In the multifamily affordable housing arena, being compliant with Department of Housing and Urban Development regulations is paramount for property owners. Often the burden of compliance can be costly and overwhelming for organizations that typically have a core focus of managing these properties and are not in the “compliance business.”
The key is being proactive with all audits, which can cover a wide-range of topics—file maintenance, effective property maintenance, use of entity funds and performing annual re-certifications. The goal is to ensure that all HUD compliance requirements are being fully met, while also minimizing the time and expenses for meeting these regulations.
The place to begin is the HUD website itself. The site includes the HUD Audit Guide, the bible for those seeking insight into compliance. Chapter 3, “HUD Multifamily Housing Programs,” is a 43-page, publicly available compendium of rules and how to meet them.
The guide outlines what the annual HUD audits seek to do and how to prepare for them. A reading tells you that many of the audit points are simply good-business methods and recommendations.
Audits are part of a process, and a critical part to take anxiety out of the equation is preparation. As many owners may know, there are two auditing parties. One is a HUD inspector, the other an independent auditor generally employed by the property owner to both prepare for the HUD inspections and to assure that the owner is in compliance with the HUD requirements on a financial level as well as a compliance level.
The commercial auditor looks for some of the same things HUD does and is required to report findings and figures to the Real Estate Assessment Center (REAC) electronically. HUD uses the REAC to guide government auditors in their quest for compliance assurance.
The major difference in the auditors’ duties is that, as the commercial auditor works, non-compliance issues can be reported to the owner for remedial action. The auditor can then report to REAC that the action mitigates the HUD noncompliance issue, helping the owner when HUD’s auditor comes to call.
WHAT DO THE AUDITORS WANT?
The best way to answer this question is to look at a few examples:
- Security Deposit Liability. Property owners collect security deposits and incur a liability in doing so, because deposits must be available to return to residents when they move. Owners must have cash available to cover that liability. If they don’t, it’s a red flag for an auditor, and red flags bring closer HUD scrutiny.
- Activities of Related Parties. An apartment community may be linked with a shopping mall and a parking garage. All are commercial entities, and all owned by one corporation, which takes in rents and runs its finances with a single account, from which it extracts a profit. HUD is concerned about the apartments and looks askance at commingling funds of the retail portion of the organization with real estate property money—particularly when it’s time to pay investors.
- Resident Records. In Section 8 housing, HUD frequently subsidizes as much as 90 percent of market-rate monthly rental, with the renter paying as much as he or she can afford. An annual means recertification by the property owner is required to determine if a resident’s income and/or family makeup has changed, and if a record of that recertification is missing from the file, HUD wants to know why.
Since HUD properties can house hundreds of residents, their files are sampled, rather than completely audited. A consistent pattern of compliance can prompt a reduced sample—an owner’s goal. Management fees are often negotiated with HUD, and if the fee is 6 percent of rents, for example, it’s easy for an auditor to learn if you’re paying more to your own management firm.
WHAT’S AT STAKE?
HUD’s scrutiny is often a product of a record of compliance. The agency has enough non-compliant property owners to oversee, so those with clear records of compliance that can make a HUD inspection easier are treated as good customers.
Non-compliance can invite demand for more frequent requests for more information, which adds expense to operations. Worst-case scenarios can prompt a mortgage call and perhaps a loss of Section 8 support payments, either of which can generate a forced sale. HUD does not want this, because then the agency is called upon to find a new owner and financing. That’s why the agency tries to work with a property owner to correct problems.
When correction is impossible, HUD frequently will look to owners with a history of compliance and running a good operation. The good customers can get opportunities to buy properties at a price well below the market.
One way to take extra advantage of that is for the buyer to quickly rehabilitate the dwellings, then refinance the property for enough to retain it while extracting a profit.
The key to being in position to take advantage of those opportunities comes at the beginning of HUD-property owner relationship. The owner brings on a consulting auditor to set up accounting and compliance measures to make sure future problems don’t occur and to guide future audits.
Again, by being proactive and comprehensive with your HUD audits, it is possible to have the peace of mind knowing that your properties are being managed in a compliant manner.
Jennifer Estrada is a senior manager, audit and accounting services at Gorfine, Schiller & Gardyn. With more than 10 years of experience, Estrada focuses on financial statement preparation and audit and tax services for real estate development and HUD multifamily housing. For more information about Gorfine, Schiller & Gardyn, please click here.