Spreadsheet: 896cf568-6684-4766-893a-f6620dd110e3
Sheet: Sheet1

User Notice:  This table is provided as a tool to assist users searching for answers to M2M/DEMO Accounting questions. Please review the source documents posted at http://www.hud.gov/offices/hsg/omhar/mhrowner.cfm.  OAHP staff have annotated when answer changed a prior decision or if there are questions that are similar with different nuances - look for the phrase "see also" or "superseded" in the answer column.  Some answers would not fit in a single cell in column E, so check to be sure you are reviewing the ENTIRE answer (eg, column C lists the first question from 2005 as #1a and 1b because the answer had to be split into two cells). | Unnamed: 1 | Unnamed: 2 | Unnamed: 3 | Unnamed: 4
Category, Key Words | Accounting letter-- year released | Original Question Number |  | Answer
negative [NAME],  CRP, IPF, preconditions, | 2004 | 1 | Are payments due on DEMO and M2M notes within 10 days of the AFS due date or within 10 days of filing the AFS?  If an AFS is filed before the filing deadline, is there an earlier payment due date? | There are several impacts.  No Incentive Performance Fee (IPF) is earned, accrued, or paid to the Owner for the year just ended.  No payment is due under the Mortgage Restructuring Note (MRN) or [NAME] (CRN) for that year.  Finally, it is possible that the property may not meet the preconditions for continued payment of Capital Recovery Payments (CRPs).
CRP, IPF, preconditions | 2004 | 2 | What are the preconditions for  CRPs and IPFs to be earned and paid? | The following paraphrases the Regulatory Agreement Rider; see the Rider for the exact wording:  (a) all project expenses have been paid; (b) all required payments have been made on the Mortgage Restructuring Note and on any 1st mortgage;  (c) the most recent REAC physical inspection score is 60 or above;  (d) there are no outstanding HUD audit or management findings; and  (e) the owner is not in default under any of the key governing documents such as the Regulatory Agreement.   As noted elsewhere, in addition to these general performance and compliance criteria, IPF is earned and paid only from positive Surplus cash.
CRP | 2004 | 3 | Say that the M2M closing occurs on October 10th.  Is the owner eligible to receive a Capital Recovery Payment (CRP) on November 1? | No. The first CRP that the owner may receive (provided all preconditions for payment have been satisfied) would be the December 1 CRP. No CRP is allowed for the partial month in which the M2M closing occurs.
CRP, accrual | 2004 | 4 | If the CRP is not payable, due to lack of sufficient cash or failure to meet performance criteria, how is it treated from an accounting standpoint? | See also 2005 #7 and  2007 #8 for further clarification.  Accrued and unpaid CRPs should be listed as obligations on the Surplus Cash calculation; there is no surplus cash until those have been covered.
IPF, partial year | 2004 | 5 | For the year in which the M2M closing occurs, how is the Incentive Performance Fee (IPF) calculated? | The IPF is calculated based on the Effective Gross Income for the period beginning the day after the M2M closing and continuing through year-end. Owners who claim an IPF for the Partial year in which the M2M closing occurs must include a computation of Partial year Effective Gross Income (EGI) in the notes to the audited financial statements.
EGI, account #s, Effective Gross Income | 2004 | 6 | How is EGI calculated? | Effective Gross Income is: Gross Potential Rents (FASS account 5100T Total Rent Revenue, but excluding FASS accounts 5180 Flexible Subsidy Revenue and FASS account 5191 Excess Rents); Minus Vacancy and Bad Debt (FASS account 5200T Total Vacancies plus FASS account 6370 Bad Debt) Plus Other Income (FASS account 5900T Total Other Revenue, but excluding FASS account 5945 Interest Reduction Payments Revenue). Note: FASS account 5400T Total Financial Revenue is not included in EGI because these line items were not included in the M2M underwriting and because (for the most Part) this represents interest income on the Reserve for Replacements that is not available for operations.
IPF,  account #s | 2004 | 7 | If an IPF is earned for the year, how should it be reflected in the annual financial statements? | Do not reflect the IPF as an obligation on the Surplus Cash schedule; instead, the IPF is calculated on the Surplus Cash schedule (FASS S1300-203). The IPF should be shown as an expense on the Profit and Loss Statement (FASS 7115) and as an accrued liability on the balance sheet FASS 2190 Miscellaneous Current Liabilities.(FASS 2114 - Incentive Performance Fee Payable). ([NAME], see 2008 #6 re new account)
account #s, payments | 2004 | 8 | How does the owner document the distribution of Surplus Cash after [NAME]? | The actual payment of Capital Recovery Payments, payment of Incentive Performance Fees, and/or payments on the Mortgage Restructuring Note / Contingent Repayment Note must be reflected in the Statement of Changes in Financial Condition in the audited financial statements for the year in which payment was made.   In addition: --Any CRPs that were due but not paid as of year-end (for example, because the REAC physical inspection score was too low) must be reflected as liabilities on the balance sheet.  --Any IPF that was earned for the year (to be paid to the Owner in cash after completion of the audited financial statements) must be reflected as an expense on the Profit and Loss Statement.  --The proposed distribution of positive year-end Surplus Cash must be reflected on Part B of the Surplus Cash Schedule in the audited financial statements. OMHAR recommends that accountants include in the audited financial statements an explanation of how any IPF was calculated, and an explanation of how any Mortgage Restructuring Note / Contingent Repayment Note payment was calculated.
payments, MRN, Mortgage Restructuring Note | 2004 | 9 | How are Mortgage Restructuring Note payments calculated? | Start with audited positive Surplus Cash. Subtract any IPF that was earned for the year just ended.  Any remaining positive [NAME] is divided between the Mortgage Restructuring Note and the owner according to a percentage determined by the PAE, approved by OMHAR, and documented in the Mortgage Restructuring Note (and subject to all other applicable HUD requirements).  If no IPF is payable for the year, all positive [NAME] is split between the MRN and the owner. By statute, the percentage due on the Mortgage Restructuring Note cannot be less than 75%.
footnotes, FASS | 2004 | 10 | Will HUD read footnotes and explanations regarding post-M2M accounting treatments? | HUD and its servicer find supplemental information very valuable in understanding the accounting treatments.  Such information may forestall questions and accountants are encouraged to make use of the opportunity to provide explanations.
CRP, IPF, distribution | 2005 | 1a | If earned, when can I take distribution of CRP and IPF payments, and must I wait for permission from HUD to do so?  (Part 1 of 2) | (Part 1 of 2) CRP is made in monthly payments from property funds to the owner as earned, assuming all preconditions are met, including that “all Project expenses are paid.”  IPF is payable to the owner at the end of the accounting year, assuming all preconditions have been met.  None of these payments require explicit permission in advance from HUD.  However, by submitting an AFS reflecting that IPF was earned, or that CRPs were paid, the owner is certifying that those preconditions were met.  (See also the 2004 Q&A for clarification of CRP and IPF preconditions and calculation.)  Improper CRP/IPF payments are violations of the Regulatory Agreement (Rider) and can result in enforcement remedies including acceleration of the MRN/CRN. Additionally, improper payment may result in the issuance by HUD of an audit or management finding that, until resolved, would prohibit payment of future CRP and IPF.    (Answer is continued in 1b for 2005)
CRP, IPF, distribution | 2005 | 1 b | If earned, when can I take distribution of CRP and IPF payments, and must I wait for permission from HUD to do so?  (Part 2 of 2) | (Part 2 of 2) If a financial review by HUD concludes that CRP and/or IPF were paid when preconditions had not been met, any improperly distributed amounts will have to be repaid to the project accounts, which will increase the Surplus Cash and resulting payments due on the Mortgage Restructuring Note.  The owner will be invoiced for any amounts due on the Note that result from such a review and recalculation, and these amounts become due and payable when invoiced.  An adjusted computation of Surplus Cash must be included in the following year’s AFS (do not re-file the AFS for the year in question).
OCAF, 9250 | 2005 | 2 | My M2M Restructuring and post-M2M Section 8 contract call for annual OCAF adjustments to rents, as well as Reserve for Replacements deposits.  How do these occur?  How do I account for them? | Post-M2M rents are expected to increase, and are limited in increase, by the OCAF.  Adjustments will be processed as provided in the HAP contract and the Section 8 Renewal Guide; the annual adjustment process must be initiated by the property owner.  The Renewal Guide also requires an annual OCAF adjustment to the Reserve for Replacement (R4R) deposits (except in the few cases where the sole source of the R4R deposits is the reuse of fixed-stream Section 236 IRP funds).  This adjustment will be reflected annually on form 9250, provided to the owner by the Multifamily Project Manager.
R4R, reimbursements, reserve for replacements | 2005 | 3a | How should owners manage withdrawals from the Reserve for Replacements, so as not to adversely impact Surplus Cash in a post-M2M project? (Part 1 of 2) | (Part 1 of 2)  Generally, properties will achieve Surplus Cash over time when they are operating with positive cash flow, but there are timing issues that can affect [NAME], especially in the year following the M2M closing.  Owners wishing to take the benefit of the IPF and CRP should consider, for example, that restricted escrows (such as the Reserve for Replacements and the Rehabilitation Escrow) are not included in available cash for calculating [NAME], therefore: --Reserve for Replacement withdrawals must be approved by HUD or its authorized agent before the end of the fiscal period or the effect will be to diminish Surplus Cash; --Rehabilitation expenditures that are covered by the Rehabilitation Escrow must have been reimbursed before the end of the fiscal year to have a neutral effect on Surplus Cash; --If insured loss reimbursements can be managed to achieve reimbursement before the end of the fiscal period, this will also neutralize the otherwise negative effect on Surplus Cash;  (Answer is continued in 3b for 2005)
R4R, reimbursements, reserve for replacements | 2005 | 3 b | How should owners manage withdrawals from the Reserve for Replacements, so as not to adversely impact Surplus Cash in a post-M2M project? (Part 2 of 2) | (Part 2 of 2) As a result, while owners should not change their physical management and operation of the property in consideration of these issues, they may find it advisable to manage the submissions for reimbursement to reasonably assure that there are not large reimbursements in process at the end of the fiscal period.
TPA, partial year, purchaser | 2005 | 4 | After closing the M2M restructure I sold the subject project via a Transfer of Physical Assets (TPA).  Am I required to file a partial year AFS for the year in which the TPA was completed?  Can I collect a partial year CRP and IPF? Am I required to include a Surplus Cash Schedule in the partial year AFS, and am I obligated to make an MRN payment if there is [NAME]? | Yes, you are required to file a Partial year AFS because all closed Full M2M projects are subject to a M2M Regulatory Agreement. The seller’s obligation to file a Partial year AFS is also referenced in the TPA Application (HUD-92266).  The seller’s Partial year AFS should cover the period from the beginning of the fiscal year to the day before the property transfer closes.  Note that the TPA purchaser is also required to submit a Partial year AFS to cover from the date the property transfer closes until the end of the purchaser’s fiscal year end.  The CRP and IPF, if earned, are prorated for the portion of the year reported; a Calculation of Surplus Cash must be completed as of the date of sale, and a payment to the MRN must be made per the terms of the Note if Surplus Cash was available as of the date of TPA.
partial year, surplus cash, distribution | 2005 | 5a | In the year of the M2M closing, how do I account for the prorated portions of the year pre- and post-M2M, and how do I calculate Surplus Cash for the Partial year? (Part 1 of 3) | (Part 1 of 3) In the full year after a M2M closing, the old rules regarding distributions and accrued distributions no longer apply.  The old regulatory agreement is set aside, and the owner must follow the rules in the M2M documents.  In the year of M2M closing, however, the owner is subject to both the original regulatory requirements and the new M2M requirements.  The owner has two accounting options available during the year of closing: 1. The owner may choose to follow the new M2M requirements for the entire year.  If this option is chosen, surplus cash would be computed at the end of the year and any surplus cash would be distributed in accordance with the M2M documents.  Please note, the Incentive Performance Fee must be prorated; the owner would only be entitled to a fee based on gross collections beginning from the date of the M2M closing through the end of the fiscal year.  (Answer is continued in 5b and 5c for 2005.)
partial year, surplus cash, distribution | 2005 | 5 b | In the year of the M2M closing, how do I account for the prorated portions of the year pre- and post-M2M, and how do I calculate Surplus Cash for the Partial year? (Part 2 of 3) | (Part 2 of 3)   2. The owner may choose to perform a special computation of surplus cash as of the date of M2M closing.  This special computation of surplus cash would allow the owner to take any distributions they may be entitled to under the old regulatory agreement.  The special computation would be in addition to the year-end computation of surplus cash.  Both computations must be a part of the audited financial statements, and must be reported to HUD via the Real Estate Assessment Center’s FASS system. The owner would report the special computation using the FASS account numbers S1400-010 through S1400-250, the account numbers normally associated with a semiannual computation of surplus cash.  If the special computation indicates that the owner is entitled to a distribution, then the amount available for distribution should be counted as a current obligation on the year-end computation of surplus cash.  This will prevent the funds from being subject to the MRN payment calculation. The owner may distribute these funds any time during the next fiscal year.  (Answer is continued in 5c for 2005.)
partial year, surplus cash, distribution | 2005 | 5c | In the year of the M2M closing, how do I account for the prorated portions of the year pre- and post-M2M, and how do I calculate Surplus Cash for the partial year? (Part 3 of 3) | (Part 3 of 3)    Exception: If the M2M closing occurs during the last half of the fisal year, the owner may be entitled to a mid-year distribution under the existing regulatory agreement.  In these instances, the audited financial statements would contain 3 computations of surplus cash (the semiannual computation, the special M2M closing computation, and the yearend computation).  The owner would use the semiannual surplus cash FASS account numbers to report the semiannual computation.  The special M2M closing computation would have to be submitted as part of the notes to financial statements.
account #s, FASS schedules | 2005 | 6 | How are accrued interest and unpaid principal balance of the M2M Mortgage Restructuring Notes and Contingent Repayment Notes reflected in the AFS? | Any MRN / CRN principal balance that is to be paid from current Surplus Cash should be shown as a short term obligation in the AFS (FASS account 2172 Other Mortgages Payable Short Term). The long term portion of the unpaid principal balance of MRN / CRN should be reflected in the AFS (FASS account 2322). The accrued interest on the MRN / CRN should be shown in FASS account 2132 – Accrued Interest Payable – Other mortgages.
CRP, account #s | 2005 | 7 | How should Capital Recovery Payments (CRPs) be reflected in the AFS? | See also 2007 #8 for further clarification (strikeout below).   In the AFS, the owner’s investment (on which the CRPs provide a return) is treated as a loan, with the interest rate and term determined in the M2M underwriting.  Each monthly payment is treated as having principal and interest portions. CRP payments during a fiscal year are reported on the Statement of Cash Flows in FASS accounts S1200-417 (principal portion) and S1200-195 (interest portion).  At the end of a fiscal year, the loan will have a remaining principal balance (some of which is to be paid within twelve months and is reflected as a current liability reflected in FASS account 2179, with the balance being a long term liability reflected in FASS account 2329).  If any payments have become due but have not been paid as of fiscal year end, there will also be accrued interest payable, which should be shown in FASS account 2139 – Accrued Interest Payable – Capital Recovery Payment (M2M).    CRP payments that are due but that have not been paid may be included as obligations on the computation of surplus cash only if, as of fiscal year end, the preconditions for payment had been satisfied.
mail, payments | 2005 | 8 | How, where, and when do I send payments for my M2M Note (MRN – Mortgage Restructuring Note, or CRN – Contingent Repayment Note)? | Superseded.  See 2007 #13.
SCA, contractor | 2005 | 9 | I have received correspondence from HUD contractors on post-M2M issues.  Has HUD engaged contractors to assist in the review and analysis of AFS and M2M Notes payments? | Yes.  Representatives from HUD contractors may directly contact a property owner only when expressly directed to do so by HUD.  RER Solutions, Inc. (and its subcontractor Value Recovery Group), have been retained as OAHP’s portfolio management advisor, responsible for financial review and analysis of projects to ensure appropriate calculation of Surplus Cash and subsequent MRN and CRN payments.  DP Services, Inc. has been retained as the notes servicer and cash manager for the M2M Notes portfolio, responsible for monthly statements, billings and collections, and collection and management of escrows when HUD’s note is in first [NAME] position.  If HUD’s analysis of submitted financials results in recalculated [NAME] and MRN/CRN payments, supplemental billings for amounts due will be from DP Services, Inc., or directly from HUD.    UPDATED in intro to 2007 Supplemental Accounting Letter -new PCPM contractor.
footnotes, AFS, Notes | 2005 | 10 | If there is additional information regarding explanations or calculations of accounts, can those be included in the footnotes, and will those be accessible to HUD and OAHP? | HUD and its contractors find supplemental footnote information in the annual financial statement filings very valuable in understanding underlying calculations and accounting treatment of M2M items.  Accountants are strongly encouraged to make use of footnotes in the AFS for all projects.  For projects closed prior to 2000 in the Portfolio Reengineering Program Demonstration program, explanations of the calculation of “Net Cash” are very helpful in reconciling Notes payments.
errors, footnotes, re-file, Surplus Cash | 2006 | 1 | I received correspondence notifying me of an error made in calculating Surplus Cash in a  prior year’s AFS.   Must I re-file for that year?  How should I document the adjustment? Does it matter if the revision changes the payment due on my MRN? | HUD does not require you to amend or re-file the prior year AFS, in fact HUD discourages you from doing so.   The owner should submit a revised Computation of Surplus Cash in hard copy form to the HUD Project Manager (PM).  The revised Computation of Surplus Cash should also be entered in the footnotes of the project’s next AFS along with an explanation as to why the revised calculation was required.  That footnote should identify and summarize all such correspondence from HUD and/or HUD’s contractors regarding adjustments to prior year AFS, whether or not they resulted in additional payments to HUD on the M2M debt.  This is applicable whether or not the payment amount on the MRN changes.
errors, footnotes, re-file, amend | 2006 | 2 | After reviewing your M2M Accounting Q&As, I believe the amount due on my MRN was incorrectly reflected in my prior year AFS and thus I have made an overpayment to HUD.  What should I do to resolve this? | Please do not re-file or amend your AFS.  When HUD’s PCPM contractor reviews your AFS they will note any adjustments to the M2M payment (up or down) and provide specific guidance on how to proceed.  We recommend that the excess payment be retained by HUD, as the excess payment will simply result in less Surplus Cash (and a smaller payment) in the following year. However, if the overpayment is in excess of $1000, HUD will consider requests for refunds submitted in writing to the M2M note payment address specified in your Note (HUD’s  Lockbox--new address as of December 2006), including all relevant information.  HUD’s PCPM contractor will determine if an overpayment indeed occurred, and make a refund recommendation to OAHP.
account #[NAME], partial year | 2006 | 3 | I am submitting my AFS for the year in which the M2M closing occurred.  The REAC FASS system presents the non-M2M Surplus Cash template instead of the M2M Surplus Cash template.  What should I do? | Contact your HUD Project Manager and ask that they confirm that the Real Estate Management System (REMS) has been updated to reflect the project as a M2M project.  After assuring that all of this is correct, if the problem continues, contact REAC’s Technical Assistance Center at http://www.hud.gov/offices/reac/contactus/fass-mfh.cfm or by phone at ([PHONE]).
partial year, surplus cash | 2006 | 4 | For the partial year after  closing the M2M restructuring, I elected to calculate Surplus Cash as of the M2M closing date, and to distribute that Surplus Cash in accordance with the pre-M2M cash distribution rules.  How should I document this in the AFS? | Include a footnote that documents your election.  Include the Surplus Cash computation as of the M2M closing date, as part of the footnote. Any positive Surplus Cash as of the M2M closing date should be reflected as an obligation on the Surplus Cash schedule as of fiscal year end (i.e., the post-M2M Surplus Cash schedule).  The pre-M2M Surplus Cash (and any post-M2M Surplus Cash) can be distributed after the fiscal year end date.   Also see the 2005 Letter, part 2 of question #5.
account #[NAME], partial year | 2006 | 5 | I am the new owner of a project that previously went through a M2M debt restructure transaction.  I am having trouble getting the REAC FASS system to accept the partial year AFS starting on the purchase date.  What can I do to obtain assistance? | See also 2007 #5 for additional requirements.   First contact your local HUD office project manager and ask that they confirm that the Real Estate Management System (REMS) has been updated with your Tax Identification number, your date of acquisition (“FASS Date”), your fiscal year end date (such as December 31), and any other data that affect FASS.  Also be sure that your “FASS Coordinator” has been properly registered with REAC.  Applicable submission and registration rules are contained in the FASS Industry User Guide available at the REAC website at: http://www.hud.gov/offices/reac/products/fass/fassmf_guideChanges.cfm.  If your FASS submission is still not accepted, contact REAC’s Technical Assistance Center at http://www.hud.gov/offices/reac/contactus/fass-mfh.cfm  or by phone at ([PHONE]).
payments, account #s | 2006 | 6a | How should I reflect MRN/CRN payments in the Statement of Cash Flows? (Part 1 of 2) | (Part 1 of 2)   MRN/CRN payments must be segregated from all other debt payments, in the Statement of Cash Flows.  The following FASS accounts should be used to reflect M2M debt:  (MRN Principal Payments) S1200-361 Principal Payments - Second Mortgage    (MRN Interest Payments) S1200-181 Interest Payments - Second Mortgage      (CRN Principal Payments) S1200-362 Principal Payments - Third Mortgage   (CRN Interest Payments) S1200-182 Interest Payments - Third Mortgage.    (Answer is continued in 6b for 2006.)
payments, account #s | 2006 | 6 b | How should I reflect MRN/CRN payments in the Statement of Cash Flows? (Part 2 of 2) | (Part 2 of 2)  If the MRN/CRN is in first [NAME] position, please do not use the FASS accounts for first mortgage payments to reflect MRN/CRN payments. Use the FASS accounts identified above (regardless of lien position).  If it is not possible to dedicate the above-mentioned FASS accounts solely for MRN/CRN payments, owners should use a reporting approach that separately identifies payments made toward the MRN/CRN (for example, detailing MRN/CRN payments in a footnote).
account #s | 2006 | 7 | What are some common errors in post-M2M AFS? | Common errors include:   a. In the Statement of Cash Flows, not recording CRP payments correctly.  The correct FASS accounts are: [NAME] Principal Payments on Capital Recovery Payment (M2M) [NAME] Interest on Capital Recovery Payment (M2M) (see 2005 Letter question #7) b. Showing the current year Incentive Performance Fee (IPF) as an obligation on the Surplus Cash schedule (see the 2004 Letter, question #7, for how to correctly reflect IPF). c. In the Statement of Cash Flows, not recording IPF payments correctly.  The correct FASS account is S1200-223 Entity - Incentive Performance Fee. d. In the Statement of Cash Flows, not recording payment of the cash flow “split” from the prior year’s Surplus Cash correctly.  The correct FASS account is S1200-420 Distributions for the owner portion of the split.
distributions, timing | 2006 | 8 | When can Surplus Cash be distributed, for a post-M2M property? | For a property that completed a M2M debt restructure transaction, Surplus Cash cannot be distributed until after the AFS is filed.  Also, Surplus Cash cannot be distributed until all other requirements have been satisfied (for example, the Incentive Performance Fee cannot be earned or paid unless certain preconditions have been satisfied, see 2004 Letter, question #2).  That is, the December 31, 2005 Surplus Cash cannot be distributed until the spring of 2006 at the earliest.  Mid-year distributions are not allowed for post-M2M projects.
CRP, accrual | 2006 | 9 | In the AFS, how do I reflect Capital Recovery Payment (CRP) installments that have become due but, as of the AFS date, have not been paid? | Unpaid CRP installments will be reflected on the balance sheet as liabilities (the principal amount will be reflected as a result of recording the CRP loan at the time of the M2M closing, and the interest amount will be reflected because the interest will have accrued).  Note, however, that no additional interest may be accrued because of the delay in payment. If, as of the FYE date, the pre-conditions for payment of these CRP installments have been satisfied, reflect the unpaid installments as obligations on the Surplus Cash schedule.  Otherwise, do not reflect the unpaid installments as obligations on the Surplus Cash schedule.  Also see the 2005 Letter, question #7.
SCA, contractor | 2006 | 10 | I have not received any correspondence regarding my Surplus Cash computation or regarding payments on my M2M debt.  Can I assume that HUD accepted my computations? | No.  Going forward, you will receive a demand letter from HUD if the annual M2M payment amount reflected in your project’s annual financial statement has not been paid within 30 days of the filing date.  That delinquent amount will also appear on your next monthly billing statement from HUD’s servicer for these Notes, DynAccSys.   HUD’s PCPM Contractor is currently performing in-depth analyses of AFSs for HUD for all years since M2M closing.  The results of those analyses and any adjustments necessitated by their findings will be communicated to you in writing with a detailed explanation of HUD’s analysis.  That process requires input from the HUD PM and owners and thus is/has been very time intensive.  All payments due, and all payments received to date, will be reconciled and reflected on your monthly billing statement (sent monthly to the project owner or managing agent by HUD’s servicer for these  Notes, DynAccSys).
SCA, contractor | 2006 | 11 | Last year I received correspondence from the HUD PM for my project which stated that my response to their review findings of the Annual Financial Statements had been reviewed and the matter was now closed.   I was recently contacted by HUD’s PCPM Contractor with similar questions.  Why must I respond to them?  This is redundant. | The two reviews focus on distinct aspects of the AFS, and are therefore not redundant in scope.   You may receive correspondence regarding one or both reviews, and the controlling legal documents require your cooperation with both.    The Surplus Cash analysis is specifically focused on protecting the value of the M2M portfolio.   Either the HUD PM, or the [NAME] (at the HUD PM’s direction) may contact you regarding the analysis.
DEMO, net cash, surplus cash | 2006 DEMO | 1 | How should the owner of a Demo Project interpret the definitions of “Net Income” and “Net Cash” in the Demo Note? | “Net Cash” is equal to Surplus Cash as reflected on FASS account S1300-150 from the Computation of Surplus Cash (or zero, if [NAME] is negative).  Owners will no longer compute “Net Income” to determine [NAME] payments.
DEMO, payment | 2006 DEMO | 2 | How should the owner of a Demo Project interpret the definition of “Payment Period” found in their Demo Note? | Owners should construe Payment Period to be the project’s fiscal year as documented and approved in HUD’s Financial Accounting Sub System (FASS).  If the approved fiscal year end (FYE) does not match the Payment Period in the Note, OAHP will accept that the FYE date in FASS reflects specific owner action and approvals by the HUD PM, and thus will regard the FASS FYE as the Payment Period for calculation and billing purposes.
DEMO, account #s | 2006 DEMO | 3 | Where do we reflect the Demo loan payment amount in the FASS template? | To date, payment amounts on Demo Notes have been reflected in Notes to the financial statements, as there was no specific template for filing a Demo Note audit.  HUD is currently modifying FASS to enable owners to file AFS’s for Demo Notes using the same AFS template as for regular M2M projects.  We anticipate that these FASS changes will be completed in time for submission of AFS’s for fiscal year periods ending [NAME].  Please refer to the 2006 M2M Accounting Q&A’s which provide additional guidance on the regular M2M AFS template.
DEMO, CRP, IPF | 2006 DEMO | 4 | If we will now file Demo AFS’s using the M2M permanent AFS template in FASS, can we also receive CRP and IPF like on M2M permanent program notes? | No, while the FASS template will include all M2M accounts (CRP, IPF, [NAME], distributions, etc.) accountants must carefully review Demo Notes and only claim provisions that are reflected in the terms and conditions of the Demo Note (e.g., some Demo Notes provide for a distribution to the Owner of a fixed amount per unit per annum, similar to IPF; others include an amount similar to CRP which is sometimes referred to as New Equity Distribution, based on a % of new cash equity invested by the owner).
DEMO, payment | 2006 DEMO | 5 | My M2M Demonstration Note defines “Payment Date” so that a payment may be required before my accountant has finished the Annual Financial Statements (AFS).  Will I be penalized if I submit payment within 10 days after the due date for filing Annual Financial Statements? | HUD values the audit process.  HUD will not regard payments as late, notwithstanding the language in the relevant [NAME], if payment in full is received within ten (10) days of the date the AFS are submitted to HUD (provided that such AFS are submitted on or before the deadline established by HUD).
DEMO, note sale | 2006 DEMO | 6 | If my [NAME] is ever transferred to a third party, will the responses to these questions bind the new noteholder? | OAHP anticipates that some Demo Notes may eventually be sold by HUD. HUD’s experience in previous notes sales has been that purchasers prefer to continue the practices HUD has put in place despite any ambiguous language appearing in the loan documentation.  However, if Demo Notes are sold, the purchaser will determine its own practices.
DEMO, contractor | 2006 DEMO | 7 | I have not received any communication from HUD about my prior AFS submissions. Does this mean HUD agreed with my computations and accepted my prior year payment amounts? | No.  OAHP’s review process for servicing these Demo Notes is very similar to the process currently operational for M2M permanent program notes.  HUD’s PCPM contractor will review your most recent and prior years’AFS submissions for accuracy, and to review “reasonable and necessary operating expenses” per your Regulatory Agreement.  The results of those analyses and any adjustments necessitated by their findings will be communicated to you in writing with a detailed explanation of HUD’s analysis.  All payments due, and all payments received to date, will be reconciled and reflected on your monthly billing statement (sent monthly to the project owner or managing agent by HUD’s servicer for these Demo Notes, DynAccSys).
DEMO, policy | 2006 DEMO | 8 | My accountant has received other accounting letters from HUD relating to M2M accounting issues (and posted on the OAHP Owner’s webpage); how are those applicable to Demo Notes? | We encourage you to review the prior accounting letters posted on our webpage at http://www.hud.gov/offices/hsg/omhar/mhrowner.cfm.   These letters were written to specifically address accounting issues relevant to M2M permanent program projects (not Demo Notes), so not all will be applicable to Demo properties.  If you have questions regarding how to apply the subject of a specific [NAME] to a Demo project, please send a request via email to OAHP’s resource desk at [EMAIL] .
DEMO, payments | 2006 DEMO | 9 | Where do I send payments for my Demo Note? | Superseded.  SEE 2007 #13
Post restructuring, TPA, due on sale, assumption | 2007 | 1 | If a property with [NAME] or DEMO debt is sold, can the subordinate debt be assumed or is the entire debt due on sale?  Can the subordinate debt be transferred to the new owner via warranty deed, subject to the existing (original) M2M or DEMO notes, mortgages, [NAME] and Use Agreements in lieu of mod/assumption documents?  Who needs copies of the transfer documents? | M2M and DEMO notes are due on sale or refinance and MAY NOT be assumed without prior approval of HUD; contact your HUD PM for guidance.  Assumption approval is not automatic, if granted typically will require partial paydown of the subordinate debt and ALWAYS requires execution of M2M or DEMO modification and assumption documents by the buyer, seller and HUD.  Transfer of ownership subject to the existing (original) legal documents places unacceptable conditions on the title and violates the terms of the M2M/DEMO Notes and Regulatory Agreements.If HUD approval is granted, copies of the following documents must be forwarded to HUD MF Notes Servicing Branch, (attention [NAME]), [NAME], Washington DC 20026-4804 immediately after a new owner takes title: executed (recorded, if applicable) documents assuming the M2M or DEMO Notes, Mortgages, Regulatory Agreements (and Riders) and [NAME], and a signed W-9 providing the new owner's tax ID.  Tterms and conditions of the assumption approval must be incorporated into the legal documents (e.g., elimination of Capital Recovery Payment (CRP), subordination of the M2M/DEMO Notes to a new first subject to prescribed terms, etc.).
TPA, post restructuring, payment | 2007 | 2a | How is the annual payment on M2M or DEMO notes calculated in the year of an approved TPA?  Is the annual payment amount allocated between the buyer and seller based on their Partial year AFS submissions?  When is the seller's payment due? (Part 1 of 2) | (Part 1 of 2) M2M and DEMO Notes require payment based on the annual surplus cash computation. HUD requires that the buyer and seller each submit partial year AFSs for the year of a sale in FASS.  Currently, under the terms of the Note the annual loan payment is not due until after the end of the fiscal year. To preclude disputes regarding prorata shares of the required annual payment in the year of a TPA, HUD requires, as a condition of approval for all TPAs involving assumption, subordination, assignment or forgiveness of the M2M/DEMO debt, that the [NAME] pay their prorata share of the annual payment amount (as determined by HUD) at the time of the sale.  The [NAME] must provide interim financial statements, including a computation of surplus cash, to the HUD Field Office with a copy to OAHP as part of the request for HUD approval for all TPAs involving assumption, subordination, assignment or forgiveness of M2M/DEMO debt.  (Answer is continued in 2b for 2007.)
TPA, post restructuring, payment | 2007 | 2 b | How is the annual payment on M2M or DEMO notes calculated in the year of an approved TPA?  Is the annual payment amount allocated between the buyer and seller based on their Partial year AFS submissions?  When is the seller's payment due? (Part 2 of 2) | (Part 2 of 2) The HUD Field Office will work with OAHP to determine the required payment amount for the partial year ending on the closing date.  The purchaser will file its partial year AFS after the end of the fiscal year, and is responsible to make payment to the holder of the notes (generally HUD) from the year-end Surplus Cash.
account #s, QNP, TPA | 2007 | 3 | A property that went through a M2M full restructuring was sold to a Qualified Non-Profit and was approved for “debt relief”.   The insured first mortgage remains in place, what FASS accounting templates should the new owner use in filing AFS? | Qualified Non-Profit owners that received debt assignment or modification (for any M2M debt) must file in FASS using the M2M FASS templates.  As long as a M2M Rider(s) to [NAME] is still in place, the M2M templates must be used.  The M2M Regulatory Agreements and Riders remain in place and thus the M2M templates are needed for the QNP to access the unique M2M distributions.   Qualified Non-Profit owners that received debt forgiveness (for all M2M debt) must file in FASS based on the requirements of the underlying form of Regulatory Agreement, they no longer use the M2M templates.  With M2M debt forgiveness, the M2M Regulatory Agreements, and the Riders to those Reg Agmts were released, so the M2M templates are no longer used.
TPA, partial year submissions, account #s | 2007 | 4 | When a TPA occurs at the same time as the M2M closing, the seller and buyer must both file partial year AFS submissions in FASS.  But once the M2M closing date has been entered, the seller can’t access the standard FASS templates for filing.  The Real Estate Assessment Center (REAC) FASS system presents both the seller and buyer the M2M Surplus Cash template.   How can the seller access the correct templates for the period prior to restructuring?  (The 2006 accounting letter addressed a related  question for the buyer). | A FASS upgrade is anticipated in late spring 2007 which will address this, but in the interim, contact your HUD Project Manager and ask that they contact REAC’s Technical Assistance Center at http://www.hud.gov/offices/reac/contactus/fass-mfh.cfm  or by phone at ([PHONE]) for assistance accessing the standard FASS template for the seller’s partial year submission.
TPA,  partial year submissions, account #s | 2007 | 5 | Question 5 in the 2006 M2M accounting letter addressed problems a purchaser has in accessing the M2M accounts in the FASS templates when a transfer/sale occurs subsequent to the M2M closing.  Since modification and assumption of the legal documents is a requirement for any HUD approved assumption, the answer to Question 5 is amended below to incorporate HUD's requirement for confirmation that executed mod/assumption documents for the M2M or demo loans are on file. | First contact your local HUD Project Manager and ask that they confirm that the Real Estate Management System (REMS) has been updated with your Tax Identification number, your date of acquisition (“FASS Date”), your fiscal year end date (such as December 31), and any other data that affect FASS.    Also be sure that your “FASS Coordinator” has been properly registered with REAC.  Applicable submission and registration rules are contained in the FASS Industry User Guide available at the REAC website at: http://www.hud.gov/offices/reac/products/fass/fassmf_guideChanges.cfm.    Then confirm that the owner of record in the Notes and other legal documents matches the owner data in FASS.  If they do not match, provide copies of the required modificatio/assumption documentation (see #1 above) prior to requesting filing assistance.
DEMO, net cash, escrows | 2007 | 6 | We are an owner of a DEMO property that filed AFS using the note terms (Net Cash) for years prior to 12/31/05.    Our HUD Project Manager and the PCPM contractor contacted us recently with questions about our calculations of DEMO loan payment amounts for those prior years.   They are questioning our deduction from Net Cash of actual hazard insurance and property tax expenses AND deposits to HUD required escrows for property insurance and taxes.   My DEMO Note lists those escrow deposits as eligible operating expense.  What is the problem? | Certain DEMO notes defined “Net Cash” so as to allow owners to deduct the greater of the annual deposit to those escrows or the actual expenses incurred in the year. Your approach, deducting both these amounts, overstates your expenses, understates Net Cash and is not acceptable.  HUD’s PCPM contractor will make the appropriate adjustments in the final Surplus Cash Analysis and report the required revisions to you directly.
Payoff, maturity | 2007 | 7 | Is it true that upon maturity, any outstanding balance on the M2M/DEMO notes will be forgiven by HUD? | No.  The remaining principal balance, accrued interest and fees, are due upon maturity of the M2M/DEMO notes.  Occasionally we see inaccurate comments in the Notes to Financial Statement indicating that upon maturity, HUD will forgive any outstanding balance on the M2M/DEMO notes.   Owners and accountants should carefully review the terms of the Note and rely only on the terms and conditions of the loan documents.
CRP, account #s | 2007 | 8a | If a property did not meet the pre-conditions for CRPs during all of 2006 and did not make any of the payments, should the current portion of the note include just the twelve payments that should have been made during 2006, or should the current portion include the twelve 2006 payments plus the twelve 2007 payments?  (We understand that no additional interest may be charged for these accrued payments, and that since they still have not met the pre-conditions, the liability to make the payments will not be included on the Surplus Cash schedule.) (Part 1 of 2) | (Part 1 of 2) Question #7 in the 2005 letter responded partially to this question.  We repeat the earlier answer below and provide additional comments to further clarify.   In the AFS, the owner’s investment (on which the CRPs provide a return) is treated as a loan, with the interest rate and term determined in the M2M underwriting.  Each monthly payment is treated as having principal and interest portions.     CRP payments made during a fiscal year are reported on the Statement of Cash Flows in FASS accounts S1200-417 (principal portion) and S1200-195 (interest portion).    On [NAME], at the end of a fiscal year, the loan will have a remaining principal balance (some of which is to be paid within twelve months and is reflected as a current liability in FASS account 2179, with the balance being a long term liability in FASS account 2329).  If any payments have become due (eligible) but have not been paid as of fiscal year end, there will also be accrued interest payable, which should be shown in FASS account 2139 – Accrued Interest Payable – Capital Recovery Payment (M2M). (Answer is continued in 8b of 2007.)
CRP, account #s | 2007 | 8 b | If a property did not meet the pre-conditions for CRPs during all of 2006 and did not make any of the payments, should the current portion of the note include just the twelve payments that should have been made during 2006, or should the current portion include the twelve 2006 payments plus the twelve 2007 payments?  (We understand that no additional interest may be charged for these accrued payments, and that since they still have not met the pre-conditions, the liability to make the payments will not be included on the Surplus Cash schedule.) (Part 2 of 2) | (Part 2 of 2) The current principal portion of the CRP (FASS account 2179) would include principal payments due within the next twelve months and the principal portion of any back payments that the owner was unable to pay due to the preconditions not being met.     In the Computation of Surplus Cash, CRP payments that are due but that have not been paid may be included as Other Obligations only if, as of fiscal year end, the preconditions for payment had been satisfied.
CRP, accrual | 2007 | 9 | CRP payments were not made for 2 years because a property did not meet the preconditions.   The property has now satisfied the preconditions.  May the project now pay all unpaid CRP payments? Or should they just resume making the monthly CRPs starting from the point at which they have met the pre-conditions? | Yes, they may make all accrued back payments, subject to the availability of cash.
IPF, unpaid | 2007 | 10 | An owner earns an IPF of $5,000 for 2006 (and there is surplus cash to pay it).   If the owner chooses not to take the fee in 2007 does he permanently forfeit the money?  Does the $5,000 become part of surplus cash at 12/31/07 or can the owner set up an account payable for $5,000 and include it as an obligation on the 2007 computation of surplus cash? | It is not acceptable to set up an account payable and include IPF as an obligation on the 2007 computation of surplus cash.  Owners must either take the distribution or deposit the funds into a separate entity cash account or it becomes part of surplus cash at the end of the next fiscal year.
Delinquent, payments | 2007 | 11 | Are owners with delinquent [NAME] and DEMO loan payments being reported to the credit reporting agencies? | Yes, HUD requires that delinquencies on all HUD-held debt be reported to the credit reporting agencies quarterly (annual payments are due within 10 days of filing AFS.                                                                                                                       [NAME] (annual payments are due within 10 days from filing deadline).
final SCA report, adjustments | 2007 | 12 | As a result of HUD's review  of the Surplus Cash Analyses for my property for 2004 and 2005, HUD required I repay ineligible CRP payments to the project account.  But other feedback I received from FASS and REAC staff about my AFS did not require any such adjustments.  How do these reviews and requirements get reconciled? | Conditions addressed in final Surplus Cash Analyses are requirements of HUD and must be complied with, without regard to whether other HUD correspondence includes a similar requirement.   HUD conducts a separate detailed review of Surplus Cash Analyses on M2M and DEMO properties after the AFS screening reviews by REAC and FASS systems and staff.  In future, items noted in final SCA reports are more likely to be reflected in FASS' automated screening reviews, as REAC/FASS staff recently implemented changes to FASS that will flag owner failure to make required MRN payments, overpayment of the IPF, and excessive owner distributions.   Further,  a summary report of prior year SCA conditions is being provided to HUD Project Managers for use when screening AFS' for subsequent filing periods for compliance.   (Examples of conditions include a requirement that the owner repay funds to the project account for ineligible CRP, IPF,  or other distributions or make a supplemental payment to HUD on those Notes.)   Revised: summary report of prior year SCA subsequently not provided to HUD Project Managers.
Mailing payments, lockbox, address | 2007 | 13 | Where do I send my annual M2M or DEMO loan payments?  I heard the address recently changed. | The address for HUD’s lockbox for receipt of payments on HUD-held notes changed effective 12/20/2006 and is provided below.  Be sure to include a transmittal letter/memo identifying the property name and FHA loan number, and provide a contact person’s name and phone number.     For regular mail deliveries send payments with a transmittal identifying project name, FHA number, and how funds are to be applied, to the following address:  HUD - Multifamily Mortgage Notes, P O Box 530256, Atlanta, GA 30353-0256.    For overnight deliveries send payments with a transmittal which includes the entire address below, in addition to project name, FHA number, and how funds are to be applied, to the following address: Bank of America (530256),  C/O HUD Multifamily Mortgage Note Collections, GA5-005-02-10, 1075 Loop Road, Atlanta, GA 30337.  The telephone number to enter for the recipient on the overnight label is (404) 209-6187.
contractor | 2007 Supplemental | [NAME] | Transition to MBI as the contractors to assist in the review and analysis of AFS and M2M Notes payments. | Most of the backlog of prior year Surplus Cash Analyses (SCA) have now been finalized and issued to owners by HUD’s Post-Closing Portfolio Management (PCPM) contractor, RER Solutions, Inc.  The backlog is expected to be completely cleared by the end of December.  OAHP has begun assigning the SCAs for the most recent fiscal year filings (e.g., December 31, 2006) on those assets with completed prior year SCAs, to our new PCPM contractor, MacArthur and [NAME], Intl. dba MBI Consulting, for processing.  We hope to provide feedback to you on those reports prior to the end of the current filing period. However, because of the lateness of the final contract award, all FY2006 reviews will not be completed until early 2008.
policy | 2007 Supplemental | 1 | Why is HUD paying such close attention to property operations after a M2M closing?  Specifically, why is there such an in-depth review of operating expenses, surplus cash, R4R withdrawals, etc? (This scrutiny creates an additional burden on owners and accountants.) | A M2M restructuring implements the plan agreed to by HUD and the owner regarding the current and future needs of the property.  HUD takes a partial payment of claim against the FHA Insurance Fund on behalf of the owner in order to facilitate the restructure, and the M2M Notes document the owner’s commitment to repay that claim.  Since the M2M Notes are repayable from surplus cash from operations of the property, and since that expected surplus cash payment stream after restructuring is dependent upon future operation of the property as anticipated in the plan, HUD has a fiduciary responsibility to monitor operations and scrutinize material variances from those anticipated expenses.  When unjustified variances increase expenses, reduce surplus cash, and minimize cash flow payments to the M2M Notes, HUD holds property owners accountable.  Thus, the PCPM review process continues to implement the terms of the M2M restructuring, agreed to by HUD and the owner, and in so doing, protects the value of the M2M Notes portfolio.
acronyms | 2007 Supplemental | 2a | These Accounting Q&A letters are helpful but are full of acronyms that I don’t understand, please help!  Why are the same terms capitalized in some answers but not in others (e.g., surplus cash)? (Part 1 of 2) | (Part 1 of 2) Some frequently used terms have defined meanings under the M2M/DEMO legal documents beyond their general usage.  When ‘Surplus Cash’ and ‘Restricted Surplus Cash’ are capitalized they refer to the defined terms in the M2M legal documents signed at closing rather than the broader HUD accounting usage.  A list of many acronyms commonly referred to in this letter follows:    AFS – owner’s Annual Financial Statement filed in FASS CSC –owner’s Computation of Surplus Cash Schedule in the AFS  CRN – Contingent Repayment Note (usually the M2M “third mortgage”) CRP – Capital Recovery Payment, plural refers to monthly payments of CRP DEMO – Portfolio Reengineering Demonstration program (precursor to [NAME]) FASS – HUD’s Financial Assessment Subsystem-Multifamily, the system used to file AFS   electronically with HUD FY – Fiscal Year FYE – Fiscal Year End IPF – Incentive Performance Fee M2M – Mark-to-Market program M2M/DEMO –loans restructured under the [NAME]-to-Market or DEMO program MF – HUD’s Office of Multifamily Housing                                                                                                                                                                                                                                                                                                                                                               .             (Answer is continued in 2b of Supplemental 2007.)
acronyms | 2007 Supplemental | 2b | These Accounting Q&A letters are helpful but are full of acronyms that I don’t understand, please help!  Why are the same terms capitalized in some answers but not in others (e.g., surplus cash)? (Part 2 of 2) | (Part 2 of 2)      MRN – Mortgage Restructuring Note (usually the M2M “second mortgage”) OAHP – HUD’s Office of Affordable Housing Preservation PCA – Physical Condition Assessment, part of the restructuring plan addressing immediate rehab needs and 20 year needs  [NAME] – OAHP’s Post Closing Portfolio Management contractor PM - HUD project manager R4R – Reserve for Replacement Escrow Account REAC – Real Estate Assessment Center REMS – HUD’s Real Estate Management System SCA – Surplus Cash Analysis prepared by the PCPM contractor, often referred to as a PSCA (preliminary) or an FSCA (final)
negative [NAME],  CRP, IPF, preconditions | 2007 Supplemental | 3 | Can a property have negative surplus cash at the end of its fiscal year and still be eligible to pay itself an IPF? | No.  Positive surplus cash is an absolute requirement to earn and pay the IPF (or any other distribution) to the owner.  This requirement is discussed in Question 2 in the 2004 Accounting Letter, and is prescribed in the Rider to the Regulatory Agreement, as well as paragraph 2-25 of HUD Handbook 4370.1. (See also 2005 #1a and 1b)
negative [NAME],  CRP, IPF, preconditions | 2007 Supplemental | 4 | An owner took monthly payments of CRP during part of the year but had negative surplus cash at year-end.  Does CRP paid monthly have to be repaid because the property had negative surplus cash at year-end? | Generally when a property has negative surplus cash it cannot meet the first CRP precondition (all expenses paid) and should not have taken CRP.  However, if the owner took monthly CRP payments during part of the year based on a reasonable expectation that the property would have positive surplus cash and unanticipated changes occurred, the owner may only be required to reimburse the project account for monthly CRP disbursements after the unexpected change.  To meet this standard, the property must have had positive surplus cash in the prior year and available surplus cash documented at the time of each monthly disbursement.  In the “notes” to the financial statement (AFS), the owner’s accountant must fully document the basis for asserting that the owner is entitled to retain any monthly CRP that was disbursed.  That documentation will be reviewed as part of HUD’s SCA review.
REAC score, preconditions | 2007 Supplemental | 5 | If a project had negative surplus cash last fiscal year is the owner barred from taking monthly CRP this year? | Yes, the M2M Rider to the Regulatory Agreement (paragraph 7a.) states that when a project has negative surplus cash in a filing period, the owner is prohibited thereafter from disbursing monthly CRP until after “…the next annual review by HUD of the Owner’s audited AFS confirms, as determined by HUD, that there is sufficient cash then available to resume.”  However, while HUD reserves the right to require strict compliance with this provision on a case by case basis, owners may resume payment of CRP once a subsequent AFS shows positive surplus cash.  See also question 1 in the 2005 accounting letter.  (See also 2004 #2)
REAC score, preconditions | 2007 Supplemental | 6 | A project scored a “58” on its physical inspection in May of 2006, prior to closing the M2M Restructuring and shortly before starting rehab work.  The owner completed the work, but was unable to get the re-inspection scheduled and completed by December 31, 2006.  In February 2007, the project received a passing score.  Can the ownership pay itself the CRP and the IPF for FY2006? | Yes, if the other preconditions are satisfied, CRP and IPF for FY2006 can be paid.   In performing the surplus cash analysis each year, OAHP uses the most recent REAC physical inspection score prior to the FYE to determine if the third precondition for payment of CRP and IPF (most recent REAC physical inspection of 60 or above) is met.  However, effective for FYE December 31, 2006 filings and after, OAHP will apply a presumption that the M2M restructuring will address or has addressed all repairs necessary to obtain a passing score in the M2M rehabilitation plan.  OAHP monitors rehab escrow progress and can issue management findings if progress is not satisfactory.
REAC score, preconditions | 2007 Supplemental | 7 | A project scored a “58” on its physical inspection in May of 2006, three years after the M2M Restructuring but shortly before starting additional repair/rehab work covered by the Reserve for Replacement account (R4R).  The owner completed the work in November 2006, but was unable to get the re-inspection scheduled and completed by December 31, 2006.  In February 2007, the project received a passing score.  Can the owner distribute the IPF for FY2006 and retain all monthly CRP disbursed prior to issuance of the failing inspection report? | No, the owner is ineligible for the IPF for FY2006.  While CRP disbursed prior to the failing inspection may be retained if all other preconditions were satisfied, no monthly payments of CRP are permitted after issuance of the failing score by REAC. In this example, any CRP disbursed after May 2006 must be repaid to the project account.  The HUD Regulatory Agreement signed by owners requires properties to be maintained in good repair at all times and owners should not wait for, or rely on, the REAC inspection to find out what repairs are needed.
Delinquent, payments, preconditions | 2007 Supplemental | 8 | Please clarify the implications of a late M2M loan payment to HUD on the owner’s eligibility for IPF.  For example, if a project has a December 31, 2006 FYE, and the payment was due April 10, 2007 and paid May 22, 2007, does the late payment impact eligibility for FY2006 IPF? | Yes, in this case, the owner forfeits IPF for FY2006 because of the late 2006 payment to HUD and if IPF was disbursed already (at year-end) it must be repaid to the project account.  Satisfaction of the precondition that “all required payments have been made on the Mortgage Restructuring Note and on any 1st mortgage” is based on whether the payment due for that period was made timely.  However two other caveats should be noted:    1.  If the owner paid on time, but an error in the calculation was later discovered, so long as any additional amount due is promptly remitted there is no loss of IPF; and   2.  A late note payment for FY2006 would not affect IPF for FY2007.
explanatory comment, violations, preconditions, distributions | 2007 Supplemental | NOTE  re question 9 thru 12 | NOTE:  The fact patterns presented in questions 9 through 12 below are very similar, but the slight variations in each result in significant differences in the answers.  To assist the reader, the distinctive differences are bolded in each of these questions.
violations, preconditions, distributions | 2007 Supplemental | 9 | The owner had positive surplus cash on its FYE date (December 31, 2006). However, on April 23, 2006, HUD notified the owner of a Fair Housing violation, and the owner disputed the violation. On October 14, 2006 HUD notified the owner that no violation had occurred.  As of December 31, 2006, the remaining CRP and IPF preconditions were satisfied. Can the owner earn and pay the FY2006 IPF?  Pay CRPs that have become due through December 1, 2006? Distribute the owner’s share of FY2006 surplus cash (Surplus Cash minus IPF minus [NAME]) also sometimes called the “owner’s split”?  Variations from the questions presented in # 10, 11 and 12 are highlighted in bold. | Yes to all of those questions.
violations, preconditions, distributions | 2007 Supplemental | 10 | The owner had positive surplus cash at the end of FY2006 (December 31, 2006). However, on April 23, 2006, HUD notified the owner of a Fair Housing violation, and the owner disputed the violation. On October 14, 2006 HUD notified the owner that a final determination had been made, that a violation had occurred, and that the Fair Housing violation constituted a default under the Regulatory Agreement.  As of December 31, 2006, the remaining CRP and IPF preconditions were satisfied. Can the owner earn and pay the FY2006 IPF?  Pay CRPs that have become due through December 1, 2006? Distribute the owner’s share of FY2006 surplus cash (Surplus Cash minus IPF minus [NAME]) also sometimes called the “owner’s split”?  Variations from the questions presented in #9, 11 and 12 are highlighted in bold. | No.  The FY2006 IPF may neither be earned nor paid. Beginning with the May 2006 CRP (the first CRP after the notice of alleged default), no further CRPs may be paid unless and until HUD notifies the owner that the Regulatory Agreement default has been cured.  The FY2006 “owner’s split” may not be distributed, does not accrue, and may not be distributed (as a FY2006 distribution) in subsequent periods.  The funds must remain in the project account, increasing surplus cash and the required FY2006 payment due to HUD.  The HUD Regulatory Agreement prohibits any distributions when there is a default under the Regulatory Agreement, Note or mortgage.
violations, preconditions, distributions | 2007 Supplemental | 11 | The owner had positive surplus cash at the end of FY2006 (December 31, 2006). However, on April 23, 2006, HUD notified the owner of a Fair Housing violation, and the owner disputed the violation. On January 22, 2007 HUD notified the owner that a final determination had been made, that a violation had occurred, and that the Fair Housing violation constituted a default under the Regulatory Agreement.  As of December 31, 2006, the remaining CRP and IPF preconditions were satisfied. Can the owner earn and pay the FY2006 IPF?  Pay CRPs that have become due through December 1, 2006? Distribute the owner’s share of FY2006 surplus cash (Surplus Cash minus IPF minus [NAME]) also sometimes called the “owner’s split”? Is there any effect on the 2007 IPF, CRPs and “owner’s split”?  Variations from the questions presented in #9, 10 and 12 are highlighted in bold. | The HUD Regulatory Agreement prohibits any distributions when there is a default under the Regulatory Agreement, Note or mortgage.  ►With respect to FY2006:  • The FY2006 IPF may neither be earned nor paid.      The May 2006 through December 2006 CRPs may not be paid unless and until HUD notifies the owner that the Regulatory Agreement default has been cured.     • The FY2006 “owner’s split” may not be distributed, does not accrue, and may not be distributed (as a FY2006 distribution) in subsequent periods.  The funds must remain in the project account, increasing surplus cash and the required FY2006 payment due HUD.  ►With respect to FY2007: unless, prior to 12/31/2007, HUD notifies the owner that the Regulatory Agreement default has been cured.   • The FY2007 IPF may neither be earned nor paid.     • The January 2007 through December 2007 CRPs may not be paid (but remain for potential future payment if the preconditions are satisfied at some future point).   •The FY2007 “owner’s split” may not be distributed, does not accrue, and may not be distributed (as a 2007 distribution) in subsequent periods.  The funds must remain in the project account,  increasing surplus cash and the required FY2007 payment due to HUD.
violations, preconditions, distributions | 2007 Supplemental | 12 | The owner had positive surplus cash at the end of FY2006 (December 31, 2006). However, on April 23, 2006, HUD notified the owner of a Fair Housing violation, and the owner disputed the violation. On March 13, 2007 HUD notified the owner that a final determination had been made, and that a violation had not occurred. As of December 31, 2006, the remaining CRP and IPF preconditions were satisfied. Can the owner earn and pay the 2006 IPF?  Pay CRPs that have become due through December 1, 2006? Distribute the owner’s share of FY2006 surplus cash (Surplus Cash minus IPF minus [NAME]) also sometimes called the “owner’s split”? Is there any effect on the FY2007 IPF, CRPs and “owner’s split”?  Variations from the questions presented in #9,10, and 11 above are highlighted in bold. | ►With respect to FY2006:  The FY2006 IPF may now be earned and paid, subject to satisfying the remaining IPF preconditions. Any CRPs not paid while HUD was reviewing the owner’s appeal may now be paid, subject to satisfying the remaining CRP preconditions. The FY2006 “owner’s split” may now be distributed. If the FY2006 AFS has already been submitted to HUD, reflecting no IPF, the owner should communicate with HUD and the PCPM in order to agree on how to document the post-submission change to reinstate the IPF and re-calculate the MRN payment and “owner’s split”. ►With respect to FY2007:  there is no effect on the FY2007 IPF, CRPs or “owner’s split”.
preconditions, waiver | 2007 Supplemental | 13 | Is a HUD PM authorized to waive a precondition for payment of CRP and IPF? | No, the preconditions are a function of the HUD Regulatory Agreement and are not waivable by the PM.  If unusual circumstances (outside of the owner’s control) occurred which resulted in the owner’s failure to meet the preconditions, the local HUB Director may submit a request for waiver to the Director of the Office of MF Asset Management in HUD headquarters for consideration.  The request must be accompanied by specific documentation supporting the Hub Director’s request.  No owner distributions or incentive payments may be distributed while such a request is pending.
preconditions, CRP accrual | 2007 Supplemental | 14 | Please clarify whether all unpaid CRP are to be listed as obligations or only those for years in which the preconditions were satisfied? | This question has been addressed in prior years, but warrants clarification here.  The correct treatment is that all unpaid CRP should be listed as obligations, whether or not the preconditions have been satisfied.  While CRP may accrue (and will reduce surplus cash by the amount of that accrual) even if the preconditions for payment are not met, it cannot be distributed until a period in which all of the preconditions are met.  (Previous instructions to include CRP as obligations only if the preconditions for payment had been satisfied were incorrect.)   (See also 2005 #7 and 2007 # 8)
HAP receivable, preconditions | 2007 Supplemental | 15a | Section 8 HAP payments have been delayed for many months for some projects this year, for reasons that are outside of the owners’ control.  What are the implications on surplus cash if those HAP payments have not been received as of FYE, and as a result the owner does not meet the preconditions for CRP and IPF payments?  What are the implications on CRP and IPF payment and accrual? (Part 1 of 3) | (Part 1 of 3) Specific guidance that enables owners to accurately and fairly reflect whether a project had surplus cash when a HAP receivable (in excess of 30 days) remains at FYE, and avoids unduly penalizing the owner for the lack of cash on hand, is provided below:  ►Reflect the HAP receivable as follows:   The full amount of the HAP receivable must be included in the cash portion of the CSC (using account 1135) even if the HAP receivable isn't expected to be paid within 30 days of year end.  Accountants may segregate the late HAP receivables from normal HAP receivables in the Notes to the AFS.   (Answer is continued in 15b and 15c of Supplemental 2007.)
HAP receivable, preconditions | 2007 Supplemental | 15b | Section 8 HAP payments have been delayed for many months for some projects this year, for reasons that are outside of the owners’ control.  What are the implications on surplus cash if those HAP payments have not been received as of FYE, and as a result the owner does not meet the preconditions for CRP and IPF payments?  What are the implications on CRP and IPF payment and accrual? (Part 2 of 3) | (Part 2 of 3) ►Reflect the offsetting obligation(s) on the CSC.  The full HAP receivable and the full offsetting obligation must be included in the CSC.  If they are treated inconsistently (receivable as current on CSC, payable as long term), this will distort surplus cash.    If owners were approved to borrow funds from the R4R account the borrowed amount should be reflected as an obligation (using account S1300-110) on the CSC.  If owners were approved to suspend monthly deposits to the R4R and the suspended/deferred deposits remained unpaid at FYE, the suspended/deferred deposits must be shown as an obligation on the CSC even though the repayment obligation would not normally be an accounting obligation.  Accountants should provide explanatory comments in the Notes to the AFS. If owners advanced funds to cover project expenses, the amount should be reflected as a payable to the owner on the CSC. If owners were unable to access other funds and incurred sizeable short-term payables, those payables must be included in the CSC.     (Answer is continued in 15c of Supplemental 2007.)
HAP receivable, preconditions | 2007 Supplemental | 15c | Section 8 HAP payments have been delayed for many months for some projects this year, for reasons that are outside of the owners’ control.  What are the implications on surplus cash if those HAP payments have not been received as of FYE, and as a result the owner does not meet the preconditions for CRP and IPF payments?  What are the implications on CRP and IPF payment and accrual? (Part 3 of 3) | (Part 3 of 3) ►Monthly disbursement of CRP to the owner must be temporarily suspended during any period when either deposits to the R4R are suspended, or funds are borrowed from the R4R (and amounts in either scenario have not been repaid).  In such a situation, the owner would be unable to accurately and reasonably document that monthly cash flow is adequate to pay all project expenses.  If the CSC at year end shows positive surplus cash, CRP may be disbursed then for all eligible months in the year.  ► No changes are required in accounting for IPF for the reporting period.     ►The HAP receivable does not distort (increase) surplus cash when the offsetting obligation is included in the CSC.  HUD’s PCPM contractor and the HUD PM will review carefully to assure that the preconditions for CRP and IPF are satisfied.  Owners are encouraged to provide comments in the Notes to the AFS for clarification.
preconditions , suspended R4R | 2007 Supplemental | 16 | If HUD approved suspension of monthly deposits to the R4R account during the year because the project was at risk of default (unrelated to late Section 8 HAP payments), can the owner take CRP and IPF to the extent there is positive surplus cash at the FYE2007? | No.  Suspending deposits to the R4R is a form of relief to the owner which makes them ineligible for any distributions for that filing period.  The exception to this scenario is addressed in question 15 above.  Section 8 regulations at 24 CFR 880.205(b), prohibit an owner from taking distributions unless all project expenses have been paid and all reserve requirements have been met.  No monthly disbursements of CRP are permitted in this instance, and no other distributions may be paid either until the owner has paid all suspended/deferred deposits to the R4R.  If the owner repaid the suspended/deferred deposits during the year, the accountant must include an explanatory Note in the AFS.  If the suspended/deferred deposits remained unpaid at FYE, the suspended/deferred deposits must be shown as an obligation on the CSC, an explanation  must be included in the Notes to the AFS, and no distributions may be paid until the suspended/deferred deposits have actually been paid to the R4R.
operating expenses, R4R, reimbursement | 2007 Supplemental | 17 | The owner of a project with significant surplus cash prefers not to request reimbursement from the R4R escrow account.  Is it okay to absorb such expenses from operations even though the items are eligible for reimbursement from the R4R? | No, this practice is not acceptable for a M2M or DEMO property.  The M2M statute and regulations, and the property-specific M2M underwriting, to which the owner agreed, include a clear intent that the R4R be utilized to meet ongoing major repair and replacement needs.  [NAME] restructurings examine the adequacy of the R4R, typically fund a significant additional deposit at closing, and typically provide for a significantly increased deposit after closing, so that 100% of anticipated 20-year needs can be funded from the R4R.  Failure to promptly request R4R reimbursement understates surplus cash, which in turn understates the required payments due to HUD.  This practice may lead to disallowed expenses resulting in adjustments to the CSC, increasing the payment due to HUD.  In such instances HUD’s Office of MF Asset Management may direct PMs to issue management findings which, until corrected, will block further IPF and CRP payments and further increase the payment due to HUD.  (See also 2005 #3a and 3b)
operating expenses, R4R, reimbursement | 2007 Supplemental | 18 | What type of expenses should be reimbursed from the R4R after being paid for out of operating accounts? | The PCA, developed by the owner and HUD and agreed upon in the Restructuring Plan, includes a 20-year schedule of R4R needs. In general, reimbursement from the R4R should be sought for all expenditures for items included in the PCA, so long as such reimbursements would not lead to a R4R balance below the “floor” established in the M2M underwriting.
operating expenses, R4R, reimbursement | 2007 Supplemental | 19 | How should an owner reflect R4R-eligible expenses in the AFS that were paid for from operating accounts when they are either:  1) approved for reimbursement from the R4R by the HUD PM but the funds have not been received at FYE, or 2) the request for reimbursement from the R4R has not been acted upon by the HUD PM? | 1) If a request for R4R reimbursement has been approved by the HUD PM but not yet received, it should be shown as an expense in operations and as “other cash” Account S1300-030 on the CSC (the detail for this account should explain that the R4R release was approved by the PM but has not been received).  2) If the HUD PM has not acted upon the request yet, it cannot be reflected on the CSC.  Any such requests pending with the HUD PM should be described in the notes to the AFS.
operating expenses, baseline | 2007 Supplemental | 20a | HUD’s PCPM review of my AFS refers back to the operating expenses as underwritten at the time of restructuring, and a principle of “reasonable and necessary” operating expenses.   What does HUD consider “reasonable and necessary” operating expenses for a project post-restructuring?  (Part 1 of 2) | (Part 1 of 2)   During the M2M restructuring process, the owner and HUD examined historic, current, and projected operating expenses for the property based on the best information available.  This expense baseline, agreed upon by all parties in the restructuring (and adjusted annually for inflation), is what owners should use to develop their budget post-restructuring.  By executing the Restructuring Commitment, which survives [NAME] closing, the owner and HUD acknowledged the terms of the restructure including the expense underwriting.  The annual PCPM review examines expenses that are materially above or below those expected from the adjusted, agreed-upon baseline, and the PCPM will ask the owner for documentation and justification of these expense line items.  If the expenses cannot be satisfactorily justified, HUD may determine that certain expenditures were not reasonable and necessary to the project, and those expenses may be disallowed from the computation of surplus cash. This may result in greater surplus cash, and additional amounts due on the M2M/DEMO notes.   Answer is continued in 20b of Supplemental 2007.)
operating expenses, baseline | 2007 Supplemental | 20b | HUD’s PCPM review of my AFS refers back to the operating expenses as underwritten at the time of restructuring, and a principle of “reasonable and necessary” operating expenses.   What does HUD consider “reasonable and necessary” operating expenses for a project post-restructuring?  (Part 2 of 2) | (Part 2 of 2)   Whenever expenses diverge significantly from the baseline, the owner should keep the HUD PM apprised of the reasons for such changes.   Question #17 above illustrates one of the most common disallowed expense categories, repairs and replacements made from operating accounts without a concurrent request for reimbursement from the R4R account.
entity expenses, distributions | 2007 Supplemental | 21 | FASS provides accounts for various entity expenses (FASS 7100 series accounts).  How do these accounts impact surplus cash? | Entity expenses are any expenses not directly related to the operation of the project (e.g. legal fees related to the ownership, supervisory asset management fees, general partner fees, owner income taxes, etc.) and do not impact the calculation of surplus cash.   Entity expenses are not allowable project expenses.  Entity expenses may not be paid from the operating account.  Entity expenses are distributions that may only be paid from distributed surplus cash. Entity expenses should not appear as obligations in the CSC in the AFS.
nonresponsive owner | 2007 Supplemental | 22 | The owner received a letter from HUD saying that, because the owner failed to respond to questions from the PCPM contractor, HUD’s SCA will be finalized without the owner’s input.  What does this mean? | HUD’s PCPM contractor contacts the owner (by means of a series of emails and letters) to request clarification regarding questionable expense items, significant variances from baseline expenses, or unusual accounting treatments.  Most owners respond fully, but if the owner fails to fully respond, does not respond in a timely fashion, or does not respond at all, HUD will finalize the SCA without the owner’s input and notify the owner accordingly.   The PCPM attempts to collect information from owners for a period of about thirty days and thereafter issues a 15-day warning letter to the owner (with a copy provided to the HUD PM).  When the 15-day grace period expires, OAHP notifies the owner that since they have not responded (at all, fully or timely, as appropriate), HUD will finalize the SCA without the owner’s input.   SCAs finalized without the owner’s input may result in adjustments to expenses and supplemental payments due to HUD.   HUD’s Office of MF Asset Management may direct PMs to issue management findings for failure to respond (at all, fully or timely).  Such findings will:      i.) block IPF and CRP payments until corrected,       ii.) further increase the payment due to HUD, and       iii.) lead to other enforcement action, if unresolved.
partial year, IPF proration | 2007 Supplemental | 23 | Question # 5 from the 2005 M2M Accounting Letter regarding the prorating of IPF during the year in which the M2M closing took place stated that the owner could choose to follow the new M2M requirements for the full year, but the IPF had to be prorated.  Owners have asked OAHP to reconsider this position.  Currently, if the owner elects to treat the property as if it were under M2M for the full year, then for the period prior to the closing they lose access to any distributions available under the previous Regulatory Agreement and yet gain only a portion of the M2M owner distributions covering the same period (no IPF for that period). | OAHP has revised its policy for AFS submissions for FYE December 31, 2006 and thereafter. IPF no longer has to be prorated during the year of closing.  If the owner chooses to follow the M2M requirements for the entire year then the IPF may be paid for a full year.  Alternately, the owner may still elect to compute surplus cash up to the date of the M2M closing under the old Regulatory Agreement and take pre-M2M distributions through that date, and then prorate the IPF for the period of time from the first day of the month following the M2M restructuring through the end of the fiscal year.   The owner has one opportunity to decide which approach to use (when preparing the AFS for the year of closing) and that choice is final.
correction account #s | 2007 Supplemental | 24 | Question # 6 in the 2005 M2M Accounting Letter had a typo, and the wrong account number was given for the long term principal portion of the balance on the M2M or DEMO notes.  What is the correct account information?  Also please clarify what accounts to use the following year to reflect those actual loan payments on the Statement of Cash Flows. | FASS Account 2322 – Other mortgages payable long-term, is the correct account number to use for the long term portion of the unpaid principal balance of all M2M or DEMO notes.  The following reiterates the other accounts to be used to reflect the short term principal and interest payments from the 2005 Q&A:    Any MRN / CRN principal balance that is to be paid from current surplus cash should be shown as a short term obligation in the AFS (FASS account 2172) and  All accrued interest on the M2M/DEMO notes should be shown in FASS account 2132 – Accrued Interest Payable – Other mortgages.   The actual [NAME] payments to principal and interest are reflected on the Statement of Cash Flows in the following year's AFS using account S1200-181 for interest and account S1200-361 for principal.
filing deadline | 2007 Supplemental | 25 | The owner submitted a question to OAHP and REAC that was not answered before the AFS filing deadline.  Should the owner wait for an answer before filing? | No, the owner must complete and file the AFS for the current period and make any payment required on the MRN/ CRN timely unless an extension has been approved by HUD.  Failure to do so jeopardizes owner incentives, may place the property at risk of default under the HUD Regulatory Agreement and at risk of other sanctions.   Similarly, unresolved questions from prior year SCAs must not be used as a basis for late filing of an AFS with HUD.  If HUD’s PCPM Contractor ultimately determines that the AFS had errors affecting the payment due to HUD, they will notify the owner of required adjustments.
payments, balances, AFS, preconditions, CRP, IPF | 2009 | 1 | 1. How can an owner obtain information on the current M2M mortgage account balances?  The accountant needs this to prepare the AFS. | Dynaxys, HUD’s multifamily notes servicing contractor , can provide this information upon receipt of a written request from the owner.  For self-service access to up-to-date account information on HUD-held M2M and DEMO notes, information is also available on the Dynaxys Mortgage Loan Servicing Website at https://www.dynaxys.com/mlsw/.  Click on “New User” to gain access to information on a property.  The FHA loan number and owner’s tax ID number must be entered.  Authorized users can view the following information:   • Mortgage confirmation  • Payments applied to accounts  • Current balances  • Accrued interest details  • Tax payments  • Reserve balances. Some owners may provide their accountants with access to the website information for a period of time.
[NAME], FSCA, PCPM, payments,   accounting adjustments | 2009 | 2 | 2. If the Final Surplus Cash Analysis (FSCA) for a prior fiscal year determined that an additional payment is due on the M2M note and required specific accounting adjustments, what is the process for making these required adjustments? | The PCPM addresses necessary adjustments and the required sources of funding for additional payments in the FSCA in Section I, Issues and Recommendation.  Pay special attention to specific guidance given by the PCPM regarding required sources.  If, after reviewing Section I, these requirements are not clear, please contact the PCPM analyst directly.    On the next monthly billing statement following issuance of the FSCA, HUD’s multifamily notes servicing contractor (Dynaxys) will bill for the additional amount and the PCPM will review the sources of repayments in the next year’s financial statements.  If the next year’s financial statements do not show appropriate adjustments and repayments as detailed in the FSCA, enforcement action may be initiated.  The HUD project manager (HUD PM or PM) may request additional documentation to demonstrate compliance with the findings in the FSCA.  If so, please respond directly to the PM. The PCPM addresses necessary adjustments and the required sources of funding for additional payments in the FSCA in Section I, Issues and Recommendation.  Pay special attention to specific guidance given by the PCPM regarding required sources.  If, after reviewing Section I, these requirements are not clear, please contact the PCPM analyst directly.    On the next monthly billing statement following issuance of the FSCA, HUD’s multifamily notes servicing contractor (Dynaxys) will bill for the additional amount and the PCPM will review the sources of repayments in the next year’s financial statements.  If the next year’s financial statements do not show appropriate adjustments and repayments as detailed in the FSCA, enforcement action may be initiated.  The HUD project manager (HUD PM or PM) may request additional documentation to demonstrate compliance with the findings in the FSCA.  If so, please respond directly to the PM.
account numbers,  REAC | 2009 | 3 | 3. Where can I look-up/confirm HUD account numbers to be used in FASS?   Account numbers are not numerically ordered within the FASS templates; it is difficult to determine the appropriate account numbers. | Owners and accountants should review the FASS User Guide for help finding appropriate HUD account numbers.  See Chapter 13 of REAC’s Industry User Guide for the Financial Assessment Subsystem - Multifamily Housing (FASSUB 7.0).  http://www.hud.gov/offices/reac/products/fass/fassmf_guide.cfm
account numbers, IPF | 2009 | 4 | 4. FASS created a new account, FASS 2114, titled “Incentive Performance Fee Payable”.  When should it be used and what does it replace? | The new FASS account 2114 was created in 2007.  FASS account 2114 should be used to report the Incentive Performance Fee (IPF) that is earned in the current year and payable in the subsequent year.  The amount in FASS account 2114 should match the calculated IPF reported in FASS account S1300-203 on the Computation of Surplus Cash and the amount reported as IPF earned in FASS account 7115 on the Statement of Profit and Loss.  This supersedes prior guidance given in Question #7 in the 2004 Accounting Q&A Letter.  NOTE: If the IPF is not paid in the year subsequent to the year it is earned, then the owner loses the right to take it.  An IPF should never appear on the Computation of Surplus Cash as an obligation.
interest expense, MRN, CRN, [NAME] | 2009 | 5 | 5. Where do I report the interest expense for the Mortgage Restructuring Note (MRN) and [NAME] (CRN), collectively “M2M notes”, on the Statement of Profit and Loss?  Should the interest be reported in FASS account 6825, “Interest on Other Mortgages” (a project account) or in FASS account 7142, “Interest on Mortgages Payable” (an entity account)? | Interest due on the M2M notes should be reported in FASS account 6825, “Interest on Other Mortgages.”
AFS, R4R, repairs and maintenance | 2009 | 6 | 6. If the FY 2006 FSCA disallowed “Repairs and Maintenance” expenses that should have been reimbursed from the R4R account and the HUD PM agreed to allow reimbursement of the FY 2006 expenses during FY 2008, how should the delayed reimbursement request be shown in the FY 2008 AFS?  What if the reimbursement is not received until FY 2009? | Typically expenditures, requests for reimbursement associated with those expenditures, and the associated reimbursements themselves all occur in the same year.  When this does not occur, special rules apply as shown in the following example.   EXAMPLE: In August 2008, HUD issued the FY 2006 FSCA to the owner, disallowing Repairs and Maintenance expenses of $100,000 because the expenses should have been reimbursed from the Reserves for Replacement account (R4R).  This caused an additional payment to be due on the MRN.  The owner was billed for the additional amount due in September 2008 ($75,000, assuming a 75%/25% split applied to the $100,000 disallowed expenses).  In October 2008, the owner promptly paid the $75,000 owed from non-project funds and submitted a request for release of $100,000 from the R4R for reimbursement of those FY 2006 expenses.  The owner received reimbursement from the R4R in December 2008.   Scenario A below responds to this example.  See Scenario B below for the accounting treatment required if payment and reimbursement occur in different fiscal years.                                                                                                                                                                                                                                                                                   Scenario A – If payment to HUD and reimbursement from R4R occur in the same fiscal year, handle as follows:  1. An entity payable account is established to recognize the owner’s out-of-pocket payment on the MRN. 2. HUD approves the reserve release.  Thereafter, $100,000 is transferred from the R4R account to the operating account and will appear on the 2008 Statement of Cash Flows as a source of operating cash in FASS account S1200-250. 3. $75,000 is paid back to the owner from the operating account to extinguish the entity payable.  4. The remaining $25,000 of the reserve release may remain in the operating account and becomes part of the surplus cash calculation as of 12/31/2008 OR it may be returned to the owner as the owner’s share of surplus cash, provided the owner is entitled to distributions (i.e., if all preconditions were met for that period). 5. The 2008 Statement of Cash Flows shows the receipt and repayment of the owner advance in FASS account S1200-455 (Entity Financing Activities) and the principal and interest payments on the MRN, CRN, or DEMO notes in FASS accounts S1200-361 and/or S1200-181.  If the owner distributes the remaining $25,000 it is shown as a distribution in FASS account S1200-420.  The Notes to the Financial Statements for 12/31/2008 must fully disclose the details of these transactions.
AFS, R4R, repairs and maintenance | 2009 | 6 | 6. If the FY 2006 FSCA disallowed “Repairs and Maintenance” expenses that should have been reimbursed from the R4R account and the HUD PM agreed to allow reimbursement of the FY 2006 expenses during FY 2008, how should the delayed reimbursement request be shown in the FY 2008 AFS?  What if the reimbursement is not received until FY 2009? | Scenario B – If payment to HUD was made in the fiscal year prior to when the owner received reimbursement from the R4R, handle as follows:  1. An entity payable account is established to recognize the owner’s out-of-pocket payment on the MRN. 2. The audited financial statements for 12/31/2008 disclose the entity payable in FASS account 2113 – “Accounts Payable – Entity,” and the Statement of Cash Flows shows the $75,000 cash receipt from the owner in FASS account S1200-455 and shows principal and interest payments on the MRN in FASS accounts S1200-181 and S1200-361.  The Notes to the Financial Statements for 12/31/2008 must fully disclose the details of these transactions.  The $75,000 entity payable CANNOT be shown as an obligation on the 12/31/2008 Computation of Surplus Cash.   3. The 12/31/2009 financial statement discloses the $100,000 withdrawal from the R4R account and the Statement of Cash Flows show the $75,000 repayment of the owner advance in FASS account S1200-455 - “Entity/Construction Financing Activities.”  The remaining $25,000 of the reserve release may remain in the operating account and become part of the surplus cash computation as of 12/31/2009 OR be returned to the owner as the owner’s share of surplus cash, provided the owner is entitled to distributions (i.e., if all preconditions were met for that period). 4. The Notes to the Financial Statements for both years, 12/31/2008 and 12/31/2009, must fully disclose the details of these transactions in order to prevent the owner from being cited for unauthorized distributions.    NOTE: In this example, if the FY 2006 FSCA had warned that certain expenses should be reimbursed from the R4R but did not “disallow” them, the delayed reimbursement should promptly be requested from the PM and should be accounted for in the next reporting period.  The late submission of the reimbursement request to HUD and related FSCA comments should be described in the notes to the AFS.
repairs and maintenance,  R4R,  PCPM, waiver | 2009 | 7 | 7. HUD denied certain repairs and maintenance type expenses for a property in the FY 2006 FSCA because they should have been reimbursed from the Reserve for Replacement Account (R4R).  The HUD PM says they may not approve ‘old’ R4R reimbursements, even though those reimbursements are addressed by OAHP in the FY 2006 FSCA.  Can OAHP grant a waiver in order to allow the reimbursement? | No, OAHP cannot grant a waiver.  HUD Headquarters multifamily staff advises that PMs have discretion in approving old reimbursement requests, especially if ineligible repairs and maintenance expenses were not previously cited by the PCPM in the SCA.  HUD Handbook 4350.1 says “Owners should make reimbursement requests during the same (project) fiscal year in which the expenditure occurred, preferably at least sixty days prior to the close of the project’s fiscal year”.  However, if a request for reimbursement is submitted within a reasonable time of being notified by OAHP and the PCPM, such delayed reimbursement requests may be considered by the PM.  Submit Form 9250 at once when notified by OAHP and the PCPM contractor, and include documentation explaining the delayed submission to the HUD PM and requesting special consideration for the late submission.  Prior year adjustments, including any reimbursement requests denied by the PM, must always be fully documented in the Notes to the Financial Statements.
MRN, CRN, Demo | 2009 | 8 | 8. How and when am I billed for payments that are due on the MRN, CRN or DEMO loan? | Loan payment notices for the M2M notes are generated and mailed to you by Dynaxys, HUD’s multifamily notes servicing contractor.  Your filing of the Annual Financial Statements (AFS) identifies the required loan payment for that period.  The required payment amounts as well as the receipt of any payments are transmitted to Dynaxys and are incorporated into the regular monthly billing cycle.  If the FSCA (mailed to you by the PCPM) reflects an adjustment to the loan payment amount, that adjustment is then relayed to Dynaxys and is incorporated into the next monthly billing statement.  If full payment has not been made, that billing statement will reflect an amount due HUD.  To assure your payments are applied promptly and correctly, please include the following information with your payment: the M2M/DEMO loan number, the project name, and the purpose of the payment (for example, surplus cash payment for FYE 12/31/08, or settlement adjustment for FYE 12/31/08, etc.).
CRP, IPF, PCPM, | 2009 | 9 | 9. Each year the PCPM asks some owners for supplemental information related to entity transactions, capital recovery payment (CRP) and incentive performance fee (IPF) for each property in their portfolio.  These questions arise although the accounting for CRP and IPF in the financial statements complies with generally accepted accounting principles (GAAP).  How should this entity accounting be handled in order to achieve transparency in FASS? | This situation occurs with a few owners who consider the partnership the owner of the property (instead of the individual partners) and are treating CRP and IPF as “return of capital” and then rolling CRP and IPF into a net distribution in lieu of using the prescribed FASS accounts for each.  This accounting approach generally provides a net distribution amount with no detail on how the net figure was reached, resulting in questions each year from the PCPM.  Owners must provide sufficiently detailed accounting data in FASS in order for HUD to determine whether the IPF and CRP were accrued and paid appropriately and in the correct amounts since those payments directly affect the computed payment due to HUD on any M2M notes.  To facilitate HUD’s review, the following accounting treatment is recommended: Each type of entity payment (whether CRP, IPF, or distributions) needs to be shown individually, in lieu of netting, and the owner must use the specified FASS accounts for CRP and IPF with adjusting entries reflected in the Entity accounts:   • The AFS must contain a supplemental schedule detailing all receipts and disbursements from the entity cash account(s) including beginning and ending balances of said account(s). • If the ownership entity chooses to treat any IPF payment as a return of capital, the full amount of any IPF that is earned must still be shown in FASS account 7115 on the Statement of Profit and Loss and as an accrued liability on the balance sheet using FASS account 2114 – “Incentive Performance Fee Payable.”  Then the ownership entity should use FASS account 7190 for any adjusting entries (this account requires detail in FASS account [7190-010 or -020]).  See #4 above for further IPF discussion. • If the ownership entity chooses to treat any CRP payment as a return of capital, the full amount of any CRPs that are earned must still be shown in FASS account S1200-417 – “Principal Payments on Capital Recovery Payment (M2M)” and FASS account S1200-195 – “Interest on Capital Recovery Payment (M2M)” in the Statement of Cash Flows.  The ownership entity must use FASS account 7190 for any adjusting entries (this account requires detail in FASS account [7190-010 or -020]). • CRP payments made during a fiscal year are reported on the Statement of Cash Flows in FASS accounts S1200-417 (principal portion) and S1200-195 (interest portion).   • At the end of a fiscal year, the loan will have a remaining principal balance.  Some of the remaining balance is to be paid within twelve months and is shown as a current liability in FASS account 2179, with the balance being a long term liability shown in FASS account 2329.   • If any payments have become due but have not been paid as of fiscal year end, there will also be accrued interest payable, which should be shown in FASS account 2139 – “Accrued Interest Payable – Capital Recovery Payment (M2M)”. • In the Statement of Cash Flows, payment of the cash flow “split” from the prior year’s surplus cash must be reflected in FASS account S1200-420 – “Distributions” for the owner portion of the split.  The ownership entity must use FASS account 7190 for any adjusting entries (this account requires detail in FASS account [7190-010 or -020]).
IPF, SCA, CRP, PCPM | 2009 | 10 | 10. Must an owner respond to the PCPM’s questions about expenses when there will be negative surplus cash regardless of whether the questioned expenses are allowed? | Yes, HUD takes seriously the agreements the owner made at the time of the M2M restructuring and a failure to respond violates those terms and conditions.  HUD must confirm the calculation of surplus cash (even if it is negative) and doing so requires an analysis of the individual line items.  In addition, it is important for the SCA to be based on complete and correct information each year, as the current year will form the basis for reviews in future years. If an owner is non-responsive to the PCPM’s requests for information, HUD may issue a management finding which is deemed a default under the Regulatory Agreement and would result in forfeiture of the IPF and CRP (or owner distributions in a DEMO restructuring) for the current and/or future years.  Unresolved findings could impact the principals’ 2530 approval, result in fines, and ultimately lead to acceleration of the M2M/DEMO notes.
AFS, IPF,  payments | 2009 | 11 | 11. How may an extension of the FASS filing deadline be granted if an owner does not want to lose out on eligibility for IPF because of a late filing or late payment? | Loan payment notices for the M2M notes are generated and mailed to you by Dynaxys, HUD’s multifamily notes servicing contractor.  Your filing of the Annual Financial Statements (AFS) identifies the required loan payment for that period.  The required payment amounts as well as the receipt of any payments are transmitted to Dynaxys and are incorporated into the regular monthly billing cycle.  If the FSCA (mailed to you by the PCPM) reflects an adjustment to the loan payment amount, that adjustment is then relayed to Dynaxys and is incorporated into the next monthly billing statement.  If full payment has not been made, that billing statement will reflect an amount due HUD.  To assure your payments are applied promptly and correctly, please include the following information with your payment: the M2M/DEMO loan number, the project name, and the purpose of the payment (for example, surplus cash payment for FYE 12/31/08, or settlement adjustment for FYE 12/31/08, etc.).
AFS, errors, footnotes, refile | 2009 | 12 | 12. How does an owner re-file a financial statement for a prior year to correct an error that was made?  For example, what if the AFS filing reflects a payment due to HUD but the amount is incorrect. | OAHP understands that HUD generally discourages owners from re-filing a prior period AFS, preferring that owners submit a revised Computation of Surplus Cash in hard copy form to the HUD Project Manager (PM) and enter those changes in the footnotes of the project’s next AFS along with an explanation as to why the revised calculation was required.  The AFS footnote should summarize all correspondence from HUD addressing adjustments to prior year AFSs, including findings from prior year FSCAs.    However, these determinations are not made by OAHP. The owner must file a resubmission request electronically in the FASS system to be approved or denied by REAC.   REAC can be reached by phone at [PHONE], or by email to [EMAIL].  see also 2006 #1 for additional guideance
M2M, MRN, payments, filing deadline | 2009 | 13 | 13. Are payments due on DEMO and M2M notes within 10 days of the AFS due date or within 10 days of filing the AFS?  If an AFS is filed before the filing deadline, is there an earlier payment due date? | Payments are ALWAYS due ten (10) days after the date that the AFS is due to HUD.  If an AFS is filed before or after the filing deadline, the payment due date does not change
AFS, filing, cash flow distributions | 2009 | 14 | 14. Are project accountants routinely provided with copies of the FSCA that was completed by the [NAME]? | No, the FSCA is not transmitted to accountants by HUD or its contractor; this is the owner’s responsibility.  Since the FSCA may address project operations and accounting adjustments to be made in the AFS for the subsequent filing period, it is important that project-specific FSCAs be provided by the owner to the project accountants.  Failure to address prior year corrections may result in management findings in the subsequent year, impacting owner eligibility for cash flow distributions (including the CRP, IPF, and owner distributions).
AFS, FSCA | 2009 | 15 | 15. If the meaning of any of the comments made in the FSCA are  not clear to an owner or to the HUD PM; who should be contacted for clarification? | Please contact the PCPM Help Desk at [EMAIL] to seek clarification.  For further questions, contact the PCPM Project Manager, [NAME], by phone at [PHONE], extension 108 or by email at [EMAIL].  If you continue to have questions after contacting the PCPM Help Desk and the PCPM Project Manager, please contact the OAHP Portfolio Management staff (see cover letter for contact names and phone number).
baseline, SCA, PCPM | 2009 | 16 | 16. What is the “Baseline” that the [NAME] refers to, and why is it important if an expense exceeds it? | The Baseline refers to the operating expense levels determined during the M2M underwriting process.  The owner and the M2M underwriters agreed on those expense levels in the M2M restructuring process and the property should be operating reasonably at or near the Baseline expense amounts, adjusted annually for the operating costs adjustment factor (OCAF).  Expenses that exceed the Baseline decrease the operating cash and could jeopardize the financial stability of the property.  Alternatively, expenses that are lower than the Baseline could signal a decrease in services.
baseline, AFS, surplus cash | 2009 | 17 | 17. Why are Baselines not being adjusted?  Won’t the variances keep growing, triggering more and repeated questions in the surplus cash analysis? | The M2M baseline was developed after an extensive analysis by the M2M underwriters and through negotiations and agreement with the owner.  Circumstances change and some changes are long-lasting, but the SCA process does not include the same extensive underwriting and collaborative process as occurred during the M2M restructuring process.  After a variance has been explained by the owner and the variance accepted by HUD, the PCPM will take that explanation into consideration in the following years.  An owner may be asked to confirm that there is no change in the reason for particular expense variances, but OAHP and the PCPM are aiming to avoid unnecessarily repeating questions on specific line items in future years.
TPA, QNP, AFS, reporting | 2009 | 18 | 18. Do [NAME] and the [NAME] prepare FSCAs after a property is sold to a Qualified Non Profit (QNP) with debt relief?  Where should questions regarding HUD AFS reporting requirements after a Transfer of Physical Assets (TPA) and QNP debt relief be directed? | No, OAHP and the PCPM do not review the AFS or prepare an FSCA for operations subsequent to the completion of QNP debt forgiveness or debt assignment.  [NAME] versions of the seller’s partial year AFS are reviewed during the TPA/QNP review process.  Formal submission of the seller’s partial year AFS in FASS is still required and subject to standard review by [NAME] and REAC.  The QNP’s AFS (for the partial year and subsequent reporting periods) should be prepared in accordance with standard HUD accounting requirements.  Non M2M AFS questions should be directed to the HUD PM or to the REAC Technical Assistance Center (TAC) via email at [EMAIL]