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Avoid One of the Most Common Findings in HUD Audits

No one likes reportable findings of non-compliance in the annual audit.  Reportable findings result in extra work for everyone involved, and they could even lead to sanctions from the U.S. Department of Housing and Urban Development (HUD).  As auditors, there are certain types of findings that we see more often than others.  One of the most common findings can be easily avoided by implementing simple preventative measures.

Shared Costs

Oftentimes two or more housing projects share a campus or are otherwise managed in conjunction with one another.  This can bring significant benefits in terms of efficiency and cost-savings.  Multiple projects working in conjunction share services, the costs of which are allocated to each project based on a reasonable method such as number of units or actual use.

In many situations, such costs are initially paid by one of the projects and then subsequently reimbursed by the other projects sharing in the costs.  This seems to be a reasonable approach; however, when one or more of the projects involved are HUD-financed projects, management will need to be cautious that payments of shared costs do not cause HUD-financed projects to be out of compliance with the regulatory agreement that they have entered into with HUD.

Regulatory Agreements

In general, the regulatory agreement is what governs a project’s obligations to HUD.  Most HUD regulatory agreements contain language similar to one of the following examples:

“Owners shall not, without the prior written consent of HUD pay out any funds except for reasonable operating expenses and necessary repairs.”

“Borrower shall not, without the prior written approval of HUD, pay out any funds of the mortgaged property except as provided in this agreement.”

This means that HUD-financed projects are disallowed from making any payments from project funds except for project operating expenses and approved payments from surplus cash.  Unfortunately, this includes payment of shared costs of other projects, even when those costs are to be reimbursed.

To clarify, it is okay for HUD-financed projects to share costs with other projects; however, what is disallowed is payment by the HUD-financed project of the portion of those costs which relates to other projects.  Such payments are considered unauthorized loans of project funds, which are reportable instances of noncompliance.

Identifying and Reporting Unauthorized Loans of Project Funds

For for-profit entities, if the auditor identifies unauthorized loans of project funds in any dollar amount, even if such amounts have been repaid, the unauthorized loans are required to be reported as a finding in the annual financial statements in accordance with the Consolidated Audit Guide for Audits of HUD Programs.

Preventing Unauthorized Loans of Project Funds

In order to prevent the project from making unauthorized loans, but still take advantage of the benefits of shared costs, management can take one of the following approaches:

  1. When a group of projects that share costs includes a project which is not a HUD-financed project, shared costs can be initially paid by the non-HUD-financed project and then be reimbursed by the HUD-financed projects. This is the simplest approach.

 

  1. When all of the projects that share costs are HUD-financed projects, each project should make payment only for its proportionate share of the costs. This means two or more partial payments would be made for a single invoice or group of invoices.

What if Something is Missed?

Sometimes items are missed, even by experienced management.  If an unauthorized loan is made during the year, the best action management can take is to ensure that the amount is repaid as soon as possible.

When an auditor identifies an unauthorized loan of project funds related to amounts that have already been repaid, the finding would be reported with a designation of “Corrective Action Completed”. This will greatly increase the chances of no follow-up correspondence from HUD, which will ultimately help avoid additional time commitment by management and additional cost.

Want More?

SVA Certified Public Accountants has many years of experience working with housing projects regulated by HUD.  Our experts can  assist your team in implementing the suggestions discussed above, assist with your audit or tax needs, or respond to any questions you may have.  Contact an SVA expert today!

BIZ TIP TOPIC EXPERT: Adam Kleinmaus

Adam Kleinmaus

Adam is a Manager with SVA Certified Public Accountants, S.C. in Real Estate and Nonprofit Services. In his role, he supervises and performs audits for owners of affordable multifamily housing projects receiving Section 42 Low-Income Housing Tax Credits.

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