For-profit owner distribution for nursing home project owner

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ID Status Date Public/Private Industry AHACPA Contact
#6974 Closed public Multifamily Les Sparks
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I have a question related to the surplus cash calculation and subsequent distribution for a for-profit nursing home project owner. He has been calculating his surplus cash for his semi-annual distributions based on his operating cash balance prior to him prepaying his mortgage principal and interest that is due on the 1st of the month. I have expressed to him that he can’t draw based on the higher cash balance because the funds have been withdrawn as part of the mortgage payment that was applied by the lender.
I explained to him that drawing funds in excess of surplus cash such as the above situation would lead to HUD finding requesting refunding the excess and as much as contact from DEC.
Please let me know if that HUD’s calculation is appropriate subsequent to the mortgage prepayment. Strong-willed client that believes he is correct and HUD is wrong.
Thank you in advance for your assistance.
Kathy Christensen

From Les Sparks:

I may be confused somewhat regarding your question. Here is the basic requirement for the surplus cash calculation as far as HUD see it.

First – cash balances at December 31 or June 30th. There is NO prepaid mortgage as HUD anticipates that the mortgage is paid on January1. I think this is where my basic question arises. Why the indication of a prepaid mortgage?

The only deduction related to the mortgage should be the next month interest payment.

In normal multifamily, we now also deduct principal, R4R, escrows and MIP for January. However, there is no prepayment. Let me know how I might be misunderstanding this.

From client:

Sorry to confuse you regarding this surplus cash. Let me refine my question.
My client is calculating his surplus cash based on balance as of 12/26/16 . On 12/27/16 he ACH debited his January 1st mortgage payment (P&I) with the payment applied on 12/28/16. Isn’t my client calculating his surplus cash incorrectly. My understanding from your CPE annual updates is that the balance should be the 12/31/16 balance and not the 12/26/16.
I explained to my client to ACH his mortgage payment on the 1st of the month in the future to eliminate this situation.
I appreciate any help from your knowledge.

From Les Sparks:

In general, he is doing it wrong. However, in this case, I understand why. HE did it early to avoid the deduction that his early mortgage payment caused. So to avoid that punishment, he did it early. Look, how different would the calculation be had he done everything correct, including the mortgage payment? If it is not materially different, then probably no big deal. However, you are correct that it should only be calculated at the end of each period.

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