HUD Allows for Increase in Distribution of Surplus Cash for Insured Properties

The Department of Housing & Urban Development (HUD) issued Mortgagee Letter 2022-16 on September 7, 2022, allowing for an increase in the frequency of the distribution of surplus cash for Non-Assisted HUD Insured properties.

Surplus Cash Distributions from insured multifamily projects are governed by the HUD Regulatory Agreement (Form HUD-92466M). Section 13 of this document requires that the Borrower calculate “Surplus Cash” (as that term is defined in the Regulatory Agreement, along with the term “Distributions”) as of the last day of its fiscal year and submit a report of its Surplus Cash calculations to HUD with its required annual financial reports, pursuant to Program Obligations. The Borrower may also, at its election, calculate Surplus Cash as of the last day of the sixth month of its fiscal year.

The semi-annual distribution rule was created in the 1970s to control Distributions to owners of subsidized housing with extremely constrained operating income due to affordable rental rates (e.g., the Section 236 and Section 8 programs). The primary economic benefit of multifamily equity investment was large tax deductions, and manual bookkeeping methods precluded more frequent reporting.

HUD will now permit modification of Section 13 of the Regulatory Agreement (form HUD-92466M) to allow Distributions from Surplus Cash as frequently as monthly for eligible Borrowers. This policy is limited to FHA-insured multifamily properties not subject to a Section 8 project-based rental assistance payments contract or a HUD-held mortgage note. This policy aligns HUD’s multifamily insurance for unassisted projects with industry standards and increases its competitive standing in the lending industry.

This new policy is only available to eligible multifamily projects with loans endorsed after September 7, 2022. Projects with loans closed before this date are not eligible and HUD will not consider amendments to executed Regulatory Agreements on existing insured projects.

Borrowers of such projects with loans closing after September 7, 2022, should obtain a copy of the Notice and follow the guidance provided in order to take advantage of the more frequent distributions. For questions about this Mortgagee Letter, contact Thomas A. Bernaciak, Deputy Director, Office of Multifamily Production at or (202) 402-3242.