U.S. Department of Housing and Urban Development (HUD) 2 Ginnie Mae Public and Indian Housing Center for Faith-Based Partnerships Community Planning and Development HUD Inspector General Departmental Enforcement Center Housing Fair Housing
Office of Housing 3 Office of Housing Multifamily FHA Healthcare Section 8 Grants (202 & 811) Single Family Hospital Facilities (241) Residential Care (232) Preservation
HUD s Role in Housing 4 Insured Loans Sec 221(d)(3) Sec 221(d)(4) Sec 236 Sec 223(f) Sec 223(a)(7) Sec 232 Sec 241 Direct Loans Section 202 Capital Advances Sec 202 Sec811 Tenant Subsidy Section 8 Old contract New contract PRAC /SPRAC PAC
Project Operating Environment: Key Concepts 5 Owning Entity vs. Project Relationship between Owner & Agent? Services provided by Agent? Entity Cash vs. Project Operating Cash As the Insurer/Lender of the loan, HUD wishes to protect the bricks & mortar as well as project assets, both cash & non-cash.
Hierarchy of HUD Requirements 6 Regulatory Agreement Use Agreement Subsidy Contract HUD Program Handbooks Housing Notices Mortgagee Letters
Newest Regulatory Agreement 7 Latest is now 30 pages More Surplus Cash Changes Changes to R4R and Residual Receipts Other changes that may turn out to be more important than you think Copy of Borrower Regulatory Agreement Copy of Operator Regulatory Agreement
5 Surplus Cash Calculations/Methodologies 8 MF Old MF 2012 MF 2014 NH Old NH New
General Audit Guidance 9 Purpose Financial statement audit Compliance Audit Performed in accordance with GAGAS Retained auditor s judgment in the application of procedures All compliance areas must be addressed Auditor should perform procedures to ensure the procedures in guide are current
Use of the Guide for A-133 10 Use Guide for programs not covered by a compliance supplement This is in accordance with guidance contained in Part 7 of the compliance supplement
Project Operating Environment 11 HUD Regulatory Agreement Entity Project Operating $ Sec. Dep. R4R Res. Rec. Rental Payments All Operations Billings Maintenance Operator
Protecting the Project (DEC Referral Flags) 12 Mortgage Status Reserve for Replacement Unauthorized Change in Project Ownership Disposal of Project Assets
Protecting Project Assets (DEC Referral Flags) 13 Distribution of Project Assets Loans from Project funds Underfunded Security Deposits Commingling of funds
Audited F/S REAC Financial Assessment Process The Entity Entered in FASS Validate Data Start here Or Meet with Entity (Is it over?) Attestation Field Office DEC Or FASS Analyst Assessments Produced Submit 2 REAC
FASS-MF 15 Review results: 43% of submissions are closed by the FASS system 19% of submissions are closed by REAC analysts 30% of submissions are referred to Multifamily Program Center 8% of submissions are referred to Departmental Enforcement Center
16
Most Popular Compliance Flags 17 1. Unauthorized Distributions 2. Unauthorized Loans 3. Other Auditor Findings - Code Z 4. Failure to make R4R Deposits 5. Acquisition of Liabilities 6. Failure to make Residual Receipts Deposits 7. Underfunded Security Deposits
Field Office Review 18
Purpose of Field Office Review 19
Emphasis of Field Office Review 20
Security Deposits and Reserves 21
Payables, Receivables & Liabilities 22
Vacancies and Bad Debt 23
Miscellaneous Expenses 24
Cash Flow 25
Notes and Auditor s Reports 26
Audit Scope and Approach 27 Financial Statement Audit Sufficient to permit an expression of an opinion on the financial statements and the in-relation-to opinion on the supplemental information Follow GAAS and obtain a sufficient understanding of internal control to determine the nature, timing and extent of tests to be performed. At a minimum follow AU-C Section 315. GAGAS adds an internal control reporting requirement
Audit Scope and Approach 28 Compliance Audit Opinion on each major program $500,000 for Multifamily & Link to 2013-16 Always for Ginnie Mae and FHA lenders Internal control over compliance Demonstrate auditor s understanding and assessment of control risk for IC over compliance Should perform tests of controls regardless of assessment of control risk Results clearly stated in documentation
HUD Audit Guide Chapter 2 29 Hardcopy may be required by some program offices, primary multifamily reporting will be electronic Required content IPA Report on Financial Statements and Supplementary Data IPA Report on Internal Control and Compliance in Accordance with GAGAS IPA Report on Compliance on Each Major Program and Internal Control Over Compliance
HUD Audit Guide Chapter 2 30 Required Reports, con t Schedule of Findings, Questioned Costs and Recommendations Management Letter Schedule of Status of Prior Audit Findings, Questioned Costs and Recommendations Corrective Action Plan This probably means that a report reference must be made on the prior audit findings and CAP schedules?
IPA Report on Financial Statements 31 See Example Report Report now conforms to clarified audit standards We no longer refer to the IPA Report for Each Major Program and IC over Compliance as it is not a component of the financial audit
IPA Report for Yellowbook 32 These report requirements were previously combined in the report on IC and the major program report Focus on the financial statements only Must report significant deficiencies & material weaknesses in internal control over financial reporting, fraud and material noncompliance having a material effect on the AFS
IPA Report on Compliance 33 Limit of $500,000 (anything below this limit is not audited) Requires an opinion on compliance Must report on IC over compliance Sig Def & Material weaknesses must be identified in body of report Report findings with auditee response Example shows a table describing compliance areas tested. This is optional, however, AHACPA believes that it should be utilized
Schedule of Findings 34 Included regardless of finding status Now requires a positive statement that no findings were reported Arranged in two components: Corrective Action Not Started or in Process Corrective Action Completed Regardless of status, findings are to be included in all required components Should not delay report issuance to enable correction
Schedule of Findings, con t 35 Group project-based sample findings continue to be reported as before Required components: Numbered Questioned costs Information on Universe and Population Size Sample size info Number of instances of noncompliance Condition, Criteria, Cause, etc (Yellowbook Requirements) Effect or potential effect Recommendations Reporting Views of Responsible Officials
Management Letter 36 Used to report nonmaterial noncompliance, if required (Required for chapter 3) Not to be used for material noncompliance Auditor s report should refer to it Not to be used to report corrected material noncompliance
Schedule of Prior Audit Findings 37 Prepared by the auditee Address all findings in the prior year s finding schedule, including repayment of questioned costs Should include findings from audits, attestations, studies or reviews conducted by oversight agencies that directly relate to the current year under audit Requires a positive statement that no findings were reported
Corrective Action Plan 38 Prepared for each finding Separate from report package and views of responsible officials Follow example F Describe corrective action taken, including tasks and subtasks and dates for planned actions Auditee should express agreement or disagreement with finding and recommendations
Fraud and Equity Skimming 39 Willful misuse of any part of rent, assets, proceeds, income or other project funds Follow GAGAS First responsibility to governance. If they fail to communicate to external parties, auditor should report directly Auditors should communicate with Single Audit Coordinator
HUD Clarifies Notice 2013-23 40 Issued August 2013 Limited audited submission to entities expending more than $500,000 in federal awards Clarifies what constitutes federal awards
HUD Clarifies Notice 2013-23, continued 41
REAC Template Changes May 2014 42 Schedule of Status of Prior Audit Findings fields changed as follows: S2800-005 (Previous Findings Reference Number) & S2800-030 (Report Period) eliminated S2800-020 (Narrative) is renamed to Finding and configured as a text field Affect only profit-motivated/limited dividend entities
Validation Errors 43 To correct these errors, enter Not Applicable in S1200-030 For NFPs the account to be populated as N/A is S3400-030
HOUSING NOTICE 2013-25 UPDATED GUIDELINES FOR CONTINUATION OF IRP AFTER REFINANCING DECOUPLING AS ALLOWED BY THE NATIONAL HOUSING ACT UNDER SECTION 236(E)(2)
Housing Notice 2013-25 45 Issued August 23, 2013 Updates procedures for continuation of IRP Subsidies at decoupling Applies to all M/F projects currently receiving IRP as well as 235 insured mortgages Include guidelines on refinancing or previously decoupled projects
2. Background 46 "SECTION 532 SECTION 236 ASSISTANCE. (a) CONTINUED RECEIPT OF SUBSIDIES UPON REFINANCING.- Section 236(e) of the National Housing Act (12 U.S.C. 1715z- 1(e)) is amended- A project for which interest reduction payments are made under this section and for which the mortgage on the project has been refinanced shall continue to receive the interest reduction payments under this section under the terms of the contract for such payments, but only if the project owner enters into such binding commitments as the Secretary may require (which shall be applicable to any subsequent owner) to ensure that the owner will continue to operate the project in accordance with all low-income affordability restrictions for the project in connection with the Federal assistance for the project for a period having a duration that is not less than the term for which such interest reduction payments are made plus an additional 5 years."
3. General 47 a. IRP paid after the refinancing is a general project-based assistance conditioned upon the multifamily meeting certain restrictions. HUD reserves the right to suspend or terminate the IRP if the project fails to meet the IRP conditions b. IRP subsidy may not exceed total established for original 236 mortgage monthly or annually
3. General, con t 48 c. Use agreement for low-income housing extends 5 years beyond the IRP term d. Assistance is paid to mortgagees to assist in debt service. IRP is not paid directly to owners. Acceptable public agency must provide oversight e. In a decoupling the 236 mortgage is prepaid and IRP continues for debt service. Nevertheless, basic 236 requirements must be maintained
3. General, con t 49 f. Rent Structure Must maintain Basic and Market rent payment standards. 236 rents and Section 8 rents may be different due to calculations in rent increases for basic rents and Section 8 adjustments. Owner must receive basic rent. Combination of basic rent and Sec 8 rent must be sufficient to operate project
3. General, con t 50 g. Section contract must be renewed with a 20-year term. Renewal must include the Preservation Exhibit
Eligibility 51 4. Mortgagees May be financed by any agency not debarred by HUD 5. Mortgagors most likely nonprofit, limited dividend or coops 6. Projects Any 236 project is eligible 7. Tenant Participation Owner must post a copy of the Decoupling application
Application Procedures 52 July 1, 2013, HUD established a central processing model through OAHP OAHP coordinates with HUB May involve refinancing of existing debt or a sale and refinancing. Objective should be long-term rehab of project
10. Application Procedures, con t 53 Proposals must contain a. Sponsor b. General Project Description c. Financing/Leveraging Public dollars d. Continuing IRP Assistance e. Oversight agency f. Physical Improvements g. Affordability h. Tenant Protections
10. Application Procedures, con t 54 Proposal must contain, con t i. Describe required HUD approvals j. Sources and uses statement k. Disclosure of other assistance l. APPs procedures m. Additional information Preservationeligible projects terminating insurance is eligible for enhanced vouchers for unassisted tenants not receiving Sec 8 assistance (Notices, 01-41 & 12-03)
11. Outstanding Debt 55 To extent financially feasible, all outstanding debt must be repaid. Deferrals must not be approved by HUB but forwarded to OAHP
12. Establishing Basic Rents 56 Establish Basic and Market rents Follow budget-based rent increase procedures Basic rent approvals follow 4350.1 chapter 7 After decoupling rent may not be lower than basic rent. Tenant may be less than basic rent if subsidy is available Restructuring costs must be reasonable
13. Allowable Distributions 57 Decoupling proposals may request limited dividend distribution increases. If new equity is brought in, the new distribution will be 6% of new equity less developer fees expected to be paid shortly after closing. Long-term fees to be paid from surplus cash count as equity Where no equity is brought in, the post transaction distribution will be based on a 10% return on 10% of new mortgage debt after decoupling
14. Additional Rent Issues 58 OAHP must ensure that income and expenses are same as mortgage application amended for final commitment Utilities ensure utility allowances are adequate Real estate taxes if no longer eligible fro property tax exemption, then include RE tax in budget Rental increases may not begin until rehab is complete IRP may only be paid for current debt service, so it may be suspended until full amortization begins
20. Use Agreement 59 A Decoupling transaction will require the execution and recordation of a Use Agreement that requires the project to be maintained and operated as a Section 236 low-income housing resource until the maturity date of the existing Section 236 mortgage plus an additional five (5) years. Further it will require restrictions imposed by other Federal Assistance to continue at least as long as the decoupling Use Agreement.
21. Hap Contract Renewal 60 If there is a Section 8 project-based HAP contract in place at the property, OAHP will ensure that the Owner executes a Renewal Contract with a 20-year term. The Owner and OAHP must mutually agree to terminate the existing HAP contract and execute a 20-year Renewal Contract, which includes the Preservation Exhibit. The term of the Renewal Contract must be equal to 20 years. The Preservation Exhibit must be completed to provide that upon expiration, the 20-year Renewal Contract shall automatically renew for an additional term at least equal to the number of years remaining on the existing HAP contract that is being terminated by mutual agreement of HUD and the Owner
30. Post Decoupling Monitoring 61 Owner agrees to continue all 236 characteristics (income limits, budgetbased rent increases, Basic and Market rent, etc.) Public Entity Oversight MOR reviews Fair Housing Budget-based rent increases Contact for tenant inquiries
30. Post Decoupling Monitoring, con t 62 Distributions are set in decoupling agreement Owner eligible to take surplus cash up to that amount Unpaid distributions accrue until surplus cash is available New distribution allowances do not affect rent
30. Post Decoupling Monitoring, con t 63 Resident Files Owners maintain files in accordance with 236 requirements Follow Handbook 4350.3 Special considerations for LIHTC projects: Owner should coordinate with PHA to get a copy of the 50058 in the tenants file. If obtained, owner is not required to complete the 50059 or an other 3 rd party verification For LIHTC the IRS requires a Tenant Income Certification be completed for each file. Owner may perform an interim recertification to align recertifications
30. Post Decoupling Monitoring, con t 64 Financial Statements File within 90 days in REAC File monthly excess income reports. Reports must be filed even though there is no excess income Owner may request retention of excess income Maintain compliance with Use Agreements
Refinancing Previously Decoupled Projects 65 OAHP may approve refinancing of previously decoupled projects Retain IRP New IRP Agreement extend to 5 years beyond the original 236 timeframe No rent increase due to refi 20 year HAP renewal Equity take-out ok if project needs are met Payment of developer fees from LIHTC proceeds ok Distributions not increased until expiration of IRP Debt Service equal to or greater than the continued IRP