HUD loans finance many non-profit-seeking properties across the country, all of which are dedicated to the mission of providing safe, affordable housing for members of at-risk communities. The agreements drawn up for non-profit HUD properties include the calculation of surplus cash, which may sound like cash that can be used to upgrade the property’s facilities, but in reality may cause more hassle for the managers and operating staff.
What happens to not-for-profit surplus cash?
Both for-profit and not-for-profit HUD properties utilize surplus cash calculations to receive distributions from their property — the difference being that not-for-profits redirect the funds into a special account called residual receipts.
This account isn’t controlled by the property; management cannot allocate any funds from residual receipts without express permission from HUD. In practice, these funds are rarely used. HUD is far more likely to tell the property to use the replacement reserve account for additional, necessary expenses than the residual receipts account.
This means that not-for-profit HUD properties may need to create a strategy before their year-end date to avoid losing funds to the residual receipts account, from which they may never be able to make withdrawals.
How to calculate surplus cash
The template for calculating a property’s surplus cash is purposefully non-specific. HUD provides categories such as cash, accounts payable, and other obligations, and your auditor applies the relevant accounts to each category.
It helps to know the process, however, since your goal may be to minimize the amount of surplus cash you have, which means spending more money during the year, but from the right accounts.
- Examine the HUD regulatory agreement. There are many different types out there, and each one has a slightly different way of calculating surplus cash. Make sure you know what is eligible and ineligible for HUD’s calculation according to your specific agreement.
- Add the total amount in your cash accounts, including operating, savings, and security deposits.
- Add the total amount in eligible liabilities, which typically include security deposits, prepaid rent, mortgage principal and sometimes escrow payments.
- Subtract your liabilities from cash. Any positive amount left over is surplus cash, and may be earmarked for residual receipts.
Best practices for non-profit HUD properties
Monitoring surplus cash is extremely important for not-for-profit properties. The HUD project sets the operational and capital budget at the beginning of the year, but actual expenses may fall short of this amount. When this happens, the cash left unused by the property at the end of the year goes into residual receipts. In addition, HUD will re-evaluate the actual cost it takes to run the property, reducing the amount paid the following year, without considering anomalies like delayed expenses.
To help combat surplus cash miscalculations, owners can ask their auditor to calculate surplus cash amounts during preliminary work, or even perform the calculation themselves. Be careful, however, because if this calculation isn’t done correctly, the property may over-estimate its surplus cash and come up short after actual year-end expenses.
Though it won’t be a perfectly accurate projection, performing a surplus cash calculation early will still give you an idea of what extra cash your organization will have at year-end, and therefore what kinds of tenant improvements owners can make.
Guidance for performing HUD surplus cash calculation
Your auditor may already have a strategy in place to minimize your organization’s payment to residual receipts, but if not, feel free to contact us for a free conversation about your options. We’re happy to schedule a phone call with your organization to walk through how surplus cash affects your year-end strategy.
We’ve also built an interactive template that will help you calculate surplus cash on your own. It walks through each category of cash and liabilities to consider and has pre-built formulas that take care of some of the work for you. If you’ve already calculated your own surplus cash, let us know! We’re always happy to review surplus cash calculations to make sure your organization operates with the full amount of funding possible.
We look forward to hearing from you!