The U.S. Department of Housing and Urban Development (HUD) sponsors a broad range of programs designed to revitalize urban neighborhoods, stimulate housing construction, encourage home ownership opportunities, and provide safe and affordable housing primarily for low-income families.
HUD programs take many forms, including direct financial assistance, grants, direct loans and advances, subsidies, and mortgage insurance. Generally a win-win situation for everyone involved, developers and owners of housing projects benefit from lending, insurance and/or subsidies offered by the HUD programming, while residents and surrounding communities gain housing that also contributes to the long-term viability of the nation’s affordable housing challenges.
So what’s the catch?
HUD mainly exercises control over a project through a regulatory agreement, approval of management entities and financial reporting obligations. Most projects are required to have financial statements audited by an independent accountant in accordance with generally accepted auditing standards, generally accepted accounting principles and Government Auditing Standards. Statements include reports on internal control and compliance under single audit requirements and are submitted electronically to the Real Estate Assessment Center (REAC) for review.
Navigating the reporting requirements of a HUD-assisted project can be cumbersome as modifications occur, especially for new project owners. Below are the five best practices a developer or project owner can employ to remain compliant with HUD regulations:
Read this carefully. The regulatory agreement lays out the basic responsibilities of your contract with HUD, including the prompt payment of mortgages. Additional notable areas include potential requirements for a replacement reserve for project repairs to be held at a financial institution, restrictions on modifications of rental rates and security deposits, project maintenance and limitations on distributions.
This agreement outlines the project owner, management agent and the agreed-upon management fees permitted by HUD to be paid to the management agent. Also included are requirements related to insurance coverage, regular unit inspection and financial reporting obligations — all of which you will need to follow to a tee.
Make sure you document resident selection criteria for new rental units and have an affirmative fair housing marketing plan in place to promote equal opportunity housing. Review policies regularly in accordance with HUD specifications and make sure those policies are displayed/available for public inspection.
Your team should be intimately familiar with HUD requirements, such as keeping organized and updated tenant files, facilitating annual inspections and re-certifications, providing regular rental updates, etc. to ensure audits and inspections can be easily facilitated.
Just ask anyone who has been involved in a HUD project — especially one in which an unfamiliar situation arose — and they’ll tell you your external team of professional advisors will be critical to getting through the project successfully. Don’t be afraid to use your advisors for more than just compliance, either. Ask about best practices or experience from other clients they’ve worked with, and see if they have access to HUD resources that could be useful in resolving questions before they become larger issues.
HUD projects can be profitable ventures for project owners as well as welcome additions to low-income communities. Whether you are considering a HUD project for the first time, or just want to be sure you are checking off the boxes on a current project, these fives best practices should help put you on a track for success.
Please contact a member of your service team, or contact Lisa Metzinger at lmetzinger@cohencpa.com for further discussion.
Cohen & Company is not rendering legal, accounting or other professional advice. Information contained in this post is considered accurate as of the date of publishing. Any action taken based on information in this blog should be taken only after a detailed review of the specific facts, circumstances and current law.