Surplus Cash Overview

For-profit HUD projects are given the opportunity two times a year to distribute surplus cash to the owners involved in the property. These biannual distributions always depend on calculating the property’s surplus cash and must be in correspondence to the guidelines established in the HUD regulatory agreement. This calculation will vary by property, which means account eligibility will vary too. In the blog below we will expand on the following:

  • Surplus cash cannot be calculated using a cut-and-dry formula. This template provides a framework to guide what accounts fall under which heading.
  • Each entity’s regulatory agreement will determine how surplus cash is calculated.
  • There are consequences to over- and under-distribution.
  • HUD permits surplus cash calculations twice each year. To avoid miscalculations, our firm is happy to provide complimentary reviews and calculations.
  • Though there are many ways to calculate surplus cash, we have included a four-step checklist that can shed light on what you will need to complete.

Ready to Dive Deeper? Let’s Define Surplus Cash!

Surplus cash is the cash that exceeds the amount of cash that is required for your day-to-day operations. Once you determine your surplus cash, you will want to maximize it by distributing the money. To gain a greater amount of surplus cash, you will want to reduce accrued expenses and other liabilities while generating as much cash as possible.

However, surplus cash is not found through a cut-and-dry formula that each property can simply plug in a few account balances to figure out. To navigate your surplus cash, this template has broad categories (i.e. accounts payable, accrued expenses, prepaid revenue, etc.) which allows owners/property managers to figure out which accounts fall under which heading.

The Affect of Regulatory Agreements on Surplus Cash

Throughout the last decade, HUD has been adjusting the language they use in their regulatory agreements to new definitions and calculations of surplus cash. In older agreements there was an allowance for surplus cash to include total cash less other obligatory payments, which is no longer seen.

Today, newer definitions of surplus cash tend to be more restrictive. One restriction to be mindful of includes subtracting one month of mortgage payments, including escrows and replacement reserves. Regulatory agreements today also reduce the total amount of allowable distributions compared to older agreements.

Over- and Under-Distribution Consequence

Highly motivated for-profit properties will likely strive to reduce their liabilities reporting as they calculate their surplus cash. While great in theory, it is important to understand the consequences of over-distributing.

If over-distribution is found, there will be a corresponding results finding on your audited financial statements. Unless corrected or planned to be corrected, these findings can cause a default on your HUD loan agreement and a warning letter from the HUD Enforcement Center (DEC). In addition, you will be responsible for paying back the amount that was over-distributed.

On the other end of the spectrum, under-distributing means that the property keeps more cash for operations. Depending on the for-profit property, this is neither good nor bad. If there is under-distribution, owners are not given any available distributions. However, the amount saved can be used to beautify, upgrade, or simply maintain the property for tenants’ benefit.

When You Can Calculate Your Surplus Cash

HUD allows surplus cash calculations two times a year. The timeline is pretty easy to remember: once at yearend and then again six months prior to yearend which you will see included in your annual audit.

Sometimes properties miscalculate their distributions (leading to over- and under- distribution consequences) when they do it on their own. Because we understand this possibility, we offer complimentary reviews and calculations, separate from our audit as a value add. With an auditor’s review on calculations, you can be confident that you will receive the money your property has earned, without dealing with the potential hassle and fees of over-distribution.

A Checklist to Help Calculate Your Surplus Cash

With a plethora of ways available, we cannot guarantee that this calculation is exactly what HUD will require from your property. However, the checklist below can offer you a high overview of what you and your auditor will need prior to receiving distributions for the year.

  1. Double-check your regulatory agreement before you begin. It will explain what can and can’t be included in your total cash and obligation categories, which can be different for every property financed by HUD.
  2. Add up the balances in your cash accounts. This typically includes petty cash, tenant security deposits, and operating accounts. Mortgage escrows and replacement reserves are excluded.
  3. Add up the balances in liability accounts, including prepaid rent, accrued management fees (if payable in 30 days), tenant security deposits, and often mortgage and mortgage reserve payments.
  4. Subtract total liabilities from total cash. This is the amount you have available for distribution (if negative, you are not allowed to distribute any funds).

To help calculate distributions, please use our interactive template. This template will walk through each item to consider and automatically make certain calculations for you. If you have figured calculations out on your own, great! We are always happy to review your surplus cash calculations to make sure you do not over- or under-distribute. Just give us a call or contact us through our website and say you would like a complimentary review of your surplus cash calculation.

Thanks for reading!