Compliance Requirements for HUD-Assisted Properties: What Owners and Management Agents Need to Know

Created in 1967 under provisions of the U.S. Housing Act of 1937, the U.S. Department of Housing and Urban Development’s (HUD’s) mission is “to create strong,
sustainable, inclusive communities and quality affordable homes for all.” Furthering this mission, HUD offers several products that complement or independently support multifamily affordable housing in the United States and its territories.

Property owners and operators often engage with HUD through these programs as a viable solution to supporting or augmenting their property portfolios. The terms are attractive and the function makes sense. However, there are compliance requirements that should be considered when owners execute these agreements with and/or under direction of HUD.

Common HUD Programs in Affordable Housing

Within the multifamily affordable housing arena, the following HUD programs are commonly used alone or coupled with low-income housing tax credits (LIHTCs) and/or other forms of federal assistance:

• Section 8 project-based rental assistance (renewals);
• FHA-insured mortgages, including Sections 207 and 223(f), mortgage insurance for purchase or refinance of existing health care and multifamily rental housing, Sections 221(d)(3) and (4), multifamily rental housing for moderate-income families;
• Supportive housing for the elderly (Section 202) and for people with disabilities (Section 811);
• New construction or substantial rehabilitation of nursing homes, intermediate care facilities, board and care homes, and assisted living facilities (Section 232).

Determination of Compliance Requirements

The specific compliance requirements for a particular property are identified through several documents and sources of guidance, including:

• Governing documents such as the regulatory agreement governing the operations of the property, Housing Assistance Payment (HAP) agreements or use agreements. Each of these is a specific form issued by HUD and represents a binding legal agreement between owner and HUD.
• HUD handbooks, including the following:
  • 4370.2 Financial Operations and Accounting Procedures
  • 4381.5 Management Agent Handbook
  • 4350.3 Occupancy Requirements
  • 4350.1 Multifamily Asset Management and Project Servicing
  • IG2000.04 Consolidated Audit Guide for Audits of HUD Programs
  • Multifamily Accelerated Processing (MAP) Guide
• Other forms, such as Management Agent’s Certification (Form HUD-9839), Management Entity Profile (Form HUD-9832), Owner’s Certification of Compliance with HUD’s Tenant Eligibility and Rent Procedures (Form 50059) Replacement reserve withdrawal form (Form HUD-9250)

Owners new to HUD assistance programs are often surprised to learn that they must adhere to certain ongoing compliance requirements, such as site inspections by HUD and/or contract administrators, management occupancy reports and annual financial statement submission. It’s important to be aware of requirements, such as these, to ensure that ongoing compliance is maintained and that owners and managing agents are adequately prepared to meet inspection, audit and reporting requirements in a timely manner.

In addition, for new construction properties financed using FHA-insured loans, contractors' and mortgagors' cost certifications may be required. However, it’s important to note that HUD allows certain exceptions to cost certification requirements if the property is also financed using equity generated from LIHTCs.

Failure to comply with the requirements specific to the operation of a property can result in a variety of consequences, ranging from successfully submitting explanation and/or support for correction of the violation to HUD to clear the finding to submission to ongoing HUD oversight and monitoring, to referral of the owner and manager to HUD’s Departmental Enforcement Center. In some cases, HUD may take action such as barring the owner, property manager and/or any related entities from participating in other transactions with HUD or assessment of substantial punitive damages.

Common Compliance Pitfalls

Some of the most common compliance violations occurring across HUD’s portfolio of properties include the following:

• Unauthorized distributions (or “equity skimming”): Some governing documents restrict distributions of project cash only once or twice annually, and only after calculation of “surplus cash” using a specific formula promulgated by HUD. It should be noted that payments to any “identity of interest” (or related-party entity) are considered distributions, whether they are advances to other entities, repayments of loans or advances, or capital distributions. An important consideration for owners is that there is a clear difference in the definition of distributable cash based on HUD’s surplus cash calculation and definitions of distributable cash flow based on the provisions of each entity’s operating or partnership agreement. There may be circumstances where the amount that would be available for distribution under the partnership/operating agreement is limited by the amount calculated as surplus cash.
• Underfunded tenant security deposits: Funds must be held in a separate bank account for purposes of repayment of tenant security deposits.
• Overpaid management fees: Management fees are subject to the management agent certification approved by HUD and are allowable up to a certain percentage of income or per-unit per-month (PUPM) amount. Management fees may be limited to a percentage of rental income collections or may include fees on certain other income.
• Improper replacement reserve account maintenance/withdrawals: Regulatory agreements specify initial and ongoing required monthly deposits to replacement reserve accounts, and withdrawals must be approved in advance by HUD. Owners must support amounts withdrawn with invoices and payments for the goods and services approved by HUD on the requisition.
• Cash management: Owners may not commingle project funds with funds of the owner, property manager, or other properties or entities. There is an exception for property managers to use centralized accounts under certain conditions and with sufficient monitoring and controls.
• Noncompliance with tenant application, eligibility and recertification requirements: Leases must be properly executed by all parties, and applications and leases must include specific required information. Certain personal information, income and allowances for adjusted income must be verified, and specific forms must be included and maintained in the tenant files.
• Failure to file annual financial statements: Annual financial statements are typically required to be filed via HUD’s Financial Accounting Sub-System on the Real Estate Assessment Center website.

Recommended Practices

The good news is that diligent owners and property managers can take steps to ensure compliance and prevent or mitigate the effects of noncompliance identified during inspections and audits. This can be accomplished in a variety of ways.

• Read and understand the governing documents, relevant handbooks and HUD forms.
• Obtain training for individuals within the ownership and management entities to ensure they understand the requirements and how to ensure compliance.
• If new to HUD programs, owners should engage property managers with experience operating properties subject to HUD requirements and/or partner with entities with such experience.
• Establish systems of controls and processes for monitoring compliance with HUD requirements.
• Ensure that the entity is properly set up in HUD’s Real Estate Assessment Center Financial Assessment Subsystem (REAC FASSUB) system, to avoid delays in submitting annual financial statements on time.
• Coordinate with HUD experts such as accountants and consultants, who can guide them through the requirements and help identify potential compliance issues early, so they can be addressed before they become a finding or issue between the owner and HUD.

How Can Novogradac Help?

Novogradac provides a wide variety of services to owners and managers of properties receiving HUD assistance. These services range from preconstruction consulting through cost certification on properties with FHA-insured loans, to assistance with REAC FASSUB setup, compliance consulting, accounting system and chart-of-account setup and adherence and more. Novogradac also performs financial statement preparation, compilation and audit engagements, as well as entry and certification of the annual financial statements in the FASSUB system. For more information, visit the Novogradac HUD Resource Center at www.novoco.com.

It is important for owners, operators and property managers to be aware of HUD’s operating and compliance when developing or purchasing assisted properties, as well as during ongoing operations. A proactive approach to identifying those requirements and establishing systems to maintain compliance is key to a smooth and worry-free relationship with HUD.