From Les Sparks:

I suppose this question is really about avoiding the required deposit to residual receipts and instead making the repayment. Since that is the gist of most of these questions, that is how I will approach this.

First, let me say that there is no real written guidance covering this specific topic. The general guidance from HUD indicates that such loans are to be repaid from surplus cash. However, there is no provision in the REAC forms to allow that. So, there are two choices. The first is to place the money in residual receipts and request a release to repay the loan. I dare not venture to guess how that will work out. The second choice is to calculate surplus cash normally. Then do not deposit the amount to surplus cash and instead make the debt payment. In the next just indicate that they made the debt payment from surplus cash.

Some have tried to place the actual debt payment in the calculation of surplus cash. However, you are still in “noncompliance” because there was insufficient surplus cash to actually pay the debt.

So, my recommendation is to follow option 2. There are really no good answers for this in the REAC system.

Les

There have been several of these questions in the last few weeks. There is no documented method for accomplishing these payments. Here is the only thing written by HUD. It is from Handbook 4370.2:

2-11. REPAYMENT OF OWNER ADVANCES
A. Advances made for reasonable and necessary operating expenses may be paid from surplus cash at the end of the annual or semi-annual period. Such repayment is not considered an owner distribution. It is considered a repayment of advances.

Repayment of owner advances when the project is in a nonsurplus cash position will subject the owner to criminal and civil monetary penalties. (See Appendix 1, Criminal Statutes.)

So, these items are only able to repaid from surplus cash. The only way to do this is to show the liability on the balance sheet. However, it cannot be included as a liability on the schedule the Calculation of Surplus Cash. Calculate surplus cash as normal. Then do not make the payment to residual receipts. First pay the amount you are able to pay on the surplus cash note. Then, next year just note that the deposit to residua receipts was not made as the surplus cash note was paid. Make sure to include a footnote in the statements describing what happened. HUD only knows whether or not you made a deposit to residual receipts based on the auditor telling them that it is there in the next year’s audit. So, only deposit the amount remaining after the surplus cash note was paid. The auditor would then not have a finding, however, the AFS would have to describe why the finding was not necessary. REAC will note that no deposit was made and they were expecting it from last year. However, footnotes should make it clear what happened.

That is the best we can recommend.

Les

From client:

So here’s another question for you. ASU 2015-03 is effective for 12/31/16 audits. ASU 2015-03 requires Debt issue costs to reduce debt costs. It doesn’t appear that REAC has updated their data fields for this change. Where is HUD suggesting that deferred finance costs be presented? Audited REAC’s must be GAAP so we can’t issue an opinion for another basis of accounting and if we show the asset, it won’t be in accordance with GAAP. The amounts are material.

From Les Sparks:

There are two choices depending on your preference. The first is to just net the costs against the debt in account 2320. Then let the footnote indicate the differences. The next is to use the new account 2340 – Debt Issuance Costs. That account is listed as a contra-debt account. Of course, amortization is included in interest in the P&L. In the cash flow the amortization is broken out in a new account (s1200-486). That pretty much sums up the impacts.