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4.1 INTRODUCTION

Successful projects require sound financial management procedures to track funds, 

prepare realistic budgets, manage project funds effectively, and report financial progress. 

This chapter covers the borrower’s financial management responsibilities and provides 

guidance to Loan Servicers on monitoring a borrower’s financial management performance.

The chapter is divided into five sections:

Section 1: Project Accounting System describes program requirements and 

Agency monitoring responsibilities for the project accounting system. 

Section 2: Project Accounts discusses the contribution, use, and monitoring of 

project accounts. 

Section 3: Reserve Accounts outlines the requirements for and monitoring of 

reserve accounts. 

Section 4: Project Budgets explains project proposed budget requirements and the 

budget approval process. 

Section 5: Reporting and Financial Examination describes project actual

reporting and financial examinations and Agency review of these reports.

SECTION 1: PROJECT ACCOUNTING SYSTEM

4.2 OVERVIEW OF ACCOUNTING SYSTEM REQUIREMENTS [7 CFR 

3560.302]

Borrowers must establish accounting systems that support safe and sound project 

financial management. The accounting system must allow borrowers to maintain records in 

a manner suitable for an audit; track the use of funds, report accurate operational results to 

the Agency, and otherwise comply with the terms of their loan agreement. The following 

requirements apply to the borrower’s accounting system:

• Agency approval. The accounting system must be approved by the Agency as part of 

the management plan (as discussed in Chapter 3). The borrower must notify the 

Agency of any changes in the method or system of accounting through a revision to the 

project management plan.

CHAPTER 4: FINANCIAL MANAGEMENT 
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• Method of accounting. The borrower is required to use the accrual method of 

accounting throughout the year for bookkeeping and budget preparations. Annual 

reporting must be convertible to the standards identified in §3560.308.

• When the accrual method of accounting is used, the accrual-to-cash adjustment must 

equal the difference between Beginning Cash Balance and Ending Cash Balance to 

ensure these balances match their respective Balance Sheet figures. The sole purpose 

of this adjustment is to reconcile a company’s internal ledger, kept on an accrual 

basis, to the IRS forms which are on a cash basis. 

• Recordkeeping. Borrowers must retain all financial records and supporting material 

for at least 3 years after the issuance of annual financial reports and financial 

statements or until the next Agency monitoring visit whichever is longer. These 

records must be maintained in a manner that can be audited by the Agency or a third 

party. Records may need to be retained longer for IRS retention rules or Tax Credit 

Guidelines. Borrower accounts and records will be made available in a location with 

reasonable access for review at the request of the Agency.

If an account is a problem case or an investigation or audit is in process, do not destroy 

material until the problem is resolved or the investigation audit is closed.

• Account requirements. The following general requirements apply to the 

borrower’s accounts:

◊ Accounts must be held in domestic institutions;

◊ Accounts must be insured by an agency of the Federal Government, backed 

by collateral approved by the bank, or held in securities meeting the 

requirements of 7 CFR part 3560, subpart G; 

◊ Funds maintained in an institution may not exceed the limit established for 

Federal deposit insurance. If funds at any one institution exceed the amount 

covered by Federal deposit insurance, borrowers must obtain a collateral 

pledge from the institution to cover all funds, or must move funds to an 

institution that will insure funds; and

◊ Borrowers must maintain at least one demand deposit or checking account so 

that funds are always readily available to pay necessary operating expenses.

• Use of funds. Funds other than those in the security deposit/membership fee or 

patron capital accounts serve as security for the Agency grant or loan and must 

be held in trust by the borrower until used. 

◊ In no case may project funds be pledged as collateral for non-project debts; 
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◊ Funds must be used only for authorized purposes as described in 7 CFR part 

3560, subpart G and in the project loan agreement or resolution; and

◊ Priority Order of planned and actual project expenditures are discussed in 7 

CFR, part 3560, subpart G.

• Separate accountability. The accounting system must establish separate 

accountability for different projects. Funds for housing projects managed by the 

same management company must not be co-mingled.

The borrower may combine funds from different projects owned by the same 

borrower with the same tax identification number or Social Security Number in 

the same bank account, as long as the accounting system segregates and tracks 

each project’s funds separately. A statement issued by a Certified Public 

Accountant (CPA) stating that the accounting system is structured to meet the 

principle of separate accountability will be provided. If funds for different 

projects are combined, the management plan must document how revenue and 

expenses that are not clearly associated with a particular project are prorated 

across projects. For example, the plan must document how costs for a computer 

system that serves several projects are allocated across the projects. The 

accounting system must track these prorated costs.

4.3 OVERVIEW OF ACCOUNTS

The borrowers must establish and maintain the accounts required by their loan 

agreement or resolution. At a minimum, these include the following accounts:

• General operating account;

• Tax and insurance account (amounts escrowed may be part of the general 

operating account but tracked separately);

• Reserve account; 

• Tenant security deposit account 

• Membership fee account (if applicable); and 

• For cooperative projects, a patron capital account.

Each account serves a different purpose, as described in Section 2 and the project loan 

agreement or resolution.
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SECTION 2: PROJECT ACCOUNTS

4.4 GENERAL OPERATING ACCOUNT

 The borrower must establish a general operating account to handle all revenues and 

expenses associated with project operations. Authorized expenses payable from this account 

include expenses that are directly attributable to project operations and are necessary to carry 

out successful project operations. Attachment 4-C addresses eligible and ineligible 

operating expenses.

A. Initial Operating Capital and Other Advances [7 CFR 3560.304].

The period between initial occupancy and full rent-up in a project can be risky 

because rental income may not be sufficient to cover all operating costs, make 

payments on the Agency loan, and make required contributions to the reserve fund. 

To assist projects through this phase, the Agency requires the establishment of a fund 

for Initial Operating Capital by the borrower for each project. Approval of 

subsequent loans, transfer of ownership or other servicing actions may require 

additional deposits to the Operating Account and will be described in the loan, 

transfer or servicing approval.

This Initial Operating Capital is to be used for initial operating expenses, such as 

advertising, insurance, fidelity coverage, and initial lease-up expenses. The funds 

may also be used to meet project obligations, such as debt payments and reserve 

deposits, until cash flow is sufficient to fund these accounts. In addition to these 

regular operating expenses, there are some special expenses associated with this 

period, such as purchasing furniture or equipment for public spaces or advertising 

and marketing. Borrowers are to provide the Agency with a list of proposed uses for 

Initial Operating Capital during loan origination.

Other Advances include any advances made by the borrower, borrower entity, or 

designee to cover ordinary project operating expenses.

• Funding of Initial Operating Capital

All borrowers must provide Initial Operating Capital equal to at least 2 percent of

the total development costs to support initial operation of the project. Borrowers 

must put this amount down at the loan closing or construction start, whichever 

comes first. The Agency may loan the required 2 percent to not-for-profit 

borrowers. (For details on this process, see Chapter 5 of HB-1-3560.)

• Accounting for Initial Operating Capital 

When the project accounts are established, Initial Operating Capital is blended 

with other revenue and used for operating expenses. The borrower may leave an 

amount of money equal to the initial capitalization of the fund in the operating 
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account. This money should not be treated as surplus funds in the operating 

account nor should it be transferred to reserves. Its presence in the operating 

account should not be used as justification for the Loan Servicer to deny a rent 

increase. 

• Duration of Initial Occupancy

The initial occupancy phase lasts until the project has attained a stable occupancy 

rate and the operating budget can reliably be supported by rental income. 

Projects vary as to when they achieve this stability; the Agency anticipates it 

occurs sometime between the end of the second and seventh year of occupancy. 

When project stability is reached before the end of the seventh year, a for-profit 

borrower whose cash contribution created the Initial Operating Capital may 

request that the contribution be repaid. 

• Repayment

◊ Agency Policy

The borrower may, with the consent of the Agency, withdraw its original 

contribution to the Initial Operating Capital in multiple annual installments or 

a single installment after the second year of the housing project operations 

and prior to the seventh full year of project operation, provided the borrower 

can satisfy Agency criteria for approving repayment. Repayment can only be 

made once the project has been operating for 2 years, and the project’s 

operations and finances have stabilized. Repayment may be requested in one 

to five annual installments, until the borrower’s contribution to Initial 

Operating Capital has been fully repaid and prior to the close of year seven. 

The borrower must be able to demonstrate that the project is financially 

stable, that repayment will not require a rent increase, and that the project is 

in compliance with Agency requirements. The financial condition of the 

project may preclude full repayment of Initial Operating Capital. 

◊ Borrower Submissions

The borrower may submit a request for repayment of Initial Operating Capital

when the annual financial report is submitted. The borrower’s request is 

submitted in writing and addressed to the Servicing Office. 

The submission should specify the amount of the repayment the borrower is 

requesting in the current year and, if applicable, the borrower’s plan for 

withdrawing the balance of the repayment in ensuing years. The submission 

includes documentation demonstrating how the project meets Agency criteria 

for repayment: 

 Occupancy. The occupancy rate for the project over the most recent 12 

months has averaged at least 90 percent. 
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 Contributions to Reserves. Contributions to reserves are on schedule, 

less any authorized withdrawals. 

 Sufficient Income. The project’s financial position is stable. All 

accounts payables are less than 30 days old. When the amount of the 

repayment is subtracted from the general operating account, the ending 

cash balance still includes an amount equal to 20 percent of projected 

annual operating costs and required escrows for taxes and insurance. 

 Impact on Rents:

o Repayment is acceptable if no rent increases are projected in the year 

the repayment is made. 

o A rent increase will not affect repayment if rents are increasing to 

cover increases in costs, such as wages, taxes, or insurance. 

o Repayment is denied if it creates a shortfall in operating income that 

must be made up by a rent increase and/or funded by the owner.

 Physical Maintenance. There are no outstanding deficiencies in 

management’s physical maintenance of the housing project in accordance 

with 7 CFR 3560.354.

 Compliance. There are no outstanding compliance violations, and the

project is not under a workout agreement. 

◊ Agency Processing

Agency staff will examine the submission for eligibility, completeness, and 

compliance with the criteria the Agency has established that a project must 

meet for a repayment to be made. If staff finds that the project can support 

the repayment, the repayment amount will be calculated.

 Amount of Repayment

The borrower may receive a lump sum amount equal to the original 

contribution of Initial Operating Capital, or smaller amounts in 

installments if the operating budget cannot support repayment in a single 

lump sum amount (see Example below).
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Example – Initial Operating Capital

Case 

One

Case 

Two

Case

Three

Year-end cash balance

20% O&M requirement plus taxes & insur.

Surplus 

Initial Operating Capital

Repayment Amount

Initial Operating Capital unpaid balance

$57,000

27,000

30,000

30,000

30,000

0

$40,000

27,000

13,000

30,000

13,000

17,000

$27,000

27,000

0

30,000

0

30,000

 The borrower in Case One can be repaid in a single installment. 

 The borrower in Case Two will require 3 installments assuming little change

in the project’s financial condition. 

 The borrower in Case Three could not receive any repayment this year. 

 The Decision Process

• The Servicing Office has 60 calendar days to review the annual 

financial statement, including any request for repayment of Initial 

Operating Capital. 

• The Servicing Office may decide to:

o Permit repayment in the amount requested by the borrower; 

o Permit repayments, but in an amount less than that requested by 

the borrower; or 

o Deny repayment because the project does not meet the criteria for 

repayment.

• The decision of the Servicing Office is provided to the borrower in a 

letter. In addition to the amount of any authorized repayment or the 

reasons for denying repayment, the letter states the amount of any 

remaining unpaid balance of the original contribution to Initial 

Operating Capital. If repayment is denied appeal rights will be sent. 

• The Servicing Office updates Multi-Family Integrated System (MFIS) 

Tracked accounts and Servicing efforts to show the amount of the 

authorized repayment and the unpaid balance of Initial Operating 

Capital.
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• Other Borrower Advances

Prior written approval by the Loan Servicer is required for any 

advances made by the borrower, borrower entity, or designee to cover 

ordinary project operating expenses. Such advances may be authorized 

when justified by unusual short-term conditions. When conditions are 

not short term in nature, a servicing plan may be developed, and 

advances may be approved if justified by the following:

o A review of the documented circumstances and the project 

operating budget before any funds are advanced. The financial 

position of the project must not be jeopardized.

o Funds are not immediately available from any of the following 

sources:

 Reserve funds;

 Initial operating capital; or

 An imminent rent increase.

The borrower may charge or be paid interest on the loan using project 

income; however, interest must be reasonable. The proposed loan may 

be denied if Agency financing can be provided to resolve the problem in 

a more cost-effective manner.

No lien in connection with the loan will be filed against the property 

securing the Agency’s loan or against project income. The advance 

may be shown as an unsecured project liability on financial statements 

prepared for year-end reports until such time as it is authorized to be 

repaid.

• Repayment of Advanced Loan Funds

The repayment of the advance may be permitted by the Loan Servicer, 

provided the terms and conditions were mutually agreed to by the 

borrower and the Agency at the time of the advance, and the financial 

position of the project will not be jeopardized. Repayment should 

only be permitted on the advance when the Agency debt is current,

and the reserve requirements are being maintained in accordance with 

Section 3 of this chapter.

B. Return on Investment/Return to Owner [7 CFR 3560.305]

The borrower’s Return on Investment (ROI) is the annual amount of profit an 

owner operating on a limited or full-profit basis may receive from a project, as 

established in the loan agreement. When a property has a transfer of ownership,
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ROI is referred to as a Return to Owner (RTO) and is based upon the transfer 

underwriting analysis and approval conditions. The amount is calculated as a 

percentage of the owner’s investment in the project. 

The borrower may take the earned ROI/RTO (Return) before withdrawing the 

original contribution to Initial Operating Capital. A full or partial Return may be 

taken in a given year. If only a partial is taken, the remainder may be taken the

following year if allowed. The borrower may receive a Return in accordance 

with the terms of its loan agreement, and if the following conditions exist:

1. The borrower may take the Return budgeted and approved after the project’s 

fiscal year ends if there is a positive net cash flow (see line 30 on Form RD 

3560-7, Multiple Family Housing Project Budget/Utility Allowance), and the 

balance of the reserve account is equal to or greater than required deposits 

minus authorized withdrawals.

When determining positive net cash flow, the Agency will consider such 

items as accounts payable and reserve withdrawals to cover operating 

expenses. For example, the borrower may not circumvent the order for 

funding accounts by using reserve funds or creating an accounts payable for 

budgeted operating expenses to make it appear as though the budget has a 

positive cash flow at year end. If the annual financial reports indicate that the 

borrower should not have taken a Return, the Agency will require the 

borrower to repay the unauthorized Return to the project. 

2. If the project’s operations show a negative cash flow (see Form RD 3560-7, 

line 30) as in the Example, Case 1 below, the Agency may authorize the 

borrower to take the Return only after the Agency has reviewed the project’s 

annual financial report and determines:

◊ There is surplus cash in either the general operating account or the reserve 

account and;

◊ The housing project has sufficient funds to address identified capital or 

operational needs. Needs of the property may be identified by inspections 

and/or capital needs proposed.

The Agency considers surplus cash to be the portion of the ending cash 

balance on Form RD 3560-7 that after all payables, exceeds 20 percent of 

projected annual operating and maintenance expenses, the taxes and 

insurance escrow, and initial operating capital, if applicable. To determine 

surplus cash, refer to Attachment 4-D, PROPOSED BUDGET AND YEAR END 

ANALYSIS PROCESS.
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An earned, but unpaid Return for the previous year may only be requested if, 

at the end of a project’s current fiscal year, surplus project funds are more 

than sufficient to pay Return for the year just ended. The borrower 

mayrequest that the additional surplus project funds be used to pay any 

portion of the prior year’s Return that could not be paid previously. See 

Example Payment of Return, Case 

3. The borrower will indicate the year the Return being withdrawn represents on 

Form RD 3560-7, Part I, line 23 under “Comments”. 

4. The borrower may request the Return from the reserve account if the 

conditions set out in the loan agreement are met and the account balance is 

greater than the required deposits minus authorized withdrawals. After the 

disbursement the reserve account actual balance must be equal to or greater 

than the required balance. The disbursement does not reduce the required 

balance.

C. Surplus Funds [ 7 CFR 3560.306]

If the general operating account has surplus funds at the end of the housing 

project’s fiscal year, the Agency will require the borrower to use the surplus 

funds to address capital needs, make a deposit into the housing project’s reserve 

account, reduce the debt service on the borrower’s loan, or reduce rents in the 

following year.
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Example- Payment of Return

Consider a project that has been operational for 8 years, has a $1,000 Return

specified in the loan agreement, and needs $10,000 cash to cover 20 percent of 

annual operating and maintenance expenses, and taxes and insurance escrow.

Case 1: If the project had a negative cash flow after payment of operating and 

maintenance expenses, reserves, and debt service expenses during the fiscal year 

(FY) 20X7 but had $20,000 available in the general operating account, the Agency 

would approve a Return from funds available at the end of FY 20X7. In this 

example, “FY 20X7 RTO” would be noted in the comments section of

Form 3560-7. This Return would be taken immediately after the end of the fiscal 

year, preferably January 20X8.

After the $1,000 RTO was paid, if all or a portion of the previous year (20X6) 

RTO is unpaid - it may be paid from the remaining surplus cash. Any remaining 

previous years unpaid RTO will then be written off. 

Case 2: If the project had a negative cash flow during FY 20X7 but had only 

$5,000 available in the general operating account, the Agency would not approve a

Return from funds available at the end of FY 20X7. This FY 20X7 RTO could be 

requested the following year if there is surplus cash to cover it, the 20X8 RTO is 

paid first and it does not cause a rent increase. The Return would be taken 

immediately after the end of the fiscal year, preferably January 20X9.

Case 3: Consider the same project as described above. During FY 20X7, the 

borrower believed that there would not be adequate cash to pay taxes at year end, 

so the borrower requested $2,000 from the reserve account for operating purposes; 

however, the project ended the year with $3,000 positive cash flow. In this case, 

the borrower can take the $1,000 without Agency permission, as they used a 

reserve withdrawal request to cover operating expenses. However, if the net cash 

amount was less than $2,000, the borrower can only take Return from surplus cash.

Case One Case Two Case Three

Form RD 3560-7 

Part I Line 30 $ (2,000) $ (2,000) $ 3,000 

Form RD 3560-7

Part I Line 33 $ 20,000 $ 5,000

Tax & Ins escrow $ (5,000) $ (5,000)

Accounts Payable $ (2,500) $ (2,500)

Cash Available $ 12,500 $ 0 

Cash Required (20% 

proposed O&M - Tax & 

Insurance) $(10,000) $(10,000)

Surplus Cash $ 2,500 $ 0 
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4.5 TAX AND INSURANCE ACCOUNT

The borrower must deposit money on a monthly basis to pay required taxes and 

insurance. Generally, these funds can be kept in the general operating account as long as 

they are tracked separately from other general operating funds to ensure that funds are 

available to pay taxes and insurance. In some cases, however, the Agency may require a 

separate account for taxes and insurance to ensure the availability of these funds. See 

Chapter 3 for a discussion of insurance requirements and taxes. Also, see Attachment 4-D 

Budget and Year End Analysis for evaluation of escrow amounts.

4.6 RESERVE ACCOUNT

The reserve account is used primarily to pay for large planned expenses for 

maintenance and improvements of capital items. It is funded through contributions from 

project operating funds. The reserves are not to be used as an alternative operating budget. 

The project’s reserves must be held in an account with a current executed Depository

Agreement that requires the Agency’s approval on all withdrawals. The administration of 

project reserves is covered in detail in Section 3 of this chapter.

4.7 SECURITY DEPOSIT OR MEMBERSHIP FEE ACCOUNT

The security deposit or membership fee account holds funds provided by residents as 

security deposits and membership fees. See Chapter 7 for a full discussion of security 

deposits and membership fees.

• Uses of Funds. Funds deposited in the security deposit/membership fee account must 

be used for purposes outlined in the management plan:

◊ The borrower may only use security deposits to cover costs of fixing damage to 

units beyond ordinary wear and tear by the tenant who provided the deposit. The 

funds must be returned to the tenant if not used in accordance with the State Law. 

If the borrower cannot locate the tenant to return the deposit, these funds must be 

deposited in the general operating account or handled in accordance with 

applicable state laws. In cooperatives, the return of membership fees depends upon 

the legal instruments governing the project.

◊ Funds retained by the borrower as a result of a lease or occupancy violation must be 

transferred to the general operating account and treated as project income.

◊ Interest. The interest on security deposit/membership fee accounts is handled in 

accordance with state law. If no state law governs the use of interest, it must be 

deposited in the general operating account, at least annually, and used for general 

operating expenses. In no case may interest accrue to the benefit of the borrower or 

management agent.
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4.8 PATRON CAPITAL ACCOUNT

In cooperative projects, borrowers must establish a patron capital account to hold 

surplus operating funds in trust for cooperative shareholders. 

• Any funds in excess of 3 months of average operating expenses remaining in the 

general operating account at the end of the fiscal year must be deposited in the 

patron capital account. This account must be interest bearing and must be 

administered according to state laws governing patronage capital.

• Each shareholder of the cooperative association must be assigned an equal 

portion of the funds in this account. These funds are held in trust for the 

shareholders of the association until they terminate their membership in the 

cooperative. Shareholders may receive their portion of the funds only if they 

have paid all association charges and costs due the cooperative association.

SECTION 3: RESERVE ACCOUNT [7 CFR 3560.306]

4.9 PURPOSE OF RESERVES

The Agency has a financial interest in a project over the life of its loan. During this 

period, which can be as long as 50 years, major replacements and capital expenditures will 

have to be made to the building, such as replacing the roof, rewiring, replacing windows, 

doing major exterior work, or adding new kitchen and bathroom fixtures. The reserve 

account is primarily used to meet the major capital expense needs of a project. If these 

expenditures are not made, the property loses value, becomes less attractive to tenants, and 

begins to deteriorate. The Agency’s financial interest in the project is then at risk.

Adequate replacement reserves are a critical component of a successful project. The 

reserves are not to be used as an alternative operating budget. Rents should reflect and cover 

the reasonable and customary costs of annual operating expenses of the property in the 

market. Annual reserve deposit for projects with Agency approved Capital Needs 

Assessments (CNA) will be adjusted as authorized in the loan, transfer or servicing 

approval. 

4.10 RESERVE ACCOUNT REQUIREMENTS

The reserve account is a required account subject to the requirements set out in this 

paragraph. The borrower will initiate deposits in this project account, starting in the same 

month the first loan payment is due the Agency. As projects age, the required reserve 

account level may be adjusted to meet anticipated life-cycle needs, such as equipment and 

facility replacement costs, by amending the loan agreement/resolution. Refer to Attachment 

4-B for guidance on the amendment. Requirements for the reserve account include the 

following: 
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• All Rural Rental Housing, Rural Cooperative Housing, and Farm Labor Housing

borrowers are required to establish and maintain a reserve account. This 

requirement excludes On-Farm Labor Housing borrowers with fewer than12 units. 

• Reserve accounts must be deposited in interest-bearing accounts or securities with 

rates greater than or equal to savings or checking accounts.

• Reserve funds are required to be placed in a supervised account or have an Agency 

accepted Depository Agreement approved by the Agency, executed after October 

1, 2018. With the updated Depository Agreement, the Agency is no longer 

required to countersign approved withdrawals from reserve accounts as provided 

by 7 CFR 3560.306(e)(2) and 7 CFR 1902.4(a)(1).

• Agency approval must be obtained prior to the withdrawal of any reserve account 

funds per 7 CFR 3560.306 and MFH Handbook (HB)-2-3560 Chapter 4, Section 3. 

If the Agency finds any unauthorized Reserve account usage, the Agency will take 

the appropriate servicing actions.

• Any amount in the reserve account that exceeds the total sum specified in the loan

agreement or resolution may be transferred to the general operating account for 

authorized purposes only when it is agreed, between the borrower and the Agency,

to be in excess of the requirement and there is a specific need for the excess funds. 

However, the Loan Servicer may direct the excess sum to be retained in the reserve 

account or applied as an extra payment on the loan.

• Section 515 properties leveraged with 538 Guarantee Rural Rental Housing 

(GRRH) program funding are not subject to countersignature requirements. Direct 

Section 515 loan borrowers, exempted from the counter-signature requirements, 

must comply with the Section 538 GRRH program regulatory requirements. In all 

cases, the Section 538 lender must get prior written approval from the Agency 

before reserve account funds involving a direct MFH loan project can be disbursed 

to the borrower.

4.11 RESERVE INSTALLMENTS

Required reserve installments will be transferred to the reserve account at least at the

rate stipulated by the borrower’s loan agreement or resolution, starting with the date the first 

loan payment is due to the Agency. Transfers of funds to the reserve account will continue 

until the account reaches the total amount specified in the loan agreement or resolution. 

Transfers will be resumed the period following withdrawals that decrease the reserve 

account balance below its fully funded level until it is restored to the specified total 

minimum sum.

The Agency may approve a change in the borrower/projects reserve account funding level 

based on the findings of an approved Capital Needs Assessment (CNA). The approval to 

increase reserve account funding levels will take into consideration the housing project’s 

approved budget and ability to support increased reserve account deposits without causing 

basic rents to exceed conventional rents for comparable units in the area. If the borrower 

requests an increase in the project’s annual reserve account deposits, the borrower must have 
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a capital needs assessment prepared and submitted to the Agency to reflect the project’s 

anticipated needs for replacement of capital equipment and systems. The cost for 

preparation of a CNA will be approved by the Agency as an eligible project expense for 

existing owners, provided that the cost of the assessment is reasonable and meets Agency 

requirements. (Note: CNA’s required by transferees for ownership changes are not eligible 

for payment from the reserve account unless the transferee is also a non-profit entity and no 

additional third party is providing funds for acquisition or rehab.)

The Agency may approve a borrower’s request to increase the fully funded level of the 

reserve account to ensure sufficient funds are available to address the capital requirements of

a Transition Plan. 

The following definitions are displayed on the MFIS Tracked Accounts page, and are 

used to further explain the reserve account:

• Required Balance. The amount that the reserve account is required to contain as 

of the date displayed. This amount is calculated by adding deposits as required 

by the loan agreement/resolution and subtracting authorized withdrawals. 

• Fully Funded. The amount set in the borrower’s loan agreement/resolution for 

funds to be set aside during the life of the project. 

• Annual Deposit. The amount of funds that must be deposited annually to the 

reserve account according to the borrower’s loan agreement/resolution.

• Account Balance. The account balance as of the date displayed. This would 

correspond to the reserve section actual balance on financial reports. 

• Account Status. This shows whether the reserve account is current or delinquent 

according to the required balance less the account balance. 

4.12 RESERVE ACCOUNT PRINCIPLES

Reserve account funds are governed by the following principles:

A. Investment Vehicles and Institutions

Reserve account funds not immediately needed to pay for expenses or authorized 

purposes may be held as set out in this paragraph. Reserve account funds may be 

held in the form of:

◊ A checking, savings, negotiable order of withdrawal, or similar account at a 

federally-insured domestic institution, such as a bank, savings and loan, or 

credit union.
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◊ Readily marketable obligations of the U.S. Treasury Department (e.g., U.S. 

Treasury bonds, U.S. Savings bonds, zero coupon bonds, etc.) at a 

federally-insured domestic institution or at an insured domestic institution 

authorized to sell securities.

◊ An account established at an insured domestic institution authorized to sell 

securities, provided that the accounts meet the remaining conditions set out in 

this paragraph and are not used in a speculative manner. The account may be 

a tax-exempt account or a taxable account, and the institution may or may not 

charge brokerage fees. 

B. Limitations on Investments in Securities

Any securities must be: 

◊ Backed by the U.S. Government or an Agency of the U.S. Government;

◊ Triple A-rated Government National Mortgage Association (GNMA)-

collateralized tax-exempt bonds; or 

◊ Triple A-rated pre-refunded bonds. 

Pre-refunded bonds are bonds that originally may have been issued as general 

obligation or revenue bonds but are now secured, until the call date or 

maturity, by an escrow fund consisting entirely of direct Government 

obligations that are sufficient for paying the bondholders.

C. Reporting Actual Costs of Securities

To ensure that required amounts have been paid into the reserve account, the 

actual costs of securities (which in many cases may not be the face value) must 

be shown on the project books. In addition, details of these transactions should 

be disclosed in footnotes to financial information provided to the Agency.

1. Security Sales

When the Agency approves withdrawals from the reserve account and the 

funds are invested in securities, borrowers must, to the extent that securities 

are available, assure that securities are sold in an amount that results in 

proceeds sufficient to cover the disbursement.
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2. Forecasting Security Sales

Since the sale or redemption of any securities may result in cash proceeds of 

less than the amount invested, borrowers should take steps to minimize the 

risk of loss from converting securities to cash. Needed reserve account 

withdrawals should be planned in advance to permit Agency approval of 

anticipated needs such that security sales can be arranged to be sold in 

favorable market conditions. When sales of securities take place, the 

proceeds will normally be held in a reserve fund at a domestic bank, savings

and loan, credit union, or similar institution insured by an Agency of the 

Federal Government until such time as withdrawals are actually needed for 

the purposes authorized. Should unusual circumstances require the sale of 

securities in unfavorable market conditions, the borrower will not be required

to reimburse the project for any losses incurred.

3. Knowledge Required of Securities Investors

Those investing in securities must be knowledgeable of common industry 

practices prior to investing in securities. Knowledge of the various fees that 

may be associated with the purchase and sale of securities and the 

maintenance of security accounts must be considered when making security 

investments. Examples of these fees are front-end loads of fees, back-end

loads of fees, and maintenance fees. These fees may be paid using general 

operating account or reserve account funds. However, the Agency must give 

its prior consent before reserve account funds may be used.

4. Financial Advisor Limitations

Project proceeds may not be permitted to be used to pay for the services of a 

financial advisor to assist in the selection of securities for investment, since 

the securities permitted are relatively limited and must meet the requirements 

set out in this chapter. However, normal brokerage fees may be paid to 

secure and sell securities. It is recognized that financial advice may also be 

provided as part of the normal brokerage fee.

4.13 USE OF THE RESERVE ACCOUNT

A. Planned Use of Reserve Funds

The borrower will request approval for use of the reserve funds using Form RD

3560-12, Request for Authorization to Withdraw Reserve Funds, before funds are 

needed if items were not included on the approved capital budget. The borrower 

will request withdrawal from the reserve fund using Form RD 3560-12. 

Annual budgets are to include realistic routine income and expense levels to 

avoid the need to use reserve funds for routine expenses (operating shortfalls) not 
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caused by emergencies or very unusual servicing situations. The Agency expects 

borrowers to anticipate and plan for major capital expenditures at least annually, 

including a careful review of any approved CNA. Loan Servicers will monitor 

planned capital needs and expenditures to determine if revisions will be 

necessary and document the file accordingly.

The borrower is required to submit an annual capital expenditure budget as part 

of the annual budget submission. The budget should include plans to catch up 

with any maintenance expenses deferred from previous years, correct any 

deficiencies identified during Agency site visits, complete capital repairs and 

replacements scheduled in the project’s approved CNA, and/or make necessary 

modifications to remove physical barriers as identified in a Transition Plan. A 

cost analysis provides data on projected useful life of materials, common 

replacement and repair schedules. Independent resources of information such as 

insurance actuary tables, FANNIE MAE Physical Needs Assessment Guidance to 

the Property Evaluator or Agency documentation should be consulted for 

common costs and repair/replacements schedules. 

When a reserve account and contributions to the reserve account have been sized 

in accordance with a fully acceptable capital needs assessment, the reserve 

account funds are to be used to fund capital items as described in the plan. Since 

under a capital needs assessment, funding of the reserve is designed to match the 

timing and amount of needs, following the plan should limit the amount of funds 

required from operating sources to pay for capital needs.

B. Authorized Uses/Eligible Expenditures

Items usually considered as eligible for draws from the reserve account include 

capital items such as, but not limited to, the following: 

• Making improvements to the housing project without creating new living 

units, or to retrofit units to make them accessible to the physically 

handicapped. This is not meant to limit the use of reserve account funds to 

meet handicapped accessibility needs required to make reasonable 

accommodations for persons with a disability who apply for housing. 

• To address the capital requirements identified by the borrower’s Transition 

Plan and other servicing tools. Loan funds may also be used for this purpose. 

• Making permanent improvements to the housing project, such as installing an 

energy-conserving heat pump. 

• For other purposes desired by the borrower, which in the judgment of the 

Agency will promote the loan purposes; strengthen the security of the loan; or 

facilitate, improve, or maintain the project and the payment of the loan 

without jeopardizing the loan or impairing the adequacy of the security. 
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• Facilitating payment of fees associated with the buying or selling of securities 

or maintaining a securities account.

• Meet loan obligations of the project in the event the amount available for debt 

service is not sufficient for the payments.

• Meet an emergency shortfall in operating expenses when the emergency is 

beyond the control of the borrower and threatens life, or the safety or the 

physical security of the project. Examples include an extreme weather 

disaster or reductions in rental income caused by changes in the rental market 

that affect other housing projects in the market as well. In cases of weather 

disasters, the project insurance coverage will be reviewed to determine if 

funding from insurance will be available for repairs. Suitable justification as 

to why the general operating account is insufficient is required.

• With Agency approval, borrowers operating on a for-profit or a limited-profit 

basis may make an annual withdrawal from the reserve account equal to no 

more than 25 percent of the interest earned on the reserve account during the 

prior year. The borrower will use Form RD 3560-12 to request the 

withdrawal and must provide documentation of the prior year interest earned. 

For example, in the report submitted for the period January 1, 20X9 through 

December 31, 20X9, the owner is entitled to 25 percent of the interest earned 

during calendar year 20X9. The borrower is not entitled to interest earnings 

from prior years.

• Other items considered eligible for draws from the reserve account include 

capital items listed in Attachment 4-A, Capital Expenditures.

C. Unanticipated Uses of Reserves

The Agency recognizes that not all capital expenditures can be predicted a year in 

advance. Sometimes a major piece of equipment will break down unexpectedly 

or a severe storm will create damage. Borrowers must seek Agency approval for 

the unforeseen use of reserves. In emergency situations when the borrower can 

demonstrate an imminent and serious threat to the health, safety, or physical 

security of the project, the borrower may request the Agency to post-approve the 

use of reserves. The Agency will only approve emergency withdrawals if the 

reserves are used for eligible expenses. If post-approval is requested, the bidding 

requirements, as described below, still apply. If the bid is obtained post-approval 

and is less than the expense, the difference will be reimbursed to the account by 

the borrower. Unforeseen circumstances may alter the approved CNA schedule 

adversely and require further review and modification to meet the reserve deposit 

schedule in the borrower’s loan agreement /resolution. Loan Servicers will
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review any loan, transfer or servicing conditions that may be impacted and 

develop a plan to reflect any modified schedule of findings or repairs. 

D. Withdrawal Approval Process

• The borrower must submit a written request, on Form RD 3560-12, “Request for 

Authorization to Withdraw Reserve Funds”, to the Agency to withdraw reserve 

funds, even if the Agency has reviewed and approved the capital expenditures in 

its review of the annual capital budget.

• The Loan Servicer will take prompt action on a request for reserve withdrawal,

normally within 5 working days of receipt of the request, and provide written 

authorization to the borrower, on Form RD 3560-12, for any authorized 

withdrawal of funds before the borrower actually withdraws any funds. 

• When the Depository Agreement has been updated to allow, upon receipt of 

authorization to use reserve funds, the borrower may use electronic transfer of 

reserve funds. It is acceptable for the approved withdrawal to be run through the 

general operating account. 

• Borrowers will notify the Loan Servicer of work completed within 5 days so that 

needed inspections may occur. 

• Borrowers will submit a final invoice that describes the specific service and 

banking transaction if the amount is different than initially approved or was a 

preapproved capital budget item. 

• Borrowers must maintain records documenting all expenses that were paid by 

withdrawals from the reserve account. 

1. Bid Requirements

Expenditures of $5,000 or less do not require bids, even if it is an identity-ofinterest (IOI) entity. 

The expenditure of reserve funds for a project (all work included in one 

contract) estimated to cost more than $5,000 will require a minimum of two 

bids. When there is an IOI between the borrower or property manager and a 

bidder a minimum of three bids must be submitted. The entity with the IOI 

must submit its bid directly to the Servicing Office prior to requesting bids 
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from other firms. Once the bids are received the borrower will submit the 

request using Form RD 3560-12 to the servicing office with all bids attached. 

An explanation of why the borrower was unable to obtain two non-IOI bids 

must be provided when appropriate

.2. Projects Involving Moderate Levels of Construction

If construction does not involve substantial changes to structures or 

replacement of major systems, e.g. electrical, plumbing, heating, or cooling, 

the housing project is considered to involve moderate levels of construction. 

Examples include exterior repainting, roof repair, parking lot repaving, and 

repairs to plumbing or electrical systems. 

When the borrower requests access to reserves for a moderate construction 

activity, the Agency first reviews the project documents for acceptance, and 

then reviews a payment request.

In addition to the items for bids specified above, the borrower must provide

the following:

• Project planning documents that describe the work to be performed;

•Copies of written bids; and

•A copy of the contract/proposal.

After the project has been completed, the borrower notifies the Loan Servicer 

with actual invoice/cost. The Loan Servicer will perform an inspection of the 

work done to assure it has been completed in accordance with the 

contract/agreement or statement of work if applicable.

3. Project Involving Large Levels of Construction

A project with large levels of construction involves substantial changes to the 

structure, replacement of major systems, and/or expenditures estimated in 

excess of $100,000. Such activities are subject to the design requirements of
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Exhibit K of RD Instructions 1924-A and 1924-C. In addition to the items for 

bids specified above, the borrower must provide: 

• Project planning documents, including specifications and drawings as 

necessary to fully describe the work;

•Copies of written bids;

•A rationale for awarding the contract; and

•A copy of the construction contract.

The required planning documents may be prepared by any individual or firm 

meeting the qualification requirements of the local building jurisdiction. 

After the planning documents and construction contract have been accepted 

by the Agency, the borrower may request an initial draw to pay for materials 

or make a down payment to the contractor. The request for an initial draw 

should be accompanied by an invoice and a check made out to the contractor 

or vendor, to be cosigned by the Agency. The Agency may approve such a 

request provided the amount of the initial draw does not exceed a reasonable 

percentage of the value of the construction contract. Refer to RD instruction 

1924-A.

The Agency will inspect the project before approving the work and again at 

construction completion before approving the final payment. 

•The purpose of the initial inspection is to establish that the proposed 

work is needed and is an appropriate response to existing conditions. 

•The purpose of the final inspection is to establish that the work was 

performed as described in the Agency-accepted documents.

The Agency may conduct additional inspections as necessary. 

The borrower should be required to hire an independent third-party inspector 

to verify that the work complies with all applicable requirements. To verify 

that all major systems are adequate, State-licensed inspectors must certify that 

the dwelling has been inspected and meets Agency standards. When a State 

does not have licensed inspectors, a qualified, independent, third-party 

inspector may provide these certifications.
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SECTION 4: PROJECT BUDGETS

4.14 BUDGET REQUIREMENTS [7 CFR 3560.205 and 3560.303]

A. General Information

Project budgets are planning documents that provide a picture of a project’s

financial operations for the coming year. They reflect:

• Expected revenues and expenses;

• Plans for maintenance, capital improvements, and reserve account activity;

• Return on the owner’s investment, or a Non-Profit Asset Management Fee; 

• Establish rents; and

• Reasonable and customary costs to cover turnover costs and maintenance

which should be in line with comparable properties in the market. 

For projects with 8 units or more, all borrowers will be required to submit project 

budgets through the Management Agent Interactive Network (MINC). The 

Agency may make an exception to this requirement if the borrower submits 

documentation that the costs associated with electronic submission of project 

budgets would pose a financial hardship to the project. Borrowers must submit 

annual project budgets to the Agency for approval. Budgets must meet the 

following requirements:

• Budgets must be reasonable and realistic. Revenues, vacancies and expenses 

must be consistent with past project budgets, historical actuals and 

comparable projects. Any differences must be due to legitimate operating 

needs of the project. 

• Project expenses will include only expenses necessary to maintain successful 

projects. An example of an unnecessary expense is owner or manager 

entertainment expenses. Project expenses cannot be used for unearned 

personal benefit or gain, or for reimbursement of false or inaccurate expenses. 

• The priority order of project expenditures must be:

o Senior Position lien holder, if any;

o Operating and maintenance expenses, including taxes and insurance;

o Debt service to the Agency;

o Reserve account deposits;
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o Other authorized expenses; and

o Return on the owner’s investment or Non-Profit Asset Management

Fee.

B. Sections of the Project Budget (Form RD 3560-7)

The Form RD 3560-7 is used to plan and report the financial activity of a

multiple family housing project as required by Agency regulations. Refer to the 

Forms Manual Insert (FMI) for this form and for a detailed explanation of each 

line item on the budget. The form is divided in 6 parts as described below:

1. Part I - Cash Flow Statement

For budgeting purposes, the cash flow statement projects whether the 

property will generate enough revenues for all cash needs for the budget 

period. The proposed budget ending balance must be a positive cash balance 

and not cause an unwarranted rent increase, nor should it exceed the total of: 

(1) approximately 20 percent of Total O&M Expenses (Part I, line 16); (2) 

the amount held for taxes and insurance; (3) any initial operating capital 

during the first 7 years or until it is withdrawn, whichever comes first. 

Accrual method accounting will be considered with the annual financial 

reports and is discussed in Section 5 of this chapter.

• The borrower must not include expenses for purposes unrelated to the 

housing project or for fines, penalties, and legal fees in the event the 

borrower has been found guilty of violating laws such as civil rights, 

evictions, and building codes. 

• The borrower is responsible for submitting project budgets that address the 

project’s physical accessibility needs. The Loan Servicer may approve 

the cost of providing accessible rental housing as an authorized use of 

project funds.

• The borrower must not include organizational expenses among project 

expenses. These items are covered by the management fee. (For a list of 

the bundle of services covered in the management fee, see Chapter 3, 

Attachment 3-D, and 7 CFR 3560.102.)

A vacancy and contingency allowance is calculated from the previous 3 

years’ historical vacancy rate of the property, and should not exceed the 

caps as identified below. If the historical vacancy rate is greater than

established caps, the vacancy and contingency allowance is capped at the 

following levels:

◊ For projects with 15 or fewer units, the vacancy and contingency 

allowance is capped at 15 percent.
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◊ For projects with more than 15 units, the vacancy and contingency 

allowance is capped at 10 percent.

◊ When historical vacancy rates exceed the caps, a budget may be 

approved with the historical rates only after a feasible workout plan 

has been submitted and approved.

• A Non-Profit Asset Management Fee may be requested by non-profits and 

cooperatives. Non-profit owners are entitled up to $7,500 per project for

certain organizational expenses, such as Errors and Omissions insurance

and actual expenses prorated by the number of Rural Development units. 

Expense reimbursement may not be duplicated on multiple properties. 

Evidence of expenses is necessary to support the budgeted amount. 

Examples of acceptable documentation for this expense would be:

◊ A copy of the Errors and Omissions Insurance policy that reflects who 

is covered and the cost;

◊ Documentation of hours, number of meetings, and the hourly wage 

rate used for Board of Director’s review.

◊ The oversight functions include:

Board of Director’s review and approval of proposed budgets, 

including proposed repairs, outlays, and accruals;

Review of capital expenditures;

Approval of annual financial reports and considerations of any 

management comments noted; and 

Long-term asset management reviews.

Any investor asset management fee, investor service fee, or similar fee may be paid solely 

from the annual Return to Owner and may not be paid from project operating funds. This is 

not the same as the Non-Profit Asset Management Fee.

Part II - Operating and Maintenance Expense Schedule

• Operating and Maintenance Expenses entered in this section are broken 

down as indicated on the appropriate lines according to the following 

categories:

• Operating and Maintenance include items such as maintenance payroll, 

painting, snow removal, and grounds. Borrowers should include expected 

unit turnover expenses, based on the properties historic turnover rate, in 
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the operating budget. Turnover expenses, such as the replacement of a 

refrigerator, scheduled unit carpet cleaning, curtain or flooring cleaning or 

replacement, painting, etc. should be treated as a normal operating 

occurrence and do not represent a reserve account need. If the unit 

sustains damages beyond reasonable wear and tear, then an exception may 

be warranted, as the costs may be abnormal. This is not the typical 

situation. If an item is budgeted in the annual operating budget as an 

operating expense, the item must be paid for out of the operating budget, 

unless it is a circumstance beyond the borrower’s control.

• Utilities include only utilities paid by the project. Utilities paid by the 

tenant are not included on this form. Administrative expenses are project

expenses only and do not include expenses that a management firm incurs. 

The management fee and the services performed for the fee are defined in 

the 7CFR 3560.102 (i)(1) , Management Certification and or Management 

Agreement. The Management Plan establishes the systems and procedures 

that will be employed on site to ensure that project operations comply with 

Agency requirements.

• Taxes and Insurance expenses include all project insurance and real estate 

taxes, or any special assessments or other taxes allowed.

2. Part III - Account Budgeting/Status

This section of the budget reflects the projected reserve account. The 

balances of the other accounts are not completed for budgeting purposes, only 

when actuals are received.

The Loan Servicer must review the reserve account levels and 

contributions to ensure that they are consistent with the loan agreement. The

review focuses on four items:

◊ Beginning balance. The Loan Servicer should review the beginning 

balance of the reserve account to ensure accuracy.

◊ Transfers to reserves. The Loan Servicer should examine the budget 

to ensure that the appropriate dollar amount, as specified in the loan 

agreement/loan resolution, is budgeted for deposit in the reserve 

account.

◊ Transfers from reserves. Any transfers from the reserve account that 

are included in the budget should be described in the budget narrative 

and justified by the capital plan. 

◊ Ending balance. The ending reserve account balance is calculated by 

taking the beginning balance, adding the transfers to the reserve 

account, and subtracting the transfers from the reserve account. 
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If the Loan Servicer finds that the reserve account level is not where it 

is supposed to be, that the budget does not show correct contributions to 

reserves, or that transfers from reserves are not adequately documented, 

then the borrower must submit corrected budget documents.

3. Part IV - Rent Schedule and Utility Allowance

The rent schedule documents the rent and utility allowance structure, and 

establishes the Rental Income entered in Form RD 3560-7, Part I, Line 1. 

◊ The Basic Rent is the level required to cover all uses of cash and the 

repayment of the Rural Development loan at the interest credit reduced 

payment. 

◊ The Note Rate rent is the level required to cover all uses of cash and the 

repayment of the Rural Development loan at the unsubsidized or 

promissory note rate. 

When tenants pay some or all of their utility costs themselves, borrowers 

must establish a utility allowance to determine the amount tenants pay toward 

rent. The utility allowance is deducted from the total shelter cost calculated 

for the tenant, and the difference is paid by the tenant as rent. If the tenant is 

entitled to a utility reimbursement, management companies may issue a joint 

check payable to the tenant and utility company, if they choose.

4. Part V- Annual Capital Budget

The capital budget portion of Form RD 3560-7, Part V provides information 

on plans for capital improvements. It lists all the capital items in the project 

and provides space for the borrower to indicate their condition, address 

transition plan items and any needed improvements. The Annual Capital 

Budget allows capital items to either be expensed from operations or 

capitalized from the reserve. 

The borrower identifies major maintenance, replacement and accessibility 

needs during the annual budget cycle and develops a schedule for making 

withdrawals from the reserve account to pay for their cost. These plans are 

incorporated by the borrower into the annual capital expenditure budget and

may also be reflected in the operating budget if the work is to be paid for out 

of operating income. Attachment 4-A offers guidance for budgeting capital

items. The objective is to help ensure the borrower properly manages reserve 

account resources and establishes budgets to address the project’s capital 

needs.
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If the Loan Servicer finds the operating and capital budgets inadequate to 

keep the project in compliance with Agency standards for physical conditions 

[7 CFR 3560.103], the Loan Servicer must request the borrower to modify 

the annual capital plan. The Loan Servicer may also request modifications if 

it is found that the borrower has proposed expenditures to be paid from 

reserves that should be charged to the operating account.

5. Part VI - Narrative, Signatures, Dates and Comments

This section of the form will be used to complete the borrower’s Budget 

Narrative, Signatures, Dates and Comments.

Budget Narrative:

The budget narrative provides a description of the budget and highlights 

important elements to aid Loan Servicers in their review of the budget.

The budget narrative must be completed, or the budget will be considered 

incomplete and returned for correction.

◊ Items to Be Covered in a Budget Narrative:

The following information should be included in the budget narrative. 

A brief description of the project and its status. The description 

should address key indicators of project status.

A statement of project compliance. Indicate any outstanding 

monitoring findings and the progress in addressing the problems. 

An explanation of projected capital expenditures and reserve 

withdrawals for the upcoming year and capital needs for the next 

three years.

A description of the project’s overall financial status and important 

factors contributing to the changes. (Vacancy, workout plan 

status, debt deferrals, servicing efforts.) If the analysis reveals 

that the subtotal for any operating expense category (maintenance 

and operating costs, utilities, administration, or taxes and 

insurance) exceeds the tolerance threshold, the borrower will 

provide adequate documentation that the expenses for this 

category are reasonable and necessary. For example: 

Costs are comparable to the costs for similar properties in the 

conventional market. In this example, the borrower might 

show that insurance costs for the same coverage at a 

conventional project are comparable to the costs for the project 

shown in the budget.
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o The factors contributing to the cost increases are beyond the 

borrower’s control and the borrower is actively implementing 

cost-containment measures. For example, the project is 

subject to utility rate or tax increases. 

o The cost increase is needed to cover actions to address 

identified physical deficiencies that are not due to negligence 

by the borrower or the management agent. Physical 

deficiencies that are due to negligence by the borrower or the 

management agent are not acceptable reasons for a rent 

increase.

• Signatures:

The budget form requires signatures of the borrower. If the budget has 

been submitted electronically, a signed copy is not required to be 

submitted to the Agency. Agency approval may be by letter submitted 

electronically or by signing and returning form RD 3560-7. 

• Comments:

Borrowers are encouraged to submit additional information detailing 

sources and uses of cash required. Detailed breakouts should relate to 

specific line subtotals or total entry as listed on the form. Comments are 

encouraged to better explain the contents of the submitted budget. Use

the comment area if additional disclosures or analyses are necessary. 

Rural Development Servicing Officials should document additional 

relevant information, or record issues or concerns noted during review.

C. Borrower Submission Requirements 

The borrower should ensure that the project budget meets all the following: 

• Complete Budget 

The Budget is considered complete when the borrower has submitted the 

information listed in Exhibit 4-1.

• Changes in Rents 

It may be necessary for the borrower to request Agency approval to effect 

a rent change as operating costs and/or revenues in a project fluctuate

Exhibit 4-3 shows the timeline for borrower submission and Agency 

review of rent change requests. 
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All borrowers, including those using the Department of Housing and 

Urban Development (HUD) project-based Section 8 contract assistance, 

must obtain prior Agency approval for a rent increase. Changes in rental 

rates will apply to all units in a project. Rent change requests for multifamily housing projects with no HUD subsidy are typically submitted and 

reviewed at the same time the borrower submits an annual budget for 

approval. Rent changes in HUD project- based Section 8 projects 

resulting from rent increases by HUD must also be reviewed and are not

to be automatically approved. As with any Section 515 project, only the 

amount of rent necessary to cover project expenses must be approved. 

• Annual Utility Allowance Reviews

The borrower should review utility allowances on an annual basis to 

determine whether any changes need to be made. The borrower should 

indicate changes or no changes to utility rates in the budget narrative.

Setting Utility Allowances:

The utility allowance is based on expected costs for utilities. Once 

established, the borrower must review the utility allowance annually. This 

is done in conjunction with the annual budget process. The borrower must 

submit documentation along with Form RD 3560-7 to the Field Office 

using the following procedures:

1. A 12-month average will be used for the calculation.

2. Borrowers must establish utility allowances for each size and type 

of rental unit in the housing project based on utility costs.

3. Borrowers will request a change to the existing utility allowance if 

the proposed change is 10 percent or more.

4. A summary of the calculations must be submitted to the Servicing 

Official along with the Form RD 3560-7.

5. The borrower must obtain the following documentation describing 

the utility allowances and keep in the project files:

o Rate Changes: Documentation of the rate changes may 

include actual billing information or documentation from 

utility companies; 

o Usage: Documentation of a 12-month sampling of tenant 

utility usage from the utility company. A sampling will be 

dependent on the size of the project and will include every size 

of unit. If tenant utility information is unavailable from the 

utility company or only provided at cost, utility billings 

received by tenants are acceptable.
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o No Changes: Documentation of no change in utility rates has 

occurred during the period being reviewed. A public release 

from the utility provider indicating no change in rates has 

occurred during the period reviewed is acceptable. The 

borrower should indicate no changes to utility rates in the

budget narrative.

• Tenant Notification and Comments

At the same time the borrower submits the initial Notice to the Agency 

that it intends to submit a rent or utility allowance change request, the 

borrower will send or deliver notices to each tenant in the project 

notifying them of the rent change request that will be submitted to the 

Agency with their annual budget. Handbook Letter 203(3560) provides 

an example of such a Notice. The borrower must also post this Notice in 

a common area frequented by the tenants, such as the laundry room or 

near the mailboxes.

The Notice must inform the tenants that they have 20 calendar days to 

provide their comments to the Agency. If during this time the Agency 

receives any tenant comments, these must be immediately forwarded to 

the borrower with the identity of the tenant protected. This can be done 

by either paraphrasing the comments for the borrower or by removing any 

identifying information from the correspondence received from the tenant 

before forwarding it on to the borrower. The Agency will respond to the 

tenant that their comments will be considered in the review of the budget.

Upon conclusion of the 20-day comment period, the Agency must notify 

the borrower of approval or denial within 10 days.

Exhibit 4-1 Information required for a complete Budget Submission reflects 

information the borrower is required to submit on the annual budget for the project. 
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• Documentation

The borrower must fully document any rent and utility allowance change 

request. Requests for a rental charge change must be based on a realistic 

projected budget for the interim year or the ensuing full year. The borrower 

must provide to the Agency the information identified in Exhibit 4-1 with the 

rent or utility allowance change request.

The narrative attached to the budget form must clearly explain the necessity 

for the change request, and the Loan Servicer must analyze the supporting

documentation to the budget Form RD 3560-7, to see if it supports the 

request. For example, if the rent increase is due to increased taxes, then the 

Loan Servicer should look for copies of tax increase notices in the budget 

documentation. If the rent increase is due to an increase in general operating 

expenses, the Loan Servicer must review those expenses for reasonableness.

Exhibit 4-1

Information Required for Budget Submission to be Complete

1. Form RD 3560-7 must be used to reflect the project’s financial needs 

for the year and thereby rental charge requirements. A new operating 

budget for the fiscal year must include:

• Proposed budget at proposed rents 

• Operating and Maintenance Expense Schedule

• Rent Schedule and Utility Allowance

• Annual Capital budget

• Narrative explaining 

• Project statusProject compliance

• Rent and utility allowance change justification

• Projected capital expenditures and reserve withdrawals

• Outstanding findings

• Servicing effort status (Work out plan / other debt)

• Project financial accountability and concerns

• Account status ( T&I, GOA, Reserve)

• Any unique situations

2. Utility allowance review. Required documentation for utility costs 

as described earlier in this Chapter and Chapter 7. 

3. HB Letter 203(3560) Notice to Tenants (Members) Of Proposed 

Rent (Occupancy Change) And Utility Allowance Change (if 

applicable).

4. Other information. Any other information the borrower believes is 

necessary to justify the proposed rent and/or utility allowance change 

request.
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Revised (11-08-19) PN 530

• Late Budget Submissions

The schedule provided for budget reviews relies on timely submission of 

budget documents by the borrower. If the borrower is tardy in submitting 

required documents, the Agency cannot ensure that all deadlines will be met. 

Therefore, if a borrower submits the budget late, Agency deadlines no longer 

apply, and the borrower is not eligible for “automatic approval” of the budget 

(as discussed in Paragraph 4.14 D of this chapter). If no budget is approved 

by the end of the project’s fiscal year, the borrower must operate under the 

previously approved budget (referred to as a Carry-Over budget) until the 

Agency reviews and approves the new budget.

• Carry-Over Budgets

If a budget for the new fiscal year is not entered in MFIS before the first day 

of the fiscal year, a Carry-Over budget is automatically built from the prior 

year budget on the first day of the project’s fiscal year by MFIS. This is 

necessary as the borrower has not presented an acceptable budget in time to 

be effective on the first day of the project’s fiscal year and is, therefore, 

operating under the current existing budget, which would then become the 

Carry-Over budget.

When an acceptable budget is received, after the beginning of the fiscal year,

a Mid-Year Budget will need to be completed.

• Mid-Year Budgets

A Mid-Year Budget is a budget that has an effective date other than the first

day of the project’s fiscal year. This type of budget should be used if there is 

a change in rents or utilities on the project after the current budget has been 

approved. It should include operating income and expenses that would be 

expected for the next 12 months after the effective date of the budget. 
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MFIS will prorate the budget correctly for analysis. The Mid-Year Budget 

will need to be added to MFIS with the new effective date. This process 

would also be used for transfers to establish the first budget.

A Mid-Year Budget may also be needed if the regular annual budget was not 

submitted and approved prior to the first day of the project’s fiscal year and a 

Carry-Over budget went into effect.

Exhibit 4-2 Timeline Example for Carry-Over and Mid-Year Budgets provides an 

example of the timelines for Carry-Over and Mid-Year budgets and updates in MFIS.

 

Exhibit 4-2

Timeline Example for Carry-Over and Mid-Year Budgets

1. No 

budget was received by 

1-1-XXXX

MFIS creates a Carry-Over budget using a

1-1-XXXX approved date.

2. Budget 

received 2-10-XX with rent 

change effective 6-1-XX

Create new budget in MFIS (Mid-Year 

budget) with effective date of 6-1-XXXX

Exhibit 4-3 Schedule for Budget Submission and Review provides the timeframes for 

project budget submission and its review by Loan Servicers. 
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Exhibit 4-3

Schedule for Budget Submission and Review

Budgets Without Rent Change

60 calendar days prior 

to end of the project’s 

fiscal year 

November 1*

Borrower submits all necessary budget documents to Agency. 

Within 30 calendar days of transmitted, the Agency must take action by approval or 

denial of the budget or contact the Borrower to request additional information or 

clarification.

30 calendar days prior 

to end of fiscal year

December 1

Agency approves or denies the budget.**

• If the budget was unacceptable, the borrower may submit additional information 

to address deficiencies within 10 calendar days.

• Agency makes final approval or denial of budget within 20 calendar days of 

receipt of this additional information.

End of fiscal year

December 31

Final approval or denial of the budget. If budget is denied, the current year’s budget 

remains in effect. 

Budgets With Rent Change

90 calendar days prior 

to end of fiscal year

October 1*

Borrower notifies tenants of requested rent change (Handbook Letter 203(3560) and

submits all necessary budget documents to Agency.

• Tenants have 20 calendar day comment period to provide comments to Agency.

• Within 30 calendar days of transmitted, the Agency must take action by approval 

or denial of the budget or contact the Borrower to request additional information 

or clarification. If no action is taken and the rent increase is $25 or less, it may be 

considered automatically approved.

60 calendar days prior 

to end of fiscal year

November 1

Agency provides notice to the borrower of budget approval or denial.**

• If the budget was unacceptable, the borrower may submit additional information 

to address deficiencies within 10 calendar days.

• Agency has 20 calendar days to review the additional information.

30 calendar days prior 

to end of fiscal year

December 1

Agency gives final approval or denial of the budget.

• If the budget is approved, tenants must have at least 30-calendar days’ notice

(Handbook Letter 204(3560) or notification required by local law before the rent 

increase takes effect. If notices given to tenants at the outset stated the correct 

amount of the effective increase, then the 30-calendar day notice has been given. 

• If the rent increase is denied, the borrower may submit a revised budget at 

previously approved rents with expenditures acceptable to the Agency. In the 

absence of such a revised budget, the current year’s budget remains in effect.

• Tenants will receive Handbook letter 204 (3560) notifying of RD approval or 

denial of the rent change

Beginning of project’s 

fiscal year January 1

New budget and rent increase take effect.

* The dates provided are for a sample project with a fiscal year that begins January 1. For projects with different fiscal 

years, adjust accordingly.

** If the borrower submitted the budget on time and has not been notified by the Agency of any deficiencies by this 

time, the budget is considered approved unless it is not eligible for automatic approval.
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D. Agency Review Requirements

Loan Servicers must take the steps shown in Exhibit 4-4, Steps in the Budget 

Review and Approval Process, when reviewing and approving budgets. 

Exhibit 4-4

Steps in the Budget Review and Approval Process

• Follow procedure for receipt of budgets;

• Prioritize budgets for review;

• Review outstanding monitoring findings;

• Review the budget for reasonableness;

• Review the rent change, if requested; and

• Approve or deny the budget.

• Update MFIS

Budgets for projects that receive HUD project-based Section 8 assistance need to 

be reviewed with the same rigor as other projects. However, there are certain 

procedures that differ. These procedures are discussed later in the chapter.

1. Receiving the Budget

Standard procedures for budget receipt will help Loan Servicers track the 

progress of budgets through the approval process and meet approval 

deadlines. Further, intake procedures should help prioritize the review of 

budgets so that those with the highest priority (e.g., those with rent 

changes) receive the attention they need in a timely manner.

The following steps are taken upon receipt of budget submissions:

• When hard copies of the budget are submitted, the documents should be 

date stamped, entered into MFIS (complete transmitted date and input 

the financial details), and forwarded to the appropriate Servicing 

Official for review.

• When budgets are transmitted through MINC, the Loan Servicer will 

find the budget under Industry Interface in MFIS. If the budget 

transmission is accepted, the system will complete the transmitted date 

for this item. The following items are needed for the budget to be 

accepted by the MFIS system:

◊ Effective day must be 1st of the month.

◊ Effective day must be within fiscal year range.

◊ The budget cannot be in approved status.
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◊ The type of units identified in the rent schedule submitted must 

match the units identified in MFIS and must support all project 

units.

◊ Budget line items identified as ‘Other’ must contain a supporting 

detailed comment.

• Within 30 calendar days of transmitted, the Agency must take action by 

approval or denial of the budget or contact the Borrower to request 

additional information or clarification. Refer to Exhibit 4-1 for 

complete budget requirements.

• If the budget submission is complete, the Loan Servicer will input the 

receive date in MFIS and the budget review should continue as 

described in the following sections. If the budget is incomplete, the 

Loan Servicer must take the steps described below.

• Incomplete Budgets

If any items are missing or are of such poor quality that there is 

insufficient information to begin an assessment of the budget, the 

budget is considered incomplete. 

If the budget submission is incomplete, the Loan Servicer must 

contact the borrower in writing, stating that the budget is incomplete, 

and discuss the deficiencies. 

◊ If the borrower submits the information within 10 days, the budget 

is considered to be on time, and the review can still be completed 

prior to the end of the fiscal year. The budget is eligible for 

automatic approval, as described later in this chapter. 

◊ If the borrower does not submit the requested information within a 

10-day time period from the Agency’s contact, the Agency cannot 

guarantee approval of the budget before the beginning of the new 

fiscal year. In these cases, the borrower must continue operations 

under the previous year’s budget until a budget is approved. The 

borrower is not eligible for automatic approval as described in 

Paragraph 4.14 D, and the budget will be returned unapproved.

◊ A Notice should be sent to the borrower when it is determined the 

budget is past the deadlines set by the Agency. 
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Agency Review Time

The total Agency review time for a budget from submission to initial 

approval or denial is 30 calendar days for budgets with or without rent 

increases

If the initial budget is denied, this schedule allows for a second review 

of the budget and approval (if appropriate) before the start of the 

fiscal year. However, the Agency must take final action on all 

budgets within 60 calendar days of receipt of the borrower’s budget.

2. Prioritizing Budgets for Review

After budgets have been received and determined to be complete, the 

Loan Servicer should prioritize budgets for review. Prioritizing the 

budgets helps to ensure that the budgets that require the most thorough 

review receive the attention they need. Budgets with the highest priority 

for review include budgets for projects with:

• Requests for rent increases above $25/month;

• Vacancy rates above the allowable threshold; and

• Past monitoring findings.

While Loan Servicers should place the highest priority on reviewing these 

budgets, they should plan their time to allow for sufficient review of all 

budgets.

3. Reviewing Outstanding Monitoring Findings

Having determined that the budget submission is complete, the Loan 

Servicer must check the project for outstanding monitoring findings and

assess whether the borrower’s budget reflects adequate efforts to address 

these findings. 

• If the outstanding monitoring issues have been adequately addressed in 

the budget, the Loan Servicer should proceed with the review for 

reasonableness. 

• If project compliance issues have not been addressed, the budget 

documents should be returned to the borrower for revision. 
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4. Review the Budget for Reasonableness

If all outstanding compliance issues have been addressed, the Loan 

Servicer must review the budget for reasonableness using the steps 

outlined in Attachment 4-D Budget and Year End Analysis, to make a 

determination. These review items are automated in the MFIS budget 

analysis process. Attachment 4-D shows the items included in the analysis 

and how they are calculated

• Review Form RD 3560-7 to verify that all appropriate line items are 

completed. Perform a quick assessment to ensure that they appear to 

be completed properly.

• Complete the budget analysis which is required prior to entering an 

“Approved” date in the Supervisory Activity of MFIS. The analysis 

will reflect areas of observations and review items which will require 

comments. Just because an item is brought out as an observation or 

review does not necessarily mean the budget cannot be approved.

◊ Observations are the results of a test performed that may be of 

importance to the loan servicer. 

◊ Review items are the results of a test performed that require 

comments as documentation of the review. 

◊ Ratio analyses are reflected in the Budget Analysis in MFIS and

are an effective tool for financial analysis. They prescribe various 

measures of actual operating performance. The Loan Servicer 

should become familiar with these percentages as a comparative 

analysis and consider utilizing the Hyperion MFH Budget Line 

Item Comparative Cost data report for their Region in their 

analysis. The ratios ran in the MFIS Analysis Review are 

described in Attachment 4-D.

◊ Norms are also reviewed on the Budget Analysis. The Norms are 

based on Regional Groupings of “like” properties. This gives the 

Servicer an analysis of how the property is performing compared

to other “like” properties. The norm definitions are described in 

Attachment 4-D.

• Determine whether the ending cash balance exceeds the permissible 

limit. If it does, the surplus must be contributed to reserves to address 

capital needs, be deposited in the project’s reserve account, or applied 

to the loan balance to reduce the debt service on the borrower’s loan. 

Based on the surplus, the Agency may require a rent decrease.
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• Verify that the capital budget is complete. Capital improvements 

including implementing a borrower’s transition plan, and Capital 

Needs Assessment (CNA) should be included as part of the capital 

budget portion of Form RD 3560-7 when applicable. Compliancerelated costs include reasonable fees and costs for preparing selfevaluations and transition plans.

• Annual Capital Expenditure Budget

The Loan Servicer uses the budget cycle to assess the borrower’s 

annual capital expenditure budget compared with available information 

about the types of capital improvements needed to maintain the 

project’s physical condition. Independent sources of information such 

as insurance actuary tables, FANNIE MAE Physical Needs 

Assessment Guidance to the Property Evaluator or Agency 

documentation should be consulted for common costs and 

repair/replacements schedules. 

The Loan Servicer reviews the operating and annual capital budgets, 

and compares them with previous budgets, site visit reports, physical 

inspections, capital needs assessments, and audit reports. When doing 

so, the Loan Servicer should consider the following questions:

◊ Are expenditures sufficient to maintain the project according to 

the Agency’s performance standards and the requirements of the 

project management plan?

◊ Were any essential items of maintenance deferred during the past 

year, which should be financed from the upcoming operating or 

capital budget?

◊ Are there any uncorrected defects noted in site visit reports that 

should be financed from the upcoming operating or capital 

budget?

◊ Has a CNA of the property been prepared? Does the budget 

match the prepared CNA?

◊ Is the amount budgeted for maintenance and replacement reserve 

expenditures sufficient to address immediate capital needs? 

◊ If capital needs information is available from a prepared CNA, are 

replacement reserve contributions and funding levels sufficient to 

address anticipated capital needs over the next 5 years? Does the 

CNA need to be updated?
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5. Review the of Rent Change Requests

When the borrower submits a budget with a rent or utility allowance 

change request, the Agency must respond to the borrower within 30

calendar days of submission. If the Agency does not contact the 

borrower, the borrower may assume that any rent change request of $25

per month or less has been automatically approved. 

Even if the Loan Servicer has determined that the budget is reasonable 

based on the tests outlined in Attachment 4-D, the rent increase must still 

be reviewed to confirm that the rent/utility allowance change will not 

adversely affect the marketability of the units and create a vacancy 

problem. If a review of the rent increase shows that the rent increase will 

adversely affect the marketability of units, the full rent increase cannot be 

approved. The borrower should seek a reduced rent increase and, if 

appropriate, request a servicing action that will enable the project to 

achieve a positive cash flow at lower rents. The Agency will not consider 

rent increases based solely on guaranteeing that the borrower will receive 

a Return at the end of the project’s fiscal year. 

a.Circumstances in which the Agency Will Not Approve a Rent 

Increase

The Loan Servicer must not approve a rent increase under the 

following circumstances:

• The borrower is able but unwilling to comply with program 

requirements. Such a borrower has ignored repeated requests 

from the Loan Servicer to take servicing actions by a specified 

deadline.

• If the borrower is in default of the Agency loan agreement and 

does not have an Agency-approved workout plan or is not in 

compliance with an Agency-approved workout plan.

• There are sufficient project funds under the existing rents to meet 

project operating expenses, and the borrower is not able to justify 

the higher rents. Such a condition is established when the project 

budget shows that income meets expenses at current rent levels.
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Addressing Rent Increases

Loan Servicers must make every 

effort to review budgets with 

significant rent increases within the 

time limits. Postponing approval is 

not an acceptable way to address rent 

increases.

• The project is operated on a for-profit basis, and the rent change 

would result in rents higher than what tenants can afford. This 

condition is established by comparing rents with 30 percent of 

tenant-adjusted incomes. If 

it is shown that tenants 

would be paying in excess 

of 30 percent of their 

adjusted incomes with new 

rents and the increase is not 

necessary to meet projected 

costs, then the increase 

must not be approved.

b. Denial of Rent Change Requests

If the Loan Servicer denies the change request, the borrower must be 

notified of the denial and be provided with appeal rights. (See Chapter 

1)

c. Effective Dates of Change

The effective dates of any approved changes will coincide with the 

start of the project’s fiscal year or the start of the season for laborhousing projects. For a rent/utility change request on which comments 

were solicited and the amounts were increased from the original 

Notice, the borrower must deliver a notice to tenants, using Handbook 

Letter 204 (3560), announcing the rent or utility allowance increase to 

be effective 30 calendar days (or in accordance with local regulations) 

from the date of the notification. If the rent/utility increase will be the 

same as what was stated in the initial notice to the tenants, the initial 

notice then serves the purpose of “the Notice”. HB Letter 204 (3560) 

will be sent to notify tenants of RD decision to approve.

If the rent/utility change figure from the original notice is revised 

downward, the borrower must notify the tenants of their new rents 

prior to the first day of the month in which the new rent amounts are 

due. However, the borrower does not have to give a 30-day notice of 

the new rents in this case. 

For notices to tenants, see Appendix 4.

d. Rent Change Requests Under Special Circumstances (Mid-Year 

Budgets)

The Loan Servicer may accept borrower requests for rent or utility 

allowance changes at times other than with the annual budget 
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submission. Under special circumstances if a change is necessary to 

preserve the financial integrity of a project and the financial distress is 

due to circumstances beyond a borrower’s control, a change request may 

be considered. Such circumstances might be in the event of a natural 

disaster, property transfer or when workout procedures and servicing 

actions are necessary. 

When a Plan II housing project is experiencing severe vacancies due to 

market conditions, the Agency may allow the borrower to charge a

Special Note Rent (SNR) that is less than Note Rent but higher than 

Basic Rent, to attract or retain tenants whose income level would require

them to pay the SNR. The requirements for receiving an SNR are 

established in Chapter 10 of HB-3-3560.

Both of these situations would require a Mid-Year Budget be submitted 

to the Agency for approval.

e. Approving Utility Allowances

Agency Staff must review the utility allowance documents submitted with 

the budget to make sure that the numbers being used are reasonable and 

comparable to other projects in the same market area. In addition, the 

Loan Servicer should check project budgets of any other Agency-funded 

projects in the area to see if utility allowances are similar.

f. Rent Changes for Units Receiving HUD Project-Based Section 8 

Assistance [7 CFR 3560.207, and HUD’s Section 8 Renewal Policy 

Guide Book, Chapter 14]

The Agency has the responsibility to review and approve project budgets 

on an annual basis based on need to meet cash flow and expense 

requirements. Therefore, the Loan Servicer will not take into account 

HUD’s automatic annual adjustment for Section 8 contract rents. The 

Loan Servicer must approve only the rents needed to provide sufficient 

income to meet approved project expenses. 

The agreement in the Memorandum of Understanding (MOU) between 

HUD and Rural Development indicates that the RD-approved budget will 

be submitted to HUD by the Project Owner and will serve as the basis for 

the budget-based rent in the contract renewal process. The rents at initial 

renewal will be determined by the HUD staff, who will compare the RDapproved, budget-based rent as submitted by the Project Owner to the 

current rents adjusted by an Operating Cost Adjustment Factor (OCAF) 

and will set the contract rent at the lesser of the two amounts. HUD staff 

will then notify both RD and the owner of the new contract rents. Rent 

adjustment at subsequent renewals will be determined by OCAF unless 

the owner requests and HUD approves a budget-based increase that has 

been approved by RD.
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Since HUD- and Agency-approved rental rates frequently differ, it 

may be necessary to have a 3-column budget in properties with HUD 

project-based Section 8 contracts. Exhibit 4-5 Reviewing Budgets 

with HUD Subsidies depicts how many columns are required in the 

budget, depending upon the project type.

W

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e

v

i

e

w

i

n

When reviewing the budget, if the Loan Servicer concludes that the 

HUD-authorized rent is more than what is needed to meet project 

expenses, a lesser amount than the HUD rent must be approved. 

When this occurs, in accordance with Exhibit 4-6 Impact of Interest 

Credit Agreement on Ability to Cancel Interest Credit, Collect 

Overage, and Deposit Excess Funds in the Reserve Account, the 

borrower must deposit the difference between the Agency-approved 

Note Rate Rent and the higher HUD-authorized rate into the reserve 

account. The manager or borrower must use Form RD 3560-29, 

Notice of Payment Due Report, to document the required deposit in 

the reserve account. The Loan Servicer will monitor this deposit

when reviewing the year-end actuals.

If excess HUD rents accumulate in the reserve account beyond the 

sum shown in the borrower’s loan agreement or resolution, the Loan 

Servicer may reduce or cancel the interest credit on the project. The 

Agency may reinstate interest credit whenever HUD rent becomes

lower than the Agency Note Rate Rent, determined by the Interest 

Credit Agreement. Refer to Exhibit 4-5.

Before depositing excess funds in the reserve account, the borrower 

may have to collect overage. Whether overage is collected, and a 

project is subject to cancellation of interest credit depends upon the 

issuance date and execution date of the project’s interest credit 

agreement.

Exhibit 4-5

Reviewing Budgets with HUD Subsidies

 Project Type Rents Needed In Budget

• Section 8/Section 515 

without interest credit.

• Note Rate Rent (HUD contract 

rent); difference is excess funds and 

deposited into reserves.

• Section 8/Section 515 with 

interest credit.

• Basic Rent, Note Rate Rent, and 

HUD contract rent.
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Certain early versions of the Interest Credit Agreement do not have a 

legal basis to support the Agency’s policy to cancel interest credit or 

collect overage to offset interest credit. Each HUD project-based

Section 8/Section 515 project needs to be categorized according to the 

issuance date and execution date of the project’s Interest Credit 

Agreement on Form FHA 444-7, Interest Credit Agreement or its 

successor Forms FmHA 444-7, FmHA 1944-7, and RD 3560-9. 

Exhibit 4-6 Impact of Interest Credit Agreement on Ability to Cancel 

Interest Credit, Collect Overage, and Deposit Excess Funds in the 

Reserve Account provides a description of the rules that apply to each 

interest agreement form.

Exhibit 4-6

Impact of Interest Credit Agreement on Ability to Cancel Interest Credit,

Collect Overage, and Deposit Excess Funds in the Reserve Account

Form

Executed Before

October 27, 1980

Executed On Or After

October 27, 1980

FHA 444-7, 

dated 11/17/69 

and 7/27/72

No basis to cancel or reduce interest 

credit, collect overage, or deposit excess 

funds in the reserve account unless the 

borrower agrees.

Legal basis exists to cancel 

or reduce interest credit, 

collect overage, and 

deposit excess funds in the 

reserve account and/or 

apply it on the loan.

FmHA 444-7, 

dated 10/13/77

• If first, second, fourth or fifth block of 

paragraph 2 checked, no legal basis to 

cancel or reduce interest credit, collect 

overage, or deposit excess funds into 

reserves.

• If the third block of paragraph 2 is 

checked, no legal basis to cancel or 

reduce interest credit, unless borrower 

agrees. However, there is legal basis 

to collect overage and deposit excess 

funds to reserves and/or apply it on 

the loan.

Legal basis exists to cancel 

or reduce interest credit, 

collect overage, and 

deposit excess funds in the 

reserve account and/or 

apply it on the loan.

FmHA 1944-7, 

dated 11/29/82

Legal basis exists to 

cancel or reduce interest 

credit, collect overage, 

and deposit excess funds 

in the reserve account. 

FmHA 1944-7, 

dated 4/85

Legal basis exists to 

cancel or reduce interest 

credit, collect overage, 

and deposit excess funds 

in the reserve account.
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6. Approval or Denial of Budgets

Once the budget analysis is complete, Loan Servicers must notify the 

borrower whether the budget has been approved or denied.

a.Budget Approval

If a budget is received with reasonable operating expenses and a rent 

increase request to cover turnover costs and maintenance costs in line 

with comparable properties, the Agency should not unreasonably 

withhold approval. In some cases, rents may need to be increased. 

When market conditions do not allow for sufficient rents to fund both 

operating and capital needs, the workout authorities of 7 CFR 3560, 

Paragraph 3560.453 should be reviewed for their applicability in the 

situation.

If the Loan Servicer has determined that the budget represents 

reasonable costs and adequately addresses all outstanding compliance 

issues in the budget, the reserve account is current, and the rent change 

(if requested) is acceptable, the budget may be approved. To approve 

the budget, Loan Servicers must acknowledge approval (Form RD 

3560-7). This acknowledgement may be by letter if the budget was 

submitted electronically, or by signing, and returning a copy of the 

form to the borrower with a cover letter. The Loan Servicer must also 

enter the approval date in MFIS. If the approved rent/utility change is 

increased from the originally posted change, the borrower must deliver 

a notice to tenants announcing the rent or utility allowance increase to 

be effective 30 calendar days (or in accordance with local regulations),

from the date of the notification using Handbook Letter 204 (3560).

b.Automatic Budget Approval

Budgets that are not reviewed within the 30-day period are 

automatically approved unless:

◊The budget proposes a monthly rent increase above $25/month per 

unit; or

◊The budget is submitted late or misses other deadlines set by the 

Agency.

◊Vacancy rates are above the allowable threshold.

◊Property is under a workout plan or debt deferral.
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If a budget is not eligible for automatic approval and no decision is 

made prior to the beginning of the project’s new fiscal year, the 

borrower must continue operations under the previous year’s budget. 

A denied date must be completed in MFIS at this time. In these cases, 

the Agency must continue to work with the borrower to address the

requested increase. When an agreement is reached, a new budget may 

take effect. 

A notice will need to be sent to the borrower when it is determined the 

budget submission is past the deadline set by the Agency. If no 

response is received within timeframes established in the Notice, 

servicing actions will begin using Servicing Letter #1 (HB-3, HB 

Letter 301 (3560)).

c. Procedure for Automatic Approval

In the case of automatic approval, the Loan Servicer must still 

acknowledge approval (Form RD 3560-7). This acknowledgement 

may be by letter if the budget was submitted electronically, or by 

signing and returning a copy of the form to the borrower with the

letter.

d.Budget Denial 

If the Loan Servicer denies the proposed budget because it is found to

be unacceptable for reasons related to outstanding monitoring findings, 

cost reasonableness, reserves, or a rent increase, the borrower has an 

opportunity to address the deficiencies.

◊ The Loan Servicer must return the proposed budget to the borrower 

with a letter listing deficiencies. 

◊ The Loan Servicer must enter the appropriate ‘Denied’ tracking step 

in MFIS.

◊ The borrower has 10 calendar days to submit new information to the 

Agency. The borrower may adjust the size of the rent increase 

requested or provide new documentation to justify budget items.

◊ The Loan Servicer must review the new submissions within 20 

calendar days of receipt, and either approve or deny the budget.

◊ If the budget is approved based on the new submissions, the Loan 

Servicer must acknowledge approval. Approval may be by letter 

submitted electronically or by signing and returning a copy of the
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form to the borrower. MFIS will be updated by removing the 

“Denied” step and populating the “Approved” step.

◊ If the budget is denied based on the new submission, the Loan 

Servicer must send the borrower a letter stating the deficiencies and

informing the borrower that the previous year’s budget remains in 

effect. The borrower must be given the option to submit a new 

budget using the previous year’s rent levels but adjusted for projected 

capital expenditures and other known changes for the coming year. 

The borrower may appeal the budget denial in accordance with 

Agency appeal procedures. 

SECTION 5: REPORTING AND FINANCIAL EXAMINATION

4.15 MONTHLY AND QUARTERLY REPORTS [7 CFR 3560.307]

A. Overview of Reports

Financial reporting provides the Agency and the borrower a means to monitor the 

project’s financial progress.

• Quarterly Reports. 

Quarterly reports based on a Borrower’s Fiscal Year are required in the 

following situations:

• At completion of new construction or substantial rehabilitation;

• When the project is subject to a workout agreement; and

• In the case of reamortization and transfer of an existing project loan.

• Monthly Reports.

Loan Servicers may require borrowers to prepare and submit reports on a 

monthly basis when additional tracking and supervision are needed. For 

example, when a project is subject to a workout agreement; when there has 

been a violation of program rules or reporting requirements; or, when the 

project shows signs of financial distress.
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Loan Servicers may notify in writing the borrower to discontinue the monthly 

reporting requirement for projects that have demonstrated consistent 

compliance with program requirements over a sufficient time. Generally, 12 

months of consistent compliance is considered sufficient to discontinue the 

reporting requirements.

B. Review of Monthly and Quarterly Reports

The borrower must submit the required reports following the close of the 

reporting period (quarter or month, as appropriate), and submit them to the 

Agency by the 20th of the month following the reporting period via the MINC 

system. Upon receipt, the Loan Servicer must review the analysis report as 

indicated in Attachment 4-D, and review the following:

◊ Look for red flags such as dramatic changes in income, expenses, the general 

operating account, or the reserve account.

◊ Check balances in accounts as referenced in Paragraph 4.3 Overview of 

Accounts in this chapter, to make sure they are consistent with the 

management plan, loan agreement/resolution, and the budget. 

◊ Check project expenditures against the budget. Make sure the project is 

being operated in accordance with the approved budget.

◊ Check progress against workout agreements. Make sure the borrower is 

taking any actions indicated in a workout agreement and is abiding by the 

established schedule for these actions.

4.16 ENGAGEMENTS AND PREPARATION OF ANNUAL FINANCIAL 

REPORTS [7 CFR 3560.308 and 7 CFR 3560.578]

A. General Requirements for All Borrowers: Annual Financial Reports

To ensure that the project is in sound financial condition and is complying with 

the program financial management requirements, the Agency requires annual 

financial reports to be submitted by each borrower. 

All borrowers who have a Section 515 Rural Rental Housing (RRH) loan or a 

Section 514 Off-Farm Labor Housing loan must comply with the financial 

reporting requirements of this section. The requirements are established based on 

combined Federal Financial Assistance and risk thresholds for each borrower. 

Projects with fiscal years ending 12-31-19 and after are to follow the reporting 

requirements outlined in this Section. 
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Combined Federal Financial Assistances is defined as a combination of any or all 

of the following sources:

o Outstanding principal balance and deferred principal balance at the 

beginning of the fiscal year of a United States Department of Agriculture 

(USDA) Mortgage, a mortgage insured by the Federal Housing 

Administration (FHA) or HUD held mortgages and other Government 

insured loans (Including but not limited to HOME, and CBDG loans);

o Any USDA Rental Assistance or Project based Section 8 assistance 

received during the fiscal year;

o Interest reduction payments received during the year (interest subsidy);

o Federal grant funds received during the year and/or;

o Outstanding principal balance at the beginning of the fiscal year of an 

existing USDA Section 538 Guaranteed Rural Rental Housing loan.

Funds the borrower entity receives which must comply with Federal statutes, 

regulations, or terms and conditions of Federal awards will be included as 

Federal Financial Assistance.

Exhibit 4-7 Year End Financial Reporting Requirements outlines the financial 

reporting requirements for specific types of properties.
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Exhibit 4-7

Year End Financial Reporting Requirements

For-Profit or Limited Profit 

Total Borrower 

Federal Financial 

Assistance*

Forms RD 3560-7 

and 3560-10

Borrower 

Certification of 

Performance 

Standards

Uniform Administrative 

Requirements Audit 

required 

RD Borrower 

with less than 

$500,000 in Federal 

financial assistance

Yes Yes No

RD Borrower 

with $500,000 or

greater in Federal 

financial assistance

Yes Yes Yes**

State and local Governments, Indian tribes and Non-Profit Organizations

Total Borrower 

Federal Financial 

Assistance*

Forms RD 3560-7 

and 3560-10 

Borrower 

Certification of 

Performance 

Standards

Single Audit in 

accordance with 2 CFR 

part 200 subpart F

RD Borrower with 

less than $750,000 

in Federal financial 

assistance 

Yes Yes No 

RD Borrower with 

$750,000 or greater 

in Federal financial 

assistance 

Yes Yes Yes***

*See RD Programs Audit Determination Worksheet and Major Program 

Determination – Attachment 4-G. Compilation of Prescribed Forms may be necessary, if an 

audited financial statement is not required by another federal agency or other business 

agreement, 

**Must be completed by an Independent CPA.

***In accordance with the Council of Financial Assistance Reform (CoFAR) uniform 

guidance. This Single Audit is in accordance with 2 CFR part 200 subpart F, Appendix XI 

Compliance Supplement; and submitted to the Agency as part of the financial reporting 

requirements. Must be completed by an Independent CPA.

Borrowers will be required to submit Forms RD 3560-7 and 3560-10 

electronically through MINC. The Agency may make an exception to these 

requirements if the borrower submits documentation that the costs associated 

with electronic submission would pose a financial hardship to the project. 
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Borrowers with fewer than 8 units may submit hard copies to the Agency within 

90 calendar days of the project’s fiscal year end.

B. Budget Actuals and Balance Sheet

Year-end reporting requirements include the use of Forms RD 3560-7, Multiple 

Family Housing Project Budget/Utility Allowance Budget Actuals and Form RD 

3560-10, MFH Borrower Balance Sheet. 

• Form RD 3560-7 is used for end-of-year reporting using actual income and 

expenses. 

• Form RD 3560-10 is a summary of the balances of the accounts, a listing of 

the liabilities, long term debts, and an indicator of the net worth of the 

project. 

If the borrower has accurately reported actual income and expenses, specific 

figures on the two forms should be the same. 

• Ending balances of the accounts listed on Form RD 3560-7, Part III should 

match the balances listed on Form RD 3560-10, lines 1-4. 

• Ending cash balance on Form RD 3560-7, line 33 should match the balances 

listed on Form RD 3560-10, lines 1, 2, 5, and 6. These checks are a part of 

the analysis run in MFIS. 

• Since the borrower is using the accrual method of accounting, the accrual-tocash adjustment, Form RD 3560-7, line 32 must equal the difference between 

lines 31 and 33. This ensures Form RD 3560-7, lines 31 and 33 match their 

respective figures on Form RD 3560-10. The sole purpose of this adjustment 

is to reconcile a company’s internal ledger kept on an accrual basis to the IRS 

forms which are required to be on a cash basis. 

Borrower signatures are required on these forms. If they are submitted 

electronically through MINC, signed copies are not required to be submitted to 

the Agency. 

C. Borrower Certification of Performance Standards

All financial reports must include a Borrower Certification of Performance 

Standards. Attachment 4-F is used by the owner to certify to these standards. 

The Borrower or borrower representative must sign and date this selfcertification.
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The Borrower must self-certify:

◊ Required accounts are properly maintained and tracked separately;

◊ Payments from operating accounts are disclosed and accurately represented;

◊ Reserve Account is current and maintained in a supervised account or have 

an approved Deposit Agreement executed after October 1, 2018 allowing for 

a non-supervised account, contributions are on schedule, the balance accounts 

for contributions less authorized withdrawals; and there are no encumbrances;

◊ The replacement reserve account was used for authorized purposes in 

accordance with 7CFR 3560.306 (g);

◊ Tenant security deposit accounts are fully funded and are maintained in 

separate accounts;

◊ Payment of ROI was consistent with the terms of the applicable loan 

agreement or loan resolution;

◊ Borrower/grantee has maintained proper insurance in accordance with the 

requirements of 7 CFR 3560.105; 

◊ All financial records are adequate and suitable for examination.

◊ There have been no changes in project ownership other than those approved 

by the Agency and identified in the certification. All current owners are to be 

identified in the Status Report of Ownership table on Attachment 4-F. All 

Non-Profit Organizations certify that the board is active and maintains 

oversight of the property; and

◊ Real estate taxes are paid in accordance with state and/or local requirements 

and are current.

D. Owner’s Compilation of Prescribed Forms

For-profit or limited profit borrowers that receive less than $500,000 in combined 

federal financial assistance, for which there are no audit requirements per other 

agencies or agreements, will submit an annual owner certified compilation of 

prescribed forms containing Form RD 3560-7 and Form 3560-10 utilizing the 

accrual method of accounting in accordance with Statements on Standards for 

Accounting and Review Services (SSARS) promulgated by the Accounting and 

Review Services Committee of the American Institute of Certified Public 

Accountants (AICPA). Borrowers may use a CPA to complete this report of the 

prescribed forms. Attachment 4-K provides an example of an Independent 

Accountants Compilation report on RD Prescribed forms. Attachment 4-L
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provides the Owner certified Prescribe forms supporting documentation

schedules.

E. Financial and Compliance audit utilizing HUD Office of Inspector General’s 

(OIG) Consolidated Audit Guide standard

For-profit or limited profit Borrowers that receive $500,000 or more in combined 

federal financial assistance must submit an independent auditors’ report. A CPA 

must perform the audited financial statements.

Attachment 4-H is an example Engagement Letter which will be used by a CPA. 

This Engagement Letter should include the procedure, audit objectives to be 

performed and the fees associated with the service. There may be circumstances 

where the auditor may ask for information from Rural Development due to third 

party verification requirements. The Servicing Official shall receive a complete 

copy of this signed Engagement Letter prior to releasing information to the CPA.

to include financial statements and notes to the financial statements, supplemental 

information containing Agency approved forms for project budgets and borrower 

balance sheets, a report on internal control over financial reporting and on 

compliance and other matters based on an audit of financial statements in 

accordance with Generally Accepted Government Auditing Standards; a report on

compliance for each major program and internal control over compliance (if 

applicable). Attachment 4-M provides a typical report and supporting documents.

Borrower’s s will utilize HUD’s Office of Inspector General’s (OIG) Consolidated 

Audit Guide located at https://www.hud.gov/sites/documents/20004OIGH.PDF

in developing the audit. The audit will not utilize HUD’s Chart of Accounts, nor 

will the report require the CPA to review any tenant files, as this compliance test 

is being conducted by MFH field staff during regularly scheduled supervisory 

visits and annual improper payment auditing. 

An audit will consist of the following items (financial statements issued in twoyear comparative format, as applicable:

• Independent Auditor’s Report

• Financial Statements

o Balance Sheets

o Statements of Operations

o Statements of Changes in Partner’s Equity (Deficit)

o Statements of Cash Flows

• Notes to the Financial Statements
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• Supplemental Information 

o Management Fee Calculation

o Insurance Disclosure

o Return to Owner

o Changes in Rental Property

o Accrual to Cash Schedule

• Multiple Family Housing Borrower Balance Sheet and supporting 

documentation – Form RD 3560-10

• Multiple Family Housing Project Budget and supporting documentation –

Form RD 3560-7

• Independent Auditors Report on Internal Control Over Financial Reporting 

and on Compliance and Other Matters Based on an Audit of Financial 

Statements Performed in Accordance with Government Auditing Standards

• Independent Auditor’s Report on compliance for each major RD program and 

Internal control over Compliance

• Audit Findings

• Corrective Action Plan (if applicable)

F. Standards for State and local governments, Indian tribes, and Non-Profit 

Organizations

1. State and local governments, Indian tribes, and Non-Profit Organizations that 

receive less than $750,000 in combined Federal financial assistance and there are 

no audit requirements per other agencies or agreements will submit an annual 

owner certified compilation of prescribed forms containing Forms 3560-7 and 

3560-10 utilizing the accrual method of accounting in accordance with 

Statements on Standards for Account and Review Services. A CPA may be used 

to complete the prescribed forms. Attachment 4-K is provided as an example. 

2. State and local governments, Indian tribes, and Non-Profit Organizations that 

receive $750,000 or more in combined federal financial assistance must submit 

audits in accordance with 2 CFR 200, Part F, and the Office of Management and 

Budget’s (OMB) Uniform Administrative Requirements, Cost Principles and 

Audit Requirements for Federal Awards. Copies of the audit will be forwarded 

by the borrower to the Servicing Official and the appropriate Federal cognizant
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agency for audit. Within USDA, the USDA, OIG fulfills “cognizant agency” for 

audit responsibilities, (see “cognizant agency” defined 7 CFR 3052.105).

Attachment 4-N is provided as an example of Single Audit requirements. The 

auditor may refer to the American Institute of Certified Public Accountants 

(AICPA) for additional guidance in meeting audit requirements. 

Organizations subject to 2 CFR 200, Part F, must submit the single audit along 

with the borrower’s certified performance standards (Attachment 4-F), Forms RD 

3560-7, and 3560-10. Per Uniform Guidance the single audit should also be 

submitted using the Federal Audit Clearinghouse. The audit will not require the 

CPA to review tenant files, as this compliance test is being conducted by MFH 

field staff during regularly scheduled supervisory visits and annual improper 

payment auditing.

G. Other Financial Reports

• Additional Opinions. 

The Agency may require additional opinions of financial condition and 

compliance, such as audits, to ensure the security of the asset; to determine

whether the project is being operated at a reasonable cost; or to detect fraud, 

waste, or abuse.

• Annual Financial Statements. 

Another regulatory agency, legal entity, and/or other business agreement

may require an audit in accordance with Generally Accepted Auditing

Standards or Government Auditing Standards. Any project audits 

independently obtained by the borrower must be submitted to the Agency. 

H. Annual Financial Reporting Due Dates and Agency Review of Annual 

Financial Reports

1. Annual Financial Reporting Due Date

For-Profit or Limited Profit – Annual financial reports including Form RD 

3560-7 with 12 months of actual income and expenses, Form RD 3560-10, 

compilations of prescribed forms, certification of performance standards and 

audits, as appropriate, must be submitted to the Agency no later than 90 days 

following the close of the project fiscal year. 

State and local Governments, Indian tribes and Non-Profit 

Organizations – 2 CFR §200.512 allows the audit of Not-for-profits to be 

submitted within the earlier of 30 days after receipt of the auditor’s report, or 

9 months after the end of the audit period, unless a longer period is agreed to 

in advance by the cognizant or oversight agency for audit.
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If the annual financial reports cannot be submitted by the due date, the 

borrower must present a request for extension supported by evidence that 

delay is at the request of the auditor, and the request has a reasonable 

explanation of why an extension of the due date is needed. The Servicing 

Official may authorize up to a 30-day extension of the due date. 

If an explanation is not forthcoming from the Borrower, or the explanation 

received is without good reason, or the Servicing Official otherwise suspects 

fiscal difficulty, the Servicing Official may request the borrower to submit to 

the Servicing Office for review, the project bank statements for the general 

operating, reserve, and investment accounts covering the most recent 60-day

period. 

If the borrower fails to submit the requested bank statements by the date 

stipulated by the Servicing Official, the Servicing Official will immediately 

refer the matter to the OIG.

The Servicing Official may authorize the initial verification of review to 

cover a period up to 18 months for a new project whose first operating year 

was less than 6 months or when an existing owner changes their fiscal year.

2. Agency Review of Annual Financial Reports

Loan Servicers must review financial reports within 60 days of receipt, in 

accordance with guidelines provided in Attachment 4-O to ensure that they 

meet Agency requirements. Loan Servicers will complete the checklist 

provided as Attachment 4-O. In particular, Loan Servicers must:

◊ Confirm that the engagement (audit report) was conducted as described in 

the requirements above;

◊ Confirm that the performance standards were certified as described 

above;

◊ Confirm that non-profit and public bodies have submitted any OMB 

required annual financial statements; 

◊ Note any findings identified in the engagement and determine corrective

actions. These would be located in the findings of the audit findings 

page; 

◊ Utilize the MFIS analysis tool to perform the preliminary assessment of 

the financial statements. Refer to Attachment 4-D for the Analysis 

process;
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◊ Confirm the information on Forms RD 3560-7 and 3560-10, submitted to 

the Agency electronically through MINC, is the same as the forms 

submitted with the financial reports from the auditor.

◊ If the Loan Servicer has determined that the annual financial reports are 

suitable, the reports may be accepted. To approve the financial reports, 

Loan Servicers must acknowledge acceptance (Form RD 3560-7). This 

acknowledgement may be by letter if the report was submitted 

electronically, or by signing and returning a copy of the form to the

borrower with a letter. The Loan Servicer must also enter the final 

reviewed date in MFIS.

If the Loan Servicer has determined that the annual financial reports are not 

acceptable, a notice will be sent to the borrower explaining the issues and requesting

a response within 30 days. If no response is received from this notice, servicing 

actions will begin using Servicing Letter #1 (HB-3, HB Letter 301(3560).
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ATTACHMENT 4-A

CAPITAL EXPENDITURES

TYPICAL REPLACEMENT RESERVE ACCOUNT USE

Items traditionally contemplated as eligible for draws from the replacement reserve account 

include capital items such as (but not limited to):

1. Unless shown in the operating budget, replacement of range hood, refrigerators, ranges, 

washer, dryers and other major appliances in the dwelling units.

2. Unless shown in the operating budget, flooring and carpeting.

3. Extensive replacement of kitchen and bathroom cabinets, vanities, sinks and countertops, 

bathroom tubs, toilets, and doors (exterior and interior).

4. Extensive unit clean up and repairs due to tenant death, misuse of unit, damage or vermin 

eradication.

5. Unless shown in the operating budget, window coverings – blinds, draperies.

6. Replacement or major overhaul of central air conditioning and heating systems, including 

cooling towers, water chilling units, furnaces, stokers, boilers, and fuel storage tanks.

7. Major plumbing and sanitary system repairs

8. Permanent improvements to the housing project, such as installing an energy-conserving heat 

pump.

9. Overhaul of elevator systems.

10. Systematic replacement of building or unit components.

11. Major roof repairs, including major replacements of gutters, downspouts, and related eaves 

or soffits.

12. Repainting of the entire building exterior.

13. Extensive replacement of siding.

14. Window system replacement or extensive window screen replacement.

15. Major landscape and grounds items, such as fencing, recreation areas, property signs. 

16. Major repaving/resurfacing/seal coating (sidewalks, parking lots, and driveways).

17. Extensive replacement of exterior (lawn) sprinkler systems.

18. Capital requirements identified in transition plan.

19. Automation equipment located on site. 

20. Shortfalls in operating expenses beyond the control of the borrower and threatens life, safety, 

or the physical security of the project. Example: weather disaster.

21. Twenty-five percent of the interest earned on a reserve account during the prior year. [7 CFR 

3560.306 (h)(3)].

22. Return on Investment according to 7 CFR 3560.305 (a)(2)(i) which states: “Surplus cash 

exists in either the general operating account as defined in 7 CFR 3560.306(d)(1) or the 

reserve account, if the balance is greater than the required deposits minus authorized 

withdrawals...”

23. Improvements to accommodate reasonable accommodation/modification requests. The 

replacement reserve account should not be used to pay for turnover or routine maintenance 

costs. Turnover and routine maintenance expenses should appear in the operating budget.
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ATTACHMENT 4-B

AMENDMENT TO LOAN AGREEMENT/RESOLUTION

RESERVE ACCOUNT REQUIREMENTS

1. PARTIES AND TERMS DEFINED. This amendment hereby modifies reserve account 

requirements contained in Form ____________ dated _________________ signed 

by _________________________, herein called “Borrower” with the United States 

of America acting through Rural Development, United States Department of Agriculture, 

herein called the “Government.” This amendment is necessary due to increased lifecycle needs, including equipment and facility replacement costs, and is supported by a 

Capital Needs Assessment, dated ____________.

2. MODIFIED RESERVE ACCOUNT REQUIREMENTS. Transfers at the rate not 

less than $_______ (monthly) shall be made to the Reserve Account beginning 

_________ until the amount in the Reserve Account reaches the sum of $________ 

or according to the scheduled listed at the bottom of this form, or such higher amount 

later agreed to with the Government and shall be resumed at any time necessary, because 

of disbursements from the Reserve Account to restore it to said sum. Withdrawal and 

use of funds deposited to this account will be in accordance with 7 CFR part 3560. With 

prior consent of the Government, funds in the Reserve Account may be used by the 

Borrower as provided for in the original document referred to in paragraph 1.

3. All other provisions of the prior executed document referred to in paragraph 1 above 

shall remain in effect.

Optional Schedule (if applicable)

Monthly Transfer Beginning Date

$______________ _______________

$______________ _______________

$______________ _______________

$______________ _______________

$______________ _______________

____________________________ __________________________

 (Borrower) (RD Representative)

____________________________ ___________________________ 

 (Borrower) (Date)

____________________________

 (Date) 
_________________________________________________________________________________________ 

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ATTACHMENT 4-C

ALLOWABLE AND UNALLOWABLE PROJECT EXPENSES

There are generally accepted project expenses outlined in the MFH Regulation 7 CFR 

3560.102 (management fee-related) and 3560.303 (project related) allowable expenses 

that should be charged to the operating account. Text in boxed Italics following the 

Regulation citation provides clarification on allowable expenses.

§3560.303 (b) Allowable and unallowable project expenses. Expenses charged to

project operations, whether for management agent services or other expenses, must be

reasonable, typical, necessary and show a clear benefit to the residents of the 

property. Services and expenses charged to the property must show value added and

be for authorized purposes.

(1) Allowable expenses. Allowable expenses include those expenses that are

directly attributable to housing project operations and are necessary

to carry out successful operations.

(i) Housing project expenses must not duplicate expenses included

in the management fee as defined in §3560.102(i).

- Housing Authorities should only include cost directly associated with the 

operations of the MFH financed property.

•Actual costs for direct personnel costs of permanent and part-time

staff assigned directly to the project site. This includes managers, 

maintenance staff, and temporary help including their:

- On-site staff costs (including maintenance employees directly assigned) are project 

expenses. If staff is responsible for multiple properties, then their costs should be 

prorated between each property. Regional managers’ costs are to be covered by the 

management fee.

- Payroll and fringe benefits expenses included in the proposed budget must agree 

with the number of employees, positions, salaries, fringe benefits, health plans, etc. in 

the management plan and the property must be able to cash flow with the included 

expense(s).

- On-Site personnel who oversee multiple properties must pro-rate the expense of 

benefits between properties. Wages will be charged per billing method to the property.

- Large increases in site payroll or site maintenance should be supported by 

management plan changes. RD does not have to approve a budget that includes 

positions that are not shown in the management plan. 

- To be a project expense tasks must be project specific in nature.

- Payment of supervisory positions are paid from the management fee bundle of 

services and not from project operations. See §3560.102(i)(1)(i).
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________________________________________________________________________________________

(A) Gross salary;

(B) Employer FICA contribution;

(C) Federal unemployment tax;

(D) State unemployment tax;

(E) Workers compensation insurance;

(F) Health insurance premiums;

-The management plan should identify site personnel. If there is a question

about health insurance coverage for site employees, Servicing Officials

should review the health insurance policy for confirmation of coverage and

appropriate charges to the project.

-Management’s central office staff’s health insurance is not a project

expense.

(G) Cost of fidelity or comparable insurance;

(H) Leasing, performance incentive or annual bonuses;

-This expense is for project-specific site personnel and should be included as

part of the site compensation.

(I) Direct costs of travel to off-site locations by on-site staff for

property business or training; and/or

-On-site staff travel to and from the management company office to the

property is an allowable expense. However, such travel should be

reasonable. For example, maintenance staff should not routinely be sent

out from the main office to do one thing each day when it would be more

efficient to combine trips or can be completed by the on-site maintenance

person.

-Other management company staff travel to and from the property is a

management fee expense (see §3560.102 (i)(1)(xiii)(I))

-Purchase of “company vehicles” for such travel is not an allowable

project expense.

(J) Retirement benefits.

• Legal fees directly related to the operation and management of

the property including tenant lease enforcement actions, property tax

appeals and suits, and the preparation of all legal documents.

-Property legal fees are for the borrower or the project, and not for thirdparties, such as investors or syndicators.

-Fees must be paid by Borrowers from non-project funds for fines, penalties

and legal fees when the borrowers are found guilty of civil rights or other

violations.

• All outside account and auditing fees, if required by the

Agency, directly related to the preparation of the annual audit,

partnership tax returns and 401-K’s, as well as other outside reports

and year-end reports to the Agency, or other governmental agency.
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-The account, auditing, partnership, and year end reports must be directly 

related to the property. It does not include individual tax filing expenses 

for any member of the ownership entity. Properties may have financial 

reporting requirements beyond that required by the Agency. If these are 

directly related to the property, and not the partnership or ownership, they 

are allowable project expenses.

-There are no regulatory caps on the audit expense, however if costs 

exceed the average for similar properties, confirm the audit is not of the 

partnership etc., which is a borrower expense.

-Utilize Agency reports to assist in the comparison process of similar 

properties.

(v) All repair and maintenance costs for the project including:

-Repair and maintenance expenses appear on the Form RD 3560-07 in 

Part II, lines 1-11. Capital expenses, which are discussed in 

§3560.103(c), should not appear in the operating repair and maintenance 

costs; capital budget expenses appear in Part V. 

- Maintenance staff should not routinely be sent out from the main office to 

do one thing each day when it would be more efficient to combine trips or

can be completed by the on-site maintenance person. 

-There should be no manipulation of the budget or expenses to avoid taxes. 

-The reserve account should not be used to pay for typical unit turnover or 

routine maintenance costs; these should appear in the operating budget. 

Excessive repairs due to (for example) death in the unit, drug production 

clean up or extreme vandalism is not typical unit turnover. 

-Servicing Officials should question unusually low maintenance and 

repairs costs, especially in an aging property.

(A) Maintenance staffing costs and related expenses.

(B) Maintenance supplies.

Servicing Officials should carefully review this item. Small tool purchases, 

such as hammers, putty knives, and sprayers, which could be used 

repetitively, should not be repeatedly purchased by the property.

(C) Contract repairs to the projects (e.g., heating and air 

conditioning, painting, roofing).

Make ready expenses including painting and repairs, flooring 

replacement and appliance replacement as well as drapery or 

mini- blind replacement. (Turnover maintenance).
HB-2-3560 

Attachment 4-C 

Page 4 of 10 

________________________________________________________________________________________

(D) Preventive maintenance expenses including occupied unit

repairs and maintenance as well as common area systems

repairs and maintenance.

(E) Snow removal.

(F) Elevator repairs and maintenance contracts.

(G) Section 504 and other Fair Housing compliance

modifications and maintenance.

-Annual reviews updating of transition plans by management should be

completed with budgets and actual financial reviews. An explanation for

the lack of work and not following the transition plan schedule should be

provided.

-Having an independent third party review the property every 3 years for

accessibility relieves the borrower, management and Agency from making

those decisions.

- Management should review the existing plan annually with a year-end

update.

-A knowledgeable source or third party provider is considered one that has

been recognized by a federal agency or state housing agency, National

Housing organization or certification body that provides certification

testing on accessibility.

-Future changes may occur to the property as a result of maintenance

work, at which point, if it is not clear that the proper work is completed, a

further self-evaluation and transition plan may be needed.

-If there is a change in the applicable standard or circumstances at the

property the Transition plan should be updated.

-The cost of providing Limited English Proficiency (LEP) services is an

allowable expense.

(I) Landscaping maintenance, replacements, and seasonal

plantings.

(J) Pest control services.

-This includes the expense of bed bug control. If the property is experiencing

unusual pest activity or an unusually high expense, Servicing Officials should

request a breakdown of costs.

(K)Other related maintenance expenses.

-“Other maintenance expenses” is a broad category that should be carefully 

reviewed by Servicing Officials to ensure that charges are appropriate and 

reasonable. Expenses that belong in other categories should be moved by the 

Borrower to ensure that the Agency is collecting the correct data on specific 

property costs. 

-If the expense appears on Part II, line 10, it must be identified.

• All operational costs related to the project including:
HB-2-3560

Attachment 4-C

Page 5 of 10

________________________________________________________________________________________

(02-24-05) SPECIAL PN

Revised (11-08-19) PN 530

-“Sales tax” on management fees is not an allowable expense unless state law 

requires “sales tax”. 

-“Other Administrative” in general: Servicing Officials should closely review 

this line item for potential abuse. “Other Administrative” should include only

directly property-related administrative costs; for example, the Section 538 

Guarantee Fee is an allowable expense. A break out of the expenses should 

be provided with the narrative. 

-Bad debts should not appear in the O & M Expense Schedule: 

- On a proposed budget, bad debts will appear as a contingency item (Part I) 

-On year end actuals, account for bad debt (NSF checks) would be reflected

miscellaneous with a comment to explain.

-Other fees and charges should appear in the appropriate line item (i.e., bank 

charges, HFA compliance fees, credit checks, etc.) Such expenses must be 

accompanied by a narrative with detailed explanation. 

-For-profit borrowers are entitled to 25 percent of the interest earnings on the 

Reserve account in the prior year, which should be a Reserve withdrawal 

request; this amount should not be taken from the operating account. See 

§3560.306(h)(3).

(A)The costs of obtaining and receiving credit reports, police reports, 

and other checks related to tenant selection criteria for prospective 

residents.

The cost of these items may be charged as an application fee as long as it

does not exceed the actual cost of obtaining the necessary items related to 

the tenant selection criteria.

(B) The cost of duplicating forms for those properties not owning a

copier. This will include the costs of producing or purchasing

forms and mailing or delivering those forms to the project site.

Photocopying or printing expense related to actual production of project 

brochures, marketing pieces, forms, reports, notices, and newsletters which 

all directly relate to the property in question are allowable project expenses 

no matter what location or point of origin the work is performed. This 

includes outsourcing the work to a professional printer.

(C) All bank charges related to the property including purchases 

of supplies (e.g., checks, deposit slips, returned check fees, 

service fees).

Bank charges should be typical and not extraordinary; bank-charged late 

fees should be closely reviewed for reasonableness and not due to 

mismanagement. Electronic check readers and lockbox fees are an 

allowable project expense.
HB-2-3560

Attachment 4-C

Page 6 of 10

________________________________________________________________________________________

(D) Costs of site-based telephone including initial installation,

basic services, directory listings, and long-distance charges.

Cell phones issued to on-site personnel for project-related work is 

allowable. On-site personnel who oversee multiple properties must 

pro-rate the expense between properties. 

An allowance to a site personal for use of a personal cell phone is 

acceptable. 

(E) All advertising costs related specifically to the operations of 

that project. This can include advertising for applicants or 

employees in newspapers, newsletters, radio, cable TV, and 

telephone books.

This includes social media.

(F) Postage and delivery costs from the site including expenses 

to the Agency or other governmental agencies, tenants, 

verifying third parties, central management offices, etc.

Postage expenses associated with the site to mail out rental applications, 

third-party (asset income and adjustments to income) verifications, 

application processing correspondence (acceptance or denial letters), 

mailing project invoice payments, required correspondence, report 

submittals to various regulatory authorities to the managed property are 

allowable project expenses no matter what location or point of origin the 

mail is generated. 

This expense does not include normal or routine management company 

personnel responsibilities covered under §3560.102(i)(1)(xiii)(C).

(G) Partnership or corporate business expenses including state 

taxes and other mandated state or local fees as well as 

other relevant expenses required for operation of the 

property by a third- party governmental unit. Costs of 

continuation financing statements and site license and 

permit costs.

(H) Expenses related to site utilities including actual costs and 

surcharges as well as deposits and expense of utility bonds in lieu 

of bonds.

(I) Site office furniture and equipment including site-based

computer and copiers. Service agreements and warranties 

for copiers, telephone systems and computers are also 

included (if approved by the Agency).
HB-2-3560

Attachment 4-C

Page 7 of 10

________________________________________________________________________________________

(02-24-05) SPECIAL PN

Revised (11-08-19) PN 530

Items must be part of a proposed approved budget to be an eligible expense. 

Explain in Narrative.

(J) Real estate taxes (personal tangible property and real 

property taxes) and expenses related to controlling or 

reducing taxes.

Late Fees due to mismanagement must be paid by Borrowers from nonproject funds.

(K)All costs of insurance including property liability and 

casualty as well as fidelity or crime and dishonesty 

coverage for on-site employees and the owners.

(L) Costs of collecting rents on-site including bookkeeping 

supplies and recordkeeping items.

Note that these costs are for supplies such as notices; 

Costs of processing transactions, maintaining books and records are 

covered as part of the management fee. See 3560.102(i)(1)(iii).

(M) Costs of preparing and maintaining tenant files and 

processing tenant certifications including all office 

supplies, copies and other associated expenses.

-Office supplies, copies and other associated expenses needed to 

physically establish and maintain tenant files must be site-specific.

-The project management staff is responsible for the labor in 

preparing, reviewing, submission and maintaining tenant files and that 

cost is part of the salary expense to be paid by the management fee. 

3560.102(i)(1)(xi).

-Costs associated with off-site tenant file storage, physical or digital, 

are allowable project expenses. 

-Processing tenant certifications includes the transmission/submission 

of tenant certifications is covered by the management fee 

§3560.102(i)(1)(xi), is not an allowable project expense and there 

should not be an additional fee.

-Projects should not be double charged for “front-line fees” at a 

prorated rate and having personnel who are responsible for 

performing the same task being paid a salary is not acceptable.
HB-2-3560 

Attachment 4-C 

Page 8 of 10 

________________________________________________________________________________________

(N)Public relations expense relative to maintaining positive

relationships between the local community and the tenants with

the management staff and the borrowers. Chamber of

Commerce dues, contributions to local charity events, and

sponsorship of tenant activities, are examples.

(O)Tax Credit Compliance Monitoring Fees imposed by HFAs.

-This expense pays the charge from the tax credit allocator.

-Reporting to general and limited partners for LIHTC, compliance purposes

are included in the management fee and is not an allowable project expense;

see §3560.102(i)(1)(xxvii). These fees can be paid from either management

fee or return to owner.

(P)All insurance deductibles as well as adjuster expenses.

(Q)Professional service contracts (audits and compilations, tax

returns, energy audits, utility allowances, architectural,

construction, rehabilitation and inspection contracts, etc.)

-If costs appear unreasonable Servicing Officials should review any

professional services contracts.

-The Agency has no monthly unit inspection requirement.

-Inappropriate practices are covered under §3560.102(i)(4)(viii).

-The cost of installation of project-wide cable, satellite TV, or wifi/Internet, is an allowable project expense, provided that each

apartment unit receives a separate billing for the service, and it is not

included in the rent charge or utility allowance. The property will not

pay for access by each unit, including vacant units. Management could

negotiate a service fee for the property and collect the monthly fee from

each tenant. The budget would reflect other income source from the

tenants and a cable expense in O & M. With an explanation in the

narrative or comments.

(R) On-site training pre-approved by the Agency provided by

outside training vendors.

-Training for on-site staff should be appropriate to managing affordable

housing with subsidies from RD, HUD, or LIHTC. Suspected abuses

should require documentation of the course or certifications received.

-Site training planned or completed should be explained in the narrative.

-Site staff who oversee multiple properties must pro-rate the expense

between properties.
HB-2-3560 

Attachment 4-C 

Page 9 of 10 

________________________________________________________________________________________

(02-24-05) SPECIAL PN

Revised (11-08-19) PN 530

-Borrowers who attend trainings do so at their own expense and it is not

an allowable project expense.

-Management company meetings to discuss management policies are a

management fee expense (see §3560.102(i)(1)(xiv), (xv), (xxiv) and (xxv).

-Expenses during training should be reasonable and not involve costs for

items previously identified by the OIG audit, especially gifts, bonuses

(other than that identified in the management plan as part of the site

manager’s salary), or alcohol. Training expenses may include

reasonable hotel charges, meals, and snacks; such expenses should not be

excessive.

(S) Site manager salary for additional hours associated with

congregate housing.

(vii) With prior Agency approval, cooperatives and Non-Profit

Organizations may use housing project funds to pay asset

management expenses directly attributable to ownership

responsibilities. Such expenses may include:

(A) Errors and omissions insurance policy for the Board of Directors.

(B) Board of Directors’ review and approval of proposed Agency’s

annual operating budgets, including proposed repair and

replacement outlays and accruals.

(C) Board of Directors’ review and approval of capital expenditures,

financial statements, and consideration of any management

comments noted.

(D) Long-term asset management reviews.

A Non-Profit Asset Management Fee may be requested by non-profits and 

cooperatives. Non-profit owners are entitled to up to $7,500 per project for 

certain organizational expenses, such as Errors and Omissions insurance 

and actual expenses prorated by the number of Rural Development projects. 

When reviewing the justification, and the organization expenses attributed to 

each property, the owner should make sure that the expenses are prorated 

across all of the properties, and each expense is not charged in full to each 

property. For example if the errors and omissions insurance policy for the 

Board of Directors is covering all the properties and costs $3,000, the $3,000 

needs to be prorated for all of their non-profit properties and non-profit 

properties cannot charge $3,000 per property for the insurance policy. 
HB-2-3560

Attachment 4-C

Page 10 of 10

________________________________________________________________________________________

(2) Unallowable expenses. Housing project funds may not be used for any of the

following:

(i) Equity skimming as defined in 42 U.S.C. 543 (a).

(ii) Purposes unrelated to the housing project.

(iii) Reimbursement of inaccurate or false claims.

(iv) Settlement agreements, court ordered decrees, legal fees, or other

costs that result from the filing of civil rights complaints or legal 

action alleging the borrower, or a representative of the borrower,

has committed a civil rights violation.

Borrowers must pay from non-project funds for fines, penalties and legal 

fees when the borrowers are found guilty of civil rights or other violations.

(vii) Fines, penalties, and legal fees where the borrower or a borrower’s

representative has been found guilty of violating laws, including, but 

not limited to, civil rights, and building codes.

(viii) Association dues to be paid by the project should be related to training 

for site managers or management agents. To the extent that 

association dues can document training for site managers or 

management agents related to project activities by actual cost or proration, a reasonable expense may be billed to the project. 

(ix) Pay for bonuses or monetary performance awards to site managers or 

management agents that are not clearly provided for by the site 

manager salary contract.

(x) Billing for parties that are large or unreasonable, such as renting 

expensive party halls or hotel rooms and payment for alcoholic 

beverages or gifts to management agent staff. 

(xi) Billing for practices that are inefficient such as routine use of collect 

calls from a site manager to a management agent office.

(c) Priorities. The priority order of planned and actual budget expenditures will be: 

1. Senior position lienholder, if any; 

2. Operating and maintenance expenses, including taxes and insurance; 

3. Agency debt payments; 

4. Reserve account requirements; 

5. Other authorized expenditures; and 

6. Return on owner investment. 

The expense of the return on owner investment (ROI) must be included in the proposed 

budget in order for the Borrower to be eligible to collect the payment. §3560.305(a) 

includes the conditions on the return payment. §3560.305(b) discusses when an unpaid

ROI may be taken: 

“An earned, but unpaid ROI for the previous year only may be requested by the 

borrower and authorized by the Agency under the provisions of §3560.305(a)(1) 

provided the current year’s ROI has been paid first and a rent increase is not required 

to generate funds to pay the unpaid ROI.” 
HB-2-3560

Attachment 4-D

Page 1 of 6

________________________________________________________________________________________

(02-24-05) SPECIAL PN

Revised (11-08-19) PN 530

ATTACHMENT 4-D

PROPOSED BUDGET AND YEAR END ANALYSIS PROCESS

Including Return to Owner/Surplus Cash Worksheet

The summary of the budget analysis process is reviewed in the Multi-Family Integrated

System (MFIS). The Agency must review this analysis for reasonableness for the budget 

and year end reports. If items are noted as a deficiency or concern, the Loan Servicer will 

determine whether the budget narrative or case file provides an adequate explanation, 

whether the borrower must submit a corrected budget, or if appropriate servicing actions 

should be considered prior to approval. The document is split into the following nine 

sections: 

1. Project Information

This area contains the Project Name, Borrower Name, State Code, Servicing Office Code, 

County Code, Borrower ID, Project Number, Classification, Budget Effective Date, Last 

Analysis Date, Project Unit counts, and Last Rent Change (year-end actual only). 

Vacancy data is displayed for each type of budget. Proposed budget shows the average 

vacancy over the last 3 years; the last 6 months; and the last month’s average vacancy. 

Monthly, quarterly and year-end actual budgets show the vacancy covered by that period. 

The Loan Servicer needs to determine if the vacancy allowance is reasonable. 

2. Surplus Cash

This section displays the calculated amount of surplus cash per the information entered on 

the budget. If there is surplus cash it may need to address capital needs, make a deposit in 

the housing project’s reserve account, reduce the debt on the borrower’s loan, or reduce 

rents in the following year.

The calculation used is displayed on the analysis document. (This is not displayed for

Monthly/Quarterly reports) 

* Tax & Insurance Escrow should be evaluated based on the following:

o Total Annual Tax Expense / 12 months = Monthly Expense 

o Monthly Tax Expense x # Months remaining in fiscal year figured from 

last due date month = Tax Escrow Required 

o Insurance expense / 12 Months x # Months remaining in fiscal year 

figured from renewal date = Insurance Escrow Required

The calculation for a Proposed Budget is indicated on the following page:
HB-2-3560

Attachment 4-D

Page 2 of 6

________________________________________________________________________________________

RETURN TO OWNER/SURPLUS CASH WORKSHEET

CASH AVAILABLE EXAMPLE

Actual Ending Cash Balance $34,000

(Form RD 3560-7 Actuals Part I Line #33)

(Includes Balance Sheet #1, 2, 5 & 6)

Subtract Tax & Insurance Escrow Amount $ 8,500

*(Escrow Analysis based on Proposed Budget)

Subtract 2% Remaining Initial Operating $-0-

(Balance in MFIS 2% Tracked Account)

Subtract Accounts Payable $ 4,000

(Balance Sheet Line #22)

Cash Available $21,500

CASH REQUIRED

Proposed O & M Expense $95,000

(Form RD 3560-7 Proposed Part I Line #16)

Subtract Annual Tax & Insurance Expense $10,000

(Proposed Part 2, Line 34, 37, 38 and 39) 

Subtotal $85,000

Multiply Subtotal by 20% 20%

Cash Required $17,000

SURPLUS CASH

Cash Available $21,500

Subtract Cash Required $17,000

Surplus Cash $ 4,500
HB-2-3560

Attachment 4-D

Page 3 of 6

________________________________________________________________________________________

(02-24-05) SPECIAL PN

Revised (11-08-19) PN 530

3. Rent Schedule Change (proposed budget only)

This section indicates if the budget includes or does not include a rent change. If a new 

rent schedule is entered for the budget, the rent structure will be checked to see if the 

correct rents are entered dependent on the Subsidy Code of the Project and also that all 

revenue producing project units are covered. If these checks fail, the message “Invalid

Rent Schedule Structure” will be displayed. 

The amount of the rent increase will be shown as dollar value representing the average of 

all bedroom sizes for the project. It will be either the basic, note or HUD rent depending 

on the project subsidy code. Rent increases of greater than $25 will be red flagged. 

Increases in the other two rent types will be noted at the bottom of the section. 

The Loan Servicer will review the request to determine if the proposed change is 

acceptable and will notify borrowers. 

4. Reserve Account Status

This section lists information about the Reserve Account as it is within MFIS. Displayed 

information includes: 

If a Work Out Plan is In Place, Fully Funded Amount, Annual Deposit Amount, Capital 

Needs Amount, Capital Needs Amount As of Date, Account Balance Amount, Account 

Balance Amount As of Date, Required Balance Amount, Required Balance Amount As of 

Date, GAP Account Amount, GAP Account Amount As of Date and Amount Behind 

Schedule or Amount Ahead of Schedule. 

The Loan Servicer will review amounts to determine if these amounts are adequate.

5. Reserve Account Authorizations

The section lists the entered authorizations that still have funds available for use or were 

created within the last year. This will be compared to what was actually reported.

6. Project Servicing Efforts

The section lists all non-complete Servicing Efforts along with all completed efforts 

posted within the last fiscal year. A review will be made to determine if all appropriate 

servicing efforts are being utilized.

7. Review Findings

List all open non-physical findings or any created within the last fiscal year regardless of 

status. A review will be made to determine if these are correctly displayed and populated.
HB-2-3560 

Attachment 4-D 

Page 4 of 6 

________________________________________________________________________________________

8. Physical Findings

This area lists all open physical findings, or any created within the last fiscal year

regardless of status. A list of capital budget items with a budgeted value is also displayed

to compare the project response to these findings.

9. Budget Analysis Results

This area contains one or more general observations or situations that raise question on

the viability of the budget. Observations are just the results of a test performed that may

be of importance to the servicing official. All ‘Review’ items must have their check box

clicked to indicate they have been reviewed before the budget is considered analyzed and

therefore can be approved.

If the item is corrected it will not be displayed the next time the analysis is executed. If the

item is reviewed, a comment must be entered as to why the situation is OK. The budget

may not be approved if any review item remains present and not marked as reviewed in

this section. Once an item is marked as reviewed (or comment entered), it will maintain

those changes in future analysis runs.

A detailed list of the tests that are executed on the indicated lines of the budgets is

available in the MFIS Message Board under Frequently Asked Questions. The results of

the tests will display in the analysis report.

The following tests are common across multiple line items:

1. TYPO CHECK – all input values of Proposed, Monthly/Quarterly or Year-End Actual

budget line items – system will flag if:

• If the input value is equal or greater than 100 times the last year’s value (if last year’s

value is not zero).

• If the input value is equal or greater than $1,000,000.

2. MONTHLY/QUARTERLY CHECK – some Monthly/Quarterly budget line items

• All Part I input lines period and YTD are compared to the associated proposed for

expected period value

• All Part II subtotals period and YTD are compared to the associated proposed for

expected period value

3. GENERAL RULE – for some Year-End Actual line items

• If the proposed budget had a non-zero value, the actual should have a non-zero value.
HB-2-3560

Attachment 4-D

Page 5 of 6

________________________________________________________________________________________

(02-24-05) SPECIAL PN

Revised (11-08-19) PN 530

4. 10 PERCENT RULE – for some Proposed and Year-End Actual line items 

Proposed items - if proposed budget value differs from last year’s value by more than 10

percent (even if last year’s value was zero) MFIS will comment about a narrative 

explanation

• Actual items - if actual budget differs from proposed by 10 percent or more it is 

flagged for review. 

• The system checks operating expenses and income sources to see if subtotals are 

more than 10 percent different from last years. If this is the case, determine if the 

budget narrative provides an adequate explanation for the unusual item.

5. $12 RULE – for direct comparison of numbers on some Proposed and Year-End Actual 

line items such as correct debt payment, correct reserve payment, owner’s return on 

investment:

• If values differ by more than +- $12.00 then flag as a REVIEW item 

• If values differ by less or equal to +- $12.00 then flag as an OBSERVATION item 

• If any of these are unacceptable, the borrower will need to submit a new budget.

6. COMMENT RULE – for some Proposed and Year-End Actual line items 

• OTHER type line items with a value require a comment 

• LIST type line item with a value require a comment 

7. INHERITANCE RULE – for some Proposed line items 

• If last year’s actual had a value and this years proposed does not have a value

8. RATIO ANALYSIS - are reflected in the Budget Analysis. Ratios are an effective tool 

for financial analysis. They prescribe various measures of actual operating performance. 

The ratios should be reviewed for a comparative analysis. The Loan Servicer should 

become familiar with these percentages as a comparative analysis and should consider 

utilizing the Hyperion MFH Budget Line Item Comparative Cost data report for their Region 

in their analysis. The ratios run in the MFIS Analysis Review are as follows:

o Maintenance and Operating Expense / Total Operating & Maintenance

o Utilities/Total Operating & Maintenance

o Administrative/Rental Income

o Total Operating & Maintenance/Rental Income

o Per Unit Per Month Operating & Maintenance Expense

o 3-year Resident Turnover Rate
HB-2-3560

Attachment 4-D

Page 6 of 6

________________________________________________________________________________________

9. NORMS - are also reviewed on the Budget Analysis. The Norms are based on Regional 

Groupings of “like” properties. This gives the Servicer an analysis of how the property is 

comparing to other “like” properties. The norm definitions are as follows:

o Utility Allowance: If Rent schedule has one yes, else no.

o Profit type: Code = 1 or 2 yes, else no

o Tax Status: Line 34 > 0 yes, else no

o Interest Credit: Plan code = 07, 08, 21, 24 yes, else no

o Age (years): <6, <11, <20, <30, all others

o Size (units): <5, <12, <24, <40, <80, all others

o Elderly: Rental code = EL, CG yes, else no 

 The States are grouped into regions as follows:

1. CT, MA, ME, NH, RI, VT

2. NJ, NY

3. DE, MD, PA, VA, WV

4. AL, FL, GA, KY, MS, NC, SC, TN

5. IL, IN, MI MN, OH, WI

6. AR, LA, NM, OK, TX

7. IA, KS, MO, NE

8. CO, MT, ND, SD, UT, WY

9. AZ, CA, HI, NV

10. AK, ID, OR, WA

11. PR, VI, WP, GUAM

10. Look at the cash flow and ending cash balance.

a. Cash flow: Is the cash flow positive? A negative cash flow is permissible as 

long as it does not appear to represent a trend that cannot be corrected.

b. Cash balance:

i. If cash flow is negative, what is the ending cash? Does it cover the 

negative cash flow?

ii. Does the ending cash balance exceed the permissible limit? If so, the

surplus must address capital needs, be deposited in the housing 

project’s reserve account, reduce the debt service on the borrower’s 

loan, or reduce rents in the following year.

iii. Using the accrual method of accounting, the accrual to cash adjustment

must equal the difference of Beginning Cash Balance and Ending 

Cash Balance to insure these balances match their respective Balance 

Sheet figures. The sole purpose of this adjustment is to reconcile a 

company’s internal ledger kept on an accrual basis to the IRS forms 

which are required to be on a cash basis. 

If the analysis of cash flow and cash balance reveals a problem, appropriate servicing 

actions should be considered prior to budget approval.
HB-2-3560

Attachment 4-E

Page 1 of 8

________________________________________________________________________________________

(02-24-05) SPECIAL PN

Revised (11-08-19) PN 530

Attachment 4-E

AUDIT PROGRAM

USED TO REPORT CONSTRUCTION COST ENGAGEMENTS.

(For additional guidance refer to HB-1-3560 Loan Origination Handbook.)
HB-2-3560

Attachment 4-E

Page 2 of 8

___________________________________________________________________________________________________

TABLE OF CONTENTS

I. GENERAL

A. PURPOSE

B. BACKGROUND

C. PERTINENT REGULATIONS AND INSTRUCTIONS

D. STANDARDS FOR CONDUCTING THE AGREED-UPON 

PROCEDURES ENGAGEMENTS

E. OBJECTIVES

II. CONSTRUCTION COST ENGAGEMENTS

EXHIBIT A – ILLUSTRATIVE AUDITOR’S AGREED-UPON 

PROCEDURES REPORT (FORM RD 1924-13)
HB-2-3560 

Attachment 4-E 

Page 3 of 8

___________________________________________________________________________________________________

(02-24-05) SPECIAL PN

Revised (11-08-19) PN 530

I. GENERAL

A. PURPOSE

This guide is designed to assist independent public accountants (practitioners) in 

conducting agreed-upon procedures engagements of Rural Rental Housing 

(RRH) properties financed by Rural Development. The RRH Program has a history 

of abuse involving the construction and ongoing operation of properties. This guide 

includes procedures to assist the practitioner in determining borrower and 

management company compliance with certain statutory, regulatory, and contractual 

requirements of the RRH Program. Thus, practitioners need to be familiar with laws, 

regulations, and procedures related to the RRH Program.

B. BACKGROUND

Rural Development uses cost certifications to verify that borrowers spent loan funds 

for eligible and actual costs when constructing apartment complexes as part of the 

RRH Program. 

RRH borrowers typically use identity-of-interest companies in both the construction 

of apartment complexes and in managing the day-to-day operations of RRH 

properties. RRH borrowers that have an identity-of-interest with the borrower 

(general contractor) are required by Rural Development to report the actual costs of 

construction on Form RD 1924-13, Estimate and Certificate of Actual Cost. In 

addition, Form RD 1924-13 must be submitted whenever there is an identity-ofinterest relationship between a borrower and a subcontractor, material supplier, or 

equipment lessor. 

The USDA Office of Inspector General has performed audits and investigations that 

identified significant fraud and abuse in the RRH Program. Some of the fraud and 

abuse related to construction includes: Ineligible, unsupported, and duplicate costs; 

misrepresentation by borrowers of their roles as general contractors; shifting costs 

(e.g., overhead expenses) that exceeded budgeted amounts to different cost 

categories on Form RD 1924-13; and using identity-of-interest companies which are 

merely “shell” companies to either inflate legitimate charges or bill properties for 

costs that were never incurred. 

Similar abuse using identity-of-interest companies has been identified in the ongoing 

management of RRH properties. Borrowers and management companies also charge 

ineligible, unsupported, and duplicate expenses (generally for management related 

costs) to properties. Also, management companies frequently do not maintain 

suitable records when of properties, and overcharge for these services. Rural 

Development regulations refer to any scheme that improperly withdraws funds from 

RRH project accounts as “equity skimming.”
HB-2-3560

Attachment 4-E

Page 4 of 8

__________________________________________________________________________________________________

USDA Office of Inspector General audits have also identified instances of conflicts of 

interest and a lack of independence on the part of certified and licensed public 

accountants when performing audits of RRH properties. Thus, practitioners should 

strictly adhere to the standards and principles of the American Institute of Certified 

Public Accountants’ Code of Conduct and Bylaws and applicable State Boards of 

Accountancy.

C. PERTINENT REGULATIONS AND INSTRUCTIONS

Construction Cost:

The instructions for Form RD 1924-13 provide guidance on eligible construction costs, 

as well as the required format for the presentation of costs. Rural Development has also 

established regulations that restrict the amount of builder’s profit for each project, the 

use of identity-of-interest companies, and the business relationships of practitioners 

performing engagements of RRH construction costs. The following regulations and 

Rural Development instructions should be used as guidance:

•Rural Development Instruction 1924-A, and

•Rural Development 7 CFR 3560.

Management of Ongoing Operations:

Rural Development regulation 7 CFR 3560 provides details on allowable and 

unallowable operating costs, and places restrictions on the use of identity-of-interest 

companies and other activities related to managing RRH properties. 

D. STANDARDS FOR CONDUCTING THE AGREED-UPON PROCEDURES 

ENGAGEMENTS

Practitioners are to perform attestation engagements using agreed-upon procedures of 

construction costs and ongoing operations in accordance with attestation standards 

established by the American Institute of Certified Public Accountant’s (AICPA) and the 

standards applicable to attestation engagements contained in Government Auditing 

Standards issued by the Comptroller General of the United States.” The practitioner’s 

report on agreed-upon procedures should be in the form of procedures and findings. 

(See exhibit A for an illustrative example.)

If practitioners become suspicious of fraud or illegal acts during the course of 

performing the agreed-upon procedures engagement, they are to promptly report these 

matters (regardless of materiality) to:

U.S. Department of Agriculture 

Rural Development - Rural Housing Service

Director, Multi-Family Housing Processing 

Division 1400 Independence Avenue, SW

Washington, D.C. 20250

Telephone: (202) 720-3773
HB-2-3560

Attachment 4-E

Page 5 of 8

__________________________________________________________________________________________________

(02-24-05) SPECIAL PN

Revised (11-08-19) PN 530

The report and workpapers prepared in the course of these engagements are subject to a

quality control review by the USDA Office of Inspector General.

E. OBJECTIVES

The objective of the construction cost engagement is to verify the propriety of costs 

reported on Form RD 1924-13. The practitioner should be alert for kickbacks on the 

purchase of services and materials, billings in excess of agreed-upon prices, billings 

for non-existent materials or services, “sweetheart contracts,” and the diversion of 

materials to other construction sites.

Of primary concern is compliance with general contractor and management company 

requirements and the role of identity-of-interest companies in the construction and 

management of RRH properties.

II. CONSTRUCTION COST ENGAGEMENTS

A. AGREED-UPON PROCEDURES FOR THE CONSTRUCTION COST

ATTESTATION ENGAGEMENT

The procedures in this section are designed to identify ineligible expenses and 

fictitious charges to Form RD 1924-13. Per 7 CFR 1924 subpart A and the 

instructions for preparing Form RD 1924-13 provide guidance on eligible 

construction costs.

Borrowers and contractors involved in the construction of Rural Development 

financed RRH properties are required to maintain recordkeeping systems which 

establish accounts that categorize costs in conformity with sections 1924.13 (e) (1) (v) 

(A) and 1924.13 (e) (2) (i) (H) of RD Instruction 1924-A. Form RD 1924-13 includes

a certification that the cost of labor, materials, and other necessary services incurred 

during construction are accurate and fairly presented.

Borrowers are required to comply with laws, regulations, and Rural Development 

procedures related to the construction of RRH properties. USDA Office of

Inspector General audits have identified borrowers that received builder’s profit for 

being the general contractor when, in fact, general contractor responsibilities were 

being performed by other contractors. The audits also disclosed that some identity-ofinterest companies were merely “shell” companies with no employees, inventory, or 

other business activities. Other identity-of-interest companies have charged rental fees 

for equipment use for the entire construction period when the equipment was actually

used for short or intermittent periods during construction.

These actions have resulted in significant amounts of overcharges to RRH

properties. Sections 1924.13 (e) (1) (v) (H) and 1924.13 (e) (2) (viii) of RD Instruction 

1924-A prohibit borrowers from receiving builder’s profit for 
HB-2-3560

Attachment 4-E

Page 6 of 8

__________________________________________________________________________________________________

acting as the general contractor if more than 50 percent of the property is subcontracted 

to one subcontractor or 75 percent to three or fewer subcontractors. Sections 1924.13 (e) 

(1)(v) (I) and 1924.13 (e)(2)(viii) (D) of RD Instruction 1924-A Contractors,

subcontractors, material suppliers, and any other individual or organization sharing an 

identity of interest and providing materials or services for the project must certify that it 

is a viable, ongoing trade or business qualified and properly licensed to undertake the 

work for which it intends to contract. 

Agreed-Upon Procedures

1. Compare the total amount paid through the construction checking account

(by adding the total amount from monthly statements) to the total amount

of costs reported on Form RD 1924-13. Report any differences.

2. Examine selected checks, invoices, job cost ledgers, receiving documentation,

etc., that support costs presented on Form RD 1924-13 to ensure they

were actually incurred to construct the project. (Note: Verify that checks

have been cancelled and ensure that indirect costs are not included with the

cost of labor and materials on Form RD 1924-13.)

3. Inspect selected checks held as retainage from subcontractors for evidence that 

they were actually paid by the bank. Confirmation with subcontractors may be 

necessary if cancelled checks are not available or not cancelled by the bank. 

(Note: Office of Inspector General audits have disclosed instances where 

checks were made to subcontractors, but never cashed.)

4. Compare the address on selected delivery documents and invoices (using the 

sample from audit step II.A.2.) to the project’s address to ascertain whether

materials and services were provided to the project under review. (Note:

Office of Inspector General audits have disclosed instances where delivery

was not made to the RRH project site.)

5. Examine selected cancelled checks related to accounts included in the “to be 

paid” column of Form RD 1924-13 to determine the propriety of the costs 

reported. (Note: Office of Inspector General audits have disclosed instances 

where these costs were invoiced by identity-of-interest companies but were 

never actually paid by the borrower.)

6. Confirm payments with selected subcontractors and material suppliers and 

investigate any discrepancies. (Note: be alert for any discounts, rebates, or 

refunds that were provided to the contractor but not included on Form RD

1924-13.)

7. Inspect selected bid documentation to verify that the lowest bid submitted was 

accepted. If the lowest bid was not accepted, evaluate the justification for the 

higher bid. If documentation does not exist, report this and the reason why as 

a finding. (Note: be alert for “sweetheart contracts” and contracts to 

disclosed or undisclosed identity-of-interest companies.)

8. Compare selected subcontractor billings (invoices) to contract amounts. If 

billings were in excess of contractual terms, ascertain the reason for the 

higher expenses.
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Attachment 4-E

Page 7 of 8

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(02-24-05) SPECIAL PN

Revised (11-08-19) PN 530

9. Obtain the number of subcontractors used during construction and calculate 

the percentages of subcontractors to ensure compliance with Rural 

Development requirements.

1

10. Examine selected accounting records for undisclosed identity-of-interest 

companies. The practitioner should focus on transactions involving the use of 

one or two contractors/subcontractors, or if one contractor/subcontractor 

provided a significant percentage of materials orservices.

11. Determine if identity-of-interest companies meet Rural Development 

requirements2 of providing services to the general public.

a. Question the general contractor/borrower about the business activities of 

any identity-of-interest company used and request evidence that the 

company provides services or materials to the general public.

b. Review identity-of-interest records (e.g., sales records, invoices,

receiving documents, etc.).

c. Confirm by independent verification that identity-of-interest companies 

exist and provide services to the general public. (Note: This evidence 

could include listings in a telephone directory, advertisement to the 

public, etc. Also, be alert for “shell” companies that exist solely for 

processing invoices and adding markups to the original supplier’s 

invoices. Markups made by identity-of- interest companies that do not 

provide services/supplies to entities other than the RRH property are not 

allowable.)

12. Compare equipment rental and supervision charges by identity-ofinterest companies to independent rental companies to determine 

reasonableness3 of charges. Report any significant variances.

a. Question the borrower about the use of equipment during construction 

and how rental rates were established and time of use determined.

b. Contact an independent rental company to determine commercial

rental rates and compare them to the identity-of-interest charges.

c. Examine borrower documentation (e.g., commercial rate lists, time 

sheets, construction schedules, etc.) to support the rates that were used 

and time that was charged for equipment rental fees. (Note: Office of

Inspector General audits have disclosed that borrowers are charging 

rental fees when equipment is not in use.)

d. Question the borrower about supervision charges.

e. Verify that the borrower has documentation (e.g., timesheets or 

timecards, travel reports, payroll records, etc.) to support supervision

charges.

1Sections 1924.13 (e) (1) (v) (h) and 1924.13 (2) (2) (viii).

2

Sections 1924.13 (e) (1) (I) and 1924.13 (2) (viii). 3

A charge would be considered reasonable if it is approximately the same amount of cost that a non-identity-of-interest 

company would charge.
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Attachment 4-E

Page 8 of 8

__________________________________________________________________________________________________

Illustrative Auditor’s Agreed-Upon Procedures Report

(Form RD 1924-13 )

To the Owners and Management Company of (name of RRH project, city and State) and the 

project’s financial accounts:

We have performed the procedures enumerated below, which were agreed to by Rural 

Development and the owner of (name of RRH project, city and State) and the project’s financial 

accounts, solely to assist those parties in evaluating the accompanying (Form RD 1924-13, 

Estimate and Certificate of Actual Cost) prepared in accordance with the criteria specified in 

Rural Development Regulations 1924 for the year ended December 31, (applicable year). The 

owner is responsible for (name of the RRH project) financial accounts. This agreed-upon 

procedures engagement was conducted in accordance with attestation standards established by 

the American Institute of Certified Public Accountants and the standards applicable to attestation 

engagements contained in Government Auditing Standards issued by the Comptroller General of 

the United States. The sufficiency of these procedures is solely the responsibility of Rural

Development. Consequently, we make no representation regarding the sufficiency of the 

procedures described below either for the purpose for which this report has been requested or for 

any other purpose.

The agreed-upon procedures performed during this engagement were included in the audit 

program designed for the Rural Rental Housing Program dated September 29, 2004. The 

findings for each of the agreed-upon procedures are as follows.

(Agreed –Upon Procedure No.) (Finding) (Agreed –Upon Procedure No.) (Finding) (Agreed –

Upon Procedure No.) (Finding) (etc)

We were not engaged to and did not conduct an audit, the objective of which would be the 

expression of an opinion on the financial statements of (name of RRH project, city and State). 

Accordingly, we do not express such an opinion. Had we performed additional procedures, other 

matters might have come to our attention that would have been reported to you.

This report is intended solely for the information and use of the owner and management 

company of (name of RRH project, city and State), and Rural Development, and is not intended 

to be and should not be used by anyone other than these specified parties.

(Signature)

(DATE)
HB-2-3560

Attachment 4-F

Page 1 of 3

__________________________________________________________________________________________________

(02-24-05) SPECIAL PN

Revised (11-08-19) PN 530

ATTACHMENT 4-F

Performance Standards

Borrower Self-Certification Letter

Date

USDA Rural Development Office

Address

Address

In accordance with the criteria specified in Section 5; Paragraph 4.16 C. of the USDA Rural 

Development Handbook (HB-2-3560) for the year ended DATE, YEAR, the borrower must self-certify 

that PROJECT NAME is in compliance with the nine performance standards. The following is a 

summary of our compliance with the performance standards.

1. The required accounts are (are not) properly maintained and tracked separately. The 

accounts we maintain are marked below:

__ Operating Account(s) __ Security Deposit Account

__ Tax & Insurance Account __ Reserve Account

__ Other Accounts: ___________________________________________

2. The payments from operating account(s) are (are not) disclosed and accurately represented.

3. The reserve account(s):

a. is on (not on) schedule with the Agency required minimum funding requirements;

b. is (is not) maintained in a supervised bank account that requires the Agency’s 

countersignature on all withdrawals;

c. is (is not) maintained in a bank account that has a fully executed Depository 

Agreement dated after October 1, 2018 and has received Agency approval prior to 

withdrawals;

d. is on (not on) schedule with contributions to the reserve account for the current year 

with the Agency required minimum funding;

e. has no (has) encumbrances on the reserve funds; and

f. replacement reserve accounts were (were not) used only for authorized purposes in 

accordance with 7 CFR 3560.306(g).

4. The tenant security deposits accounts are (are not) fully funded and are (are not) maintained 

in separate accounts.

5. The payment of owner return was:

__ paid in the amount of $_____ for 20XX fiscal year and was (was not) in accordance 

with the Agency’s requirements; OR

__ not paid during the reporting year; OR

__ not allowable due to our non-profit status; OR

__ not allowable due to our non-profit status. However, an asset management fee in the 

amount of $_____ was paid for 20XX fiscal year.
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Attachment 4-F

Page 2 of 3

__________________________________________________________________________________________________

6. The borrower has (has not) maintained proper insurance in accordance with the requirements 

in 7 CFR 3560.105. Coverage maintained for PROJECT NAME is as follows:

__ Liability Insurance __ Flood Insurance

__ Property Insurance __ Earthquake Insurance

__ Fidelity Bond __ Other: ____________________

7. All financial records are (are not) adequate and suitable for examination.

8. There have been no changes in the ownership of PROJECT NAME, other than those 

approved by the Agency and identified in the certification. All current owners are identified 

in the Status of Ownership table in this Certification. This includes all General Partners, 

Limited Partners, President, Vice President, Secretary, Treasurer, Member and other Partners 

as applicable.

For non-profit borrowers: The Board of Directors is (is not) active and maintains oversight

responsibilities for the project.

9. The real estate taxes (property taxes) are paid in accordance with state and/or local 

requirements. As of YEAR-END DATE, there are no delinquent real estate taxes (property 

taxes).

I certify that the above is true, accurate and is properly supported by documentation kept in our files.

 [Signature of Borrower] _________________________

 

PRINTED SIGNATURE _________________________

DATE ___________________________

BORROWER ENTITY NAME ___________________________

NOTE TO BORROWER: If the project is not in compliance with any of the above Performance 

Standards, you must state that you are not in compliance with the standard and provide the 

Agency with a statement about the non-compliance and the methods taken to correct the non-compliance.
HB-2-3560 

Attachment 4-F 

Page 3 of 3

__________________________________________________________________________________________________

(02-24-05) SPECIAL PN

Revised (11-08-19) PN 530

STATUS REPORT OF OWNERSHIP

FISCAL YEAR ________ 

_______________________________________________ 

BORROWER NAME

TITLE NAME 

ADDRESS 

PHONE NUMBER

TAXPAYER 

ID NUMBER

_______The above information is current and there have been no changes in the ownership since the 

inception of the loan agreement/resolution(s), except as approved by the Agency. (7 CFR 3560.405 (c) 

(2))

_______There has been/will be a change in the ownership as reflected above. For any change in the 

ownership, information is attached as required by 7 CFR 3560.405 (c) (3) and HB-3-3560, Chapter 5 

or 7 as applicable.

______________ ______________________________ 

Date Owner
HB-2-3560

__________________________________________________________________________________________________

This page left intentionally blank
HB-2-3560 

Attachment 4-G 

Page 1 of 2

__________________________________________________________________________________________________

(02-24-05) SPECIAL PN

Revised (11-08-19) PN 530

ATTACHMENT 4-G 

RD MFH PROGRAM AUDIT DETERMINATION WORKSHEET

Step 1: Gather all the information below to determine whether a Financial and Compliance audit is required 

by Rural Development. 

RD Borrower Name: ______________________ Borrower ID:___________________

RD projects associated with ID _____________________ ____________________ 

(List all – may need additional pages) 

Federal Financial Assistance Received Current Year (See Section 4.16 )

RD 515 Loan balances at beginning of FY __________________ _____________________

Interest Subsidy __________________ _____________________

RD Rental Assistance __________________ _____________________

HUD Section 8 Assistance __________________ _____________________

RD GRRH 538 Loan balance __________________ _____________________ 

Other: __________________ _____________________

Total Federal Financial Assistance received from the borrower: $ 

Step 2: Is the RD project owned by a State, Local Government, Indian tribe or not‐for‐profit entity? 

No, go to step 3 

Yes- Was $750,000 or greater, in the aggregate, in Federal Financial Assistance received? 

Yes -follow the rules under Exhibit 4‐7 of this HB 2 3560 Ch 4 and the single audit 

requirements under 2 CFR part 200. 

No, go to Step 5. 

Step 3: Did the borrower receive $500,000 or greater, in the aggregate, in Federal Financial Assistance?

Yes, an RD Financial and Compliance Audit is necessary. Go to Step 4. 

No, go to Step 5.
HB-2-3560 

Attachment 4-G

Page 2 of 2

__________________________________________________________________________________________________ 

Step 4: Are any of the individual programs identified in Step 1 equal to or greater than $500,000?

Yes, these program(s) are the property's major program(s). A major program report is 

required. Refer to Attachment 4-I. 

No, there are no major programs. A major program report is not required in the audited 

financial statements.

Step 5: Does another regulatory agency, legal entity, and/or other business agreement require an audit in 

accordance with Generally Accepted Auditing Standards or Government Auditing Standards?

Yes, submit a copy of that audit to RD. This audit must contain the 

required reporting information illustrated in this Chapter.

 No, Go to Step 6.

Step 6: Submit a compilation of prescribed forms as outlined in Chapter 4.16.
HB-2-3560

Attachment 4-H

Page 1 of 10

__________________________________________________________________________________________________

(02-24-05) SPECIAL PN

Revised (11-08-19) PN 530

ATTACHMENT 4-H

Example Engagement Letter —For-profit Entity

$500,000 or greater in Federal Financial Assistance

[CPA Firm’s Letterhead]

Date, Year

Name

Company Name

Address

City, State Zip

We are pleased to confirm our understanding of the nature and limitations of the services our 

firm will provide for each of the Entities detailed in Exhibit A. 

We will perform an audit of the balance sheet as of DATE, YEAR, and the related statements 

of operations, changes in partners' equity and cash flows for the year then ended. Also, the 

supplementary financial information required by the United States Department of Agriculture RD 

Handbook HB-2-3560 listed below will be subjected to the auditing procedures applied in our 

audit of the financial statements:

• Calculation of Management Fee

• Return to Owner

• Insurance Detail

• Changes in Rental Property Ownership

• Accrual to cash schedule

AUDIT OBJECTIVES

The objective of our audit is the expression of an opinion about whether the financial 

statements are fairly presented, in all material respects, in conformity with accounting principles 

generally accepted in the United States of America and to report on the fairness of the 

supplementary information referred to in the second paragraph when considered in relation to the 

financial statements taken as a whole. The objective also includes reporting on each Entity’s 

Internal controls and its compliance with certain provisions of laws, regulations, contracts, and 

grant agreements in conformity with auditing standards generally accepted in the United States of 

America and as required by Government Auditing Standards and the United States Department of 

Agriculture RD Handbook HB-2-3560. Our audit will be conducted in accordance with auditing 

standards generally accepted in the United States of America, the standards for financial audits 

contained in Government Auditing Standards issued by the Comptroller General of the United 

States, and the United States Department of Agriculture RD Handbook HB-2-3560.
HB-2-3560

Attachment 4-H

Page 2 of 10

__________________________________________________________________________________________________

AUDIT PROCEDURES - General

Our audit will include tests of the accounting records of each Entity and other procedures we 

consider necessary to enable us to express such an opinion and render the required reports. If our

opinion is other than unqualified, we will discuss the reasons with you in advance. If, for any 

reason, we are unable to complete the audit or are unable to form or have not formed an opinion, 

we may decline to express an opinion or to issue a report as a result of this engagement.

 

The report on internal control and compliance will include a statement that the report is intended 

for the information and use of the partner, management, others within the organization and the 

United States Department of Agriculture Rural Development, and is not intended to be and 

should not be used by anyone other than these specified parties.

The management of each Entity is responsible for establishing and maintaining effective internal 

control and for compliance with the provisions of applicable laws, regulations, contracts, and 

grant agreements. In fulfilling this responsibility, estimates and judgments by management are 

required to assess the expected benefits and related costs of the controls. The objectives of 

internal control are to provide management with reasonable, but not absolute, assurance that 

assets are safeguarded against loss from unauthorized use or disposition, that transactions are 

executed in accordance with management’s authorizations and recorded properly to permit the 

preparation of financial statements in accordance with accounting principles generally accepted 

in the United States of America, and that Rural Development programs are managed in 

compliance with applicable laws and regulations and the provisions of contracts and grant 

agreements.

In planning and performing our audits, we will consider the internal control sufficient to plan 

each audit in order to determine the nature, timing, and extent of our auditing procedures for the 

purpose of expressing our opinions on the Entity’s financial statements and on its compliance 

with specific requirements applicable to its Rural Development programs and to report on the 

internal control in accordance with the provisions of Government Auditing Standards and not to 

provide any assurance on the internal control.

We will obtain an understanding of the design of relevant controls and whether they have been 

placed in operation, and we will assess control risk. Tests of controls may be performed to test 

the effectiveness of certain controls we consider relevant to preventing and detecting errors and 

fraud that are material to the financial statements and to preventing and detecting misstatements 

resulting from illegal acts and other non-compliance matters that have a direct and material effect 

on the financial statements. (Tests of controls are required only if control risk is assessed below 

the maximum level.) Our tests, if performed, will be less in scope than would be necessary to 

render an opinion on internal control and, accordingly, no opinion will be expressed in our report 

on internal control issued pursuant to Government Auditing Standards.

We will perform tests of controls over compliance, as required by Government Auditing 

Standards and the United States Department of Agriculture RD Handbook HB-2-3560, to 

evaluate the effectiveness of the design and operation of controls that we consider relevant to 
HB-2-3560

Attachment 4-H

Page 3 of 10

__________________________________________________________________________________________________

(02-24-05) SPECIAL PN

Revised (11-08-19) PN 530

preventing or detecting material non-compliance with specific requirements applicable to each 

Entity’s Rural Development programs. Our tests will be less in scope than would be necessary to 

render an opinion on these controls and accordingly, no opinion will be expressed.

AUDIT PROCEDURES – Internal Control

Our audit will include obtaining an understanding of internal control sufficient to plan each audit 

and to determine the nature, timing, and extent of audit procedures to be performed. An audit is 

not designed to provide assurance on internal control or to identify deficiencies in internal 

control. However, during the audit, we will communicate to you, internal control related matters 

that are required to be communicated under professional standards.

Identifying and ensuring that each Entity complies with laws, regulations, contracts, and grant 

agreements is the responsibility of management. As part of obtaining reasonable assurance about 

whether the financial statements are free of material misstatement, we will perform tests of each 

Entity’s compliance with applicable laws and regulations, and the provisions of contracts and 

agreements, including grant agreements. However, the objective of those procedures will not be 

to provide an opinion on overall compliance and we will not express such an opinion.

Our audits will be conducted in accordance with the standards referred to in the third paragraph. 

Those standards require that we plan and perform the audits to obtain reasonable assurance about 

whether material non-compliance with the requirements described in the United States 

Department of Agriculture RD Handbook HB-2-3560 that are applicable to its Rural 

Development programs occurred. The purpose of each audit will be to express an opinion on 

each Entity’s compliance with specific requirements applicable to major programs listed in the 

previous sentence.

Our procedures will include tests of documentary evidence supporting the transactions recorded 

in the account, and may include direct confirmation of cash, investments, loan balances, and 

certain other assets and liabilities by correspondence with certain individuals, creditors and 

financial institutions. We may also request written representations from your attorneys as part of 

each engagement, and they may bill you for responding to that inquiry. At the conclusion of each 

engagement, we will require a written representation letter from the owner and or management of 

each specific Entity that, among other things, will confirm management’s responsibility for the 

presentation of the financial statements.

An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in 

the financial statements; therefore, our audits will involve judgment about the number of 

transactions to be examined and the areas to be tested. Also, we will plan and perform the audits 

to obtain reasonable rather than absolute assurance about whether the financial statements are 

free of material misstatement, whether from errors, fraudulent financial reporting, 

misappropriation of assets, or violations of laws or governmental regulations that are attributable 

to each Entity or to acts by management or employees on behalf of each Entity. Because the 
HB-2-3560

Attachment 4-H

Page 4 of 10

__________________________________________________________________________________________________

determination of abuse is subjective, Government Auditing Standards do not expect auditors to 

provide reasonable assurance of detecting abuse. As required by Government Auditing Standards, 

our audits will include tests of transactions related to federal awards programs for compliance 

with applicable laws and regulations and the provisions of contracts and agreements. 

Because an audit is designed to provide reasonable, but not absolute, assurance and because we 

will not perform a detailed examination of all transactions, there is a risk that material 

misstatements or non-compliance may exist and not be detected by us. In addition, an audit is 

not designed to detect immaterial misstatements or violations of laws or governmental 

regulations that do not have a direct and material effect on the financial statements or on major 

programs. However, we will inform you, of any material errors and any fraudulent financial 

reporting or misappropriation of assets that comes to our attention. We will also inform you of 

any violations of laws or governmental regulations that come to our attention, unless clearly 

inconsequential. We will include such matters in the reports required for Rural Development 

audits. Our responsibility as auditors is limited to the period covered by our audit and does not 

extend to any later periods for which we are not engaged as auditors.

You are responsible for establishing and maintaining internal controls, including monitoring 

ongoing activities; for the selection and application of accounting principles; and for the fair 

presentation in the financial statements of financial position, changes in partners’ capital, and 

cash flows in conformity with accounting principles generally accepted in the United States of 

America. You are also responsible for management decisions and functions; for designating a 

management-level individual with suitable skill, knowledge, or experience to oversee the tax 

services and any other non-attest services we provide; and for evaluating the adequacy and 

results of those services and accepting responsibility for them. 

OTHER SERVICES

As part of our engagements:

We will not perform any management functions or make management decisions.

We will assist you and/or management in the calculation of depreciation expense and 

maintenance of fixed asset and depreciation records, however, you and/or management shall 

be responsible for determining the depreciation method, rate and life of each class of assets 

and determining salvage value, if any. You and/or management shall be solely responsible for 

the completeness and accuracy of the related fixed asset and depreciation schedules.

We will prepare a general ledger trial balance for use during each engagement. Our 

preparation of the trial balance will be limited to formatting information in the respective 

Entity’s general ledger into a working trial balance.

We will also prepare federal, state and local income tax returns for the Entities listed in the 

attached Exhibit A for the year ended DATE, YEAR. You are responsible for the decisions 

and functions of your property, and for designating a competent employee to oversee these 

services. 
HB-2-3560

Attachment 4-H

Page 5 of 10

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(02-24-05) SPECIAL PN

Revised (11-08-19) PN 530

You are responsible for evaluating the adequacy and results of the services performed and accepting 

responsibility for the results. You are also responsible for establishing and maintaining internal 

controls, including monitoring ongoing activities. You should be aware that, under the Internal 

Revenue Service Restructuring and Reform Act of 1998, certain information discussed by you with

members of our firm who are authorized tax practitioners or their agents for the purpose of obtaining 

our firm’s advice on tax matters is privileged from disclosure in any non-criminal tax matters before 

the IRS. Information compiled for the purpose of preparing a tax return is not privileged under

common law because it is intended for disclosure to the IRS or others. The privilege will be waived if 

the communication is voluntarily disclosed to a third party. Professional standards require us to discuss 

matters that may affect the engagement with our firm personnel responsible for non-attest services, 

which includes tax services. The IRS might not take the position that such communication results in a 

waiver of privilege.

MANAGEMENT RESPONSIBILITIES

Management is responsible for making all financial records and related information available to us, 

including any significant vendor relationships in which the vendor has the responsibility for 

program compliance. We understand that you will provide us with such information required for 

each audit and that you are responsible for the accuracy and completeness of that information. 

Management’s responsibilities include adjusting the financial statements to correct material 

misstatements and for confirming to us in the management representation letter that the effects of 

any uncorrected misstatements aggregated by us during the current engagement and pertaining to 

the latest period presented are immaterial, both individually and in the aggregate, to the financial 

statements taken as a whole.

Management is responsible for the design and implementation of programs and controls to prevent 

and detect fraud, and for informing us about all known or suspected fraud or illegal acts or illegal 

acts affecting each Entity involving management, employees who have significant roles in internal 

control, and others where the fraud or illegal acts could have a material effect on the financial 

statements. Your responsibilities include informing us of your knowledge of any allegations of 

fraud or suspected fraud or illegal acts affecting each Entity received in communications from 

employees, former employees, regulators, or others. In addition, management is responsible for 

identifying and ensuring that each Entity complies with applicable laws and regulations and for 

taking timely and appropriate steps to remedy any fraud, illegal acts, violations of contracts or 

grant agreements, or abuse that we may report.

As part of each audit, we will prepare a draft of your financial statements, supplementary financial 

information, and related notes. In accordance with Government Auditing Standards, you will be 

required to review and approve those financial statements prior to their issuance and have a 

responsibility to be in a position in fact and appearance to make an informed judgment on those 

financial statements. Further, you are required to designate a qualified management-level 

individual to be responsible and accountable for overseeing our services.

We will submit our report for each of the Entities in Exhibit A listing the procedures performed 

and our findings. Each report is intended solely for the use of the project’s owners, the 

management agent and Rural Development, and should not be used by anyone other than these 
HB-2-3560

Attachment 4-H

Page 6 of 10

__________________________________________________________________________________________________

specified parties, and take responsibility for the sufficiency of the procedures for their purposes. 

Our reports will contain a paragraph indicating that had we performed additional procedures, other 

matters might have come to our attention that would have been reported to you.

At the conclusion of each engagement, we will require a representation letter from the owner and 

or management of each specific Entity that, among other things, will confirm management’s 

responsibility for the presentation of Forms RD 3560-7 and 3560-10 in accordance with the 

criteria specified in 7 CFR part 3560 Section 303(b) and 7 CFR part 3560 Section 306, for the 

year ending DATE, YEAR and management’s responsibility for compliance with the 

requirements of 7 CFR part 3560 Sections 308(a), 308(b) and 308(c).

During the course of each engagement, we shall request information and explanations from the 

owner and/or management regarding the respective Entity’s operations, internal controls, 

compliance matters, future plans, specific transactions, and accounting system and procedures. We 

understand that your employees will prepare all cash, vendor, accounts payable and other 

confirmations we request and will work with our staff to locate any documents selected by us for 

testing. We will request written confirmation from financial institutions as part of each 

engagement, and they may bill you for responding to that inquiry. 

At the conclusion of each engagement, we will require, as a precondition to the issuance of our 

report, that management reconfirm this information in a written representation letter. The 

procedures which we will perform in each engagement will be heavily influenced by the 

representations that we receive from you and/or management. Accordingly, false representations 

could cause us to expend unnecessary efforts or could cause a material error or a fraud to go 

undetected by our procedures. You acknowledge that as a condition of our agreement to perform 

each engagement, you and all members of your management, agree to the best of your knowledge 

and belief to be truthful, accurate, and complete in the representations you make to us during the 

course of each engagement and in the written representations provided to us at the completion of 

each engagement. In view of the foregoing, you agree that we shall not be responsible for any 

misstatements in the financial and compliance reports as a result of false or misleading 

representations that are made to us by you or your management. In addition, because our failure to 

detect material misstatements could cause others relying upon our report to incur damages, you 

and management further agree to indemnify and hold us harmless for any liability and all 

reasonable costs (including legal fees) that we may incur in connection with claims based upon 

our failure to detect material misstatements in the respective Entity’s financial and compliance 

reports resulting from false or misleading representations made to us by you or any member of 

your management.

Management is also responsible to notify us in advance of your intent to print our reports in whole 

or in part, and to give us the opportunity to review any printed material containing our reports 

before its issuance.

The documentation for these engagements is the property of CPA FIRM NAME and constitutes 

confidential information. However, we may be requested to make certain documentation available 
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Attachment 4-H

Page 7 of 10

__________________________________________________________________________________________________

(02-24-05) SPECIAL PN

Revised (11-08-19) PN 530

to the United States Department of Agriculture acting through Rural Development, the Office of 

Inspector General (OIG) and the Government Accountability Office (GAO) or their 

representatives, pursuant to authority given to them by law or regulation. We will notify you of 

any such request. If requested, access to such documentation will be provided under the 

supervision of CPA FIRM NAME personnel. Furthermore, upon request, we may provide copies 

of selected documentation to Rural Development, OIG or GAO representatives. Rural 

Development, OIG and GAO may intend, or decide to distribute the copies or information 

contained therein to others, including other governmental agencies. We may also be requested to 

make certain documentation available to the investment partner(s)/member(s) or their 

representatives pursuant to authority given to them by the Partnership/Operating Agreement. 

Access to such documentation will be provided under the supervision of CPA FIRM NAME. 

Furthermore, upon request, we may provide photocopies of selected documentation to the 

investment partner(s)/member(s) or their representatives and they may intend or decide to 

distribute the photocopies or information contained therein to others, including governmental 

agencies.

Each engagement ends on delivery of our financial and compliance reports. Any follow-up 

services that might be required will be a separate, new engagement. The terms and conditions of 

that new engagement will be governed by a new, specific engagement letter for that service.

ENGAGEMENT ADMINISTRATION, FEES, AN OTHER

Our fees for these services are based upon the actual time spent at our standard hourly rates, 

travel, and other out-of-pocket costs such as report production, word processing, postage, etc. Our 

standard hourly rates vary according to the degree of responsibility involved and the experience 

level of the personnel assigned to each engagement. Our invoices for these fees will be 

rendered each month as work progresses and are payable on presentation. In accordance with

our firm policies, work may be suspended if your account becomes XX days or more overdue 

and will not be resumed until your account is paid in full. If we elect to terminate our services 

for non-payment, each engagement will be deemed to have been completed even if we have 

not completed our report. You will be obligated to compensate us for all time expended and to 

reimburse us for all out-of-pocket expenditures through the date of termination. The 

suspension or termination of our work may result in adverse consequences to you including 

your failure to meet deadlines imposed by governments, lenders, or other third parties. You 

agree that we will not be responsible for your failure to meet such deadlines, or for penalties 

or interest that may be assessed against you resulting from such failure. Based on our 

preliminary estimate, the audit and tax procedure fees will be as detailed in Exhibit A. The fee 

estimate is based on anticipated cooperation from your personnel and the assumption that 

unexpected circumstances will not be encountered during the engagements. If significant 

additional time is necessary, we will discuss it with you and arrive at a new fee estimate 

before we incur the additional costs.
HB-2-3560

Attachment 4-H

Page 8 of 10

__________________________________________________________________________________________________

Government Auditing Standards require that we provide you with a copy of our most recent 

external peer review report and letter of comments, and any subsequent peer review reports and 

letters of comment received during the period of the contract. Our peer review report and letter 

of comments accompanies this letter.

We appreciate the privilege and opportunity to work with you and your staff during the 

completion of these important engagements. If the engagement letter terms are acceptable and 

in accordance with your understanding of each engagement, please sign the attached agreement 

and return the signed agreement page. Please retain the original letter and the client copy of the 

agreement page for your files. If you have any questions or comments regarding the terms of 

this engagement letter, please do not hesitate to contact us.

Very truly yours,

CPA FIRM NAME

Certified Public Accountants
HB-2-3560

Attachment 4-H

Page 9 of 10

__________________________________________________________________________________________________

(02-24-05) SPECIAL PN

Revised (11-08-19) PN 530

EXHIBIT A

Entity and Fee Schedule

Year End DATE, YEAR

ENTITY NAME FEE AMOUNT
HB-2-3560

Attachment 4-H

Page 10 of 10

__________________________________________________________________________________________________

Exhibit B

[CPA FIRM NAME] SERVICE AGREEMENT

Agreement to report on Rural Development Financial and Compliance Reports and prepare 

Federal, State & Local tax reporting forms for the Entities listed in the Exhibit A managed by

Company Name as outlined in the CPA FIRM NAME engagement letter dated Date, Year.

To accept the schedule of fees in Exhibit A and the terms as stated in the attached engagement

letter:

• Sign below,

• Return this page to us,

• Retain the original engagement letter and the client copy of this letter for your files.

By: _____________________________________ Date: ______________

(Signature)

_____________________________________

(Name, Printed)

_____________________________________

(Title)
HB-2-3560

Attachment 4-I

Page 1 of 4

__________________________________________________________________________________________________

(02-24-05) SPECIAL PN

Added (11-08-19) PN 530

ATTACHMENT 4-I

ANNUAL RD COMPLIANCE AUDIT TO BE CONDUCTED IN CONNECTION

WITH THE ANNUAL FINANCIAL STATEMENT AUDIT

Background – This section contains the U.S. Department of Agriculture, Rural

Development’s (RD) requirements for conducting the compliance portion of the annual

financial audits of profit-motivated entities participating in RD’s housing programs.

Compliance Procedures – See Attachment 4-J, Compliance Requirements and Audit Areas 

of this Chapter: Financial Management.

Major Program Determination/Defined – Attachment 4-G of Chapter 4: Financial

Management has been developed to assist auditors on how to determine a major program in 

For-profit entities. Major program is defined as an individual assistance program for which

expenditures equal or exceeded $500,000 during the applicable year.

Special Note on RD Rental Assistance, Major Program Determination and Reporting.

For RD projects that have determined that RD Rental Assistance is a major program, no

additional testing or reporting (such as testing of a tenant file, review of the recertification

forms, etc.) is necessary for the rental assistance program.

Non-Major Program Testing – Under this attachment, there are no requirements to test

non-major programs.

Group Project-Based Testing - RD prohibits the use of Group Project Based Testing as

allowed and defined by the HUD audit guide.

Instances of Non-Compliance – All material instances of non-compliance should be

reported as finding in the Schedule of Findings and Questioned Costs. However, nonmaterial non-compliance must be reported to management in writing and must be

referenced in the auditor’s report by name and the actual or planned date of issuance. A

copy of this letter may be requested by RD at its discretion.

Test of Controls Over Compliance – The auditor is required to test controls 

over compliance.

Attribute Sampling – Applies to all testing performed for the compliance component of an

audit performed under this section. When planning to test a particular sample of

transactions, the auditor should consider the specific audit objective to be achieved and

determine whether the audit procedure or combination of procedures to be applied will

achieve that objective. The size of a sample is necessary to provide sufficient evidential
HB-2-3560

Attachment 4-I

Page 2 of 4

__________________________________________________________________________________________________

matter depends on both the objectives and the efficiency of the sample. All material

instances of non-compliance, including those identified through sampling, must be reported

as findings in the audit report.

Determining Test Objective, Defining the Population, and Defining

an Exception

Before testing begins, the auditor must understand and document what attributes and

assertions are being tested. The auditor needs to identify and document the appropriate

population and should also perform procedures (for example, reconciliations or inquiry) to

ensure that the population from which the sample is selected is complete.

Each compliance requirement selected for testing should be considered a separate

population, and samples should be selected accordingly. The sample selected could

possibly be used to test multiple attributes within each compliance requirement.

Additionally, auditors must assess the control environment at entities with multiple

locations. If controls at the different locations are significantly different, each location

must be considered a separate population.

The auditor must document the “sampling unit,” which is the individual item subject to

sampling in the population. When selecting the sample of individual items, auditors must

ensure that the sample is representative of the universe for the compliance requirement being

tested.

The auditor should also clearly define what would be considered an exception. A 

single exception would indicate non-compliance, subject t o further determinat ion

o f materiality necessary to determine the required method of reporting.

Determining the Sample Size

To determine attribute testing sample sizes, the auditor needs to determine the value for three

inputs: desired confidence level, tolerable exception rate, and expected exception rate. The

compliance sample size table below is based on the following assumptions:

• Desired Confidence – Auditors should obtain the appropriate level of assurance by

using a confidence level of 90 or 95 percent.

• Tolerable Exception Rate – A 5-10 percent exception rate is acceptable.

• Expected Exception Rate – No exceptions should be expected.

• Materiality – Using attribute testing, monetary materiality, or tolerable misstatement

is not a necessary input for determining sample size.
HB-2-3560

Attachment 4-I

Page 3 of 4

__________________________________________________________________________________________________

(02-24-05) SPECIAL PN

Added (11-08-19) PN 530

Sample Size Table

Using the above considerations and standard attribute sampling methodology, a low to normal

level of assurance can be obtained by applying a 90 percent confidence level when there is an

expectation of an error rate between 0 and 5 percent. The minimum recommended sample size using 

these parameters at a 5 and 10 percent tolerable exception rate is 50 and 25, respectively. Similarly,

using a 95 percent confidence level, an expected error rate between 0 and 5 percent, and a 5 or 10

percent tolerable exception rate, the sample size is 65 and 35, respectively. These sample sizes are

shown in the table below.

Compliance sample size table

Importance or significance

of the attribute being

t t d

Confidence 

level

Tolerable 

rate

Minimum sample

size for populations

250 Low to normal 90% 5% 50

Low to normal 90% 10% 25

High 95% 5% 65

High 95% 10% 35

This table is illustrative and does not replace professional judgment. As noted in the table,

these are minimum sample sizes, and there may be many situations in which the auditor should also

consider qualitative factors when determining sample size. Factors indicative of higher risk include

but are not limited to:

• Whether this is the initial audit of the entity performed by the auditor.

• The entity’s size and level of decentralization. The existence of a large number of prior,

significant deficiencies, material weaknesses, or other audit findings.

• Poor internal controls.

• Extremely high volume of activity relating to a particular compliance requirement.

• High employee turnover in a particular area or department.

If the initial sample does not include a particular attribute being tested, typically there would be a

need to have additional items included in the sample to address only that specific attribute.

Each compliance test performed should be evaluated separately for purposes of determining

sample size. Professional judgment should be used to determine what tests are considered low

versus high risk. When making the risk determination, it is important to understand the nature of the

population.

 

Populations of 250 Items or Fewer

When performing compliance testing of populations of 250 items or fewer, auditors generally

should examine at least 10 percent of the items in the population. This is a minimum sample size,

and qualitative factors may exist that would require a larger sample size.
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Attachment 4-I

Page 4 of 4

__________________________________________________________________________________________________

Testing and Evaluating Results

The sample sizes in the table above are based on an expectation of no exceptions. If the testing

performed discovers no exceptions, the auditor has achieved a high degree of confidence that the

attribute or assertion is being performed at an acceptable level.

If there are observed exceptions, the auditor should investigate the nature and cause of the

exceptions to determine whether the exceptions are immaterial or represent material compliance

findings or significant deficiencies or material weaknesses in internal control. It is not necessary to

expand testing when exceptions are found.

In cases in which an exception is found, the auditor must determine whether the individual

exception is material enough to report as a compliance violation. The auditor should also consider

whether the lack of an effective internal control constitutes a significant deficiency or a material

weakness and document the basis for an unqualified opinion if a finding is determined to be a

significant deficiency or material weakness.

Audit Documentation

Documentation of sampling procedures must include the test objective, the definition of an

exception, a description of the population tested and the sampling unit, the confidence level, the

significance of the attribute, the sample size, and the results of testing.

Technical Assistance

Technical guidance on audit sampling is available in the AICPA’s Audit Guide for Government

Auditing Standards. Auditors may substitute an approach from the AICPA’s audit guide for the 

approach described above, provided that the resulting sample size is equal to or greater than the

above minimum sample sizes.
HB-2-3560

Attachment 4-J

Page 1 of 9

__________________________________________________________________________________________________

(02-24-05) SPECIAL PN

Added (11-08-19) PN 530

ATTACHMENT 4-J

COMPLIANCE REQUIREMENTS AND AUDIT AREAS

The following sections within this Attachment contain suggested audit procedures that RD

believes should be performed. If an auditor determines that the stated procedures to be inappropriate

and/or other audit procedures should be performed, the deviation from the stated procedures must be

justified and documented in the auditor’s working papers. The term “Owners” is utilized throughout

this Attachment to refer to Borrowers, Projects, Entities, etc.

A. Mortgage Status.

1. Compliance Requirement. Owners shall promptly make all payments due

under the note and mortgage.

2. Suggested Audit Procedures.

a. Obtain a copy of the mortgage note, mortgage (or deed of trust), and associated 

loan amortization schedule to determine the terms and conditions of those 

agreements.

b. Obtain an understanding of the Owner’s procedures for assuring prompt 

payment of the mortgage.

c. If the project is operating under a mortgage modification agreement, workout 

agreement, forbearance agreement, use agreement, or other agreement, 

determine whether the Owner is complying with the terms and conditions of 

the agreement.

B. Replacement Reserve.

1. Compliance Requirement. Owners, as required, shall establish a reserve for 

replacement account and make deposits in accordance with RD requirements, 

usually the loan agreement or other similar business agreement. Disbursements from 

the reserve for replacement fund may be made only after written consent is received

from RD.

2. Suggested Audit Procedures.

a. Obtain an understanding of the Owner’s deposit and maintenance requirements 

included in the loan agreement, business agreement and any amendments or 

other written agreements with RD and determine whether there were any changes

to the funding requirement by obtaining and reviewing Multi-Family 

Information System (MFIS) Project Reserve CheckBook Authorization (FIN 

2100).
HB-2-3560

Attachment 4-J

Page 2 of 9

__________________________________________________________________________________________________

b. Obtain an understanding of the Owner’s procedures for depositing,

maintaining, requesting, and disbursing reserve for replacement funds.

c. Verify the yearend balance of the replacement reserve. In addition to the 

verification of the balance, verify with the financial institution that no 

encumbrances are being held on the reserve account.

d. Determine whether all disbursements from the reserve for replacement account 

were properly authorized by RD.

e. Determine whether the reserve fund has been established in a federally insured 

depository.

f. RD requires funds to be invested, determine whether funds were invested and 

interest was only withdrawn with RD approval.

g. Using the FIN 2100 Report, verification of the account balance and the

approved withdrawals, determine whether all required deposits to the reserve

for replacement were made in compliance with RD requirements and

agreements and the project is on schedule with its funding requirements.

h. Review the related repairs covered by funds from the reserve for replacement 

account. Trace the reserve withdrawal amount to cancelled invoices and 

cancelled checks or check images to determine whether funds were used for the 

purpose authorized by RD.

C. Return on Investment (ROI) or Return to Owner (RTO)s.

1. Compliance Requirement. Owners may not make, receive, and/or retain any

distribution of assets or any income of any kind unless the project has positive net 

cash flow per Form RD 3560-7 “Multiple Family Housing Project Budget,” line

30. This process is further defined in this Chapter.

2. Suggested Audit Procedures.

a. Obtain a copy of the project’s loan agreement, business agreements and any 

amendments or associated documents to determine the owner’s rights for 

receiving distributions.
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Attachment 4-J

Page 3 of 9

__________________________________________________________________________________________________

(02-24-05) SPECIAL PN

Added (11-08-19) PN 530

b.Obtain an understanding of the Owner/management agent’s procedures for 

determining the cash available for making distributions.

c.Scan minutes of board or partnership meetings for discussions authorizing 

distributions.

d.Question the Owner or management agent about the existence of any notices 

of default or other items of non-compliance under any of the terms of the loan

or business agreement.

e.Determine whether the Form RD 3560-7 was prepared in accordance with the 

loan or business agreement and other RD guidance.

f. Determine whether distributions taken during the audit period exceeded the 

amounts calculated and/or authorized for that period based on the loan or 

business agreements, including any amendments.

g.Scan cash disbursements for evidence of any payments made to the

Owner or related parties. Scan journal entries for unexplained decreases in 

accounts payable, notes payable, and the related unpaid interest to the Owner 

or related parties. Determine whether the owner paid partnership management 

fees, asset management fees, incentive management fees, and write-offs of 

related party receivables from funds other than allowable distribution amounts.

h.Scan the bank statements for any deposit, from the Owner and/or related parties, 

which would evidence that incorrect distributions or payments were made

and that those funds were redeposited into the project’s accounts during the

year under audit.

i. Review inspection reports and Owner responses to verify compliance with all

outstanding Notices for proper maintenance of the project. Delays in making 

repairs could erroneously result in excess operating cash being reported to be on 

hand at the end of the reporting period, making funds available for distribution

to the Owners.

j. With Agency approval, Owners operating on a for-profit or a limited profit

basis may make an annual withdrawal from the reserve account, equal to no 

more than 25 percent of the interest earned on a reserve account during the prior

year. The borrower uses Form RD 3560-12, requesting the withdrawal and

must provide documentation of the prior year interest earned.
HB-2-3560

Attachment 4-J

Page 4 of 9

__________________________________________________________________________________________________

D. Equity Skimming.

1. Compliance Requirement. Equity skimming is the willful misuse of any part of the 

rent, assets, proceeds, income, or other funds derived from the project covered by the 

mortgage for any purpose other than to meet actual or necessary expenses of the 

project. Equity skimming deprives the project of needed funds for repairs, 

maintenance, and improvements, which contributes to the financial and physical 

deterioration of the project and the standard of living conditions for the families who 

depend on the federal government to provide housing. Also, a community where the 

project is located suffers since the project may become the breeding ground for crime, 

violence, and drugs.

2. Suggested Audit Procedures. The various compliance areas in this Attachment have 

included audit steps that are designed to disclose equity skimming.

E. Cash Receipts.

1. Compliance Requirement. All cash receipts, including those collected by a 

management agent, must be deposited into an account in the name of the project at an

institution in which deposits are federally insured.

2. Suggested Audit Procedures.

a. Obtain an understanding of the Owner/management agent’s procedures for 

handling cash receipts.

b. Determine whether the account is exclusively in the name of the project.

c. Verify that cash receipts are maintained in an FDIC account.

d. Obtain the monthly project worksheets and determine the net tenant rent and 

rental assistance are reasonable compared to amounts recorded in the general 

ledger.

e. Owners may be motivated to both understate and overstate revenue. The 

following audit steps are designed to disclose such occurrences:

(1) Consider the fraud risk factors and the potential for material misstatement of

the financial statements related to revenue recognition including vacancy loss

and bad debt expense. Perform testing to address any material fraud risk

factors identified. The auditorshould tailor audit steps/procedures based on

the individual risk factors identified and the results of other audit evidence

gathered.
HB-2-3560

Attachment 4-J

Page 5 of 9

__________________________________________________________________________________________________

(02-24-05) SPECIAL PN

Added (11-08-19) PN 530

(2) Determine whether vacancy loss is greater than 15 percent of total rental

revenue or if the change in vacancy loss between the current year and prior

year is greater than 5 percent. If so, the following steps should be performed:

i. Determine whether rent potential and vacancy loss were properly

calculated.

ii. For all revenue accounts, scan the detailed general ledger. Review the

supporting documentation for all material manual entries and unusual

entries.

iii. Determine the reason for the increase or cause of the high vacancy rate

via discussion with management. The auditor may also want to select a

sample of vacant units and perform tests to substantiate the high vacancy

rate. Possible tests on the sample include but are not limited to the

following:

(i) Reviewing the move-out notice from the tenant.

(ii) Reviewing the documentation from the move-out inspection.

(iii) Determining whether the security deposit was refunded to the

tenant.

(iv) Reviewing the itemized list of damages and charges provided to

the tenant, which was used to reduce the amount of security 

deposit due back to the tenant.

(v) Inspecting the vacant unit i f the unit is still unoccupied.

(vi) Questioning site personnel, including the resident manager and the

building manager, to determine the period when the unit was 

vacant.

(vii) Reviewing work orders to determine the period when the unit was

vacant.

(3) Determine whether bad debt expense is greater than 10 percent of total rental

revenue or whether the change in bad debt expense is greater than 5 percent 

between the current year and the prior year. If so, the following steps

should be performed:

i. Obtain an understanding of the owner/management agent’s procedures

for collecting delinquent debt and policy for writing off debt.

ii. Determine whether delinquent accounts are sufficiently pursued according

to procedures.

iii.Select a sample of accounts written off to bad debts expense and review

supporting documentation to determine whether debt was written off in

accordance with policy and generally accepted accounting principles.

iv. Determine the reason for any activity on the tenant record after the debt

was written off.
HB-2-3560 

Attachment 4-J 

Page 6 of 9 

__________________________________________________________________________________________________

F. Cash Disbursements.

1. Compliance Requirement. All disbursements from the regular operating account

must be supported by approved invoices, bills, or other supporting documentation.

Project funds should only be used to pay for mortgage payments, required deposits to

the reserve for replacement fund, reasonable expenses necessary for the operation

and maintenance of the project, distributions, as permitted, and repayment of owner

advances or as authorized by RD.

2. Suggested Audit Procedures.

a. Obtain an understanding of the Owner/management agent’s procedures for

withdrawing funds from the regular operating account and determine whether

they are properly supported and used in accordance with the loan agreement.

b. Select a sample of disbursements from the cash disbursement ledger or similar

record related to Form RD 3560-7, Part II, line items 1-10 and 19-32 and

perform the following steps:

(1) Determine whether the disbursements are supported by approved

invoices, bills, or other supporting documentation; the supporting

documents are in the name of the project; and the costs are reasonable

and necessary for the operation of the project. If the supporting

documentation is not in the name of the project, determine whether

only the portion applicable to the project was paid from project funds.

(2) Determine whether the disbursements were made on behalf of other

projects or entities since project funds cannot be loaned or used for

non-project purposes. Report instances even if amounts have been

repaid prior to the issuance of the audit report unless clearly

inconsequential and was discovered in the normal course of internal

control processes.

(3) Determine whether the disbursements were properly charged to the

correct account.

(4) Determine whether the disbursement sampled items were allowable

eligible project expenses (Attachment 4-C).

G. Tenant Security Deposits.

1. Compliance Requirement. Funds collected as a security deposit shall be kept in the

name of the project, separate and apart from all other funds of the project in a trust

account. The amount of this account shall always equal or exceed the aggregate of

all outstanding obligations under that account. In addition, state and local governments

may have specific regulations governing the handling of tenant security deposits.
HB-2-3560

Attachment 4-J

Page 7 of 9

__________________________________________________________________________________________________

(02-24-05) SPECIAL PN

Added (11-08-19) PN 530

2. Suggested Audit Procedures.

a. Obtain an understanding of the Owner’s procedures, including state and local

laws, and regulatory agreement and RD requirements for establishment and

maintenance of the security deposit account and making approved 

disbursements from that account.

b. Determine whether the account has been established in a federally insured 

depository in the name of the project, which is segregated from project operating 

funds, and the owner’s records support the amount on deposit.

c. Determine whether interest is earned on the security deposit account and the 

disposition of that interest. If state and local law requires the owner to pay the 

tenant for interest earned, determine that the tenant interest is credited to tenants

and paid upon termination of tenancy.

H. Management Functions.

1. Compliance Requirement. The Owner is responsible for complying with all 

requirements of the regulatory and loan agreements. *The Owner may perform all 

management functions or contract with a management agent to provide project 

management, but the responsibility cannot be delegated to the management agent. 

The owner or management agent must be approved by RD and must certify that it will 

follow RD’s rules and regulations.

2. Suggested Audit Procedures.

a. Obtain a copy of the most recent RD-approved management agent’s certification 

Form RD 3560-13. Perform the following steps:

(1). Determine whether RD has approved the Owner or current management 

agent.

(2). Obtain the identity-of-interest (IOI) disclosure certificate Form RD 

3560-31 from the owner or RD and that the IOI’s have been reported in

the notes to the financial statements.

(3). Using the Form RD 3560-31, examine a sample of invoices from

IOI companies and determine that the actual services and fees charged to

the project were approved and properly supported.

(4). Determine whether the management agent fees paid exceeded the 

amount listed on the management agent certification. This amount 

should also agree with the amount in the management agreement.
HB-2-3560

Attachment 4-J

Page 8 of 9

__________________________________________________________________________________________________

b. Determine whether the Owner or the management agent has obtained a fidelity

bond in accordance with 7 CFR 3560.105.

c. Determine whether hazard insurance has been obtained in the amount required

by the project’s mortgage.

d. Determine whether the Owner or management agent has responded to all RD

management review reports, physical inspection reports, and inquiries regarding

annual financial statements or monthly accounting reports within 30 days.

I. Unauthorized Change of Ownership/Acquisition of Liabilities.

1. Compliance Requirements. Owners shall not, without the prior written consent of RD, 

convey, assign, transfer, dispose of, or encumber any of the mortgaged property or permit

the conveyance, transfer, or encumbrance of such property.

2. Suggested Audit Procedures.

a. Question management about the existence of any agreements to sell, assign, 

dispose of, or encumber any of the mortgaged property or assets of or 

beneficial interest* in the property. Review any agreements. Determine 

whether RD has approved transactions or is in the process of approving 

transactions and report any instances of non-compliance.

b. Confirm all material liabilities listed on the client’s balance sheet. Review

for indications of change of ownership or additional encumbrances that may

have been made without RD approval.

c. Report any other instances of unauthorized conveyance, assignment, transfer, 

disposal, or encumbrance of any of the mortgaged property or assets of or 

beneficial interest* in the property identified during the course of the audit.
HB-2-3560

Attachment 4-J

Page 9 of 9

__________________________________________________________________________________________________

(02-24-05) SPECIAL PN

Added (11-08-19) PN 530

J. Unauthorized Loans of Project Funds.

1. Compliance Requirements. Owners shall not, without the prior written consent of

RD, assign, transfer, dispose of, or encumber any personal property of the project, 

including rents, or pay out any funds except for reasonable operating expenses and 

necessary repairs.

2. Suggested Audit Procedures.

a. Question management about the existence of any agreements to assign, 

transfer, dispose of, or encumber any of the personal property of the project, 

including rents, and read any agreements.

b. Review the results of the audit procedures applied to specific accounts or

other general procedures to identify the existence of any unauthorized

transactions.

c. Test accounts receivable to determine whether receivables are the result of 

routine operations and whether project funds have been loaned to the 

management agent, other projects, employees, or the owner.

*

Beneficial interest is generally the right to profits from an estate or property without owning the estate

or property.
HB-2-3560

Attachment 4-K

Page 1 of 6

__________________________________________________________________________________________________

(02-24-05) SPECIAL PN

Added (11-08-19) PN 530

This page is intentionally left blank
HB-2-3560 

Attachment 4-K 

Page 1 of 6 

__________________________________________________________________________________________________

(02-24-05) SPECIAL PN 

Added (11-08-19) PN 530

ATTACHMENT 4-K 

EXAMPLE INDEPENDENT ACCOUNTANTS’ COMPILATION REPORT

ON RD PRESCRIBED FORMS

Note – Subject to change based on the most recent professional literature and guidance.

It is the accountant’s responsibility to use the most up to date language.

INDEPENDENT ACCOUNTANT'S COMPILATION REPORT

ABC LIMITED PARTNERSHIP

DBA ABC APARTMENTS

RD PROJECT NO: 00-000-000000000 

COMPILATION OF PRESCRIBED FORMS

(WITH SUPPLEMENTAL INFORMATION)

AND INDEPENDENT ACCOUNTANT'S COMPILATION REPORT

DECEMBER 31, 20xx
HB-2-3560 

Attachment 4-K 

Page 2 of 6 

__________________________________________________________________________________________________

ABC Limited Partnership

TABLE OF CONTENTS

PAGE

INDEPENDENT ACCOUNTANT'S COMPILATION REPORT 3 

PRESCRIBED FORMS

MULTIPLE FAMILY HOUSING BORROWER BALANCE SHEET 

– FORM RD 3560-10 4 

MULTIPLE FAMILY HOUSING PROJECT BUDGET 

– FORM RD 3560-7 5 

SUPPORTING DOCUMENTATION TO FORMS 

RD 3560-10 AND 3560-7 6 
HB-2-3560

Attachment 4-K

Page 3 of 6

__________________________________________________________________________________________________

(02-24-05) SPECIAL PN

Added (11-08-19) PN 530

To the Partners of ABC Limited Partnership

City, State

Management is responsible for the accompanying financial statements of ABC Limited 

Partnership (a limited partnership), which comprise the balance sheet as of December 31, 

20XX, and the related statements of income for the year then ended, included in the 

accompanying prescribed forms in accordance with accounting principles generally accepted 

in the United States of America. I (We) have performed a compilation engagement in 

accordance with Statements on Standards for Accounting and Review Services promulgated 

by the Accounting and Review Services Committee of the AICPA. I (We) did not audit or 

review the financial statements included in the accompanying prescribed forms nor was I 

(were we) required to perform any procedures to verify the accuracy or completeness of the 

information provided by management. Accordingly, I (we) do not express an opinion, a 

conclusion, nor provide any form of assurance on the financial statements included in the 

accompanying prescribed form. 

The financial statements included in the accompanying prescribed forms are presented in

accordance with the requirements of the U.S. Department of Agriculture, Rural

Development, and are not intended to be a presentation in accordance with accounting

principles generally accepted in the United States of America.

The supplementary information is presented for purposes of additional analysis and is not a 

required part of the basic financial statements. Such information is the responsibility of 

management. The supplementary information was subject to my (our) compilation

engagement. I (We) have not audited or reviewed the supplementary information and do not 

express an opinion, a conclusion, nor provide any assurance on such information.

This report is intended solely for the information and use of the management of ABC

Limited Partnership and the U.S. Department of Agriculture, Rural Development and is not

intended to be and should not be used by anyone other than these specified parties.

Firm Name

City, State

Report Date
HB-2-3560 

Attachment 4-K 

Page 4 of 6 

__________________________________________________________________________________________________

Form RD 3560-10 

Multi-Family Housing Borrower Balance Sheet 

See Independent Accountant’s Compilation Report
HB-2-3560 

Attachment 4-K 

Page 5 of 6 

__________________________________________________________________________________________________

(02-24-05) SPECIAL PN

Added (11-08-19) PN 530

Form RD 3560-7 

Multi-Family Housing Project Budget 

See Independent Accountant’s Compilation Report
HB-2-3560 

Attachment 4-K 

Page 6 of 6 

__________________________________________________________________________________________________

See Independent Accountant’s Compilation Report.
HB-2-3560 

Attachment 4-L 

Page 1 of 1 

__________________________________________________________________________________________________

(02-24-05) SPECIAL PN

Added (11-08-19) PN 530

ATTACHMENT 4-L 

OWNER CERTIFIED

PRESCRIBED FORMS

On the accrual method of accounting 

Include RD Forms 3560-10 and 3560-7 and 

SUPPORTING DOCUMENTATION SCHEDULES

1. Accounts Receivable (Form RD 3560-10, Line 7) Yr XXXX Yr XXXX

Accounts Receivable - Rental Subsidy $ - $ - 

Accounts Receivable - Tenants - - 

Accounts Receivable - Other - - 

2. Notes Payable (Form RD 3560-10, Line 23)

Accrued Mortgage Interest $ - $ - 

Accrued Real Estate Taxes - - 

Prepaid Rents - - 

3. Other (Form RD 3560-10, Line 27)

Due to Partners $ - 

4. Miscellaneous (Form RD 3560-7, Line 27)

Bad Debts $ - 

Other – - 

5. Accrual to Cash Adjustment (Form RD 3560-7, Line 32)

Assets

Accounts Receivable $ - - 

Accounts Receivable - Other - - 

Prepaid Expenses - - 

Security Deposits - - 

Liabilities

Accounts Payable - Trade - - 

Accrued Real Estate Taxes - - 

Security Deposits & Prepaid Rents - - 

Other Adjustments - - 

20XX Mortgage Payment made in 20XX - - 
HB-2-3560 

__________________________________________________________________________________________________

This page left intentionally blank
HB-2-3560 

Attachment 4-M 

Page 1 of 26 

__________________________________________________________________________________________________

(02-24-05) SPECIAL PN 

Added (11-08-19) PN 530 

ATTACHMENT 4-M 

EXAMPLE REPORTS

1.Independent Auditor’s Report

2.Independent Auditor’s Report on Internal Control Over Financial Reporting and on

Compliance and Other Matters Based on an Audit of Financial Statements Performed in

Accordance with Government Auditing Standards

3.Independent Auditor’s Report on Compliance For Each Major RD Program and

Internal Control Over Compliance required by the Audit Guide for Audits of RD

Programs

Note – Subject to change based on most recent professional literature and guidance.

It is the auditor’s responsibility to use the most up to date language.
HB-2-3560 

Attachment 4-M 

Page 2 of 26 

__________________________________________________________________________________________________

Audited Financial Statements 

With Required Rural Development 

Supplemental Information 

ABC Apartments, LP 

RHS Project Number: 00-000-000000000-00-0 

December 31, 20x2 and 20x3
HB-2-3560 

Attachment 4-M 

Page 3 of 26 

__________________________________________________________________________________________________

(02-24-05) SPECIAL PN

Added (11-08-19) PN 530

ABC Apartments, LP 

RHS Project No. 00-000-000000000-00-0 

______________________________________________________________________________ 

Table of Contents 

Independent Auditor’s Report ....................................................................................1-2 

Financial Statements 

Balance Sheets ................................................................................................ 3-4 

Statements of Income (Loss)....................................................................................5 

Statements of Changes in Partners’ Capital (Deficit) .......................................................6 

Statements of Cash Flows ........................................................................................7 

Notes to the Financial Statements ............................................................................ 8-12 

Rural Development Required Supplemental Information 

Schedule of Required Supplemental Information ..........................................................14 

Schedules of Expenses ........................................................................................ 15 

Multi Family Housing Borrower Balance Sheet – Form RD 3560-10 ..............................16-17 

Multiple Family Housing Project Budget – Form RD 3560-7 .........................................18-23 

Supporting Documentation to Forms RD 3560-10 and 3560-7 ..........................................24 

Independent Auditor’s Report on Internal Control Over Financial Reporting and 

on Compliance and Other Matters Based on an Audit of Financial Statements 

Performed in Accordance with Government Auditing Standards ................................... 25-26 

Independent Auditor’s Report on Compliance for Each Major RD Program and 

on Internal Control over Compliance Required by the Audit Guide for Audits 

of RD Programs..............................................................................................27-28 

Schedule of Findings and Questioned Costs ..................................................................29 

Schedule of Lead Auditor....................................................................................... 30
HB-2-3560 

Attachment 4-M 

Page 4 of 26 

__________________________________________________________________________________________________

(02-24-05) SPECIAL PN

Added (11-08-19) PN 530

Independent Auditor’s Report

To the Partners of USDA Rural Development 

ABC Apartments, LP Servicing Office 

New York, New York New York, New York 

Report on the Financial Statements 

We have audited the accompanying financial statements of ABC Apartments, LP RHS Project 

No. 00-000-000000000-00-0 (Partnership), which comprise the balance sheets as of December 

31, 20X2 and 20X1, and the related statements of income (loss), changes in partners’ capital 

(deficit), and cash flows for the years then ended, and the related notes to the financial 

statements. 

Management’s Responsibility for the Financial Statements 

Management is responsible for the preparation and fair presentation of these financial statements 

in accordance with accounting principles generally accepted in the United States of America; this 

includes the design, implementation, and maintenance of internal control relevant to the 

preparation and fair presentation of financial statements that are free from material misstatement, 

whether due to fraud or error. 

Auditor’s Responsibility 

Our responsibility is to express an opinion on these financial statements based on our audits. We 

conducted our audits in accordance with auditing standards generally accepted in the United 

States of America and the standards applicable to financial audits contained in Government 

Auditing Standards, issued by the Comptroller General of the United States. Those standards 

require that we plan and perform the audits to obtain reasonable assurance about whether the 

financial statements are free from material misstatement. 

An audit involves performing procedures to obtain audit evidence about the amounts and 

disclosures in the financial statements. The procedures selected depend on the auditor’s 

judgment, including the assessment of the risks of material misstatement of the financial 

statements, whether due to fraud or error. In making those risk assessments, the auditor considers 

internal control relevant to Partnership’s preparation and fair presentation of the financial 

statements in order to design audit procedures that are appropriate in the circumstances, but not 

for the purpose of expressing an opinion on the effectiveness of Partnership’s internal control. 

Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness 

of accounting policies used and the reasonableness of significant accounting estimates made by 

management, as well as evaluating the overall presentation of the financial statements. 

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a 

basis for our audit opinion. 
HB-2-3560 

Attachment 4-M 

Page 5 of 26 

__________________________________________________________________________________________________

(02-24-05) SPECIAL PN

Added (11-08-19) PN 530

Page | 2 

Opinion 

In our opinion, the financial statements referred to above present fairly, in all material respects, 

the financial position of Partnership as of December 31, 20X2 and 20X1, and the results of its 

operations, changes in partners’ capital (deficit), and its cash flows for the years then ended in 

accordance with accounting principles generally accepted in the United States of America. 

Report on Supplementary Information 

Our audits were conducted for the purpose of forming an opinion on the financial statements as a 

whole. The accompanying supplementary information is presented for purposes of additional 

analysis as required by the United States Department of Agriculture Rural Development. 

Such information is the responsibility of management and was derived from and relates directly 

to the underlying accounting and other records used to prepare the financial statements. The 

information has been subjected to the auditing procedures applied in the audits of the financial 

statements and certain additional procedures, including comparing and reconciling such 

information directly to the underlying accounting and other records used to prepare the financial 

statements or to the financial statements themselves, and other additional procedures in 

accordance with auditing standards generally accepted in the United States of America. In our 

opinion, the information is fairly stated in all material respects in relation to the financial

statements as a whole. 

Reports Issued in Accordance with Government Auditing Standards 

In accordance with Government Auditing Standards, we have also issued a report dated March XX, 

20X3 on our consideration of Partnership’s internal control over financial reporting and on our tests 

of its compliance with certain provisions of laws, regulations, contracts, grant agreements, and other 

matters. The purpose of that report is to describe the scope of our testing of internal control over 

financial reporting and compliance and the results of that testing, and not to provide an opinion on the 

internal control over financial reporting or on compliance. Those reports are an integral part of an 

audit performed in accordance with Government Auditing Standards in considering Partnership’s 

internal control over financial reporting and compliance. 

ABC Firm, LLC 

Indianapolis, Indiana 

March XX, 20X3
HB-2-3560 

Attachment 4-M 

Page 6 of 26 

__________________________________________________________________________________________________

ABC Apartments, LP

RHS Project No. 00-000-000000000-00-0 

______________________________________________________________________________ 

Balance Sheets

December 31, 20X2 and 20X1 

The accompanying notes are an integral part of the financial statements. 
HB-2-3560 

Attachment 4-M 

Page 7 of 26 

__________________________________________________________________________________________________

(02-24-05) SPECIAL PN

Added (11-08-19) PN 530

ABC Apartments, LP

RHS Project No. 00-000-000000000-00-0 

______________________________________________________________________________ 

Balance Sheets (continued)

December 31, 20X2 and 20X1 

The accompanying notes are an integral part of the financial statements. 
HB-2-3560 

Attachment 4-M 

Page 8 of 26 

__________________________________________________________________________________________________

The accompanying notes are an integral part of the financial statements. 
HB-2-3560 

Attachment 4-M 

Page 9 of 26 

__________________________________________________________________________________________________

(02-24-05) SPECIAL PN

Added (11-08-19) PN 530

ABC Apartments, LP

RHS Project No. 00-000-000000000-00-0 

___________________________________________________________________________ 

The accompanying notes are an integral part of the financial statements. 
HB-2-3560 

Attachment 4-M 

Page 10 of 26 

__________________________________________________________________________________________________

ABC Apartments, LP

RHS Project No. 00-000-000000000-00-0 

______________________________________________________________________________ 

The accompanying notes are an integral part of the financial statements. 
HB-2-3560 

Attachment 4-M 

Page 11 of 26 

__________________________________________________________________________________________________

(02-24-05) SPECIAL PN

Added (11-08-19) PN 530

ABC Apartments, LP

RHS Project No. 00-000-000000000-00-0 

______________________________________________________________________________

Notes to the Financial Statements

For the Years Ended December 31, 20X2 and 20X1

Note 1 – Nature of Activities 

ABC Apartments, LP RHS Project No. 00-000-000000000-00-0 (Partnership) was formed on June 1, 1908, 

under the laws of the State of New York, for the purpose of operating a XX-unit apartment community 

located in New York, New York. The community is financed by a United States Department of Agriculture 

Rural Development (RD) Section 515 Loan, and therefore is regulated by RD as to rent charges and 

operating methods. Under this program, Partnership provides housing to low-income and moderate-income 

families, subject to regulation by RD as to rental charges and operating methods. Lower rental charges to 

tenants are recovered by Partnership through rental and interest subsidies provided by RD. 

Note 2 – Significant Accounting Policies 

A summary of Partnership’s significant accounting policies consistently applied in the preparation of the 

accompanying financial statements is as follows: 

Basis of Accounting 

Partnership’s financial statements were prepared on the accrual basis of accounting. 

Use of Estimates 

The preparation of financial statements in conformity with accounting principles generally accepted in the 

United States of America requires management to make estimates and assumptions that affect the reported 

amounts of assets and liabilities and disclosures of continent assets and liabilities at the date of the 

financial statements and the reported amounts of revenues, expenses, and other changes in partners’ capital 

(deficit) during the reporting period. Actual results could differ from those estimates. 

Cash and Cash Equivalents 

For the statements of cash flows, all unrestricted investment instruments with original maturities of three 

months or less are cash and cash equivalents. As of December 31, 20X2 and 20X1, cash and cash 

equivalents consist of an operating checking account. 

Subsequent Events 

Partnership evaluated subsequent events through March XX, 20X3, which is the date the financial 

statements were available to be issued. This evaluation determined that there are no subsequent events that 

necessitated further disclosure in and/or adjustments to the accompanying financial statements. 
HB-2-3560 

Attachment 4-M 

Page 12 of 26 

ABC Apartments, LP

RHS Project No. 00-000-000000000-00-0 

______________________________________________________________________________

Note 2 – Significant Accounting Policies (continued)

Tenant Receivable and Bad Debt

Tenant rent charges for the current month are due on the first of the month. Tenants who are evicted or move out are

charged with damages or cleaning fees, if applicable. Tenant receivable consists of amounts due for rental income,

security deposits, or the charges for damages and cleaning fees. Partnership does not accrue interest on the tenant

receivable balances.

Partnership has not established an allowance for doubtful accounts and does not use the reserve method for

recognizing bad debts. Bad debts are treated as direct write-offs in the period management determines that collection

is not probable. 

Tenant Security Deposits

Partnership maintains accounts for security deposits received from tenants. The cash is restricted for reimbursement

of the security deposits unless there is evidence of default by a tenant under the lease agreement.

Tax and Insurance Reserve 

Tax and insurance reserve is restricted cash for payments of real estate taxes and insurance. Partnership is required to 

establish and maintain a reserve account. This account is used to receive monthly deposits sufficient to pay annual

real estate taxes and insurance premiums that are paid from the account.

Replacement Reserves 

In accordance with the loan agreement with RD, a reserve for replacement is to be funded $AMT annually until it

reaches $AMT.

Property and Equipment

Property and equipment are recorded at cost. Depreciation is computed using the straight-line method of

depreciation. When assets are retired or otherwise disposed of, the cost and related accumulated depreciation are

removed from the accounts, and any resulting gain or loss is recognized as income or loss for the period. The cost of

maintenance and repairs is charged to expense as incurred and significant renewal and betterments are capitalized.

Deductions are made for retirements resulting from renewals or betterments.

Accrued Real Estate Taxes 

Partnership is subject to real estate and personal property taxes and pays one year in arrears. Partnership was assessed

in 20X1 and made bi-annual payments in May 20X2 and November 20X2. Failure to make these payments could

have resulted in additional penalties, interest, and liens. At December 31, 20X2 and 20X1, accrued real estate taxes

represent an estimated amount to be paid in the subsequent year.

Recognition of Rent Revenue

Partnership recognized net rent revenue in the period in which the rent is earned. In accordance with the RD financial

reporting requirements, potential rental income represents total possible rent revenue as if all units are 100 percent

occupied during the year. Total rental income represents potential rental income less vacancies. Rents collected in

advance are deferred until the rental income is earned.

__________________________________________________________________________________________________ 
HB-2-3560 

Attachment 4-M 

Page 13 of 26 

__________________________________________________________________________________________________

(02-24-05) SPECIAL PN

Added (11-08-19) PN 530

ABC Apartments, LP

RHS Project No. 00-000-000000000-00-0 

______________________________________________________________________________

Note 2 – Significant Accounting Policies (continued) 

Rental Assistance Payments 

Partnership entered into a rental assistance contract for low-income families as provided by RD. 

Advertising 

Partnership expenses advertising costs as they incur. For the years ended December 31, 20X2 and 20X1, 

advertising and marketing expenses were $AMT and $AMT, respectively. 

Income Taxes 

No provision for federal or state income taxes was made in the financial statements as the federal and state 

income tax effect on Partnership’s activities accrued to its partners. 

Generally accepted accounting principles in the United States require Partnership to examine its tax positions 

for uncertain positions. Partnership is not aware of any tax positions that are more likely than not to change 

in the next twelve months, or that would not sustain an examination by applicable taxing authorities. 

Partnership’s policy is to recognize penalties and interest as incurred in its statements of income (loss) as a 

component of operating expenses, and totaled $0 for December 31, 20X2 and 20X1. Partnership’s federal 

and state income tax returns for fiscal years ended 20XX through 20XX are subject to examination by the 

applicable tax authorities, generally for three years after the later of the original or extended due date.

Impairment of Long-Lived Assets 

In accordance with the provisions of accounting for the impairment or disposal of long-lived assets, 

Partnership reviews long-lived assets for impairments when circumstances indicate the carrying amount of 

an asset may not be recoverable based on the undiscounted future cash flows of the asset. If the carrying 

amount of an asset may not be recoverable, a write-down to fair value is recorded. Fair values are determined 

based on the discounted cash flows, quoted market values, or external appraisals, as applicable. Long-lived 

assets are reviewed for impairment at the individual asset or the asset group level for which the lowest level 

of independent cash flows can be identified. 

Fair Value Measurements 

Partnership adopted fair value measurements of financial assets and financial liabilities of non-financial 

items that are recognized or disclosed at fair value in the financial statements on a recurring basis. This 

establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. 

The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or 

liabilities (Level 1 measurements) and the lowest priority to measurements involving significant 

unobservable inputs (Level 3 measurements).The three levels of the fair value hierarchy are as follows: 

• Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that

Partnership has the ability to access at the measurement date. 

• Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the

asset or liability, either directly or indirectly. 

• Level 3 inputs are unobservable inputs for the asset or liability.
HB-2-3560 

Attachment 4-M 

Page 14 of 26 

__________________________________________________________________________________________________

ABC Apartments, LP RHS

Project No. 00-000-000000000-00-0 

______________________________________________________________________________

Note 2 – Significant Accounting Policies (continued) 

The level in the fair value hierarchy within which a fair measurement in its entirety falls is based on the lowest level 

input that is significant to the fair value measurement in its entirety. Partnership had no investments at December 31, 

20X2 and 20X1 except for certificate of deposits. 

Partnership operates in a heavily regulated environment that typically includes restrictions such as land use, rent 

regulations, government subsidies in the form of rental assistance through either rent subsidy or tenant vouchers, 

subsidized mortgage interest rates, and restrictions on selling or transferring. 

A summary of the methods and significant assumptions used to estimate the fair values of financial instruments is as 

follows: 

• Short-term financial instruments – The fair value of short-term financial instruments, including cash and

cash equivalents, restricted deposits, accounts receivable, accounts payable and accrued liabilities

approximate their carrying value due to the short-term nature of these instruments.

• Long-term financial instruments – The fair value of long-term financial instruments, including mortgage

payable which approximates the carrying value in the accompanying financial statements based on current

borrowing rates.

Reclassifications 

Certain accounts in the 20X1 financial statements were reclassified for comparative purposes to conform with the 

presentation in the 20X2 financial statements. Total assets, liabilities, partners’ capital (deficits), and net income are 

unchanged due to these reclassifications. 

Note 3 – Mortgage Payable 

The mortgage payable is payable to RD in monthly installments of $AMT at an interest rate of RATE% per annum 

and a term of # years, maturing on DATE. As part of the Loan Agreement, Partnership entered into an Interest Credit 

and Rental Assistance Agreement that effectively lowers the interest rate to approximately 1 percent over the term of 

the loan. The mortgage liability of Partnership is limited to the underlying value of the real estate collateral pledged.

No partner is personally liable on the mortgage note payable. The original amount of the note payable was $AMT. 

Estimated annual maturities of the mortgage notes payable are as follows:

20X3 $ AMT

20X4 AMT

20X5 AMT

20X6 AMT

20X7 AMT

Thereafter AMT

 $ AMT
HB-2-3560 

Attachment 4-M 

Page 15 of 26 

__________________________________________________________________________________________________

ABC Apartments, LP RHS

Project No. 00-000-000000000-00-0 

______________________________________________________________________________

NOTE 4 – DISTRIBUTION TO PARTNERS

Under the mortgage payable agreement, annual distributions to partners are limited by RD regulations to 

$AMT. During the years ended December 31, 20X2 and 20X1, $AMT and $AMT, respectively were distributed to 

the partners. Distributions are paid one year in arrears of being earned. 

Note 5 – Related Party Transaction

Management Fee

Partnership entered into a management agreement with ABC Property Management (management agent), an 

identity of interest with the general partner, to manage the rental operations. The management agreement allows for 

a management fee based on per occupied unit per month. Property management fees were $AMT and $AMT 

during the years ended December 31, 20X2 and 20X1, respectively. 

Management Services

Management agent provides administrative services to Partnership and was reimbursed $AMT and $AMT for the 

cost of site employee payroll, payroll taxes, and benefits during the years ended December 31, 20X2 and 20X1, 

respectively. 

Legal Services

ABC Legal, an identity of interest with the general partner, performs legal services for Partnership. During the 

years ended December 31, 20X2 and 20X1, $AMT and $AMT, respectively, was incurred and expensed. 

Advances from General Partner

A general partner made non-interest-bearing operating deficit loans of $AMT which are payable from the proceeds 

of the sale or refinancing of the rental property. At December 31, 20X2 and 20X1, Partnership 

owes the general partner $AMT and $AMT, respectively. 

Note 6 – Current Vulnerability Due to Certain Concentrations

Concentration in Affordable Housing Market 

Partnership’s sole asset is ABC Apartments. Partnership’s operations are concentrated in the affordable housing 

real estate market. In addition, Partnership operates in a heavily regulated environment. The operations of 

Partnership are subject to the administrative directives, rules, and regulations of federal, state, and local regulatory 

agencies, including, but not limited to, RD and the State Housing Agency. Such administrative directives, rules, 

and regulations are subject to change by an act of Congress or an administrative change mandated by RD or the 

State Housing Agency. Such changes may occur with little adequate funding to pay for the related cost, including 

the additional administrative burden, to comply with a change. 

Concentration in Government Funding 

Partnership received X percent and X percent of gross revenue from RD in the form of rental assistance and interest 

reduction subsidy payments during the years ended December 31, 20X2 and 20X1, respectively. 

Concentration in Credit Risk 

Partnership continually monitors its positions with, and the credit quality of, the financial institutions with which it 

invests. Financial instruments that potentially subject the company to concentration of credit risk consist principally 
HB-2-3560 

Attachment 4-M 

Page 16 of 26 

__________________________________________________________________________________________________ 

of cash. Management believes Partnership placed all cash with high-credit quality financial institutions and that 

there is no significant concentration of credit risk with respect to cash.

ABC Apartments, LP RHS

Project No. 00-000-000000000-00-0 

______________________________________________________________________________

See Independent Auditors report
HB-2-3560 

Attachment 4-M 

Page 17 of 26 

__________________________________________________________________________________________________

(02-24-05) SPECIAL PN

Added (11-08-19) PN 530

ABC Apartments, LP RHS

Project No. 00-000-000000000-00-0 

______________________________________________________________________________

See Independent Auditors report
HB-2-3560 

Attachment 4-M 

Page 18 of 26 

__________________________________________________________________________________________________

ABC Apartments, LP RHS

Project No. 00-000-000000000-00-0 

______________________________________________________________________________ 

Form RD 3560-10

Multi-Family Housing

Borrower Balance Sheet

See Independent Auditors report
HB-2-3560 

Attachment 4-M 

Page 19 of 26 

__________________________________________________________________________________________________

(02-24-05) SPECIAL PN

Added (11-08-19) PN 530

ABC Apartments, LP RHS

Project No. 00-000-000000000-00-0 

______________________________________________________________________________

Form RD 3560-7 

Multi-Family Housing

Project Budget

See Independent Auditors report
HB-2-3560 

Attachment 4-M 

Page 20 of 26 

__________________________________________________________________________________________________

INDEPENDENT AUDITORS’ REPORT ON INTERNAL CONTROL OVER FINANCIAL 

REPORTING AND ON COMPLIANCE AND OTHER MATTERS BASED ON AN AUDIT OF

FINANCIAL STATEMENTS PERFORMED IN ACCORDANCE WITH GOVERNMENT AUDITING

STANDARDS

To the Partners of USDA Rural Development 

ABC Limited Partnership Servicing Office

DBA ABC Apartments City, State

City, State

We have audited, in accordance with the auditing standards generally accepted in the United States of 

America and the standards applicable to financial audits contained in Government Auditing

Standards issued by the Comptroller General of the United States, the financial statements of ABC

Limited Partnership, which comprise the balance sheet as of December 31, 20X2, and the related

statements of operations, changes in partners’ equity and cash flows for the year then ended, and the 

related notes to the financial statements, and have issued our report thereon dated DATE, YEAR.

Internal Control Over Financial Reporting

In planning and performing our audit of the financial statements, we considered ABC Limited

Partnership’s internal control over financial reporting (internal control) to determine the audit 

procedures that are appropriate in the circumstances for the purpose of expressing our opinion on the 

financial statements, but not for the purpose of expressing an opinion on the effectiveness of ABC 

Limited Partnership’s internal control. Accordingly, we do not express an opinion on the effectiveness of 

ABC Limited Partnership’s internal control. 

A deficiency in internal control exists when the design or operation of a control does not allow 

management or employees, in the normal course of performing their assigned functions, to prevent, 

or detect and correct, misstatements on a timely basis. A material weakness is a deficiency, or a 

combination of deficiencies, in internal control, such that there is a reasonable possibility that a 

material misstatement of the entity’s financial statements will not be prevented, or detected and 

corrected on a timely basis. A significant deficiency is a deficiency, or a combination of 

deficiencies, in internal control that is less severe than a material weakness, yet important enough to 

merit attention by those charged with governance.

Our consideration of internal control was for the limited purpose described in the first paragraph of 

this section and was not designed to identify all deficiencies in internal control that might be material 

weaknesses or significant deficiencies. Given these limitations, during our audit we did not identify 

any deficiencies in internal control that we consider to be material weaknesses. However, material 

weaknesses may exist that have not been identified.
HB-2-3560 

Attachment 4-M 

Page 21 of 26 

__________________________________________________________________________________________________

(02-24-05) SPECIAL PN

Added (11-08-19) PN 530

ABC Limited Partnership 

Independent Auditors’ 

Report on Internal Control 

Page Two

Compliance and Other Matters

As part of obtaining reasonable assurance about whether ABC Limited Partnership’s financial

statements are free from material misstatement, we performed tests of its compliance with certain 

provisions of laws, regulations, contracts, and grant agreements, non-compliance with which could 

have a direct and material effect on the determination of financial statement amounts. However,

providing an opinion on compliance with those provisions was not an objective of our audit, and 

accordingly, we do not express such an opinion. The results of our tests disclosed no instances of 

non-compliance or other matters that are required to be reported under Government Auditing

Standards. 

Purpose of this Report

The purpose of this report is solely to describe the scope of our testing of internal control and 

compliance and the results of that testing, and not to provide an opinion on the effectiveness of ABC

Limited Partnership’s internal control or on compliance. This report is an integral part of an audit 

performed in accordance with Government Auditing Standards in considering ABC Limited 

Partnership’s internal control and compliance. Accordingly, this communication is not suitable for any

other purpose.

Firm’s signature

City, State

DATE, YEAR
HB-2-3560

Attachment 4-M 

Page 22 of 26

_____________________________________________________________________________________________

INDEPENDENT AUDITOR’S REPORT ON COMPLIANCE FOR EACH MAJOR RD

PROGRAM AND ON INTERNAL CONTROL OVER COMPLIANCE REQUIRED BY THE 

CONSOLIDATED AUDIT GUIDE FOR AUDITS OF RD PROGRAMS

To the Partners of USDA Rural Development 

ABC Limited Partnership Servicing Office 

DBA ABC Apartments City, State City, State 

Report on Compliance for Each Major RD Program

We have audited ABC Limited Partnership’s compliance with the compliance requirements 

described in the Audit Guide for Audits of RD Programs (the Guide) that could have a 

direct and material effect on ABC Limited Partnership’s major U.S. Department of Rural

Development (RD) program for the year ended December 31, 20X2. The Partnership’s 

major RD program is as follows: 

List the major program. 

Name of Major RD Program Direct and Material Compliance 

Requirements 

Section 515 Rural Rental Housing Loan Mortgage status, replacement reserve, return 

on investment or return to owner, equity 

skimming, cash receipts, cash disbursements, 

tenant security deposits, management 

functions, unauthorized change of ownership 

or acquisition of liabilities and unauthorized 

loans of project funds. 

Management’s Responsibility

Management is responsible for compliance with the requirements of laws, regulations, 

contracts, and grants applicable to its RD program.

Auditor’s Responsibility

Our responsibility is to express an opinion on compliance for each of ABC Limited 

Partnership’s major RD programs based on our audit of the compliance requirements 

referred to above. We conducted our audit of compliance in accordance with auditing 

standards generally accepted in the United States of America; the standards applicable to

financial audits contained in Government Auditing Standards, issued by the Comptroller 

General of the United States; and the Guide. Those standards and the Guide require that we

plan and perform the audit to obtain reasonable assurance about whether non-compliance with

the compliance requirements referred to above that could have a direct and material effect on 

a major RD program occurred. An audit includes examining, on a test basis, evidence

about ABC Limited Partnership’s compliance with those requirements and performing such

other procedures as we considered necessary in the circumstances.
HB-2-3560

Attachment 4-M 

Page 23 of 26

_____________________________________________________________________________________________

(02-24-05) SPECIAL PN

Added (11-08-19) PN 530

ABC Limited Partnership 

Independent Auditors’ Report

on Internal Control 

Page Two

We believe that our audit provides a reasonable basis for our opinion on compliance for each 

major RD programs. However, our audit does not provide a legal determination of ABC 

Limited Partnership’s compliance.

Opinion on Each Major RD Program

In our opinion, ABC Limited Partnership complied, in all material respects, with the 

compliance requirements referred to above that could have a direct and material effect on 

each of its major RD program for the year ended December 31, 20X2. 

Other Matters (needs to be included if immaterial instances of non-compliance 

were noted)

We noted certain matters that we are required to report to management of ABC Limited 

Partnership in a separate written communication. These matters are described in our 

management letter dated DATE, YEAR.

Report on Internal Control Over Compliance

Management of ABC Limited Partnership is responsible for establishing and maintaining 

effective internal control over compliance with the compliance requirements referred to

above. In planning and performing our audit of compliance, we considered ABC Limited 

Partnership’s internal control over compliance with the requirements that could have a 

direct and material effect on its major RD program to determine the auditing procedures that 

are appropriate in the circumstances for the purpose of expressing an opinion on compliance

for its major RD program and to test and report on internal control over compliance in 

accordance with the Guide, but not for the purpose of expressing an opinion on the 

effectiveness of internal control over compliance. Accordingly, we do not express an opinion 

on the effectiveness of ABC Limited Partnership’s internal control over compliance.

A deficiency in internal control over compliance exists when the design or operation of a 

control over compliance does not allow management or employees, in the normal course 

of performing their assigned functions, to prevent, or detect and correct, non-compliance

with a compliance requirement of an RD program on a timely basis. A material weakness in

internal control over compliance is a deficiency, or combination of deficiencies, in internal 

control over compliance, such that there is a reasonable possibility that material noncompliance with a compliance requirement of a RD program will not be prevented, or 

detected and corrected, on a timely basis. A significant deficiency in internal control over 

compliance is a deficiency, or a combination of deficiencies, in internal control over 

compliance with a compliance requirement of a RD program that is less severe than a 

material weakness in internal control over compliance, yet important enough to merit

attention by those charged with governance.

.
HB-2-3560

Attachment 4-M 

Page 24 of 26

_____________________________________________________________________________________________

 ABC Limited Partnership 

Independent Auditors’ Report 

on Internal Control Page Three

Our consideration of internal control over compliance was for the limited purpose described in 

the first paragraph of this section and was not designed to identify all deficiencies in internal 

control over compliance that might be material weaknesses or significant deficiencies. We

did not identify any deficiencies in internal control over compliance that we consider to be 

material weaknesses. However, material weaknesses may exist that have not been identified. 

The purpose of this report on internal control over compliance is solely to describe the 

scope of our testing of internal control over compliance and the results of that testing 

based on the requirements of the Guide. Accordingly, this report is not suitable for any other 

purpose.

Firm’s signature

City, State 

DATE,YEAR
HB-2-3560

Attachment 4-M 

Page 25 of 26 

_____________________________________________________________________________________________

(02-24-05) SPECIAL PN

Added (11-08-19) PN 530

ABC Apartments, LP RHS

Project No. 00-000-000000000-00-0 

______________________________________________________________________________
HB-2-3560

Attachment 4-M 

Page 26 of 26

_____________________________________________________________________________________________ 

ABC Apartments, LP RHS

Project No. 00-000-000000000-00-0 

______________________________________________________________________________
HB-2-3560

Attachment 4-N

Page 1 of 4

(02-24-05) SPECIAL PN

Added (11-08-19) PN 530

Attachment 4-N

Year End Financial Reporting Requirements

State and Local Government, Indian Tribes and Non-Profit Organizations

Single Audit

The Single Audit is divided into two areas: Compliance and Financial.

The compliance component of a Single Audit covers the study and understanding (planning stage) as well 

as the testing and evaluation (exam stage) of the recipient with respect to federal assistance usage, 

operations and compliance with laws and regulations

The financial component is exactly like a financial audit of a non-Federal entity which includes the audit 

of the financial statements and accompanying notes.

Single Audit Component Reference /Checklist

Financial Statement(s) 2 CFR 200.510(a) 

Opinion on Financial Statements 2 CFR 200.515(a)

Uniform Guidance Report on Internal Control 2 CFR 200.515(b) (major programs)

Uniform Guidance Report on Compliance 2 CFR 200.515(c) (major programs)

GAS Report on Internal Control 2 CFR 200.515(b)

Schedule of expenditures of Federal Awards 2 CFR 200.510(b) (Example provided)

Opinion or Disclaimer of Opinion on Schedule of Federal Awards 2 CFR 200.515(a)

GAS Report on Compliance 2 CFR 200.515(c)

Schedule of Findings and Questioned Costs 2 CFR 200.515(d) (Example provided)

Summary Schedule of Prior Audit Findings 2 CFR 200.511(b)

Corrective Action Plan (if findings) 2 CFR 200.511(c) (Example provided)
HB-2-3560

Attachment 4-N

Page 2 of 4

_________________________________________________________________________________________

DEF Apartments NFP

Project No. 00-000-000000000-00-0 ____________________________________________________________________________________________________

SCHEDULE OF EXPENDITURES OF FEDERAL AWARDS

Year ended December 31, 20X7

Federal Grantor/ Federal Agency or

(Pass-through Grantor)/ CFDA Pass-through Federal

Program Title Number Number Expenditures 

U.S. Departments of Agriculture 

Rural Rental Housing Loans 10.415 $2,247,033

U.S. Departments of Agriculture 

Rural Rental Housing Loans 10.427 242,249

U.S. Departments of Agriculture 

Interest Assistance Programs 10.437 87, 046

Total $ 2,576,328

1. Basis of Presentation

The accompanying schedule of expenditures of federal awards (the Schedule) includes the

federal award activity of DEF Apartments under programs of the federal government

for the year ended December 31, 20X7.

The information in this Schedule is presented in accordance with the requirements of Title 2

U.S. Code of Federal Regulations (CFR) Part 200, Uniform Administrative Requirements, Cost

Principles, and Audit Requirements for Federal Awards (Uniform Guidance). Because the

Schedule presents only a selected portion of the operations of the Project, it is not intended to

and does not present the Project's financial position, changes in net assets, or cash flows.

2. Summary of Significant Accounting Policies

(a) Expenditures reported on the Schedule are reported on the accrual basis of accounting. Such

expenditures are recognized following the cost principles contained in the Uniform Guidance,

wherein certain types of expenditures are not allowable or are limited as to reimbursement.

(b) DEF Apartments NFP has elected not to use the 10 percent de minimus indirect cost

rate as allowed under the Uniform Guidance.

(c) The outstanding balance of loan and loan guarantee programs at December 31, 20x7 with

continuing compliance requirements which are reported as federal expenditures on the

accompanying schedule of expenditures of Federal Awards was $2,229,088.

See Independent Auditor’s Report

.
HB-2-3560

Attachment 4-N

Page 3 of 4

_____________________________________________________________________________________________

(02-24-05) SPECIAL PN

Added (11-08-19) PN 530

DEF Apartments NFP

Project No. 00-000-000000000-00-0

_____________________________________________________________________________

_

SCHEDULE OF FINDINGS

Year ended December 31, 20X7

Financial Statements

Type of auditor's report issued: Unmodified

Internal control over financial reporting:

 Material weakness identified? _____ Yes X No

 Significant deficiency identified not considered

to be material weaknesses? _____ Yes X None

Non-compliance material to financial statements noted? _____ Yes X No 

Federal Awards

Type of auditor's report issued on compliance for

major programs:

Internal control over financial reporting:

Material weakness identified? _____ Yes X No 

Significant deficiency identified not considered

to be material weaknesses? _____ Yes X None

Any audit findings disclosed that are required to be

reported in accordance with CFR Section

200.516(a)? _____ Yes X No

Identification of major programs:

CFDA Number Name of Federal Program or Cluster

 10.415 Rural Rental Housing Loans

Dollar threshold used to distinguish between Type A

and Type B programs: $XX0, 0000

 

Auditee qualified as low-risk auditee? _____ Yes X No
HB-2-3560

Attachment 4-N

Page 4 of 4

_____________________________________________________________________________________________

DEF Apartments NFP

Project No. 00-000-000000000-00-0

_____________________________________________________________________________

_

SCHEDULE OF FINDINGS, QUESTIONED COSTS, AND RECOMMENDATIONS

December 31, 20X7

Findings Financial Statements Audit

None noted

Findings and Questioned Costs Major Award Programs Audit

None noted

Findings and Questioned Costs Prior Years

None noted
HB-2-3560

Attachment 4-O

Page 1 of 5

_____________________________________________________________________________________________

(02-24-05) SPECIAL PN

Added (11-08-19) PN 530

ATTACHMENT 4-O

Agency Review of Annual Financial Reports 

To be used as a GUIDE to assist in the review and expose areas of risk that may need further scrutiny.

Borrower/Property Name: _________________________ Year Ending: ______________ 

Number of Units: ________ RA Units ________ Date Received: __________________ (complete package)

Amount of Federal financial assistance_________________

Borrower Submissions 

 Form 3560-7 MFH Project Budget Actual Expenditures (Submitted through MINC, unless <8 units)

 Form 3560-10 MFH Borrower Balance Sheet (Submitted through MINC, unless < 8 units))

 Borrower Certification of Performance Standards (Attachment 4-F)

 Engagement Letter (For-Profit/Limited Profit Borrowers- $500,000 or greater of federal financial assistance)

For profit entities with less than $500,000 or not for profit type entities with less than $750,000 in Federal 

assistance with no other required audits, see Section 4.16 D Owners compilation of prescribe forms. 

 Independent Accountants’ Compilation Report ($500,000 or greater of federal financial assistance) 

 State and Local Governments, Indian tribes and Non-Profit Organization SUBJECT TO 2 CFR 200 Part F

 Audited Financial Statements (In accordance with GAGAS and yellow book standards) (For-Profits Entities) OR:

 Audited Financial Statements (In accordance with 2 CFR 200 Part F) (Non-Profit Organizations)

 

Reports to View/Review 

 Year End Actual Analysis 

 Year End Actual Management Fee Analysis

 Year End Actual Rental Income Analysis

 Year End Actual Escrow calculation

 FIN2100 - Project Reserve Account Checkbook and Project Outstanding Authorizations

 PRJS4200 - Occupancy Trend 

Agency Review

 Confirm that the engagement was performed by CPA as described in the requirements 

If not: send back or provide explanation.

 Confirm that the performance standards were certified as described per Attachment 4-F

If not: send back or provide explanation.

 Confirm that non-profit and public bodies have submitted any OMB required annual financial statements.

 Note any findings identified in the compilation report and determine corrective actions. These would be 

located in the findings of the audit findings page

 Utilize the MFIS analysis tool to perform the preliminary assessment of the financial statements.

 Confirm the information submitted to the Agency electronically through MINC on Forms RD 3560-7 and 3560-

10 is the same as the forms submitted with the financial reports from the auditor, If not: send back.

Follow-up needed by __________on items in e-mail/letter to borrower dated __________. 

(e-mail/letter attached)

COMMENTS:___________________________________________________________________________________

_____________________________________________________________________________________________

_____________________________________________________________________________________________
HB-2-3560

Attachment 4-O

Page 3 of 5

_____________________________________________________________________________________________

AGENCY REVIEW OF ANNUAL FINANCIAL REPORTS

A. Analysis of actual income and expenses. 

 Using the actual budget submitted in MFIS, review actual income and expenses & note any unexplained

variance from projection or historical data

 RUN Analysis Report – review and explain variances in comments. 

B. Account maintenance, tracking, and disclosure. 

 Compare account balances from MFIS, the audit report and borrower certification and confirm that the 

financial report states that:

o Required accounts (operating, reserve, tax & insurance, and tenant security deposits) are maintained 

and tracked separately;  Yes  No _________________________________________________

o Payments from operating accounts are disclosed and accurately represented.

 Yes  No ________________________________________________________________

o Have any dramatic, unexplained changes in account balances occurred.

 Yes  No ________________________________________________________________

C. Reserve account status. 

 From the financial report, review the amounts listed for the reserve balance, deposits, and withdrawals 

o Confirm that the financial report states that the reserve account is current and that there are no 

encumbrances on the reserve account funds

o If Reserve Account is delinquent is there a Work Out Plan in place or requested? Yes  No

 Review Reserve Tracked account with Actuals

o Does the amount the Agency shows as authorized withdrawals match the amount reported 

withdrawn on yearend actuals?  Yes  No ____________

o Is the proper bids been received for work greater than $5,000?  Yes  No ____________

 The following items are flags and require further analysis: 

o Was Reserve used for operating?  Yes  No _____

o Is there less than $1000 balance in the reserve account?  Yes  No _______________

o Is there less than the deductible (GAP amount) in the account?  Yes  No _______________

D. Tenant security deposit account status. 

Review tenant security account balance from the financial report

Tenant security deposit balance $_______________

Tenant security deposit liability $_______________ Overfunded/Underfunded? 

Verify tenant security deposits are maintained in a separate account and in accordance with state law.

E. Payment of return to owner OR Non-Profit Asset Management Fee. 

 Confirm that the financial report states that the payment of the owner’s return was consistent with the terms 

of the loan agreement or resolution. 

The payment of owner return was:

 paid in the amount of $____________ for _____ fiscal year and was in accordance with the Agency’s 

requirements 

o Amount allowed from $ Net Cash $ Excess Cash $ Reserve Account

 paid in the amount of $____________ for _____ fiscal year and was not in accordance with the 

Agency’s requirements

o Requested to refund ____________

 not paid during the reporting year 

 The payment of Non-Profit Asset Management Fee was:

 paid in the amount of $____________ 
HB-2-3560

Attachment 4-O

Page 3 of 5

_____________________________________________________________________________________________

 not more than $7500 per project for certain organizational expenses, such as errors and omissions 

and actual expenses prorated by the number of Rural Development projects. 

 documented by evidence of allowable expenses. 

F. Insurance status. 

 Confirm that the financial report states that all relevant insurance requirements were met.

 Reasonable expense amount for insurance?  Yes  No _______________

 List not current. __________________________________________

G. Taxes and other assessments. 

 Confirm that the financial report states that taxes and other assessments are current.

 Expense amount for taxes? _______________

 List any taxes or assessments that are not current. __________________________________________

H. Issues of financial compliance and conditions. 

 Confirm in the financial report that any funds used for unauthorized purposes have been repaid.

 Not Applicable

 Yes...Amount Repaid $__________________ / What for: _______________________________

I. Payment of management fees. 

 Review Management Analysis in MFIS.

 Using the actuals in the financial report, confirm that the management fee was paid in accordance with 

the management certification 

 Confirm management agent is not charging the project for agent expenses. 

J. Miscellaneous Review

 Is all Rental Assistance being utilized?  Yes  No _______________

 Amount of accounts receivable $__________________

o Is there an itemization attached showing what it includes?  Yes  No 

o Corrective actions disclosed?  Yes  No 

 Amount of Accounts Payable $ __________________

o Is there an itemization attached showing what it includes?  Yes  No 

o Corrective Actions disclosed?  Yes  No 

 Notes payable $____________ Who to ________________ Payment terms $__________________

o Documentation of RD approval  Yes  No 

o Servicing effort in MFIS with comments?  Yes  No 

 Is the 3560-10, balance Sheet signed by the borrower/rep and the disinterested third party?  Yes  No 

 Is there a need for a Work Out Agreement  Yes  No For what reason? ___________________

o If there is a Work Out Agreement, is it being followed?  Yes  No Does it need to be 

updated?  Yes  No Quarterly reports being received?  Yes  No 

K. When done - Update Supervisory Activities in MFIS: 

 3560-7 Actual / 3560-10 Balance Sheet receive date (when complete report received), figures entered MFIS 

 3560-7 Actual / 3560-10 Bal Sheet Initial Review date (analysis must be complete, additional info needed) –

 3560-7 Actual / 3560-10 Bal Sheet Final Review date (analysis must be complete & acceptable to the Agency) 

 Audit received date entered in MFIS (if applicable) 

 Audit reviewed date entered in MFIS (if applicable) 

 Real Estate Taxes

Letter to Borrower: 

 Letter to borrower that actuals have been reviewed & any findings or concerns noted during review 

MISC: 

 Questions on Year End Financial review: ______________ ______________ ______________ 
HB-2-3560

Attachment 4-O

Page 4 of 5

_____________________________________________________________________________________________

Date Sent ___________________Due Back (30 days)_______________________ Date Received Back_______

PROJECT FINANCIAL AUDIT

Over $500,000 Federal Financial Assistance

An audit should consist of the following items at a minimum: 

 Independent Auditor’s Report 

 Financial Statements 

 Balance Sheets 

 Statements of Operations 

 Statements of Changes in Partner’s Equity (Deficit) 

 Statements of Cash Flows 

 Notes to the Financial Statements 

 Supplemental Information 

• Management Fee Calculation

• Insurance Disclosure

• Return to Owner

• Changes in Rental Property

• Accrual to cash schedule

• Multiple Family Housing Borrower Balance Sheet – form RD 3560-10

• Multiple Family Housing Project Budget – Form RD 3560-7

• Supporting Documentation to Form 3560-10 and 3560-7

 Report on Internal Control Over Financial Reporting and on Compliance and Other Matters Based on an 

Audit of Financial Statements Performed in Accordance with Government Auditing Standards 

 Independent Auditor’s Report on compliance for Each Major RD Program and Internal control over 

Compliance required by the Audit guide for Audits of RD Programs

 Schedule of Findings and Questioned Costs (current year and prior year)

 Corrective Action Plan (if applicable)

COMMENTS:

_____________________________________________________________________________________________

_____________________________________________________________________________________________

_____________________________________________________________________________________________ 

_____________________________________________________________________________________________

_____________________________________________________________________________________________

Agency Review of Annual Financial Reports

 _______________________

 Review Completed By Date

 This borrower has 

$500,000 or less of Federal 

financial assistance.

Audit is not required

 No project audits are 

available completed by 

anyone else. 

 
HB-2-3560

Attachment 4-O

Page 5 of 5

_____________________________________________________________________________________________

(02-24-05) SPECIAL PN

Added (11-08-19) PN 530

PROJECT FINANCIAL AUDIT

Over $750,000 Federal Financial Assistance

A Single audit should consist of the following items at a minimum: 

 Financial Statement(s) 2 CFR 200.510(a) 

 Opinion on Financial Statements 2 CFR 200.515(a)

 Uniform Guidance Report on Internal Control 2 CFR 200.515(b) (major programs)

 Uniform Guidance Report on Compliance 2 CFR 200.515(c) (major programs)

 GAS Report on Internal Control 2 CFR 200.515(b)

 Schedule of expenditures of Federal Awards 2 CFR 200.510(b) (Example provided)

 Opinion or Disclaimer of Opinion on Schedule of Federal Awards 2 CFR 200.515(a)

 GAS Report on Compliance 2 CFR 200.515(c)

 Schedule of Findings and Questioned Costs 2 CFR 200.515(d) (Example provided)

 Summary Schedule of Prior Audit Findings 2 CFR 200.511(b)

 Corrective Action Plan (if findings) 2 CFR 200.511(c) (Example provided)

COMMENTS:

_____________________________________________________________________________________________

_____________________________________________________________________________________________

_____________________________________________________________________________________________ 

_____________________________________________________________________________________________

_____________________________________________________________________________________________

Agency Review of Annual Financial Reports

 _______________________

 Review Completed By Date

 This borrower has 

$750,000 or less of Federal 

financial assistance. 

A single audit is not 

required.

 No project audits have 

been completed by anyone 

else. 
HB-2-3560

_____________________________________________________________________________________________

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