Good morning!

I have a property who did not have a HUD insured loan until March 30, 2022. They refinanced their non-HUD bank loan to be HUD insured only in 2022 and took two large distributions during the regulatory agreement period of 3/1/2022 – 12/31/2022 (distributions were taken in May 2022 and October 2022). The property has a 12/31 balance sheet date.

They are currently operating under the 2018 regulatory agreement where two distributions during the two- six-month periods as allowed under the regulatory agreement. However, I believe the first distribution they took (May 2022) were from the refinancing proceeds of ~$127k (total distribution was ~$125k). Based on review of the regulatory agreement, it states under Section 14 paragraph a – “no distribution shall be made or taken from borrowed funds”, however based on their LP agreement they could distribute funds from a refinancing (which is I’m sure what they followed). The other distribution (~$106k) taken in October would then be permitted under the regulatory agreement.

My questions from above:

1. the May 2022 distribution – is this in violation of the regulatory agreement as they distributed funds from the refinancing during the period in which the regulatory agreement was in effect? They did have some surplus cash calculated at 12/31/2021 based off the LPA cash flow definition.
2. The October 2022 distribution – I’m assuming we will have to obtain their calculation for the distribution and verify that it was accurate based on the records provided at 6/30 (mid-year). Do we have to calculate the surplus cash using the cash & tenant security deposits amounts at 6/30/22?
3. When calculating surplus cash at 12/31 – if they had positive surplus cash calculated, but was less than what was distributed during 2022, are they in violation of their regulatory agreement and have to ‘repay’ the difference?
4. When calculating surplus cash at 12/31 – Will they be able to distribute what was calculated at 12/31 between the months of Jan – June or is what was calculated applied to the mid-year distributions?
5. Should we have two surplus cash calculations presented for the property – 6/30/22 (which would apply to their October 2022 distribution) and 12/31/22 (for distributions allowed during Jan – Jun 2023) as they did take two distributions during the year?
6. Or when we calculate the surplus cash calculation during the mid year, do we apply that calculation to the previous period’s distribution (i.e., 6/30 surplus cash calculation would be reviewed against the May 2022 distribution, etc.)