If you own or manage Rural Development (RD) properties, chances are you’ve heard of upcoming changes that will shake up which properties need audits, and therefore how much you pay for annual assurance services from a CPA firm.
Though the changes only apply to for-profit properties, owners may be able to save money by early adopting these new rules, which will be mandatory in FY 2019.
Cost Reductions in RD Changes
In an effort to make Rural Development guidelines more aligned to the Department of Housing and Urban Development (HUD), RD administrators have switched from a unit threshold to a federal award threshold.
Previously, any for-profit RD property with more than 24 units needed to have an annual audit. Under the new rules, properties only need an audit if their total federal grants are greater than $500,000. This means any properties that have more than 24 units but receive less than $500,000 from the government no longer induce an annual audit fee, saving you money.
New Rule Form Submission Requirements
Instead of filing an audit, for-profit properties that don’t meet the threshold will instead submit several forms and attached schedules to certify their properties. These forms include:
- Accrual-based financial statements
- Owner-certified and complete 3560-07 and 3560-10
- Schedules of:
- Accounts receivable by type (resident, rental assistance, other)
- Accounts payable by type (operating, accrued real estate taxes)
- Detail of amounts owed to partners
- Miscellaneous expense line detail
- Accrual to cash adjustments
So just because these properties no longer need to file an annual audit, you may still need to work with a CPA to prepare financial statements on the accrual basis of accounting. An experienced Rural Development CPA will also be able to help your organization strategize how to make the most of these new rule changes, saving you time, money, and hassle when they become mandatory.
No More Agreed-Upon Procedures
It’s also worth mentioning that for-profit RD audits will no longer have to perform agreed-upon procedures (AUPs), though it may not result in a cost reduction to owners of these properties. Instead of AUPs, auditors will instead perform a longer series of tests and create a new report on compliance to cover the assurance previously provided by AUPs.
Cost Increases in RD Changes
Because the threshold has changed for determining which for-profit RD properties need annual audits, it’s possible owners will discover their previously un-audited project now requires an audit under the new RD rules.
Because of this, owners may be hesitant to early adopt these changes, since the new rules will force owners to pay an audit fee when they wouldn’t need to under the old rules. However, there are several things to consider when making this decision.
First, if you own multiple properties, consider the cost savings on those that will no longer require audits vs. the cost increase of beginning new audits. Especially for companies that own many small- to mid-size properties with low mortgage balances, the savings may be more likely to outweigh the costs.
Second, even if it may be cheaper to avoid early adopting RD changes, failing to prepare for them may cost your organization when the changes become mandatory. This is because properties that have never been audited will take longer to audit (and cause more hassle to your staff) than those that have previously prepared financial statements.
Step Up Service to Avoid Complications
One way to ease the transition for properties that have never been audited before is to hire a CPA firm to perform a compilation for FY 2018. Without getting too involved in the details why this matters, this helps because it provides an anchor point for the mandatory audit that will occur in 2019. In addition, you gain a year-long head start on preparing and compiling the financial statements before the mandatory due date in 2019. This allows your organization to move more freely through the process, reducing stress and giving your staff more time to adjust.
Without any previous balance sheets to tie back to, the property’s 2019 audit will take longer and likely cause more stress because of the impending deadline.
Analyzing Properties’ Statuses Under New Rules
To determine if your for-profit RD property will or will not need an audit when these rules become mandatory, you will need to look at the total amount of federal financial assistance each property receives. This amount includes, but is not limited to:
- Mortgage balance
- Rental Assistance
- Interest Subsidy
- Other Government Loans
- Other Government Subsidies
If the amounts from the 2017 financial statements under these categories total more than $500,000, you will need to file an audit beginning in FY 2019. If the amount is less than $500,000, you will need to submit the forms mentioned above.
Forming a Strategy That Works for You
Whether you own a single apartment complex or a hundred RD properties, these rule changes will affect how you report financial information to the government through MINC. Each owner’s strategy will be different according to their properties’ status under the new rules, whether they should early adopt, consider stepping up their service without early adopting, or simply waiting until the changes become mandatory.
Ask your CPA or give us a call to find out if you can save money by early adopting RD’s upcoming changes. We can perform an analysis on all your RD-funded properties and offer solutions for making the transition as smooth and affordable as possible.
This is a tricky time for RD properties, but by staying on the cutting edge, you have a better chance of weathering these changes and making the most of them for your properties and the tenants they serve.