Settlement Agreement and Distributions

ID Status Date Public/Private Industry AHACPA Contact
#13134 Closed public Rural Development Les Sparks
Customer Reply

I have a client with Rural Development projects. One of the projects has reached a settlement with the government on the premise that they would not allow older properties to prepay their mortgage and get out of the RD program. The settlement of $200,000+ is basically provided to keep the project in the RD program until the end of the original 50 year agreement and is compensation to the owners for lost value in the property due to not be able to convert the complex into a conventional apartment.

My question revolves around whether or not this is project cash that is limited to distribution rules (return to owner) or if this can be distributed to the partners of the project outside the scope of return to owner. The project’s return to owner is very small and the preference is to distribute the funds to the owners so they can offset the tax implications. Otherwise, if deemed operating cash, RD will typically force the excess funds into reserve accounts or loan repayment.

The client reached out to business contact that recently went through this same settlement and was told that they opened up a separate bank account in the name of the partnership; but, didn’t include it on the financials nor the annual audit. For tax purposes, it was shown as basis reduction and gain in excess of basis. I am at a loss regarding guidance as their auditor in terms of whether this is acceptable or not.

I appreciate any help you can provide.

Les Sparks

Christopher, I have not read the settlement agreement so it is hard to say.  Generally, these agreements put money into owner’s pockets. The theory is that they were paid because they could not move the project to a conventional building. In that new building, they would have no restrictions.  SO, if the money is supposed to sit in the project until the end of the 50 years, it does not sound like such a good deal.  Nevertheless, stranger things have happened. IT all depends on the wording of the agreement. In a HUD world it would definitely go to the owner.  I tend to believe the other owner is on to something.  However, I guess they are afraid to spend it.  I cannot imagine how that would be enforceable, but RD does some crazy things.  If you have the settlement, the language may help.

 

Just curious – What does the client think the settlement meant?

 

Les Sparks

AHACPA

(801) 547-0809

 

From: AHACPA Support <[email protected]>
Sent: Tuesday, June 2, 2020 3:39 PM
To: [email protected]
Subject: Settlement Agreement and Distributions [NEW]

Les Sparks

Okay, so a quick reading did not reveal too much.  However, it is clear payments were made to the claimants.  If the claimants were not the project, but were individuals or owners, then the money belongs to whoever the claimants are and not the projects.

 

The attached unnumbered letter does not address the funds specifically, but does indicate the funds went to the “borrower” and not the project.  From what I remember this money was the owners and not the projects.  Hence it is not subject to restrictions.  This money was to compensate the owner up through the date of the change in the law that restricted their contractually allowed prepayments. There can be no real legal basis for keeping that money at the project.

 

Les Sparks

AHACPA

(801) 547-0809

 

From: AHACPA Support <[email protected]>
Sent: Wednesday, June 3, 2020 11:43 AM
To: [email protected]
Subject: Settlement Agreement and Distributions [Client Reply]

Write a reply

The ticket has been closed. If you feel that your issue has not been solved yet or something new came up in relation to this ticket, you can re-open it by clicking this link.
Item Status Opt-in Date Opt-out Date Action
Subject
Additional Information
Subject