the same ACC as the Section 23 program, no

accounting entries are necessary. The property ledger

for the property in Account 1400.4 shall be annotated

to reflect the transfer from the Section 23 program to

the PHA-owned projects.

\(2\) Transfer to Section 8 HAP Program. If the assets are

transferred to a Section 8 program, the following

entries are needed.

\(a\) Section 23 Books of Account.

Debit: Account 6120, Gain or Loss on

Disposition of Assets \*

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LOW-INCOME HOUSING

LEASED HOUSING HANDBOOK

CHAPTER 5

\* Credit: Account 1400.4, Land, Structures and

Equipment

\(b\) Section 8 Books of Account.

Debit: Account 1400.4, Land Structures and

Equipment

Credit: Account 2850, Surplus - Cumulative

Donations

\(3\) Transfer to a PHA-owned Project which is Under a

Separate ACC from the Section 23 Program. If the

assets are transferred for use in a PHA-owned project

which is under a separate ACC from the Section 23

program, the entries in paragraph 9a(2) shall be made

in the Books of Account for both the Section 23

Program and the PHA-owned project.

b\. Disposition of Cash. The following entries shall be made

in the Section 23 Books of Account to establish the payable

to HUD of excess cash remaining from the Section 23

program.

Debit: Account 2821, Reserved Surplus - Operating

Reserve - Leased Programs

Credit: Account 7011, Provision for Operating Reserve,

Leased Programs

To close-out that portion of the operating reserve, if

any, applicable to the Section 23 program being

closed-out (the amount of excess cash).

Debit: Account 7011, Provision for Operating Reserve,

Leased Programs

Credit: Account 2810, Unreserved Surplus

To close Account 7011 to Account 2810.

Debit: Account 2810, Unreserved Surplus

Credit: Account 2118, Accounts Payable - HUD

To establish the payable to HUD of excess cash remaining

from the Section 23 program at time of close-out. \*

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LOW-INCOME HOUSING

LEASED HOUSING HANDBOOK

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\* In addition, the entries below shall be made to the

appropriate Books of Account to record the disposition of

excess cash depending on the specific method of

disposition approved by the Field Office.

\(1\) If cash remaining from the Section 23 program is

used to reduce the next scheduled annual

contribution payments(s) for a Section 8

program, the following entries shall be made:

\(a\) Section 23 Books of Account.

Debit: Account 2118, Accounts Payable

\- HUD

Credit: Account 1111.1, Cash - General

Fund

\(b\) Section 8 Books of Account.

Debit: Account 1111.1, Cash - General

Fund

Credit: Account 2210, Deferred Credits

\- Prepaid Annual

Contributions

A debit to Account 1111.1 and a credit to

Account 2210 will be made for both the

transfer from the Section 23 program and the

amount of the check, if any, from HUD for

the balance of the scheduled annual

contribution payment.

\(2\) If cash remaining from the Section 23 Program is

used to offset operating subsidy for a PHA-owned

Rental Housing Program which is under the same

ACC as the Section 23 program, the following

entries shall be made in the PHA\'s Books of

Account

Debit: Account 1111.1, Cash - General Fund

Debit: Account 2118, Accounts Payable - HUD

Credit: Account 8020, Contributions Earned

\- Operating Subsidy-Current Year

The debit to Account 2118 will be made for the

amount of cash used as an offset against

operating subsidy. The \*

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LOW-INCOME HOUSING

LEASED HOUSING HANDBOOK

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\* debit to Account 1111.1 will be made for the

amount of the check, if any, from HUD for the

balance of the scheduled operating subsidy

payment. A credit to Account 8020 will be made

for each of the above two amounts.

\(3\) If cash remaining from the Section 23 program is

used to offset operating subsidy for a PHA-owned

Rental Housing Program which is under a separate

ACC from the Section 23 program, the entries

shown in paragraph 9b(l)(a) shall be made in the

Section 23 Books of Account. The following

entries shall be made in the Books of Account for

the PHA-owned Rental Housing Program.

Debit: Account 1111.1, Cash - General Fund

Credit: Account 8020, Contributions Earned

\- Operating Subsidy

\- Current Year

These entries shall be made for the amount of

cash used as an offset against operating subsidy

and for the amount of the check, if any, received

from HUD for the balance of the scheduled

operating subsidy payment.

5-10. TENANTS ACCOUNTS RECEIVABLE (TAR). Every feasible attempt

shall be made by the PHA during the close-out process to

collect all TAR. If a Section 23 family is transferred to

a Low-Income Public Housing program, any amounts owed by

the family also shall be transferred to that program. If

the Board of Commissioners determines that TAR are

uncollectible or if TAR attributable to families converted

to Section 8 remain uncollected when the PHA is otherwise

ready to close the Books of Account, the PHA, with the

approval of the Board of Commissioners, shall write-off the

TAR as collection losses in accordance with the Low-Rent

Housing Accounting Handbook 7510.1; however, the PHA shall

continue to pursue collection of TAR which are

written-off, or refer them to a collection agency. Any

amounts subsequently collected shall be remitted to HUD.

5-11. INDEPENDENT PUBLIC ACCOUNTANT AUDIT. An IPA audit of the

Section 23 program shall be scheduled within 90 calendars

days after closing the Books of Account, unless the PHA

administers other units under the Low-Income Public Housing

program. In such cases, all PHA projects, including those

in the Section 23 program, shall be audited no later than

the next regularly scheduled IPA audit. In no case shall

an audit be postponed beyond the required date of the next

regular audit and the Section 23 ACC shall not be

terminated, or the consolidated \*

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LOW-INCOME HOUSING

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\* ACC shall not be amended, as appropriate, until the IPA

audit is completed and all findings therefrom are closed or

cleared. If the Field Office determines that other audit

arrangements are necessary, the Field Office

Manager/Supervisor shall consult with the Regional

Inspector General for Audit (RIGA) regarding alternative

audit arrangements. The IPA audit shall specifically state

whether or not contingent liabilities or other

contingencies exist and, if so, the Section 23 ACC shall

not be terminated, or the consolidated ACC shall not be

amended, as appropriate, until such contingent liabilities

or other contingencies are cleared.

5-12. UNUSED PREPAID INSURANCE AND OTHER RECEIVABLES. The PHA

shall be responsible for obtaining payment of any unused

prepaid insurance and any other receivable of the Section

23 program not mentioned above prior to final close-out.

All amounts shall be accounted for in accordance with the

Low-Rent Housing Accounting Handbook 7510.1, and placed in

the general fund pending final close-out.

5-13. FINANCIAL STATEMENTS AND REPORTS. During the close-out

process, the PHA shall continue to submit all regular

financial statements and reports. In addition, the Field

Office, at its discretion, may require special reports from

time-to-time in order to properly monitor the close-out

process. Additional financial statements or reports may

also be required at the time of final close-out as

necessary to provide a final accounting of program funds.

5-14. FINAL CLOSE-OUT. The PHA may proceed with final

close-out after all leases with owners and families have

expired or have been terminated; all TAR have been

collected or written-off; all liabilities of and claims

and litigation against the PHA with respect to the Section

23 program have been settled; unused prepaid insurance and

other receivables have been collected; remaining cash and

other assets have been properly disposed of; and a final

IPA audit has been performed and all findings there-from

closed or cleared. The PHA may start final close-out

prior to completion of the final IPA audit; however, the

Section 23 ACC shall not be terminated, or if applicable,

the consolidated ACC shall not be amended, until such

audit has been completed and all findings therefrom have

been closed or cleared. All accounting entries and other

transactions involving the Section 23 program, whether done

prior to or during close-out, are subject to adjustment

based upon findings from the final IPA audit or other

information which may subsequently become available.

a\. Books of Account. After the PHA has collected all

receivables, disposed of all assets, and satisfied

all liabilities, it shall close the Books of Account

and repay to HUD \*

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LOW-INCOME HOUSING

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any remaining cash not used as an offset against

amounts due from HUD for the Section 8 HAP Program or

the PHA-owned Rental Housing Program. The Books of

Account shall be closed even if the final IPA audit

has not been completed and will not be started within

90 calendar days. HUD will approve ABAC to pay for

the final IPA audit at the time that it is done. If

the PHA requires the services of a fee accountant to

close the Books of Account, the expenses of such shall

be included in the final Operating Budget.

b\. Certification of Close-out. After the Books of

Account are closed, the PHA shall prepare all

required forms covering the final fiscal year,

including Forms HUD-52595 , Balance Sheet; HUD-52599,

Operating Statement; and HUD-52981, Statement and

Voucher for Basic Annual Contribution-Leased Housing.

(See Low-Rent Housing Accounting Guide 7511.1, Chapter

l2.) In addition, the PHA Board of Commissioners shall

adopt a resolution containing the following items:

\(l\) A certification that close-out of the Section 23

program has been conducted in accordance with the

requirements of this chapter and is complete (with the

possible exception of the IPA audit) and that all

assets and cash remaining from the Section 23 program

have been disposed of in accordance with this chapter;

\(2\) A certification that Board of Commissioners has

examined the Books of Account and Records of the

Section 23 program and has determined that there are

no outstanding obligations or receivables; and (3) A

statement agreeing to the termination of the Section

23 ACC, or removal of the Section 23 program from the

consolidated ACC, if appropriate, once the final IPA

audit is completed and all findings therefrom are

closed or cleared. The Board of Commissioners\'

resolution shall be submitted, together with the three

financial forms listed above, to the RAD, with copies

to the Field Office. All other forms shall be

submitted to the appropriate HUD Office. A check

payable to HUD in the amount of any cash remaining

from the Section 23 program which has not been offset

against amounts payable by HUD to the PHA for the

Section 8 HAP Program or the PHA-owned Rental Housing

Program, shall be attached to the Form HUD-52981

submitted to the RAD.

c\. Audit Findings. In clearing findings presented in

the final IPA audit, the PHA may incur additional

eligible expenses in addition to the cost of the

audit itself. In this case, HUD will approve ABAC to

cover the added eligible expenditures. If the final

IPA audit finds that there is additional cash

remaining from the Section 23 program, such cash shall

be repaid to HUD rather than used as an offset against

amounts \*

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\* payable by HUD to the PHA for the Section 8 HAP

Program or PHA-owned Rental Housing Program. When it

is necessary to clear audit findings after the Books

of Account have been closed, adjusting entries shall

be made and the Books of Account shall be closed

again. In addition, originals or revisions, as

appropriate, of some or all of the following forms

must be submitted to the RAD or other appropriate HUD

Office, with copies to the Field Office: HUD-52564,

Operating Budget; HUD-52595, Balance Sheet; HUD-52599,

Operating Statement; HUD-52981, Statement and Voucher

for Basic Annual Contribution-Leased Housing;

HUD-53087, Request for Payment of Subsidies for

Operations, Non-PFS Projects (see Low-Income Housing

Financial Management Handbook 7475.1, Appendix 6), and

any other form requiring revision.

d\. Termination of ACC. At such time as: (l) the RAD and

the Field Office have received (a) the PHA\'s

certification that final close-out has been

completed, (b) the required financial forms and (c)

the final IPA audit; (2) the Field Office and the RAD

have reviewed these items and the IPA audit and found

them to be in order; and (3) all remaining cash and

assets have been disposed of in accordance with the

instructions provided in this chapter, the Field

Office Manager/Supervisor shall request the Area

Counsel to take the appropriate action to terminate

the Section 23 ACC, or amend the consolidated ACC to

remove the Section 23 Program, as appropriate.

5-15. RECEIPTS AND EXPENDITURES SUBSEQUENT TO TERMINATION OF

ACC.

a\. Receipts. Any amounts originating from the closed-out

Section 23 program which are collected subsequent to

termination of the ACC (e.g., TAR) shall be remitted

to HUD, along with an explanation as to their source,

to be placed in the General Fund of the U.S Treasury.

b\. Expenditures. No additional expenditures associated

with the Section 23 program which are incurred

subsequent to the termination of the ACC will be

approved by HUD.

c\. Basic Annual Contribution or Adjustments to BAC. No

BAC or ABAC will be paid by HUD to a PHA after

termination of the Section 23 ACC or removal of the

Section 23 program from a consolidated ACC. \*

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