Residual Receipts 4350.1 Chpt. 25

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CHAPTER 25. RESIDUAL RECEIPTS

25-1. Applicability. This Chapter 25 applies to all

non-profit and limited dividend multifamily

projects with HUD-insured and HUD-held

mortgages, including the Section 202 Program

projects. This Chapter does not apply to

releases of Residual Receipts under an approved

Plan of Action pursuant to the Emergency

Low-Income Housing Preservation Act of 1987 or the

Low-Income Housing preservation and Resident

Homeownership Act of 1990; guidance for such

uses may be found in HUD Handbook 4350.6,

Processing Plans of Action Under the Low-Income

Housing Preservation and Resident Homeownership

Act of 1990. Many but not all of these

projects are required to establish a Residual

Receipts Account. Generally, all projects

owned by non-profit mortgagors and all Section

236 and 221(d)(3) projects owned by limited

distribution (LD) mortgagors as well as Section

8 New Construction/ Substantial Rehabilitation

projects subject to the 1979/80 revised Section

8 regulations are required to establish a

Residual Receipts Account. The requirement for

a Residual Receipts Account is established by a

Regulatory Agreement or a project-based subsidy

contract such as Section 8 Housing Assistance

Payments. A general test for a Residual

Receipts Account requirement is: If

distributions of cash to the owners are limited

or not permitted, the project probably must

maintain a Residual Receipts Account.

25-2. Definition. During the life of the mortgage

(except for certain Section 8 projects that are

described in paragraph 25-11 of this Chapter),

Residual Receipts are an asset of the mortgagor

held under HUD control. When a Residual

Receipts Account is required, the project's

Regulatory Agreement provides an exact

definition of "Residual Receipts." For

purposes of a "working definition" for this

Handbook 4350.1, however, "Residual Receipts"

may be thought of as including:

A. All "Surplus Cash" for non-profit

projects.

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B. Cash remaining after all accrued

distributions have been properly taken

for limited dividend projects (see

paragraph 25-3).

C. Under certain circumstances for Section

221(d)(3) BMIR projects, another source

of residual receipts may exist. Rental

collections due from over-income tenants

not receiving Section 8 subsidy are

normally greater than the BMIR "contract

rent" as described in HUD Handbook

4350.3. Occupancy Requirements of

Subsidized Multifamily Housing Programs.

These surcharges, which are the

differences between the BMIR "contract"

and "market" rents, are recorded in

Account No. 115190, Rent Revenue

- Miscellaneous," as described in HUD

Handbook 4370.2, Financial Operations and

Accounting Procedures for Insured

Multifamily Projects. Although accounted

for separately, these surcharges are

ordinary revenue for purposes of

operations and surplus cash computations.

25-3. Calculation of Residual Receipts. Form

HUD-93486, "Computation of Surplus Cash,

Distributions, and Residual Receipts," is shown

in Appendix 2 of HUD Handbook 4370.2. Financial

Operations and Accounting Procedures for

Insured Multifamily Projects. Project owners

use this form either semi-annually or annually

(depending on the executed Regulatory Agreement

for the project) to calculate allowable

distributions and any amounts that may be due

for deposit to the Residual Receipts Account.

Instructions for completing the form are shown

on the back of the form and in the Appendix 2

of Handbook 4370.2.

25-4. Depositing Residual Receipts. The project's

Regulatory Agreement or Section 8 HAP Contract

specifies where Residual Receipts are to be

deposited. Owners of Section 202 projects

maintain their own separate bank accounts for

Residual Receipts; all other project owners

with insured or HUD-held mortgages or

State-financed projects are required to deposit

Residual Receipts with their mortgagees.

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25-5.* Holding and Investing Funds. The Residual Receipts of all projects

with HUD-insured mortgages should be invested with interest

accruing from the investments credited to the Residual Receipts

account. Investments of Residual Receipts Account funds may be

effected and are to be safeguarded by mortgagees and mortgagors in

the manner described in Chapter 4 of this Handbook 4350.1. The

procedures and sanctions described in Chapter 4 also pertain to the

Residual Receipts Account. Reference also is made to HUD Handbook

4350.4, Insured Multifamily Mortgagee Servicing and Field Office

Remote Monitoring Handbook, for additional information on this

topic.

25-6. Combined Investments. For HUD-insured mortgages, monies held in

the Residual Receipts Account and the Reserve Fund for

* Replacements Account may be combined to purchase a single

investment or combination of investments.

A. Earned interest and the return of principal when the investment is

liquidated must be prorated to the respective bookkeeping accounts.

B. Care should be taken to preserve sufficient liquidity in these

accounts. Some forms of investment, such as passbook savings

accounts, are very liquid; others are increasingly less liquid,

such as Thirty, Sixty, or Ninety Day Certificates of Deposit (CDs),

etc.

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25-7. Insured Mortgagee Charges for Handling Investments of the Residual

Receipts Account. Reference is made to HUD Handbook 4350.4 for

additional information on this topic. If an insured mortgagee

proposes to assess charges for investing the Residual Receipts

Account, the Field Office Asset Management staff are reminded to

examine the Mortgagee's Certificate for the project to see if any

fees or charges for making investments were

* disclosed or stated. If such fees are disclosed, no further review

is necessary; if they are not shown, any fees so collected by the

insured mortgagee may only be collected according to a written

agreement between the insured mortgagee and the mortgagor.

25-8. Other Fees. HUD does not recognize special fees or charges that

might be paid by project mortgagors to investment brokers or other

parties (other than HUD) such as managing agents for providing

investment advice or for making or brokering investments except

where the nature of the investment itself requires that it be

brokered, i.e., obligations of federal agencies such as GNMA. Such

fees, other than those involving the above exception, are not

considered to be necessary expenses of the project, should not be

paid from project funds, and are not considered by HUD when

calculating rental rates.

25-9. Capital Resources. Projects fortunate enough to have funds in a

Residual Receipts Account have a versatile source of capital that

may be used only with the approval of HUD for any number of

purposes if the uses are fully consistent with the intent of the

program under which the project was originally endorsed or

approved. Except for projects subject to the 1979/1980 revised

Section 8 regulations, withdrawals from the Residual Receipts

Account may be authorized by the Asset Management Branch Chief;

some of these uses include but are not limited to:

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A. Reduce operating deficits when legitimate cash flow deficits exist,

i.e., offset increased operating expenses instead of increasing

rental rates.

B. Make mortgage payments when a mortgage default is actual or

imminent.

C. Make repairs to the property not covered by the Reserve Fund for

Replacements.

D. Provide additional project amenities such as air conditioning, a

sprinkler system, fire or smoke detectors, or energy saving devices

as well as office equipment such as computers and associated

software. For Section 202 projects the amenities must conform to

the program's cost containment provisions.

E. Pay accrued, allowable distributions where insufficient surplus

cash is available provided:

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1. There are no known violations of the Regulatory Agreement.

2. There are no major unresolved findings from management reviews

or analyses of financial statements.

3. The project is in acceptable physical condition and the

mortgagor has certified to the acceptability of the project's

physical condition.

F. Repay HUD-approved Residual Receipts Notes if the project is

financially solvent, well maintained, and in a stable market if

these Residual Receipts Notes do not exist as a result of a

Transfer of Physical Assets (TPA). For projects with insured and

HUD-held mortgages. authority for release of residual receipts for

TPA-related transactions is reserved to the Director, Office of

Multifamily Housing Management, in HUD Headquarters.

G. Repay Flexible Subsidy Operating Assistance or Capital Improvement

Loans.

H. Make enhancements to the project or retrofit units for Rousing

Accessibility under Section 504.

I. Provide for testing or abatement of lead-based paint at the

project.

25-10. Section 8. Special Considerations. For those projects subject to

the revised 1979/1980 Section 8 regulations, requests for

withdrawals will be considered if such requests are for the

purposes stated in only paragraphs 25-9A or 25-9B above. Asset

Management Branch Chiefs may approve requests for these two

purposes. Requests for purposes other than those in paragraphs 25-

9A or 25-9B will be disapproved by the Field Office.

25-11. Section 8 Other Considerations. For certain Section 8 projects,

notably those subject to the 1979/1980 revised Section 8

regulations, the Assistant Secretary for Housing/Federal

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Housing Commissioner may direct that all or a portion of funds in a

project's Residual Receipts Account be used to reduce Rousing Assistance

Payments or for other project purposes. When a project's Section 8

contract expires, is terminated, or any extensions are terminated, HUD

will request the project owner to return to HUD the unused balance of

funds remaining in the Residual Receipts Account at the time of the

contract's termination. It is therefore reasonably possible that some

portion of monies that have been deposited to the Residual Receipts

Account during the course of operations under a Section 8 Contract will

be transferred back to HUD. HUD staff may hear about so-called "phantom

income" from project owners subject to this provision, where taxes might

be paid on this portion of income without the taxpayer (mortgagor, in

this case) having the benefit of the income. Although HUD employees are

not responsible for providing tax advice to mortgagors, these amounts

may represent a "loss contingency" as defined by the Financial

Accounting Standards Board (FASB) Statement No. 5, "Accounting for

Contingencies." HUD staff may refer mortgagors to FASB Statement No. 5

if they become aware of questions on this issue.

25-12. Residual Receipts Notes. Form FHA-1710, "Residual Receipts Note

(non-profit mortgagors)" and Form FHA-1712, "Residual Receipts Note

(Limited Distribution Mortgagors)" may be used where such notes are

necessary. The use of these Residual Receipts Notes after final

endorsement or closing should be relatively rare except for

advances from owning persons or sponsors to cover unpaid

construction costs after final endorsement or closing and reported

in the Supplemental Cost Certification. However, use of these

Residual Receipts Notes may be permitted in order to recognize

owning persons', sponsors', or management's advances made to cover

operating expenses, taxes, or capital improvements after final

endorsement/closing. Execution of Residual Receipts Notes is often

desired by sponsors or other third parties as a form of guarantee

that such advances may be repaid if Residual Receipts are

generated. The Field Office Housing Management

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Division Director, in association with the Field Office Counsel, is

responsible for review, modification, and approval of these

Residual Receipts Notes after final endorsement. Copies of

executed Residual Receipts Notes and related correspondence are to

be forwarded to the Operations Division, Office of Multifamily

Housing Management, in Headquarters for inclusion in the Washington

Docket. Reference is made to HUD Handbook 4355.1, Flexible

Subsidy, for information about residual receipts notes used in

conjunction with the Flexible Subsidy program.

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Office Housing Management Division Director, in

association with the Field Office Counsel, is

responsible for review, modification, and

approval of these Residual Receipts Notes after

final endorsement. Copies of executed Residual

Receipts Notes and related correspondence are

to be forwarded to the Operations Division,

Office of Multifamily Housing Management, in

Headquarters for inclusion in the Washington

Docket. Reference is made to HUD Handbook

4355.1, Flexible Subsidy, for information about

residual receipts notes used in conjunction

with the Flexible Subsidy program.

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