Income, budget and balance sheet

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CFS COURSE MANUAL

Certified Financial Specialist

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By registered for and/or attending an NCHM Course, Customer and Participant agree to the following terms and conditions.

DEFINITIONS

“NCHM” means the National Center for Housing Management, Inc. with administrative offices at 333 North 1st Street, Suite 305, Jacksonville Beach, Florida 32250.

“Customer” means the person or company registering the Participant and responsible for paying the fees associated with the Course.

“Participant” means the individual attending the Course.

“Course” means an educational program, training program, or webinar offered by NCHM either online or in a classroom setting and consisting of Course materials, presentations, handouts, exercises, and instruction.

“Certification” means any credential offered by NCHM as the result of a Participant meeting the standards established by NCHM.

“Exam” or “Examination” means a test administered by NCHM in conjunction with a Course and/or Certification.

ACCOMMODATION FOR INDIVIDUALS WITH DISABILITIES

We are committed to complying with all applicable federal, state and local laws regarding reasonable accommodations for Course Participants with disabilities. Accommodations should be requested by a Participant or the Customer on behalf of the Participant, preferably in writing. In order to plan for and provide effective accommodations, we ask that accommodations be requested as early as possible, and no later than two weeks before the start of the Course. Accommodations that fundamentally alter the nature of the services being provided, jeopardize safe operations, or result in undue financial or administrative hardship may not be available. NCHM will use its best efforts to discuss accommodations that are requested and deemed infeasible with the Participant and find mutually acceptable alternatives.

FEES

All fees are due upon registration unless prior arrangements have been made by the Customer to be invoiced by NCHM. Payment of invoices is due in full within thirty (30) days of invoice date. If payment is not received on time, NCHM may charge a late fee of $50.

Certification Exam results will not be released until all fees are paid.

CERTIFICATION

Participants seeking a Certification agree to adhere to the rules contained herein with respect to the administration, issuance, and use of said Certification.

1. Only the Participant registered for a Certification Course is entitled take the Course and the Certification Examination associated with it.

2. The use of any aids in the taking of an Exam besides those expressly provided by NCHM during the Course is prohibited. If a Participant uses any prohibited aid, his or her Exam will not be graded, and the Participant will not be eligible to receive the Certification. No refunds will be made for the cost of the Course or certification and no re-test will be permitted.

3. The Participant agrees to abide by the rules provided to him or her at the time of the Exam administration. Failure to adhere to the rules may result in expulsion from the Exam and/or invalidation of the Exam. No refunds will be made for the cost of the Course or certification and no re-test will be permitted.

4. NCHM will use its best efforts to inform the Participant of the results of any Certification Exam within two weeks of the administration of the Exam. NCHM is expressly authorized by the Participant to release the results of any Examination to his or her employer or the Customer, unless the Participant is also the Customer and advises NCHM in writing in advance of the administration of the Exam that he or she does not want the results released to the employer.

5. NCHM will issue a Certification only upon successful completion of the associated certification test and payment of all fees.

National Center for Housing Management Program Terms and Conditions (Effective as of March 1, 2020)

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1. After being issued the Certification, Participant shall have the right to use the title and logo of the Certification for a period of one year. This time can be prolonged only upon Participant meeting the requirements established by NCHM from time to time including payment of any extension fees and completion of any required continuing education.

2. NCHM reserves the right to establish and/or modify continuing education requirements for any Certification at any time in its sole discretion. Should Participant fail to fulfill the requirements NCHM shall have the right to suspend or terminate the Certification.

COURSE POSTPONEMENTS AND CANCELLATIONS

Exam scores shall be released automatically to the Participant taking the Exam after grading and verification.

Upon written request, Exam scores and certification status will be released to an authorized representative of the employer of the participant provided that:

1. The authorized representative is the supervisor of the participant or a senior member of the employer’s management staff acting on behalf of the employer

2. The employer paid for, or reimbursed the Participant for, the cost of the Certification Course.

Notwithstanding the above, NCHM will release scores to any third-party upon written request from the Participant taking the Exam.

All requests for Exam scores and certification status shall be sent to [email protected]

COURSE POSTPONEMENTS AND CANCELLATIONS

At times, we must change a course location or course date or postpone or cancel a course. We will try to give the Customer as much advance notice as possible of any such change or cancellation. If a Participant is unable to attend the course at the revised location or on the revised date, we will credit 100% of any prepaid course tuition fees paid against a future course or, if requested, refund those fees. NCHM is not responsible for any travel or other expenses incurred by or on behalf of the Participant or Customer resulting from the cancellation or change.

CANCELLATIONS DUE TO INADEQUATE REGISTRATIONS/CONFIRMATION OF CLASSROOM VENUE

NCHM reserves the right to cancel any program that does not meet its minimum class size requirement. Should NCHM cancel a Course due to inadequate registrations the Customer shall be entitled to the choice of a full refund or 100% credit of the amounts paid to a future Course. For in-classroom courses NCHM is not obligated to confirm an exact venue for the Course until the minimum registration requirement is met. To assist Participants in planning NCHM will use its best efforts to confirm the venue for a Course no later than two weeks prior to the start of the Course.

TRAVEL/LODGING/MEALS/INCIDENTAL EXPENSES

The cost of travel, lodging, meals, and other incidental expenses are not included in the Course registration fee. Any hotel room blocks or information regarding parking are provided as a courtesy. NCHM makes no guarantee of availability or pricing of either lodging or parking.

CANCELLATION BY CUSTOMER Cancellation requests made in writing and received by NCHM at least twenty-one (21) days in advance of the first day of the Course shall entitle the Customer to either a full refund of the course fee paid less a $50 processing fee or a 100% credit of the amount paid to a future NCHM course taken within one year of the original Course start date. Customer should indicate preference at the time of the cancellation request. If no preference is noted, Customer’s account will be credited for future use.

Cancellation requests received less than twenty-one (21) days but more than three (3) days in advance of the first day of the Course shall result in a 50% credit of the amount paid to a future NCHM course taken within one year of the original course start date.

Any cancellation request received three (3) or less days prior to the start of the course or any no-shows shall result in the forfeiture of all amounts paid and Customer shall remain liable for any unpaid amounts.

Cancellations can be sent by US Mail or email to the following:

National Center for Housing Management

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333 North 1st Street, Suite 305 Jacksonville Beach, FL 32250 Attention: Customer Service or [email protected]

NCHM will issue a Confirmation of Cancellation email upon the timely receipt of a cancellation request. Customer is advised to retain a copy of the Confirmation email as proof that the cancellation was received and approved.

A substitute attendee, defined as a person from the same organization attending a course in place of a registered participant, will be allowed without penalty provided the substitute attends the same course at the same location and date as the originally registered participant and provided that NCHM is notified in writing prior to the start of the program.

ONLINE CONNECTIVIT Y/ TECHNICAL PROBLEMS

For online courses Participant is responsible for ensuring adequate online connectivity and equipment necessary to receive the instruction. Should NCHM experience a technical problem on its end that it determines, in its sole discretion, requires the Course to be cancelled or postponed, NCHM shall have the option to either provide the Customer a full refund or offer the Course at a later date. NCHM shall maintain a toll-free number and provide said number to the Participant prior to or at the start of the Course for the purposes of reporting any technical problems. It is the obligation of the Participant or Customer to promptly report any issues receiving the online instruction.

SECURITY AND BEHAVIOR AT CLASSROOM VENUE

The Customer and Participant agree that the Participant will abide by security measures and reasonable rules of behavior at the Course location. NCHM is not responsible for, nor does it make a representations concerning, the facilities or personnel at venues provided by third-parties.

The Participant can use any course materials provided or made available in connection to our courses solely during and for the purposes of the course and does not have any ownership interest or license to these materials for any other purpose, use, or time. All copyrights, patents, designs and other intellectual property rights in or relating to any course materials provided or made available in connection with our courses remain the sole property of NCHM. No part of any course materials may be used for any other purpose, reproduced, stored in a retrieval system, disseminated, or transmitted, or published in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, or translated into any language without the prior written permission from NCHM.

INDEMNIFICATION

The Customer and Participant agree to defend, hold harmless, and indemnify NCHM, its affiliates, and its partners/vendors against any allegations, investigations, claims, actions, demands, damages, expenses, fees (including attorney’s fees and court costs) caused by, arising out of, or related to the Customer’s, Participant’s or a third party’s unauthorized use, reproduction, dissemination, publication, transmission, or storage of any materials provided or made available to customer in connection with our courses including but not limited to any alleged infringements of patents, trademarks, registered designs, design rights or copyright.

REPRESENTATIONS AND WARRANTIES

NCHM makes no representations or warranties as to the suitability of its courses or certifications for use by the Customer or Participant or that such courses or certifications shall lead to employment or continuing employment of the Participant. It is the obligation of the Customer and Participant to perform the due diligence he, she, or it determines is necessary and sufficient to judge the suitability of any course or certification for Customer or Participant’s intended use.

GENERAL

These terms and conditions set out above represent a complete statement of the agreement between the parties and supersede all prior discussions, correspondence and representations. NCHM brochures and advertisements are for information purposes only and are not intended to form any agreement between NCHM and the recipient. These terms and conditions are subject to change without notice and changes will apply to any enrollment/course order received after the date of the change. These terms and conditions may not be varied except in a written agreement signed by an officer of NCHM. NCHM’s acceptance of a purchase order containing different terms and conditions does not modify or supersede these terms and conditions. This agreement will be governed by Florida law, without regard to any conflicts of law.

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Contents

Presentation ................................................................................................................

Exercises ...................................................................................................................

CFS

Reference Material and Spreadsheets.................................................................... Balance Sheet (Northfield Apartments)..........................................................

Supplemental Definitions.................................................................................

Income and Expense Statement (Northfield Apartments)...........................

Income and Expense Statement (Southtown Apartments)..........................

Capital Planning Worksheet (Oak Ridge Apartments)....................................

Reforecast Compared to Budget (The Gables at Stone Creek)...................

Budget Worksheet.............................................................................................

Budget Assumptions (Quarry Lake Apartments) .........................................

101

102

105

108

Market Analysis - Comparable Properties (Terraces at Metro Center)......

Loss-to Lease Worksheet (The Arbors)...........................................................

Amortization Schedule (The Arbors)................................................................

Budget Worksheet (Monthly Allocation) .......................................................

Budget Summary Presentation TOC (Latitude Apartments) .........................115 Budget Summary Narrative (Latitude Apartments) ......................................

109

110

111

112

116

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Course Presentation

CFS COURSE MANUAL

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Course Presentation

Certified Financial Specialist

• Teach federal regulations and guidance for housing programs providing NCHM’s interpretation of both

• Provide examples of policies and procedures used in the industry

• Provide the instructor’s opinion on how to handle specific situations

• Do not give legal advice or set policy for your owner or management company

NCHM Courses and Instructors

Disclaimer

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IInstructor Introduction • •

Instructor

Course Materials

CFS Course Book

Presentation Slides

Ta b

Exercises

Ta b

Reference Material and SpreadsheetsTa

b 3

HUD Documents

Ta b

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•

CCertification Exam Don’t panic…

*CFS is relevant to any type of multi-family rental property, be it affordable or market-rate (although we will discuss

some of the differences).

About the Program

Part 1 Part 2

Course Organization

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BBy the end of Part 1 we hope you will learn:

• What truly are the financial goals of apartment ownership

• The basics of property-level accounting and financial management

• The structure and purpose of different financial statements

OObjectives

• How to analyze financial statements; quickly zeroing in on the numbers that matter

• How to better understand your own financial statements and make better decisions

• Why good budgeting is so important!

TThe Financial Goals of Ownership

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FFinancial Goals of Ownership

• Important to understand goals of ownership

• Goals are financial and non-financial

• Different owners have different goals

TTo get us started, please do Exercise #1, Part A only, Page #81

All owners essentially chooses from the same menu:

• Net Cash • Appreciation of Value • Preservation/Growth of

Equity • Tax Benefits.

… and a related goal: Preservation of the Asset

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CASH FLOW/NET CASH

Monthly/Annual net income flowing to the bottom-line

APPRECIATION

Increase in the fair market value of the property over time

FFinancial Goals - Definitions

PRESERVATION/GROWTH OF EQUITY

Protection and growth of the net value of the asset (the owner’s equity portion)

TAX BENEFITS

Improved financial return by taking advantage of certain income tax breaks

The above combine to result in “Return on Investment”

What if the owner is a non-profit or housing authority? Does it still have these goals?

Is it still concerned with Return on Investment?

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PPreservation of the Asset

• Goal - Ensure that the property continues to be a viable asset in the future so that it will continue to meet the owner’s financial and non-financial objectives

• Isn't a direct financial goal; can’t be measured by one factor as the others can

• Recognizes that the physical condition of the property also matters

• Management “preserves” the asset by making wise decisions in the core areas of operation

GGenerally, slum landlords aren’t interested in preservation of assets!

• Initially, when the project is “underwritten” (that is, when it is first financed or last re-financed)

• Assumptions are made and goals established, such as:

• Income and expense assumptions (A “pro forma” budget)

• Expectations with respect to the amount of cash flow and the expected “Return on investment (ROI)”

Return on Investment = The total financial return to the owners taking into consideration, annual cash flow, the projected gain on sale, and any applicable tax benefits. Usually expressed as a % of the owners’ equity.

How and when are financial goals established?

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• Most projects are financed with a combination of debt and equity

• The details of the project financing are driven by the requirements of the particular loan program (e.g. HUD, FHA, private lender, etc.)

• Replacement reserve requirements • Interest rates and terms of debt • Debt service coverage • Cap rate assumptions • Etc.

LLoan Programs Dictate Most Parameters of the Financing

Financial Goals

• Identifies the value of the business • It tells me what the NOI is worth

Therefore…

• It is important to have an accurate NOI • Classifying expenses correctly

CAPITALIZATION RATE = NET OPERATING INCOME

PURCHASE PRICE

Why is the Cap rate so important?

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• How the property was structured financially when it was built or at its last re-finance/purchase

• How it has been operated since, and,

• The current goals of the owner.

MManagement Has to Play the Cards That Were Dealt to It

Understanding these, helps you form operating expectations that are reasonable and achievable.

Owner Goals

Based on what you have learned, what, if any, questions do you have regarding your owner’s financial goals?

• Are there specific net cash expectations for the property?

• Are there any special loan requirements, such as Debt Service Coverage requirements, that management should know about?

• Any there targets for replacement reserve balances, capital expenditures, etc.?

Turn to Page 81 and complete Exercise #1, Part B

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BBasic Financial Statements

Before we dive in… What’s a Fiscal Year?

FISCAL YEAR

12-month period for financial purposes; it may or may not be the same as a calendar year (January to December)

In this program and on Exam everything is calendar year

APRIL 1ST MARCH 31STTO

OCTOBER 1ST SEPTEMBER 30THTO

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They are (or should be):

1) The way we track how the property is performing with respect to its financial goals, and

2) Tools that help us make better operational decisions.

Financial statements are more than just reports on bookkeeping

To have them become this, we need to unlock their power! And we do that through knowledge and understanding.

TThe Two Basic Statements

IIncome & Expense Statement

• Income the property receives

• Operating expenses of the property

• Difference between income and expenses

• Referred to as Net Operating Income

Balance Sheet

• Assets

• liabilities of the property

• Difference between assets and liabilities - often referred to as Equity.

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BBasic Statements in Plain English

Income

Subtotal $4,100

Pay from F/T job $3,400 Pay from P/T job $700

Expenses

Rent $1,050

Student loan $350 Car payment $400

All other day to day expenses

$1,900 Subtotal $3,700 “Net Income” $400

Cindy’s Income & Expense Statement

INCOME SUBTOTAL

- EXPENSES SUBTOTAL

“NET INCOME”

How is Cindy doing?

She’s doing okay financially

She’s not doing so good financially

I don’t have enough information to decide.

Basic Statements in Plain English

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Assets

Subtotal $22,500

Checking and savings $1,000 401k $4,000

Liabilities

Student loan $25,000 Car loan $18,000

Credit card debt $6,500 Subtotal $49,500 Net Worth (“Equity”) -$27,000

Cindy’s Balance Sheet

TOTAL ASSETS

- TOTAL LIABILITIES

NET WORTH

Car $17,000

Now, how is Cindy doing?

Like I said, she’s doing okay

Like I said, she’s not doing so good

I still don’t have enough information to decide.

I’ve changed my mind.d

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• We need both statements to better understand Cindy’s financial situation

• One gives us a picture of her day-to- day situation; the other helps us see the big picture

And, as we’ll see, we need to “combine” the two statements to understand the financial situation of an apartment community.

KKey Takeaways

The Balance Sheet

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CCaution: Don’t mistake for market value!

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LLiabilities

Other Balance Sheet items we will only mention bbriefly; not topics on Exam

Accumulated Depreciation

Retained Earnings

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MMethods of Accounting

Is your property’s income and expense statement on a cash basis, an accrual basis or something else?

Cash

Accrual

Something else

I don’t knowd

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CCash vs. Accrual Methods

CCash Method

• Income and expenses are posted (i.e., record on the books) as of the date they are received or paid, respectively

Accrual Method

• Income and expenses are posted to the period to which they apply: • For income, the period the

income was earned (whether received or not)

• For expenses, the period for which the expense applies (whether paid or not)

In Plain English

Income Mar Apr May

Ms. Green $675

Mr. Calico $600

Ms. Blue $700

Total Income (Apr) $675

Accrual MethodCash Method

Income Mar Apr May

Ms. Green $675

Mr. Calico $600

Ms. Blue $700

Total Income (Apr) $1,975

Expense Mar Apr May

Education $195

Electric $950

Lawn Care $600

Total Expense (Apr) $195

Expense Mar Apr May

Education $195

Electric $950

Lawn care $600

Total Expense (Apr) $1,745

Mar Apr May

Net Income (Apr) $480

Mar Apr May

Net Income (Apr) $230

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CCash vs. Accrual

Turn to Pages 82-83 and complete Exercise #2

Answers to Exercise #2

Income Oct Nov Dec

Ms. Gilder $950

Mr. Kim $975

Mr. Perez $975

Total Income (Nov) $975

Accrual MethodCash Method

Income Oct Nov Dec

Ms. Gilder $950

Mr. Kim $975

Mr. Perez $975

Total Income (Nov) $2,900

Expense Oct Nov Dec

Snow Removal $1,000

Plumbing $245

Supplies $445

Total Expense (Nov) $690

Expense Oct Nov Dec

Snow Removal $1,000

Plumbing $245

Supplies $445

Total Expense (Nov) $1,245

Oct Nov Dec

Net Income (Nov) $285

Oct Nov Dec

Net Income (Nov) $1,655

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February snow removal service paid in August

Why Accrual?

FEB MAR MAY JUN JUL AUGAPR

EXPENSES More accurately reflects the situation

INCOME More accurately reflects income earned for the period (but need to know accounts receivables)

NET OPERATING INCOME More accurately reflects operations that month

The Income and Expense Statement

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IIncome & Expense Statement

• Income the property receives

• Operating Expenses of the property

• Difference between income and expenses

• Referred to as Net Operating Income (NOI)

Let’s look at an example: pages 95-96 (Northfield)

Not all statements are alike!

THEY CAN GO BY DIFFERENT NAMES:

• Income statement • Operating statement

• Profit and loss statement • Monthly variance report

CAN BE FORMATTED DIFFERENTLY, BUT USUALLY CONTAIN:

• Name of Property • Name of Report • Period of Time Covered • “Book” Type (sometimes) • Time Stamp

CAN PRESENT DIFFERENT TYPES OF INFORMATION SUCH AS:

• Actuals only • Actual vs. Budget • Actual vs. Budget plus Variance

Most common and preferred

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• Used to make bookkeeping and accounting easier

• Most affordable properties follow HUD Chart of Accounts

• HUD Chart of Accounts is more than 100 accounts!

• Only use those accounts that are relevant

• Can customize charts of accounts as long as formal reports conform to requirements

• Market-rate properties can adopt any chart of accounts, though most use something similar to HUD

What are those numbers?

CHART OF ACCOUNTS

A list of numbers and descriptions for each line item

TThe Income & Expense Statement

What are not “operating” expenses? • Outlays of money reported on the balance sheet • For example:

• Capital Expenditures • Reserve for Replacement deposits

NET OPERATING INCOME:

INCOME – OPERATING EXPENSES

We’ll discuss these “outlays” later

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NNet Operating Income

WWe’ll see how an income and expense statement is “modified” to give us the information we need to get to the bottom-line but for now let’s drill down on NOI.

River Bend Apartments had NOI of $400,000 last year. How is the property doing?

It’s doing okay financially

It’s not doing so good financially

I don’t have enough information to decide

Let’s Drill Down on the Income and Expense Statement starting with income…

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Full Income & Expense Statement for Northfield is on pages 95-96

Rental Income

Gross Potential Rent Rent Subsidy (if any)

Adjustments to GPR (+⁄−) Loss to Lease Incentives Vacancy Bad Debt/Recovery

+ Non Rental (or “Other”) Income

Total Income

Total Rental Income

Income (also known as “Revenues”)

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20 unit property All 1 bedrooms

Budgeted rents: $800/month

Monthly GPR $16,000

12 monthsMonthly GPR $16,000

Annual GPR $192,000

MONTHLY GROSS POTENTIAL RENT

ANNUAL GROSS POTENTIAL RENT (for same property)

GGross Potential Rent The budgeted rent for a given period of time

Gross Potential Rent

In market rate properties = The rent we planned to get for a given unit (or unit type) when the budget was prepared (sometimes referred to as the “asking” rent, although that can be misleading)

In HUD Section 8 project-based properties = Contract Rents

In Tax Credit properties = Maximum (or Max) Tax Credit Rent (or lower if market dictates).

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RRental Income: Subsidy

If a property receives direct rent subsidies from any governmental rental housing program it is a part of Gross Potential Rent.

RRental Income Adjustments

Rent concessions

• One month free rent • $25 off first three months’ rent

Non-rent incentives

• Free parking for 6 months • Reduced security deposit • Improvement to apartment

(e.g. ceiling fans, new carpet, etc.).

IIncentives (or Concessions) A discount or other item of value given to entice someone to sign or renew a lease

Usually only these tracked on incentives line

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RRental Income Adjustments

Concept not used by all properties; more common in market-rate

Unit No. 501 Jan Feb Mar Apr May

Budgeted $1,000 $1,000 $1,000 $1,050 $1,050

Actual $950 $950 $950 $950 Vacant

Loss to Lease (LTL) -$50 -$50 -$50 -$100 $0

Complete Exercise #3 at top of Page 84

Loss to Lease Difference between budgeted rent and actual rent achieved

Unit No. 45 Jan Feb Mar Apr May

Budgeted $950 $950 $975 $975 $1,000

Actual $925 $925 $925 Vacant $1,050

Loss to Lease (LTL) -$25 -$25 -$50 $0 +$50

Answers to Exercise #3

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RRental Income Adjustments: Vacancy

VACANCY LOSS Rental income (in dollars) lost due to vacant units

PHYSICAL VACANCY RATE Number of vacant units divided by number of total units

ECONOMIC VACANCY RATE Rental income (in dollars) lost divided by GPR.

TTurn to page #84 and do Exercise #4 (a) and (b)

Exercise #4: Vacancy Loss

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Unit No. Days Vacant Rent per Day Rent Loss

102 23 $30

219 5 $35

220 12 $35

341 17 $32

412 13 $31

501 21 $30

623 30 $36

TOTAL

(a) Physical Vacancy Rate: 10 units 120 units = 8.3%

(b) Economic Vacancy Rate: $3,942 $108,000 GPR = 3.7%

$690

$175

$420

$544

$403

$630

$1,080

$3,942

Answers to Exercise #4

Which is more accurate: physical or economic?

• Typically rent owed by residents that have vacated

• Usually shown under income as a negative number (deduction from income)

• Any funds actually collected shown as bad debt recovery (added to income)

• Typically accounting department or senior management determines when an account is to be declared bad debt, per policy.

Rental Income Adjustments

Bad Debt Money owed to the property that you have no reasonable expectation to collect

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OOther Income

• Parking • Laundry/vending • Pet Rent/pet charges • Interest income • Maintenance charges

NNon-Rental Income All other income of the property; income other than rent

• Security deposit recoveries

• Late fees* • NSF fees* • And others

* Not permitted in HUD 202

Let’s take a look…

Now let’s move on to Expenses and the Bottom Line…

There are two kinds of expenses:

OPERATING

and

“NON-OPERATING”

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• We will get into details of line items in budgeting

• For now, we need to understand how they are organized: different from company to company.

OOperating Expenses All cash outlays except balance sheet items such as capital expenditures and reserve for replacement deposits

Let’s look at an example: Northfield Apartments – pages 95 and 96

O P

ER A

TI N

G E

X P

EN S

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• A simple income and expense statement ends at NOI

• However, many statements are “modified” to add balance sheet items and report “net cash” (the bottom-line)

• Financial activities that takes place after NOI are referred to as “other cash transactions”.

NNet Operating Income and Net Cash

Income

Operating Expenses

Net Operating Income

Other Cash Transactions (OCT)

Net Cash

NOI and Net Cash

Simple Income & Expense statement ends here

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OOther Cash Transactions

Lower cash in operating account

• Reserve for Replacement Funding (or Deposits)

• RE Tax Escrow Funding (or Deposits) • Property Insurance Escrow Funding

(or Deposits) • Principal portion of Mortgage Payments • Fixed Asset/Capital Improvements.

Increase cash in operating account

• Reserve for Replacement Releases (or Recovery)

• Tax & Insurance Escrow Releases (or Recovery)

OPERATING ACCOUNT

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• Standard in HUD and FHA properties

• Required by most private lenders

• Usually determined by formula when property is financed (or re-financed)

• While money is asset of owner, requires the lender or loan servicer’s consent to spend it

• Can’t spend it on non-capital items.

RReplacement Reserves Money set aside, usually in a “restricted” account, for major capital improvements

EXTENDED LIFE

COSTS OVER

$5,000

CAPITAL ITEM

• A major replacement or “betterment” to the property; an item having an extended life (more than a year) and costing over a fixed amount

• Exact “fixed amount” varies from organization to organization

• May be paid for out of the Replacement Reserve, operating cash, owner equity or borrowing.

CCapital Improvements

Also known as “Fixed Asset Improvement”

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Let’s practice with Other Cash Transactions

TTurn to Page #85 and do Exercise #5

Answers to Exercise #5

NOI (Net Operating Income) $45,045

Other Cash Transactions

Replacement Reserve Funding

Fixed Asset (Capital) Improvements

Tax & Insurance Funding

Replacement Reserve Releases

Cash Position $33,415

- $12,000

- $3,450

- $5,000

+ $8,820

CFS | 43

• Sometimes referred to as “cash flow” although that has another meaning to accountants

• Often called “cash position” in non-profits

• A related concept is “surplus cash”: • Used in many HUD-financed properties

• Dollar amount determined to be excess income for any given fiscal year over and above the property’s financial obligations (aka “net cash” or “cash position”)

• Amount must be verified by a qualified auditor.

NNet Cash

Bottom line is – it’s the bottom line! 72

CFS | 44

• Net cash is distributed to owners or retained for the future (although sometimes distributions are limited)

• Net cash is retained within the property for future use

• Non-HUD properties usually are permitted to distribute net cash to the non-profit sponsor for other charitable uses

NNon-ProfitsFor-Profits

Net Cash: What happens to the money?

Reading the Income and Expense Statement

CFS | 45

Southtown Apartments

Instructions: Review the Southtown Apartments Income and Expense statement (found behind the 3rd Tab, Pages 5-7); identify the important information; record your answers and be ready to report your findings in 10 minutes.

TTurn to Page #86 and do Exercise #6

What did you learn about Southtown Apartments?

Reading an Income & Expense Statement

CFS | 46

HHow the Pros Read Statements

• They don’t start at the top; it takes too long and doesn't provide a context

• They read a statement from the bottom up; starting with the bottom-line, usually net cash

• They typically ignore monthly data at first, focusing on Year-to-Date numbers

• They start with the variance information.

Let’s pause here to define “variance”

Perhaps the single most useful tool on an income and expense statement!

Actual Budget Variance

Rental Income $14,000 $12,000 $2,000

Payroll $14,000 $12,000 ($2,000)

Variance The dollar difference between what was budgeted and the actual result

Variances (and therefore the income statement) are only as good as the budget they are based on.

Note: Numbers in brackets “( )”, red numbers and/or with a minus sign mean “Unfavorable to budget”

CFS | 47

LLet’s look at Southtown again…

CFS | 48

• Start with the bottom-line -- the one that matters to you (whether NOI or net cash)

• Look at the variance FIRST

• Assess if the property is on track or not

• If it is not, look at the totals for income and expenses versus budget

• Zero in on the biggest contributors to the problem and work back from there.

To summarize:

CFS | 49

• Don’t be fooled by what appear to be good variances • Example: Being “under budget” on maintenance may

not be a good thing

• Look at relationships between variances • Example: Under budget on marketing while

vacancy loss is higher than budgeted

Remember, when it comes to variances…

SStay away form “good/bad” and “over/under”; use “favorable to the budget” and “unfavorable to the budget”

• Two basic reports:

• Balance sheet • Reports on property’s assets and liabilities

• Income and expense statement • Site staff primarily use the income and expense

statement • Reports revenues and routine operating expenses

• Need to know if statements are cash or accrual

• There are at least two “bottom-lines”: NOI and net cash

• Other cash transactions are typically balance sheet items that impact net cash.

Summary of Part 1 of Program

CFS | 50

• Income and expense statements are often modified to report other cash transactions

• “Variances” from the budget help identify problems or issue areas

• Be careful with so-called “good” variances

• “Read” an income and expense statement from “the bottom up” to quickly zero in on potential problems

• An income and expense statement is only as good as the budget it’s based on.

SSummary of Part 1 of Program

• If the property is a “HUD” they need to be followed • If your property is not “HUD” they’re great

supporting documents

Guidance for Replacement Reserve 4350.1 Financial handbook and HUD Chart of accounts 4370.2 Management Handbook 4381.5

HUD Handbooks

Discover…

CFS | 51

PPart 2 Developing a

Site-Level Budget

By the end of Part 2 we hope you will learn:

• A deeper understanding of the purpose of a budget.

• Key steps in the budgeting process

• Why and how to “forecast” a budget

Objectives

• How to develop accurate line item estimates

• How capital planning fits in • How to properly spread the budget

over the year • How to present a budget and get the

best reaction. 88

CFS | 52

• A financial prediction about what will happen in some future pre-established time period

• A plan for the future expressed in dollar terms

• It is based on our assumptions about future conditions

• It gives us an objective tool to measure financial performance (including how we are doing in meeting the owner’s goals).

BBudget

Budget Workshop

Task: Each company put together its budget for the trip by line item

Assume Leaving on the 1st and returning on the 8th.

CFS | 53

• Best to involve the key functions and levels • Not produced by the accounting department in isolation • Involve central office and site-level staff; management,

financial, and maintenance

• Good research leads to better decisions! • Allow enough time; don’t start too late, or for that matter, too early.

BBudgeting is a Process

The better the process, the better the budget

So, what’s a good time schedule?

2 MONTHS

OUT

6 MONTHS

OUT

4 MONTHS

OUT

DUE DATE

PREP AND CAPITAL PLANNING • Put together

schedule and assignments

• Train new staff, if necessary

• Review capital needs (conduct site inspection)

DATA COLLECTION AND BUDGET DRAFTING • Prepare the

re-forecast • Collect market data

and other needed information

• Prepare the first draft of the budget

PRESENTATION, ADJUSTMENTS AND APPROVAL • Get input from

supervisors; adjust budget

• Submit final draft to owner/board/others for review and input

• Finalize and formally submit for approval

Work back from the due date!

CFS | 54

CCapital Planning

• Determining the larger expenditures on the physical property for the coming year

• Use the latest “Property Needs Assessment” or “Capital Needs Assessment” if you have one

• Start with a site inspection with key participants

• Look at needs over the next two or three years to give you flexibility.

Example: Oak Ridge Apartments Capital Planning Worksheet on Page 101

Preparation for Budgeting

Forecasting The process of estimating how the current year is going to end based on the results to-date and an estimate as to what will happen from here on.

JAN FEB MAR APR MAY JUN JUL AUG SEP OCT NOV DEC

BUDGETED: $48,000

ACTUAL JAN-JULY: $24,500 ESTIMATED AUG-DEC: $15,000

FORECASTED: $39,500

CFS | 55

• Refocus.

• It gives us more accurate numbers upon which to base next year’s budget

Why forecast?

EExample: Gables at Stone Creek Reforecast on Pages 102-104

Preparing the Draft Budget

Using a Budget Worksheet, See example on pages 105-107

We will allocate by month later

FORECAST THE TARGET

KEEP TRACK OF DECISIONS TO PICK UP WHERE YOU LEFT OFF AND FOR LATER REFERENCE HERE

CFS | 56

• A starting point for certain line items

• Useful when budgeting for several properties in the same market and/or with common ownership

• Helps make the process go quicker and can provide consistency from property to property.

QQuarry Lake Apartments Budget Assumptions on page 108

Budget Assumptions A Special Suggestion for Those in Charge of Overseeing the Preparation of Multiple Budgets: The Budget Assumption Worksheet

Building the Income Side – Rental Income Let’s get to work on the income side of the budget… starting with establishing our new rents.

CFS | 57

EEstablishing Rents

MARKET RATE Market, modified by owner’s goals and philosophy

HUD Section 8 rents (called interchangeably Contract Rent and Market Rent)

TAX CREDIT Maximum tax credit rent (or lower depending on market)

So for all properties, except HUD, we need to understand the “market”; and even with HUD the “market” matters.

MMarket Price/Market Rent TThe price (in this case, rent) that buyers (renters) will pay for a product given: 1) their ability to pay; 2) their perception of how much the product meets their needs; and 3) the alternatives available (competition).

Which regular gas will you buy?

Regular

Plus

Premium

2.36

2.26

2.16 9

Regular

Plus

Premium

2.43

2.23

2.03 9

Regular

Plus

Premium

2.79

2.69

2.59 9

100

CFS | 58

• Establishing rent adjustments (increases or decreases) is a juggling act:

• Meet owner’s goals for net cash • Stay competitive • Keep vacancy loss and turnover costs in check.

• Every company has its own approach, but most use some type of market survey

HHow Market Rents are Determined

SSee the Terraces at Metro Center Market Analysis on page 109

101

Turn to Page #87 and do Exercise #7

Establishing Market Rents You will need the Market Comparability Analysis on Page 16 of Tab #3 to complete the exercise!

102

101

102

CFS | 59

ANNUAL GROSS POTENTIAL RENT

The total rental income if every unit is filled 365 days per year at the full budgeted or scheduled rents.

BBudgeting Gross Potential Rent (GPR)

Once we know rents we can calculate GPR per month and annually for the property

MONTHLY BUDGETED OR SCHEDULED RENT

NUMBER OF UNITS

12 MONTHS

ANNUAL GROSS POTENTIAL RENT

103

Calculating Rent Adjustments

However, not all rent adjustments occur on January 1st.

25 unit property

Current rent: $800/month

5% increase effective January 1

AMOUNT OF INCREASE

$40

$800 .05 % INCREASE

NEW RENT

$840

$800 $40

NEW GPR PER MONTH

$21,000

$840 25 # OF UNITS

NEW ANNUAL GPR

$252,000

$21,000 12 # MONTHS

104

103

104

CFS | 60

CCalculating Rent Adjustments

Turn to Page #88 and do Exercise #8 (a) and (b)

105

Unit Type Jan-May Jun-Dec Total GPR

1 BRs

2BRs

Total

Unit Type Current Rent Jan. 1st Rent June 1st Rent

1 BR $800

2 BR $900

$816

$918

$840

$946

$102,000 $147,000 $249,000

$114,750 $165,550 $280,300

$216,750 $312,550 $529,300

Answers to Exercise #8

106

105

106

CFS | 61

• Determine the Economic Vacancy Rate for current year

• Identify factors that might change that rate (up or down) • Changes in the market • Planned rent adjustments • Changes in turnover

• Set the rate for next year and apply it to the draft budget (as a % of GPR).

BBudgeting Vacancy Loss

ECONOMIC VACANCY RATE

RENT DOLLARS LOSS

GROSS POTENTIAL RENT

Reminder:

107

28 units turned over last year 90 units in property

What was the Turnover Rate? 31.1%

Turnover Rate Number of units vacated and re-occupied divided by number of units in property

108

107

108

CFS | 62

Turnover Rate also impacts:

• Unit prep costs • Utility costs • Marketing costs • And others.

• Do not underestimate your turnover rate!

• What do you think it is?

• What do you think is average turnover in USA…

…for All Properties (Market-rate and Subsidized)?

…for Subsidized Only?

109

BBudgeting Other Income Items

INCENTIVES If budgeted at all, budget what is needed, necessarily history

BAD DEBT If budgeted at all, budget based on past history; for HUD properties not more than 1% of GPR (not regulatory but a MORS standard)

OTHER INCOME (e.g., parking, vending, etc.) Factor in any fees increases any anticipated change in occupancy

110

109

110

CFS | 63

$3600THIS YEAR

NEXT YEAR $3600 - $108 = $3492

OFFICE SUPPLIES

x 3% = $108 decrease

BBudgeting Expenses

Do the “easy stuff” first

Expenses that can be “trended”1

Tip: Many expense categories can be trended.

111

• Reserve for replacement deposits

• Other “non-operating” costs and fees (e.g. loan servicer fees, partner fees, etc.)

• Amortization of loans (principal and interest)

Budgeting Expenses

Fixed or Known Costs2

Tip: Much of this information comes from loan documents (provided by owner or accountant).

Example: The Arbors Amortization Schedule on Page #111

112

111

112

CFS | 64

Depends on specific circumstances of the property, but examples include:

• Advertising/marketing • Payroll • Rent-free units • Utilities • Contract services.

LLine Items Requiring More Thought

Let’s spend a few minutes on these.

113

• Driven by market conditions (can change significantly from year to year and vary by season/month)

• What is effective continues to evolve (print to on-line; on-line to mobile, mobile to social networks)

• Remember expenses other than advertising, e.g.: • Flags, banners, signage, etc. • Events, community activities and sponsorships.

AAdvertising/Marketing

114

113

114

CFS | 65

• Determine any major changes to staffing

• Salary decisions may lie with others in company

• Must include all related costs including fringe benefits (also known as “payroll burden”) somewhere in budget (often separate line item)

PPayroll

What’s included in “payroll burden”?

115

• Remember to account for any temporary or seasonal help and overtime

• May need to allocate over two or more properties.

• Consider any changes in contract vs. in- house allocation of work

Payroll

116

115

116

CFS | 66

When allocating across properties, typically is either per unit or based on time spent

AAllocating Payroll

• Manager is responsible for 210 units • Her salary is $3,600 per month • Properties are:

Town Center - 150 units Seaside - 60 units

Note: Other expenses may need to be allocated this way as well! Examples are training, uniforms, shared equipment and others.

117

Per Unit Approach

$3,600

NUMBER OF UNITS IN EACH PROPERTY

Results rounded

PER UNIT RATE

TOTAL COST PER MONTH

TOTAL NUMBER OF UNITS $17.142

$3,600

210 $17.14Rounded to

$1,029 $2,571

$17.14 x 60 = $17.14 x 150 =Town Center

Seaside

118

117

118

CFS | 67

TTime Spent Approach

$3,600

HOURS WORKED AT EACH PROPERTYHOURLY RATE

MONTHLY SALARY

HOURS WORKED PER MONTH $20.81/hour

$3,600

173

$20.81

$20.81100 Hours Worked Per MonthTown Center

Seaside 73 Hours Worked Per Month

173 Total Hours Worked (2080/12)

$2,081

$1,519

119

Allocating Payroll

Now you try it: Complete Exercise #9 on Page 89

120

119

120

CFS | 68

AAnswers to Exercise #9

$3,500

NUMBER OF UNITS IN EACH PROPERTYPER UNIT RENT

TOTAL COST PER MONTH

TOTAL NUMBER OF UNITS $7.90 (rounded)

$3,500

443

300 =$7.90Ace Place

Baker Blvd

$2,370

$814

Columbia Court

103 =$7.90

40 =$7.90 $316

Results rounded

121

Answers to Exercise #9

$3,500

HOURS WORKED AT EACH PROPERTYHOURLY RATE

MONTHLY SALARY

HOURS WORKED PER MONTH $20.23/hour

$3,500

173

$20.23

$20.23100 Hours Worked Per Month

30 Hours Worked Per Month

173 Total Hours Worked (2080/12)

$2,023

$607

Ace Place

Baker Blvd

Columbia Court $20.2343 Hours Worked Per Month $870

122

121

122

CFS | 69

• Rent should be included in Gross Potential Rent and treated as if it were actually received (i.e. not in vacancy loss)

• Then the rent is treated as an expense in the category to which it applies (e.g. maintenance, management, marketing, etc.).

RRent-free Units (or “non-rent bearing units”) Units used for some purpose (not vacant) for which no rent is received

123

• Large percent of operating costs

• We can’t control rates but we can control usage to a point

• In many climates, weather is a big factor; can’t just look at last year’s expense and adjust by expected changes in rates; need to factor in weather (consider using degree days)

• http://www.degreedays.net/

• http://www.cpc.ncep.noaa.gov/products/analysis_monitoring/cdus /degree_days/

• Also consider any significant change in vacancy rates and any energy conservation improvements that have or will be made.

Utility Expense

124

123

124

CFS | 70

• Consuming a larger and larger percent of the budget

• Life safety equipment inspections and PM (e.g. smoke and carbon dioxide detectors, fire sprinklers, fire extinguishers, etc.)

• Security systems and services • Mechanical system inspections and PM (e.g., boilers, chillers,

elevators, etc. • Cable and internet services • Data services (computer applications) • Copiers • Trash removal • Landscaping • Snow removal

CContract Services

…and many, many more.

125

Some of the many considerations: • Your involvement may be minimal, substantial, or something in

between (even if minimal, good to know the basics) • Need to follow company/property procurement policies • Because no two contracts are alike, easy to lose track of the

various terms, particularly RENEWAL terms • Helps to keep a Master Spreadsheet or Schedule • Keys include: writing a good spec, getting sufficient number/quality

of bids, reviewing/drafting good contracts • Budget time is a good time to review all contracts and plan ahead.

Contract Services

126

125

126

CFS | 71

OOther Expenses That May Need Special Attention

Health care insurance

Property insurance

Real estate taxes.

127

Preparing the Draft Budget

See complete Budge Allocation Worksheet on Pages 112-114

FILL IN BUDGET

ALLOCATE BY MONTH

128

127

128

CFS | 72

STRIAGHT LINE METHOD Spreading annual budget evenly across 12 months of the fiscal year

AAllocating the Budget Monthly: Three Most Common Ways

Tip: Many line items can be done this way.

JAN FEB MAR APR MAY JUN JUL AUG SEP OCT NOV DEC TOTAL

Management Payroll 3,000 3,000 3,000 3,000 3,000 3,000 3,000 3,000 3,000 3,000 3,000 3,000 36,000

Office Supplies 150 150 150 150 150 150 150 150 150 150 150 150 1,800

Model Apt. Expenses 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 12,000

Electrical Repairs 750 750 750 750 750 750 750 750 750 750 750 750 9,000

129

SEASONAL OR HISTORICAL TREND METHOD

Allocating the annual budget to certain months, based on seasonality or past trends.

Allocating the Budget Monthly: Three Most Common Ways

Other examples?

JAN FEB MAR APR MAY JUN JUL AUG SEP OCT NOV DEC

Snow Removal 3,000 3,000 2,000 1,000 1,000 2,000 3,000

130

129

130

CFS | 73

FIXED OR KNOWN MONTH METHOD

Allocating the annual budget for a line item to a certain month (or months) in which it typically occurs

AAllocating the Budget Monthly: Three Most Common Ways

• Annual Audit • Annual Holiday Party • Elevator PM/ Certificate Renewal • Quarterly Sewer & Water Bills • Amortization (Principal and Interest).

131

Follow company prescribed format or if no format consider some or all of the following: • Budget Summary – Narrative • Summary Comparison Three Years Actual to New Budget • New Budget compared to Reforecast (with notes) • Forecast compared to Current Year Budget • Market Analysis - Comparable Properties • Proposed Rents • Loss to Lease Worksheets • Three-year Capital Expenditure Plan • Bids for Capital Expenditures.

Review Latitude Apartments Table of Contents and Summary on Pages 115-116 for example

Presenting the Budget

132

131

132

CFS | 74

• Incorporate input of supervisors, owners, asset managers, adjusting budget accordingly

• Submit for formal approval

• Submit to lenders, regulators, etc. as required

• Implement.

FFinalize and Implement

133

• Budgeting is a financial plan for the future based on our assumptions; it is a prediction of what will happen and a way to measure performance

• Best process: proper involvement of staff and good timing

• Capital planning should be part of annual budgeting

• The two most significant steps in budgeting income are determining Gross Potential Rent and Vacancy Loss

• Need to understand turnover rate and its impact on both income and expenses.

Summary of Part 2

134

133

134

CFS | 75

• Many expenses can be “trended” (increased by a specific factor such as the inflation rate)

• Some expense lines require special attention and research

• We need to be careful how we “spread” the budget by month; options are: straight-line, seasonal/historic trend, and fixed or known month

• How the budget is presented is important to approval process.

SSummary of Part 2

135

• That concludes the program • Consult the instruction sheet for information

about the Certification exam • Good luck and thank you for choosing NCHM!

Thank you!

136

135

136

CFS | 76

Course Presentation

Certified Financial Specialist

137

CFS | 77

CFS | 78

Exercises

CFS COURSE MANUAL

CFS | 79

CFS | 80

Exercise #1 Owner's Financial Goals

Part A - What are your owner's financial goals?

________________________________________________________________________

Part B - Based on what you have learned so far, what, if any, questions do you have regarding your owner's financial goals? (Example: “I’d like to know if we have annual cash flow goals or expectations”)

CFS | 81

Exercise #2 Accrual versus Cash Method

INCOME

Ms. Gilder's rent is $950 a month. She pays November's rent on Oct 25th Ms. Kim's rent is $975. She pays November's rent on November 2nd Mr. Perez's rent is $975. He pays November's rent on December 15th

(a) Enter the rents on the charts below; first as "Cash"; then as "Accrual".

(b) Calculate Total Rent for November.

CASH Oct Nov Dec

Ms. Gilder

Ms. Kim

Mr. Perez

TOTAL

ACCRUAL Oct Nov Dec

Ms. Gilder

Ms. Kim

Mr. Perez

TOTAL

(Exercise #2 is continued on the next page)

CFS | 82

(Exercise #2 continued)

EXPENSES

An early November snow led to a contractor bill of $1,000 for snow removal. The bill was paid in December.

Joe the plumber came out in November to fix a problem and we promptly paid the bill of $245 that same month.

We pre-paid $445 in November for the supplies that will be needed for the December elevator preventative maintenance. The supplies will be delivered in December.

(a) Enter the expenses on the charts below; first as "Cash"; then as "Accrual".

(b) Calculate Total Expenses for November.

CASH Oct Nov Dec

Snow Removal

Plumbing Contract

Supplies TOTAL

ACCRUAL Oct Nov Dec

Snow Removal

Plumbing Contract

Supplies TOTAL

CFS | 83

Exercise #3 Calculate Loss to Lease

Calculate the LTL for each month (Use a "+" or "-" sign as appropriate)

Unit #45 Jan Feb Mar Apr May Budgeted $950 $950 $975 $975 $1000 Actual $925 $925 $925 Vacant $1050 LTL

Exercise #4 Calculate Physical and Economic Vacancy

(a) Calculate Physical Vacancy:

Number of Units Vacant - 10 Number of Units in Property - 120

Physical Vacancy Rate: ______% (round to nearest tenth of one percent)

(b) Calculate Economic Vacancy:

Monthly Gross Potential Rent = $108,000 Unit No. Days Vacant Rent per Day Rent Loss 102 23 $30 219 5 $35

220 12 $35 341 17 $32 412 13 $31 501 21 $30 623 30 $36 TOTAL

Economic Vacancy Rate: ______% (round to nearest tenth of one percent)

CFS | 84

Exercise #5 Other Cash Transactions

Using the Table below, fill In Column A, based on the following information. Use a plus sign (+) when money is coming into the operating account and a minus sign (-) when it is going out of the account.

1) Show $12,000 being funded to the Replacement Reserve Escrow account.

2) Show that we spent $3,450 on a capital improvement item and paid for that out of cash flow.

3) Show that we funded $5,000 into the Property Tax and Insurance Escrow account.

4) Show that we requested and received an $8,820 release from the Replacement Reserve.

5) Calculate Cash Position.

Column A Net Operating Income $45,045

Other Cash Transactions

Replacement Reserve Funding Fixed Asset (Capital) Improvements

Tax & Insurance Funding Replacement Reserve Releases

Cash Position

CFS | 85

Exercise #6 Reading Income Statements

Review the statement for Southtown Apartments. Identify the important information and conclusions and record below.

My observations are (Please be as detailed as possible):

CFS | 86

Exercise #7 Establishing Market Rents

Looking at the Market Comparability Study for Terraces at Metro Center and assuming you are budgeting a 5% vacancy factor and that the owner wants you to be as aggressive as is reasonable, what would you recommend as rents for next year for the following unit types?

733 sq. ft. 1BR/1BA $ ___________

843 sq. ft. 2BR/2BA $ ___________

Why did you make the choices you made?

CFS | 87

Exercise #8 Calculate two rent increases during the year

Assumptions:

• 50 units in the property; consisting of 25 one-bedroom units and 25 two-bedroom units

• Current rent for 1-bedroom units is $800 per month and for 2- bedroom units is $900 per month

• 2% increase effective January 1 • Additional 3% increase (of the new January 1st rents) on June 1st

(a) What are the new rents per unit type on January 1st? What are they on June 1st? (Round to the nearest whole dollar)

Unit Type Current Rent January 1st

Rent June 1st Rent

1 BRs $800

2 BRs $900

(b) What is the new annual GPR?

Unit Type Jan-May Jun-Dec Total GPR 1 BRs

2 BRs

Total

CFS | 88

Exercise #9 Allocating Payroll

a) Per Unit Basis

What is the allocation of the manager's salary for the month by number of units?

Property Units Allocation

Ace Place 300 $____________

Baker Boulevard 103 $____________

Columbia Court 40 $____________

TOTAL 443 $ 3,500

a) Time Spent Basis

What is the allocation of the manager's salary for the month by time spent?

Property Hours Allocation

Ace Place 100 $____________

Baker Boulevard 30 $____________

Columbia Court 43 $____________

TOTAL 173 $ 3,500

CFS | 89

CFS | 90

Reference Material and Spreadsheets

CFS COURSE MANUAL

CFS | 91

CFS | 92

Northfield Apartments Balance Sheet with Period Change

Account Description Current Period

Balance Beginning Balance Net Change

ASSETS

Current Assets

Cash - Operating 19,073 28,092 (9,019)

Restricted Cash

Escrow - Replacement Reserve 29,158 28,158 1,000

Escrow - Tenant Security Deposits 101,000 98,450 2,550

Escrow - Taxes and Insurance 56,800 51,700 5,100

Accounts Receivable

Accounts Receivable Tenants 8,275 3,733 4,542

A/R - Other 275 - 275

TOTAL CURRENT ASSETS 214,581 210,133 4,448

FIXED ASSETS

Land 554,697 554,697 -

Buildings 4,080,533 4,080,533 -

FF&E 171,816 171,816 -

Accumulated Depreciation (2,582,891) (2,525,007) (57,884)

TOTAL FIXED ASSETS 2,224,155 2,282,039 (57,884)

TOTAL ASSETS 2,438,736 2,492,172 (53,436)

LIABILITIES

Current Liabilities

Accounts Payable 5,971 8,018 (2,048)

Tenant Prepaid Rent 8,162 - 8,162

Tenant Security Deposits Payable 117,800 121,800 (4,000)

TOTAL CURRENT LIABILITIES 131,933 129,818 2,114

Long-term Liabilities

Mortgage Payable 1,989,200 1,994,226 (5,026)

TOTAL LONG-TERM LIABILITIES 1,989,200 1,994,226 (5,026)

TOTAL LIABILITIES 2,121,133 2,124,044 (2,912)

EQUITY

Owners Equity 405,091 455,615 (50,524)

Retained Earnings (87,487) (87,487) -

TOTAL EQUITY (1) 368,128 (1)

CFS | 93

Certified Financial Specialist®

Supplemental Definitions

Retained Earnings

When a for-profit company generates a profit, management has one of two choices: they can either pay it out to shareholders/owners or retain the earnings and reinvest them in the business or in the case of real estate, the property. (In a not-for-profit, the earnings are either reinvested back into the property or placed in the organization's fund account to be used in accordance with the underlying financing on the property and the rules related to non-profit corporations).

Typically, retained earnings on a balance sheet are the sum of a company's (or property's) profits, after any distributions, since the company's inception. They are also called accumulated earnings, earned surplus or retained capital. Due to the nature of double-entry accrual accounting (employed by most companies), retained earnings do not represent surplus cash available to a company.

When you see "negative" retained earnings on a balance sheet you are seeing retained losses or accumulated losses; the amount of money the entity has lost since inception.

Depreciation (and Accumulated Depreciation)

Depreciation can be simply defined as the reduction in the value of an asset with the passage of time due to wear and tear. It's a concept that is relatively easy to get our arms around when we think about a car but a lot harder when we talking about real estate. With the exception of the “Great Recession” of the early 2000s,, we have gotten use to real estate values going up, so the idea of the value of a real property asset going down at the same time seems conflicting. One way to help think about it is to separate out the physical from the economic. When it comes to the physical property we can all understand that even with good maintenance things wear out and therefore the value of the property is decreased. Now at the same time due to a variety of factors including the cost to reproduce, inflation, and demand, the economic value of the same property may increase.

In real estate depreciation has as much to do with the Federal tax code as anything else. Put in its simplest terms, the IRS allows the property owner to deduct from its taxes a certain amount annually of the diminishing value (depreciation) of the real property. Yet the rules regarding what can be depreciated, over how many years, and depreciation's effect on taxes are complex. Consequently, most property owners rely upon tax attorneys and accountants to assist them in understanding how depreciation impacts their specific situation.

When we use the term "accumulated depreciation" we are referring to the total amount of depreciation over the life of the asset.

CFS | 94

Northfield Income Statement Budget Comparison (with PTD) Period = Jan 2018-Nov 2018 Book = Accrual

MTD Actual MTD Budget Variance % Var PTD Actual PTD Budget Variance % Var

51000 RENTAL INCOME

51005 BASE SCHEDULED RENT

51010 Gross Rent Potential 59,400 59,400 - 0% 654,952 653,400 1,522 0%

51130 Loss To Lease 180 (115) 295 257% -4,104 -6,110 2,006 33%

51170 TOTAL BASE SCHEDULED RENT 59,580 59,285 2 0% 650,848 647,290 3,558 1%

51290 Vacancy Loss (1,650) (1,650) - 0% -20,524 -27,225 6,701 25%

51610 Bed Debt Expense - - - - -1,020 -3,000 1,980 66%

51650 Bad Debt Recovery 192 - 192 - 693 0 693 -

51810 Rent Concessions (1,650) - (1,650) - -2,690 -2,500 -190 8%

51999 TOTAL RENTAL INCOME 56,432 57,635 (1,203) 2% 627,307 614,565 12,742 2%

52000 OTHER INCOME

52010 Credit Application Fee 80 80 - 0% 1,160 900 260 29%

52090 Pet Income 345 105 240 229% 2,416 735 1,681 229%

52130 Late Fees 205 200 5 2% 2,295 1,775 520 29%

52650 Security Deposit Recovery - - - - 6,005 0 6,005 -

52999 TOTAL OTHER INCOME 630 385 245 64% 11,876 3,410 8,466 248%

57999 TOTAL REVENUE 57,062 58,020 (958) 2% 639,183 617,975 21,208 3%

60000 EXPENSES

60001 PAYROLL

60060 Project Management 3,598 3,328 270 8% 40,041 36,608 3,433 9%

60070 Leasing 1,200 1,000 200 20% 12,950 12,000 950 8%

60080 Housekeeping 600 550 50 9% 6,879 6,050 829 14%

60100 Maintenance/Site Tech 3,006 2,086 - 0% 26,512 22,951 3,561 16%

60150 Project Managers Housing Expense 680 680 - 0% 7,480 7,480 0 0%

60225 TOTAL PAYROLL 9,084 7,644 1,440 19% 93,862 85,089 8,773 10%

61000 ADMINISTRATION

61040 Property Mgmt Fees 2,853 2,901 (48) 2% 31,959 30,899 1,060 3%

61060 Employment Screening - - - - 100 0 100 -

61100 Office Supplies 144 60 84 140% 846 720 126 18%

61140 Data Services 108 - 108 - 829 0 829 -

61150 Telephone 145 245 (104) 42% 1,947 2,739 -792 29%

61180 Audit/Tax Return Fees - - - - 2,295 1,468 827 56%

61190 Credit Checks 32 28 4 14% 338 315 23 7%

61200 Bank Charges 66 70 (4) 6% 852 770 82 11%

61230 Legal Fees - - - - 0 270 -270 100%

61270 Education/Conferences - - - - 0 750 -750 100%

61499 TOTAL ADMINISTRATION 3,348 3,308 40 1% 39,167 37,931 1,236 3%

62000 HOUSEKEEPING

62040 Housekeeping Supplies 21 60 (39) 65% 717 660 57 9%

62080 Carpet Clean 206 400 (194) 49% 2,161 4,300 -2,139 50%

62199 TOTAL HOUSEKEEPING 227 460 (233) 51% 2,878 4,960 -2,082 42%

64000 MARKETING

64030 Commission 3rd Party - 369 (369) 100% 1,127 2,214 -1,087 49%

64060 Advertising Print 790 650 140 22% 8,043 8,047 -4 0%

64100 Advertising Internet - - - - 144 0 144 -

64160 Promotional Events - 240 (240) 100% 489 640 -151 24%

64180 Promotional Signage - - - - 253 604 -351 58%

64190 Model Apt Exp 800 825 (25) 3% 8,800 9,075 -275 3%

CFS | 95

Northfield Income Statement Budget Comparison (with PTD) Period = Jan 2018-Nov 2018 Book = Accrual

YTD Actual YTD Budget Variance % Var PTD Actual PTD Budget Variance % Var

64299 TOTAL MARKETING 1,590 2,084 (494) 24% 18,856 20,580 -1,724 8%

65000 MAINTENANCE CONTRACTS

65160 Exterminator Contract - - - - 100 450 -350 78%

65220 Fire Alarm Monitoring Contract - - - - 1,050 1,470 -420 29%

65250 Fire Extinguisher Contract - - - - 1,317 0 1,317 -

65430 Lawn Maintenance Contract - - - - 4,637 5,187 -550 11%

65640 Snow/Ice/Salt/Sand Contract 1,000 1,000 - 0% 5,000 5,000 0 0%

65670 Trash Removal Contract 813 755 58 8% 8,890 7,625 1,265 17%

65700 Uniforms - Maintenance 37 - 37 - 754 0 754 -

65899 TOTAL MAINTENANCE CONTRACTS 1,850 1,755 95 5% 21,748 19,732 2,016 10%

66000 REPAIRS

66030 Masonry Repairs - 40 (40) 100% 324 440 -116 26%

66070 Windows & Glass 45 120 (75) 63% 860 1,320 -460 35%

66080 Exterior Doors 56 50 6 12% 675 550 125 23%

66130 Exterior Surfaces 17 100 (83) 83% 475 1,100 -625 57%

66170 Roofing, Gutters & Downspouts 116 120 (4) 3% 932 2,315 -1,383 60%

66200 Drywall 13 100 (87) 87% 613 1,100 -487 44%

66260 Electrical & Fixtures 222 190 32 17% 1,952 2,390 -438 18%

66310 Plumbing 177 250 (73) 29% 2,130 3,500 -1,370 39%

66350 Appliances - Unit & C/A 307 250 57 23% 2,929 4,100 -1,171 29%

66450 Window Treatments - 40 (40) 100% 480 440 40 9%

66470 Interior Doors/Millwork 131 60 71 118% 588 660 -72 11%

66510 Hardware 98 36 62 172% 686 374 312 83%

66550 Counter Surfaces 97 30 67 223% 312 330 -18 5%

66580 Interior Paint 194 610 (416) 68% 7,003 8,255 -1,252 15%

66590 Exterior Paint - - - - 255 1,200 -945 79%

66650 Carpet Floors - 100 (100) 100% 469 1,100 -631 57%

66670 Grounds Supply & Repairs 16 100 (84) 84% 1,482 1,500 -18 1%

66910 Tools & Equipment Repairs - 30 (30) 100% 2,616 330 2,286 693%

66999 TOTAL REPAIRS 1,489 2,226 (737) 33% 24,781 31,004 -6223 20%

67000 UTILITIES

67010 Electricity Common Area 358 519 (161) 31% 3,926 5,149 -1,223 24%

67030 Electricity-Vacant Units 97 116 (19) 16% 1,341 1,218 123 10%

67070 Gas -Vacant Units - - - - 1 0 1 -

67090 Water/Sewer 2,485 5,125 (2,640) 52% 21,054 20,606 448 2%

67199 TOTAL UTILITIES 2,940 5,760 (2,820) 49% 26,322 26,973 -651 2%

71000 REAL ESTATE TAXES & INSURANCE

71010 Real Estate Tax 9,021 9,021 - 0% 99,231 99,231 0 0%

71040 Insurance-Property and Liability 874 523 351 67% 8,154 5,753 2,401 42%

71199 TOTAL RE TAXES & INSURANCE 9,895 9,544 351 4% 107,385 104,984 2,401 2%

72000 FINANCIAL EXPENSE

72100 Interest Expense 11,921 12,045 (124) 1% 131,133 131,412 -279 0%

72199 TOTAL FINANCIAL EXPENSE 11,921 12,045 (124) 1% 131,133 131,412 -279 0%

76000 TOTAL OPERATING EXPENSES 42,344 44,826 (2,482) 6% 466,132 462,655 3,467 1%

76010 NET OPERATING INCOME (NOI) 14,718 13,194 1,524 12% 173,051 155,310 17,741 11%

CFS | 96

Northfield Income Statement Budget Comparison (with PTD) Period = Jan 2018-Nov 2018 Book = Accrual

YTD Actual YTD Budget Variance % Var PTD Actual PTD Budget Variance % Var

ADJUSTMENTS TO NOI

75000 REPLACEMENTS/BETTERMENTS

75070 Window Replacements - - - - 559 2,400 -1,841 77%

75260 Electrical Replacements 340 385 (45) 12% 0 4,043 -4,043 100%

75310 Plumbing Replacements - 200 (200) 100% 0 1,600 -1,600 100%

75450 Window Treatments Replacements - 154 (154) 100% 24 552 -528 96%

75550 Counter Surfaces Replacements - 200 (200) 100% 118 2,200 -2,082 95%

75635 Vinyl Floor Replacements - 400 (400) 100% 1,764 4,400 -2,636 60%

75650 Carpet Floors Replacements 400 1,200 (800) 67% 13,792 16,976 -3,184 19%

75999 TOTAL REPLACE/BETTERMENTS 740 2,539 (1,799) 71% 16,257 32,171 -15,914 49%

79000 RESERVE ACTIVITY

11540 Escrow - Replacement Reserve 2,166 2,166 - 0% 23,826 23,826 0 0%

11550 Escrow - Repl Reserve Withdrawal - - - - -32,902 -15,000 -17,902 119%

79199 TOTAL RESERVE ACTIVITY 2,166 2,166 - 0% -9,076 8,826 -17,902 203%

80000 FINANCIAL ACTIVITY

80150 Principal Reduction - Mortgage 3,819 3,695 124 3% 42,006 41,728 278 1%

80999 TOTAL FINANCIAL ACTIVITY 3,819 3,695 124 3% 42,006 41,728 278 1%

88999 CASHFLOW - OPERATIONS 7,993 4,794 3,199 67% 123,864 72,585 43,058 71%

CFS | 97

MTD Actual MTD Budget Variance % Var PTD Actual PTD Budget Variance % Var

INCOME

RENTAL INCOME

BASE SCHEDULED RENT

Gross Rent Potential 151,486 151,486 - 0.0% 1,817,835 1,817,835 - 0.0%

Loss To Lease (1,873) (1,700) (173) 10.2% (30,575) (19,858) (10,717) 54.0%

TOTAL BASE SCHEDULED RENT 149,613 149,786 (173) -0.1% 1,787,260 1,797,977 (10,717) -0.6%

Vacancy Loss (22,901) (10,348) (12,553) 121.3% (197,098) (129,184) (67,914) 52.6%

Bad Debt Expense - (400) 400 -100.0% (9,500) (4,800) (4,700) 97.9%

Bad Debt Recovery 173 200 (27) -13.5% 3,299 2,400 899 37.5%

Rent Concessions (2,525) (3,500) 975 -27.9% (16,693) (19,500) 2,807 -14.4%

TOTAL RENTAL INCOME 124,360 135,738 (11,378) -8.4% 1,567,268 1,646,893 (79,625) -4.8%

OTHER INCOME

Credit Application Fee 40 120 (80) -66.7% 1,160 1,440 (280) -19.4%

Parking Charges 1,895 2,600 (705) -27.1% 17,450 29,600 (12,150) -41.0%

Pet Income 750 705 45 6.4% 4,259 4,455 (196) -4.4%

Late Fees 1,175 450 725 161.1% 7,040 5,200 1,840 35.4%

Laundry & Vending Income 1,213 1,500 (287) -19.1% 14,126 18,000 (3,874) -21.5%

Security Deposit Recovery 1,123 400 723 180.8% 6,072 4,800 1,272 26.5%

TOTAL OTHER INCOME 6,196 5,775 421 7.3% 50,107 63,495 (13,388) -21.1%

TOTAL REVENUE 130,556 141,513 (10,957) -7.7% 1,617,375 1,710,388 (93,013) -5.4%

EXPENSES

PAYROLL - SALARIES/WAGES

Project Management 3,333 2,348 985 42.0% 27,520 25,828 1,692 6.6%

Asst Manager - 1,000 (1,000) -100.0% 9,087 12,000 (2,913) -24.3%

Leasing 1,738 3,631 (1,893) -52.1% 28,765 39,941 (11,176) -28.0%

Housekeeping 2,273 2,130 143 6.7% 24,876 23,250 1,626 7.0%

Maintenance/Site Tech 7,913 5,928 1,985 33.5% 71,488 65,208 6,280 9.6%

Project Managers Housing Expense - 1,465 (1,465) -100.0% 12,629 16,005 (3,376) -21.1%

Bonuses and Commissions - 200 (200) -100.0% 1,725 3,850 (2,125) -55.2%

TOTAL PAYROLL - SALARIES/WAGES 15,257 16,702 (1,445) -8.7% 176,090 186,082 (9,992) -5.4%

PAYROLL BURDEN

Payroll Taxes 1,321 1,370 (49) -3.6% 14,356 15,070 (714) -4.7%

WC Insurance 691 453 238 52.5% 7,080 4,661 2,419 51.9%

Health Insurance Employer 951 925 26 2.8% 11,832 10,175 1,657 16.3%

Payroll Service 147 148 (1) -0.7% 1,656 1,628 28 1.7%

TOTAL PAYROLL BURDEN 3,110 2,896 214 7.4% 34,924 31,534 3,390 10.8%

TOTAL PAYROLL 18,367 19,598 (1,231) -6.3% 211,014 217,616 (6,602) -3.0%

ADMINISTRATION

Property Management Fees 6,528 7,076 (548) -7.7% 80,869 85,519 (4,650) -5.4%

Office Supplies 98 65 33 50.8% 3,116 3,220 (104) -3.2%

Printing - 40 (40) -100.0% 328 240 88 36.7%

Data Services 247 100 147 147.0% 1,469 1,200 269 22.4%

Telephone (Land & Mobile) 205 551 (346) -62.8% 3,489 6,161 (2,672) -43.4%

Audit/Tax Return Fees - - - - 3,569 3,688 (119) -3.2%

Credit Checks 128 105 23 21.9% 1,447 1,113 334 30.0%

Legal Fees - 1,000 (1,000) -100.0% 1,717 3,700 (1,983) -53.6%

Education/Conferences - 75 (75) -100.0% - 825 (825) -100.0%

Southtown Apartments Budget Comparison (with PTD)

Period = Jan 2018 - Nov 2018 Book = Accrual

CFS | 98

MTD Actual MTD Budget Variance % Var PTD Actual PTD Budget Variance % Var

TOTAL ADMINISTRATION 7,206 9,012 (1,806) -20.0% 96,004 105,666 (9,662) -9.1%

HOUSEKEEPING -

Housekeeping Contract-C/A 460 - 460 - 830 400 430 107.5%

Housekeeping Supplies 302 50 252 504.0% 1,651 600 1,051 175.2%

Carpet Clean-Unit - 80 (80) -100.0% 305 960 (655) -68.2%

Carpet Clean-C/A 80 200 (120) -60.0% 1,200 2,400 (1,200) -50.0%

TOTAL HOUSEKEEPING 842 330 512 155.2% 3,986 4,360 (374) -8.6%

MARKETING

Commission 3rd Party 1,167 1,167 - 0.0% 5,057 6,000 (943) -15.7%

Advertising Print 1,482 700 782 111.7% 9,638 8,400 1,238 14.7%

Advertising Internet 175 200 (25) -12.5% 1,967 2,400 (433) -18.0%

Promotional Events - - - - 822 1,758 (936) -53.2%

Promotional Signage - - - - - 1,200 (1,200) -100.0%

Model Apt Rent & Exp 1,415 1,435 (20) -1.4% 7,100 15,625 (8,525) -54.6%

TOTAL MARKETING 4,239 3,502 737 21.0% 24,584 35,383 (10,799) -30.5%

MAINTENANCE CONTRACTS

Boiler Maintenance Contract - - - - 240 240 - 0.0%

Exterminator Contract 154 - 154 - 722 510 212 41.6%

Fire Alarm Monitoring Contract - - - - 1,600 1,048 552 52.7%

Life Safety Systems Maintenance 212 180 32 17.8% 473 620 (147) -23.7%

CONTRACT

Lawn Maintenance Contract - - - - 11,792 11,499 293 2.5%

Snow/Ice/Salt/Sand Contract 3,000 3,177 (177) -5.6% 15,335 15,513 (178) -1.1%

Trash Removal Contract 1,982 1,990 (8) -0.4% 21,503 21,775 (272) -1.2%

Uniforms - Maintenance - - - - 570 - 570 -

TOTAL MAINTENANCE CONTRACTS 5,348 5,347 1 0.0% 52,235 51,205 1,030 2.0%

REPAIRS

Windows & Glass 76 140 (64) -45.7% 2,377 1,690 687 40.7%

Exterior Doors and Frames 68 70 (2) -2.9% 2,033 840 1,193 142.0%

Over Head Doors 76 40 36 90.0% 840 480 360 75.0%

Roofing, Gutters & Downspouts - 540 (540) -100.0% 5,397 6,600 (1,203) -18.2%

Drywall 54 20 34 170.0% 398 240 158 65.8%

HVAC 705 500 205 41.0% 3,775 6,000 (2,225) -37.1%

Electrical & Fixtures 1,129 1,900 (771) -40.6% 8,007 6,600 1,407 21.3%

Plumbing 1,507 1,175 332 28.3% 10,774 12,125 (1,351) -11.1%

Appliances-Unit & C/A 28 400 (372) -93.0% 5,468 4,800 668 13.9%

Window Treatments 186 300 (114) -38.0% 1,541 3,600 (2,059) -57.2%

Interior Doors/Millwork 29 40 (11) -27.5% 369 480 (111) -23.1%

Hardware 492 150 342 228.0% 2,509 1,800 709 39.4%

Counter Surfaces 97 20 77 385.0% 212 240 (28) -11.7%

Interior Paint-Unit - 1,200 (1,200) -100.0% 10,456 13,600 (3,144) -23.1%

Interior Paint-C/A 2,443 1,410 1,033 73.3% 24,078 21,815 2,263 10.4%

Exterior Paint - - - - 564 600 (36) -6.0%

Carpet Floors-Unit & C/A - 80 (80) -100.0% 1,947 960 987 102.8%

Grounds Supply and Repairs 734 400 334 83.5% 1,667 3,705 (2,038) -55.0%

Site Sidewalk Repairs - - - - 1,342 600 742 123.7%

Pavement Repairs - - - - 1,567 1,500 67 4.5%

Southtown Apartments Budget Comparison (with PTD)

Period = Jan 2018 - Nov 2018 Book = Accrual

CFS | 99

MTD Actual MTD Budget Variance % Var PTD Actual PTD Budget Variance % Var

Tool & Equip Repairs - 10 (10) -100.0% 2,335 120 2,215 1845.8%

TOTAL REPAIRS 7,624 8,395 (771) -9.2% 87,656 88,395 (739) -0.8%

UTILITIES

Electricity Common Area 3,372 3,321 51 1.5% 37,558 38,248 (690) -1.8%

Electricity-Vacant Units 726 455 271 59.6% 6,820 5,451 1,369 25.1%

Gas Common Area 3,450 3,680 (230) -6.3% 44,766 45,889 (1,123) -2.4%

Gas -Vacant Units 199 115 84 73.0% 1,546 1,208 338 28.0%

Water/Sewer 4,721 6,553 (1,832) -28.0% 71,807 75,682 (3,875) -5.1%

TOTAL UTILITIES 12,468 14,124 (1,656) -11.7% 162,497 166,478 (3,981) -2.4%

REAL ESTATE TAXES & INSURANCE

Real Estate Tax 19,981 19,981 - 0.0% 219,791 219,791 - 0.0%

Insurance-Property and Liability 1,896 1,547 349 22.6% 19,627 16,833 2,794 16.6%

TOTAL RE TAXES & INSURANCE 21,877 21,528 349 1.6% 239,418 236,624 2,794 1.2%

FINANCIAL EXPENSE

Interest Expense 47,561 47,561 - 0.0% 537,122 537,122 - 0.0%

TOTAL OPERATING EXPENSES 125,532 129,397 (3,865) -3.0% 1,414,516 1,442,849 (28,333) -2.0%

NET OPERATING INCOME (NOI) 5,024 12,116 (7,092) -58.5% 202,859 267,539 (64,680) -24.2%

ADJUSTMENTS TO NOI

REPLACEMENTS/BETTERMENTS

HVAC Replacements - 2,335 (2,335) -100.0% 5,476 9,174 (3,698) -40.3%

Electrical Replacements - - - - - 1,700 (1,700) -100.0%

Window Replacements - - - - 559 1,200 (641) -53.4%

Plumbing Replacements - 525 (525) -100.0% 4,783 8,750 (3,967) -45.3%

Electrical Replacements - 385 (385) -100.0% - 4,043 (4,043) -100.0%

Window Treatments Replacements - 310 (310) -100.0% 1,000 3,022 (2,022) -66.9%

Counter Surfaces Replacements - 150 (150) -100.0% 118 1,800 (1,682) -93.4%

Vinyl Floor Replacement - Unit 722 300 422 140.7% 4,236 3,600 636 17.7%

Carpet Floors Replacement - Unit & C/A 7,953 3,355 4,598 137.0% 49,593 52,000 (2,407) -4.6%

TOTAL REPLACE/BETTERMENTS 8,675 7,360 1,315 17.9% 65,765 85,289 (19,524) -22.9%

RESERVE ACTIVITY

Escrow - Replacement Reserve Deposit 4,307 4,307 - 0.0% 47,377 47,377 - 0.0%

Escrow - Repl Reserve Withdrawal - - - - (40,000) (45,532) 5,532 -12.1%

TOTAL RESERVE ACTIVITY 4,307 4,307 - 0.0% 7,377 1,845 5,532 299.8%

FINANCIAL ACTIVITY

Principal Reduction - Mortgage 17,416 17,127 289 1.7% 191,572 190,497 1,075 0.6%

TOTAL FINANCIAL ACTIVITY 17,416 17,127 289 1.7% 191,572 190,497 1,075 0.6%

CASH FLOW - OPERATIONS (25,374) (16,678) (8,696) 52.1% (61,855) (10,092) (51,763) 512.9%

Southtown Apartments Budget Comparison (with PTD)

Period = Jan 2018 - Nov 2018 Book = Accrual

CFS | 100

Account Operating R&R Operating R&R Operating R&R

I. A Landscaping

Remove/Replace Trees $ 2,000 $ - $ 5,000 $ 1,000 $ 6,000 $ 6,000 B Lighting

Replace Pole Fixtures - Buildings 10-12 $ 8,000 $ 4,000 Replace Pole Fixtures - Front Entry Drives $ 4,000 $ 2,000

C Parking/Sidewalk Resurface Rear Lots near Bldgs 10-12 $ 35,000 $ 17,500 Resurface Entry Drive $ 10,000 $ 2,175 Sealcoat Front lots and clubhouse lot $ 7,000 3,000$

I. $ 45,000 $ 21,500 $ 19,000 $ 5,175 $ 13,000 $ 9,000

II. Roof Replacements Bldgs 10-12 $ 37,760 $ 20,000 Roof Replacements Bldgs 8 and 9 $ 30,000 $ 10,000 Roof Replacement Clubhouse $ 12,000 Replace Siding Bldgs 6-7 $ 13,000 $ 10,000 Replace Siding Bldgs 1-5 $ 52,000 Replace Monument Sign $ 8,000

II. $ 37,760 $ 20,000 $ 51,000 $ 20,000 $ 64,000 $ -

III. A Appliances

Replacement Common Laundry Dryers $ 1,200 $ 1,200 $ 1,200 Replacement Common Laundry Washers $ 1,200 $ - $ 1,200 1,200$ Appliance Stove Replacement - Unit $ 2,000 $ 2,400 $ 2,400 Appliance Refrigerator Replacement - Unit $ 2,400 $ 2,400 $ 2,400

B Finishes Carpeting - Unit $ - $ 3,000 $ 6,000 12,000$ Vinyl - Unit $ 1,500 $ 2,500 $ 3,000 Paint - Unit $ 2,670 $ 4,500 $ 7,000 Replace Office Carpet $ 3,825 Replace Model Apartment Carpet $ 3,825 Replace Clubhouse Carpet $ 8,000

C Mechanical A/C Replacement - Unit $ 6,000 $ - $ 8,000 $ 8,000 Furnace Replacements $ 8,000 $ 10,000 $ - 12,000$ Fire Protection Replacements $ 2,890

III. $ 26,395 $ 5,400 $ 32,825 $ 9,200 $ 34,890 $ 25,200

IV. Office Equipment Replacement $ 1,559 Sound System Replacement $ 2,600 Replace Office Furniture $ - $ 8,000 Replace Clubhouse Community Room $ - $ 10,000 Replace Fitness Equipment $ 6,000

IV. $ 4,159 $ - $ 8,000 $ - $ 16,000 $ - $ 113,314 $ 46,900 $ 110,825 $ 34,375 $ 127,890 $ 34,200

IV. $ 5,666 $ 2,345 $ 5,541 $ 1,719 $ 6,395 $ 1,710 $ 118,980 $ 49,245 $ 116,366 $ 36,094 $ 134,285 $ 35,910

Estimated Available Funds 2020 120,000$ Replacement Reserves 50,000$ Operating Cash Flow 170,000$

Grand Total

Furniture, Fixtures and Equipment Subtotal Total

Furniture, Fixtures and Equipment

Building Interior Subtotal

2020 2021 2022 Capital Planning Worksheet

Contingency = 5%

Building Interior

Building Exterior Subtotal

Building Exterior

Site Subtotal

Site Oak Ridge Apartments

CFS | 101

Page 1 of 3

Description 2017 Reforecast 2017 Budget $ %

RENTAL INCOME BASE SCHEDULED RENT

Gross Rent Potential 2,920,476 2,920,476 0 0.00% Loss To Lease -166,050 -205,679 39,630 19.27%

TOTAL BASE SCHEDULED RENT 2,754,426 2,714,797 39,630 1.46% Vacancies -68,516 -146,024 77,508 -53.08%

Commercial Rent Income 3,800 3,900 -100 -2.56% Rent Concessions -15,984 -12,000 -3,984 33.20%

TOTAL RENTAL INCOME 2,673,726 2,560,673 113,054 4.41% OTHER INCOME Pet Income 3,800 400 3,400 850.00%

Late Fees 2,325 1,800 525 29.17% Security Deposit Recovery 539 0 539

TOTAL OTHER INCOME 6,664 2,200 4,464 202.91% FINANCIAL INCOME

Interest Income 997 1,560 -563 -36.08% TOTAL FINANCIAL INCOME 997 1,560 -563 -36.08% TOTAL REVENUE 2,681,387 2,564,433 116,955 4.56% EXPENSES PAYROLL PAYROLL - SALARIES/WAGES

Management Staff Payroll 96,800 95,122 1,678 1.76% Front Desk Payroll 97,122 96,360 762 0.79% Maintenance/Site Tech 41,678 47,304 -5,626 -11.89% Manager's Housing Expense 9,000 12,000 -324 -2.70%

TOTAL PAYROLL - SALARIES/WAGES 244,600 250,786 -3,510 -1.40% PAYROLL BURDEN

Payroll Taxes 25,432 26,000 -568 -2.18% WC Insurance 11,866 12,000 -134 -1.12% Health Insurance Employer 30,036 27,588 2,448 8.87% Payroll Service 2,639 2,553 86 3.38%

TOTAL PAYROLL BURDEN 69,973 68,141 1,832 2.69% TOTAL PAYROLL 314,573 318,927 -1,678 -0.53% ADMINISTRATION

Property Mgmt Fees 107,240 102,400 4,840 4.73% Advertising - Staff 2,412 2,200 212 9.64% Copier Maintenance Contract 1,233 1,133 100 8.86%

Office Supplies 7,450 6,045 1,405 23.24% Postage 364 578 -214 -36.95%

Printing 1,973 2,460 -487 -19.81% Technology Consulting 1,345 3,600 -2,255 -62.64% Data Services 1,400 1,200 200 16.67% Telephone 7,050 10,701 -3,651 -34.12% Telephone Mobile 3,492 3,420 72 2.10% Audit/Tax Return Fees 2,700 2,350 350 14.89% Credit Checks 404 420 -16 -3.76% Bank Charges 145 120 25 20.83%

Legal Fees 4,937 1,185 3,752 316.65% Entertainment-Social 2,460 2,400 60 2.49%

Memberships 995 995 0 0.00% Training 2,350 2,400 -50 -2.08%

Gables at Stone Creek 2017 Reforecast Compared to 2017 Budget

Reforecast to 2017 Budget

CFS | 102

Page 2 of 3

Description 2017 Reforecast 2017 Budget $ %

Gables at Stone Creek 2017 Reforecast Compared to 2017 Budget

Reforecast to 2017 Budget

TOTAL ADMINISTRATION 147,951 143,607 4,344 3.02% HOUSEKEEPING

Housekeeping Labor Payroll 51,505 43,025 8,480 19.71% Housekeeping Supplies 6,578 5,700 878 15.40%

Carpet Clean-Unit 1,456 1,800 -344 -19.11% Carpet Clean-C/A 2,069 1,308 761 58.19%

Laundry Chemicals 4,678 4,407 271 6.15% TOTAL HOUSEKEEPING 66,286 56,240 10,046 17.86% MARKETING

Advertising Agency 1,190 2,200 -1,010 -45.91% Advertising Print 11,896 22,000 -10,104 -45.93% Advertising Direct Mail 5,000 10,000 -5,000 -50.00% Advertising - On-line 7,250 4,000 3,250 81.25% Promotional Events 8,687 6,000 2,687 44.78%

Signage 1,214 1,800 -586 -32.57% Model Apt Exp 12,775 18,804 -6,029 -32.06% Contributions/Sponsorships 2,600 2,400 200 8.33%

TOTAL MARKETING 50,612 67,204 -16,592 -24.69% MAINTENANCE CONTRACTS

Elevator Maintenance Contract 12,954 10,612 2,342 22.07% Exterminator Contract 2,567 2,714 -147 -5.42% Fire Alarm Monitoring Contract 4,890 4,751 139 2.93% Fire Extinguisher Contract 1,545 1,500 45 3.03% Fire Sprinkler Maintenance Contract 1,456 1,300 156 12.00% Interior Plants Contract 2,932 2,930 2 0.05% Lawn Maintenance Contract 5,640 5,914 -274 -4.63% Mat Rental Contract 2,571 2,076 495 23.86% Snow/Ice/Salt/Sand Contract 11,522 11,342 180 1.59% Trash Removal Contract 18,769 17,588 1,181 6.71% Uniforms - Maintenance 1,014 1,180 -166 -14.07% Window Cleaning Contract 8,400 8,895 -495 -5.56%

TOTAL MAINTENANCE CONTRACTS 74,261 70,802 3,459 4.89% REPAIRS

Roofing 1,354 480 874 182.08% HVAC 3,833 2,457 1,376 56.01%

Electrical 4,363 4,800 -437 -9.10% Plumbing 6,789 7,800 -1,011 -12.96%

Fire Protection 586 240 346 144.15% Appliances-Unit & C/A 1,284 1,100 184 16.74%

Specialty Equipment 452 240 212 88.33% Window Treatments 654 480 174 36.25% Interior Doors/Millwork 765 1,200 -435 -36.25%

Hardware 510 480 30 6.22% Glass 342 480 -138 -28.81%

Counter Surfaces 674 360 314 87.22% Interior Paint-Unit 6,879 7,850 -971 -12.37% Interior Paint-C/A 1,810 2,400 -590 -24.58% Grounds Supply and Repairs 3,899 3,900 -2 -0.04%

Vehicle Fuel 4,286 3,900 386 9.90% Vehicle Repairs 2,111 1,734 377 21.72% TOTAL REPAIRS 40,590 39,901 689 1.73%

CFS | 103

Page 3 of 3

Description 2017 Reforecast 2017 Budget $ %

Gables at Stone Creek 2017 Reforecast Compared to 2017 Budget

Reforecast to 2017 Budget

UTILITIES Electricity Common Area 79,856 86,294 -6,438 -7.46%

Electricity-Vacant Units 2,688 4,800 -2,112 -44.00% Gas Common Area 9,853 12,000 -2,147 -17.89%

Water/Sewer 33,219 31,728 1,491 4.70% TOTAL UTILITIES 125,616 134,822 -9,206 -6.83% INSURANCE AND TAX

Real Estate Tax 325,834 325,596 238 0.07% Personal Property Tax 576 576 0 0.00% Insurance-Property and Liability 44,692 46,314 -1,622 -3.50%

TOTAL INSURANCE AND TAX 371,103 372,486 -1,383 -0.37% TOTAL EXPENSES BEFORE NONCASH 1,190,991 1,203,989 -12,998 -1.08% NOI BEFORE RESERVES AND FINANCIAL EXP 1,490,397 1,360,444 129,953 9.55% REPLACEMENTS/RENOVATIONS

Structural Renovations 12,911 43,105 -30,194 -70.05% Roof Replacement 36,705 28,000 8,705 31.09%

HVAC Replacements 12,450 14,000 -1,550 -11.07% Electrical Replacements 4,231 3,800 431 11.34%

Plumbing Replacements 5,356 5,600 -244 -4.36% Fire Protection Replacements 2,400 2,890 -490 -16.96%

Appliance Replacement 6,200 4,800 1,400 29.17% Furniture Replacements 7,832 8,000 -168 -2.10%

Window Treatments Replacements 2,134 1,840 294 15.98% Hardware Replacements 3,678 4,650 -972 -20.90%

Interior Paint Renovations 4,510 4,800 -290 -6.03% Exterior Paint Renovations 4,828 4,800 28 0.57% Vinyl Floor Replacement 6,759 7,800 -1,041 -13.35%

Carpet Replacement 15,321 16,000 -679 -4.24% Grounds Replacements 3,487 2,840 647 22.80% Pavement Renovations 9,423 7,800 1,623 20.81%

TOTAL REPLACE/RENOVTNS 138,226 160,725 -22,499 -14.00% TOTAL NOI BEFORE FIN EXP 1,352,170 1,199,719 152,452 12.71% FINANCIAL EXPENSE

Interest Expense 955,331 955,213 118 0.01% Misc Financial Expense 4,800 4,800 0 0.00%

TOTAL FINANCIAL EXPENSE 960,131 960,013 118 0.01% TOTAL NI (LOSS) BEFORE NON-OPER 392,039 239,706 152,334 63.55% NONCASH AND NONOPERATING ITEMS

Depreciation Expense 577,811 577,811 0 0.00% Amortization Expense 10,569 10,569 0 0.00%

TOTAL NONOPERATING ITEMS 588,380 588,380 0 0.00% NET INCOME (LOSS) -196,341 -348,675 152,334 43.69%

CFS | 104

BUDGET WORKSHEET

ACCT. NO. ACCOUNT DESCRIPTION CURRENT

YEAR BUDGET

YTD ACTUAL

ESTIMATED ACTUAL-

REST OF YR

ESTIMATED YEAR END

ACTUAL DESCRIPTIONS/CALCULATIONS

COMING YEAR

BUDGET

51000 RENTAL INCOME

51010 Gross Rent Potential

51011 Subsidy Payments

51120 GROSS POTENTIAL RENT

51170 Loss To Lease

51290 Vacancies

51610 Bad Debt Expense

51650 Bad Debt Recovery

51810 Rent Concessions

51999 TOTAL RENTAL INCOME

52000 OTHER INCOME

52010 Credit Application Fee

52080 Pet Income

52090 Parking Income

52650 Security Deposit Recovery

52999 TOTAL OTHER INCOME

57999 TOTAL REVENUE

60000 EXPENSES

60001 PAYROLL

60060 Project Management

60070 Leasing

60100 Maintenance/Site Tech

60150 Project Managers Housing Expense

60225 TOTAL PAYROLL

61000 ADMINISTRATION

61040 Property Mgmt Fees

61060 Employment Screening

61100 Office Supplies

61110 Postage

61120 Printing

61140 Data Services

61150 Telephone

61180 Audit/Tax Return Fees

61190 Credit Checks

61230 Legal Fees

61270 Educ/Conventions

61499 TOTAL ADMINISTRATION

64000 MARKETING

64030 Commission 3rd Party

64060 Advertising Print

64100 Advertising Internet

64160 Promotional Events

64180 Promotional Signage

64190 Model Apt Exp

64299 TOTAL MARKETING

65000 MAINTENANCE CONTRACTS

65160 Exterminator Contract

65220 Fire Alarm Monitoring Contract

CFS | 105

BUDGET WORKSHEET

ACCT. NO. ACCOUNT DESCRIPTION CURRENT

YEAR BUDGET

YTD ACTUAL

ESTIMATED ACTUAL-

REST OF YR

ESTIMATED YEAR END

ACTUAL DESCRIPTIONS/CALCULATIONS

COMING YEAR

BUDGET

65250 Fire Extinguisher Contract

65430 Lawn Maintenance Contract

65640 Snow/Ice/Salt/Sand Contract

65670 Trash Removal Contract

65700 Uniforms - Maintenance

65899 TOTAL MAINTENANCE CONTRACTS

66000 REPAIRS

66030 Masonry Repairs

66070 Windows

66080 Exterior Doors

66130 Exterior Surfaces

66150 Gutters and Downspouts

66170 Roofing

66200 Interior Surfaces

66260 Electrical

66310 Plumbing

66350 Appliances-Unit & C/A

66450 Window Treatments

66470 Interior Doors/Millwork

66510 Hardware

66530 Glass

66580 Interior Paint

66590 Exterior Paint

66650 Carpet Floors

66670 Grounds Supply and Repairs

66770 Exterior Lighting

66950 Vehicle Repairs

66999 TOTAL REPAIRS

67000 UTILITIES

67010 Electricity - Common Area

67030 Electricity-Vacant Units

67070 Gas -Vacant Units

67090 Water/Sewer

67199 TOTAL UTILITIES

72000 INSURANCE AND TAX

72010 Real Estate Tax

72040 Insurance-Property and Liability

72199 TOTAL INSURANCE AND TAX

76000 TOTAL EXPENSES BEFORE NONCASH

76010 NOI BEFORE RENOVATIONS & FIN EXP

75000 REPLACEMENTS/RENOVATIONS

75070 Window Replacements

75260 Electrical Replacements

75310 Plumbing Replacements

75450 Window Treatments Replacements

75550 Counter Surfaces Replacements

75635 Vinyl Floor Replacements

75650 Carpet Floors Replacements

CFS | 106

BUDGET WORKSHEET

ACCT. NO. ACCOUNT DESCRIPTION CURRENT

YEAR BUDGET

YTD ACTUAL

ESTIMATED ACTUAL-

REST OF YR

ESTIMATED YEAR END

ACTUAL DESCRIPTIONS/CALCULATIONS

COMING YEAR

BUDGET

75999 TOTAL REPLACEMENTS/RENOVATIONS

79000 RESERVE ACTIVITY

11540 Escrow - Replacement Reserve

11550 Escrow - Repl Reserve Withdraw

79199 TOTAL RESERVE ACTIVITY

79400 NOI BEFORE FINANCIAL EXP

80000 FINANCIAL EXPENSE

80010 Interest Expense

26150 Principal Reduc - Mortgage

80999 TOTAL FINANCIAL EXPENSE

88999 CASH FLOW - OPERATIONS

CFS | 107

INCOME Notes:

Market Rents (new leases) 4% increase all unit types 2% on 1/1 and 2% on 6/1 Renewal Rents 2% increase The renewal rate shall be the lesser of the new

market rent or a 2% increase over the resident's current rent. Any resident currently above market should not receive a rent increase. No resident should be reduced below new market rent.

Rent Concessions Budgeted at 1.5% of GPR Bad Debt Expense/Recovery Lower of 3-year average actuals or 1% of GPR for

expense; do not budget any recovery Security Deposit Recovery Budget average recovery amount per unit for the

past three years times the estimated number of turnovers

Vacancy Loss 5% of GPR

Other Income Parking fees to increase 3% on January 1

Shared vending revenue to be budget 6% over current year reforecast All other income to be trended by 3% over current year reforecast

EXPENSES

All expenses trended at 2.5% except:

Health Insurance - Employer Share Health Insurance at $400 per FT employee per month

Management Fee 4.5% of total revenue per management agreement

Data Services $15 per unit per year; paid quarterly

Audit $4,000 Budget in July

Entertainment/Social $100 per employee For holiday party (employee plus guest); budget for December

Promotional Expense $10 per unit

Utilities - Water/Sewer 3.75% over reforecast As reported by utilities

Utilities - Gas Use re-forecasted dollar amount and lower by 10% Based on weather analysis Utilities - Electric Use re-forecasted dollar amount plus 5% Based on expected rate increase less energy

conservation savings Maintenance Contracts See separate schedule by property

Property Insurance See separate premium spreadsheet by property

Depreciation and Amortization See separate schedule by property

Property Taxes See separate spreadsheet by property

Budget Assumptions Quarry Lake Apartments

Managers: Use the following assumptions in developing the first draft of the new budget Deviations are permitted but must be justified at budget presentation

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CFS | 110

Month Payment Principal Interest Balance

1/2018 $21,472.86 $5,843.52 $15,629.35 $3,745,199.95 2/2018 $21,472.86 $5,867.87 $15,605.00 $3,739,332.08 3/2018 $21,472.86 $5,892.31 $15,580.55 $3,733,439.77 4/2018 $21,472.86 $5,916.87 $15,556.00 $3,727,522.90 5/2018 $21,472.86 $5,941.52 $15,531.35 $3,721,581.38 6/2018 $21,472.86 $5,966.28 $15,506.59 $3,715,615.10 7/2018 $21,472.86 $5,991.14 $15,481.73 $3,709,623.96 8/2018 $21,472.86 $6,016.10 $15,456.77 $3,703,607.86 9/2018 $21,472.86 $6,041.17 $15,431.70 $3,697,566.69 10/2018 $21,472.86 $6,066.34 $15,406.53 $3,691,500.35 11/2018 $21,472.86 $6,091.61 $15,381.25 $3,685,408.74 12/2018 $21,472.86 $6,117.00 $15,355.87 $3,679,291.74

$257,674.32 $71,751.73 $185,922.69

The Arbors at Whistling Creek 2018 Amortization Schedule

CFS | 111

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CFS | 114

Latitude Apartments 2018 Budget

TABLE OF CONTENTS

TAB 1 2018 Budget Summary - Narrative

TAB 2 Summary Comparison 2015, 2016, and 2017 Actual Financial Results to 2018 Budget

TAB 3 2018 Budget compared to 2017 Reforecast -- Related notes

TAB 4 2017 Reforecast compared to 2017 Budget

TAB 5 Market Analysis - Comparable Properties

TAB 6 2018 Proposed Rents

TAB 7 2017-18 Loss to Lease Worksheets

TAB 8 Three-year Capital Expenditure Plan (2018-2020)

TAB 9 Bids for 2018 Capital Expenditures

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Latitude Apartments 2018 Budget Summary

Rental Revenue

1) Gross Potential Rent for 2018 is budgeted at $2,933,827 compared to a forecasted actual for 2016 of $2,862,270, a 2.5% increase.

2) Total Rental Income (after loss to lease, vacancies and bad debt) is budgeted at $2,728,459 (93% of GPR) as compared to a forecasted actual for 2017 of $2,733,468 (95.5% of GPR) due to higher vacancy loss projection below.

3) 2018 Rental Revenue assumes a 5% vacancy factor, which results in a projected vacancy loss of $146,691 versus a 2017 reforecast of $68,694 or approximately 2.4%. (The expectation is that vacancies will remain below 5%; 5% is being used as a conservative factor)

4) 2018 Rental Revenue projections assume market rent increases averaging 3% across the unit types. Renewal rents are capped at the lesser of the new market rent or 2% over the resident’s current rent.

5) Loss to Lease is budgeted at $173,174 versus 2017 reforecast of $166,049.

Other (Non-Rental) Income

1) Other income for 2018 is budgeted at $109,220 compared to a forecasted actual for 2017 of $102,345 or a 6.7% increase, largely due to the implementation of non-refundable "pet rent".

Expenses

1) Total expenses before renovations, financial expenses and non-cash items are estimated at $1,694,033 in 2017 compared to $1,668,333 in 2016, or a 1.5% increase.

2) Renovations/Replacements are budgeted at $123,014 for 2018 compared to expenditures of $129,016 in 2017. (Note: The 2018 renovation budget does not include approximately $60,000 in parking lot replacements/improvements, which are recommended)

3) Financial Expense is budgeted at $728,876 versus $910,883 in 2018 owing to a significant reduction in interest expense beginning on 7/1/18.

Net Operating Income/Cash Flow

1) NOI before Financial Expense is budgeted at $1,143,646 versus $1,167,480 in 2017.

2) Cash flow is budgeted at $291,756 versus $127,581 in 2017.

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4370.2 REV-1 APPENDIX 1

___________________________________________________________________________

CRIMINAL STATUTES

1. Section 1715z-19, Title - 12. U.S.C., "Equity Skimming Penalty", provides, among other things, whoever willfully uses or authorizes the use of any part of the rents, assets, proceeds, income or other funds derived from the property during a period when the mortgage note is in default or the project is in a non-surplus cash position, for any purpose other than to meet actual or necessary expenses, shall be fined not more than $250,000 or imprisoned not more than 5 years, or both.

2. Section 1001, Title 18, U.S.C.,"Fraud and False Statements", provides, among other things, that whoever knowingly and willingly makes or uses a document or writing containing any false, fictitious, or fraudulent statement or entry, in any matter within the jurisdiction of any department or agency of the United States, shall be fined not more than $10,000 or imprisoned for not more than five years, or both.

3. Section 1010, Title 18, of the U.S.C., "H.U.D. Transactions", makes it a criminal offense to make a willful false statement or misrepresentation to any Department or Agency of the United States as to any matter within its jurisdiction.

4. Section 1010, Title 18, U.S.C., "H.U.D. Transactions", provides, in part: "Whoever, for the purposes of ... influencing in any way the action of such administration makes, passes, utters or publishes any statement knowing the same to be false ... shall be fined not more than $5,000 or imprisonment of not more than two years, or both.

5. Section 1012, Title 18, U.S.C., "Department of Housing and Urban Department Transactions", provides in part: "Whoever, with intent to defraud, makes false entry in any book of the Department of Housing and Urban Development, makes any false report or statement to or for such Department ... or whoever receives any compensation ... with intent to defraud such Department or with intent unlawfully to defeat its purposes shall be fined not more than $1,000 or imprisoned not more than 1 year, or both."

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CIVIL STATUTES

1. Section 1715z-4a, Title 12, U.S.C., "Double Damages Remedy for Unauthorized Use of Multifamily Housing Projects Assets and Income," provides for a double damages civil remedy for the use of assets or income in violation of any Regulatory Agreement or any applicable HUD regulations.

CFS | 117

2. Section 1735f-15, Title 12, U.S.C., "Civil Money Penalties Against Multifamily Mortgagors", provides, among other things, civil money penalties in addition to any other civil remedy or criminal penalty to be paid by the mortgagor through personal funds for (1) violation of agreement with HUD to use non-project funds for certain specified needs of a project (e.g., payments to the replacement reserve account) as condition of receiving transfers of physical assets, flexible subsidy loan, capital improvement loan, modification of mortgage terms or workout agreement. The penalties can be as much as the amount of loss the Secretary would experience at foreclosure sale or sale after foreclosure and (2) certain specific violations of the regulatory agreement, the penalties can be as much as $25,000 for each occurrence.

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CFS | 119

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4370.2 REV-1

APPENDIX 13 ___________________________________________________________________________

AUDITOR'S REPORT ON THE INTERNAL CONTROL STRUCTURE

To the Partners ABC Partnership Anytown, U.S.A.

We have audited the financial statements of (the Entity) as of and for the year ended June 30, 199X, and have issued our report thereon dated date of report . We have also audited the Entity's compliance with requirements applicable to its major HUD-assisted programs and have issued our report thereon dated date of report .

We conducted our audit in accordance with generally accepted auditing standards and Government Auditing Standards, issued by the Comptroller General of the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.

In planning and performing our audits for the year ended June 30, 199X, we considered the (Entity's) internal control structure in order to determine our auditing procedures for the purpose of expressing our opinions on the (Entity's) basic financial statements and on its compliance with requirements applicable to major programs and not to provide assurance on the internal control structure.

In connection therewith, we have also obtained an understanding of those internal accounting control and administrative control procedures comprehended in the U.S. Department of Housing and Urban Development (HUD) Consolidated Audit Guide for HUD Programs issued October 1991. Our study included tests of compliance with such procedures.

The management of the Project is responsible for establishing and maintaining an internal control structure. In fulfilling this responsibility, estimates and judgements by management are required to assess the expected benefits and related costs of internal control structure policies and procedures. The objectives of an internal control structure are to provide management with reasonable, but not absolute, assurance that assets are safeguarded against loss from unauthorized use or disposition and that transactions are executed in accordance with management's authorization and recorded properly to permit the preparation of financial statements in accordance with generally accepted accounting principles and that Federal financial assistance programs are managed in compliance with applicable laws and regulations. Because of inherent limitations in any internal control structure, errors, irregularities or instances of noncompliance may nevertheless occur and not be detected. Also, projection of any evaluation of the structure to future periods is subject to the risk that procedures may become inadequate because of changes in conditions or that the effectiveness of the design and operation of policies and procedures may deteriorate.

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_____________________________________________________________________ 4370.2 REV-1

APPENDIX 13 ___________________________________________________________________________

For the purpose of this report, we have classified the significant internal control structure policies and procedures in the following categories (identify internal control structure categories).

For all of the internal control structure categories listed above, we obtained an understanding of the design of relevant policies and procedures and determined whether they have been placed in operation and we assessed control risk.

We performed tests of controls to evaluate the effectiveness of the design and operation of internal control structure policies and procedures that we considered relevant to preventing or detecting material noncompliance. Our procedures were less in scope than would be necessary to render an opinion on internal control structure policy and procedures. Thus, we do not express our opinion on those policies and procedures.

We noted certain matters involving the internal control structure and its operations that we consider to be reportable conditions under standards established by the American Institute of Certified Public Accountants. Reportable conditions involve matters coming to our attention relating to significant deficiencies in the design or operation of the internal control structure that, in our judgement, could adversely affect the organization's ability to administer Federal financial assistance programs in accordance with applicable laws and regulations.

(Include paragraph to describe the reportable conditions noted.)

A material weakness is a reportable condition in which the design or operation of the specific internal control structure elements does not reduce to a relatively low level the risk that noncompliance with laws and regulations that would be material in relation to the financial statements being audited may occur and not be detected within a timely period by employees in the normal course of performing their assigned functions.

Our consideration of the internal control structure would not necessarily disclose all matters in the internal control structure that might be reportable conditions and, accordingly, would not necessarily disclose all reportable conditions that are also considered to be material weaknesses as defined above. However, we believe none of the reportable conditions described above is a material weakness.

We also noted other matters involving the internal control structure and its operation that we have reported to the management of the (Entity) in a separate communication dated September 8, 199X.

This report is for the information of the mortgagor, management, and the Department of Housing and Urban Development. This restriction is not intended to limit the distribution of this report, which is a matter of public record.

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_____________________________________________________________________ 4370.2 REV-1

APPENDIX 13 ___________________________________________________________________________

Anytown, U.S.A. XYZ and Company (Date) Certified Public Accountants

3 5/92

CFS | 123

4370.2 REV-1

APPENDIX 16 ___________________________________________________________________________

GLOSSARY

ACCOUNTING: The activity of providing quantitative information, primarily financial in nature, that is intended to be useful in making economic decisions; the process of measuring recording, summarizing and reporting the assets, liabilities and owner's equity of an enterprise and the changes in them.

ACCOUNTING PERIOD: A length of time established as a period for which accounting activity will be recorded, summarized, and reported. Accounting periods provide the divisions required for comparative financial analysis. Normally, they are established monthly and quarterly for interim statements and annually for completed audited statements and disclosures.

ACCOUNTS PAYABLE: All amounts owed for goods, properties or services which were purchased on credit and have been received. See definition of accrued liabilities, below.

ACCOUNTS RECEIVABLE: All amounts owed to an entity for facilities or services that were provided during the current or prior accounting period(s). (Rent that is due or overdue, including government Rent Supplement amounts, is a common example of an account receivable).

ACCRUAL BASIS OF ACCOUNTING: The method of accounting in which income is recognized when earned (regardless of when cash has been received) and expenses are recognized when incurred (regardless of when cash has been paid).

ACCRUALS: Entries made at the end of an accounting period which are due entirely to the use of the accrual basis of accounting; e.g., to record expenses incurred but not paid.

ACCRUED LIABILITIES: Amounts computed by an entity as owed to outsiders for goods or services received but not invoiced. Examples include utilities and wages where the service period does not coincide with the financial statement period of the project.

___________________________________________________________________________

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APPENDIX 16

CFS | 124

___________________________________________________________________________

GLOSSARY

AMORTIZATION: (1) The portion of a mortgage payment which represents a payment of principal. (2) The spreading of the cost of certain assets over more than one accounting period.

ASSETS: Economic resources used by the business entity and expected to benefit future operations.

AUDITING: The examination of financial statements and their underlying data to determine whether the statements are fairly and consistently stated in accordance with generally accepted accounting principles. Auditing is done by CPAs, others licensed by the state to do such work, or authorized by government agencies,

BALANCE SHEET: The basic financial statement which presents the assets, the liabilities and owner's equity of an entity at a point in time. The total of the assets must equal (balance) the total of the liabilities and owner's equity.

BOOKKEEPING: The process of recording transactions in an entity's books of accounts.

CAPITAL: The dollar balance of the amount of ownership interest of the owners of an entity. Also referred to as Owner's Equity.

CAPITALIZE: To set up an expenditure as an asset or to increase the recorded value of an asset so that the expenditure can be charged off as depreciation expense during future accounting periods. It is the opposite of "expensing" an expenditure.

CASH: Currency, checks and other negotiable instruments acceptable for direct deposit by a bank, and checking account balances.

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APPENDIX 16 ___________________________________________________________________________

GLOSSARY

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CASH BASIS OF ACCOUNTING: The method of accounting in which income and expenses are recorded and reported in the accounting period in which cash is actually received or disbursed, regardless of when the related goods or services were received or provided.

CERTIFIED PUBLIC ACCOUNTANT (CPA): A person who is licensed by the state to offer professional auditing and accounting services to the public; license is granted upon successful completion of an examination and satisfying other requirements of the state.

CHART OF ACCOUNTS: A list, by number and title, of all of a development's accounts, grouped according to type of account. The Chart of Accounts prescribed by HUD for cooperatives is in Chapter 6 of this Handbook.

CONSISTENCY: A convention in accounting that once an accounting method (such as depreciation) has been adopted it should not be changed without full disclosure and an explanation of the impact of the change on published financial statements.

CONTRA ACCOUNT: An account established to record offsetting liabilities or reductions in value to another account(s). Examples of contra accounts include Accumulated Depreciation of Buildings and Equipment, Allowances for Doubtful Accounts Receivable, and the liabilities applicable to security deposit accounts. The manner in which contra accounts are to be reported on financial statements varies, but usually are shown separately as subtractions from the account(s) to which they are contra.

CURRENT ASSETS: Cash and other assets that are reasonably expected to be realized in cash or used up during the normal operating period of a business, typically one year.

CURRENT LIABILITIES: Obligations due to be paid or settled within the normal operating period of a business, typically one year.

___________________________________________________________________________

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_____________________________________________________________________ 4370.2 REV-1

APPENDIX 16 ___________________________________________________________________________

GLOSSARY

DEBT SERVICE: The interest and principal due on a mortgage note. Does not include impounds or reserve fund contributions, but can include Mortgage

CFS | 126

Insurance Premium.

DEFAULT: There are two types of defaults: (1) fiscal and (2) covenant.

(1) A monetary default exists when the owner fails to make any payment due under the mortgage.

(2) A covenant default exists when the owner fails to perform any other covenant under the provisions of the mortgage or of the regulatory agreement, which is incorporated into the mortgage. A lender becomes eligible for insurance benefits on the basis of a covenant default only after the lender has accelerated the debt and the owner has failed to pay the full amount due, thus converting the covenant default to a monetary default.

DEPRECIATION: The process of distributing the cost of fixed assets over a period of years, in a systematic and rational manner.

DIRECT METHOD (for Statement of Cash Flows):

Refer to Financial Accounting Standards Board (FASB) Statement No. 95.

DISBURSEMENT: Any outlay of funds, either in cash or by check.

EXPENDITURE: An outflow of assets or increase in liability in connection with the acquisition of assets or expenses; includes both expenses and purchases of fixed assets.

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GLOSSARY

EXPENSE: The outflow of assets or increases in liabilities that takes place in connection with the products or services provided during an accounting period.

EXPENSED: The process of having charged an expenditure against operations, such expenditure having been considered to benefit a current accounting period (as opposed to a future accounting period). It is the opposite of "capitalizing" an expenditure.

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FINANCIAL POSITION: The assets, liabilities and owner's equity of an entity and the relationship among them as displayed by the Statement of Position or Balance Sheet, the Statement of Retained Earnings and the Statement of Cash Flows.

FISCAL YEAR: The twelve month period which an entity chooses as the period for reporting the annual report of its financial operations; normally runs to the end of a month. Often used in contrast to the Calendar Year ending December 31st.

FUND ASSETS: Assets such as buildings, land and equipment that are necessary to the operations of the business and have a useful life of more than one year.

FUND: (1) An amount restricted for a specified purpose, such as for replacement of fixed assets (Reserve Fund for Replacements). (2) A separate set of accounts for a subdivision of a governmental or other nonprofit entity.

GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (GAAP): General understandings governing accounting measurements and standards of presentation derived from long-standing experience and conventions in the profession. Some of these principles are written and some are unwritten.

GENERALLY ACCEPTED AUDITING STANDARDS (GAAS):

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GLOSSARY

GAAS refer to the ten auditing standards that have been approved and adopted by the members of the American Institute of Certified Public Accountants (AICPA).

GENERALLY ACCEPTED GOVERNMENT AUDITING STANDARDS (GAS or GAGAS):

GAS are standards for audits of government organizations, programs, activities and functions of government funds received by contractors non-profit organizations and other nongovernmental organizations. GAS are issued by the U.S. General Accounting Office (GAO).

IDENTITY-OF-INTEREST: This term applies to a management agent and other parties having

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business relationships with the project owner or any officer, director or partner of the mortgagor. Such a relationship should be construed to exist when the owner and the management agent are not the same person but (1) the project owner; or (2) any officer or director of the project owner or (3) any person who directly or indirectly controls 10 percent or more of the project owner's voting rights or directly or indirectly owns 10 percent or more of the project owner; is also (1) an officer or director of the management agent; or (2) a person who directly or indirectly controls 10 percent or more of the management agent's voting rights or directly or indirectly owns 10 percent or more of the management agent. For purposes of this definition, the term "person" includes any individual, member of Board of Directors, partnership, corporation, or other business entity. Any ownership, control or interest held or possessed by a person's spouse, parent, child, grandchild, brother or sister is attributed to that person.

IMMATERIAL: Judged by an accountant or auditor as insignificant to an informed reader of financial statements; said of minor items which are erroneous, omitted, or inconsistent.

IMPREST FUND: An account that is used by a project management agent as the operating account for a project. The management agent should not commingle (mix together) funds for more than one project without prior HUD approval.

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GLOSSARY

IMPOUND ACCOUNT: Amounts held by a mortgagee (or mortgagee's agent) which belong to the mortgagor but are collected to ensure future payment of items such as property taxes and insurance.

INCOME (PROJECT): The excess of annual revenues over project expenses.

INCOME (TENANT): The gross annual income of the tenant from all sources before taxes and withholdings, after giving effect to exclusions allowed by the Housing Commissioner.

INCOME STATEMENT: See Statement of Income

INVOICE:

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A document (commonly called a "bill") that states the price and an itemized description of goods and/or services bought. Not to be confused with vendors' "statements," which summarize transactions periodically (usually monthly). LIABILITY: The economic obligation to convey assets (usually cash) or to render services in the future; claims against an entity by outside parties resulting from past or current transactions and requiring future settlement. LIQUID ASSETS: Cash and other short-term assets that are expected to be converted to cash within a short period of time generally not longer than one year. These are the first items presented on asset side of balance sheet. LONG-TERM INVESTMENTS: Certificates of deposit, stocks, bonds, notes receivable, etc., that are intended to be held for more than one year. LONG-TERM LIABILITIES: Obligations that are expected to be liquidated over a period exceeding one year. ___________________________________________________________________________ G-7 5/92 _____________________________________________________________________ 4370.2 REV-1 APPENDIX 16 ___________________________________________________________________________ GLOSSARY MATERIALITY: The concept of whether an amount or event would, if known, influence the judgment of an informed reader of a financial statement; a test of the significance of an item. MORTGAGE: A loan made for the purpose of purchasing, building or rehabilitating real property, and secured by that property. MORTGAGE NOTE: Sets forth the amount the owner owes the lender and the manner in which the debt is to be satisfied. The note establishes the payment terms, conditions under which prepayments may be made, and the lender's rights in the event of default. MORTGAGEE (INVESTING/HOLDING): The institution which holds a particular mortgage. The mortgagee may be a bank, savings and loan association, FNMA, GNMA, insurance company, etc. The mortgagee often engages another institution for the loan servicing function (example: FNMA services GNMA loans).

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MORTGAGEE'S CERTIFICATE: The lender executes the Mortgagee's Certificate at the loan closing. In executing the Certificate, the lender identifies all fees and escrow deposits collected in conjunction with the mortgage transaction and agrees to collect, hold and administer the reserve for replacements and any required mortgage escrows in accordance with HUD's requirements.

MORTGAGE INSURANCE PREMIUM (MIP): A payment made to HUD for insurance to protect the lender against any failure by the mortgagor to make payments on the mortgage loan. Paid by the mortgagor through the lender, it amounts to one-half of one percent (0.5%) annually of the unpaid balance of the mortgage loan. In Section 236 projects, an "interest reduction payment." (IRP) also is used to pay the MIP.

MORTGAGOR:

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GLOSSARY

An individual, corporation, or partnership that borrows money from the lending institution (the mortgagee) in exchange for a mortgage on his/her property).

MULTIFAMILY INFORMATION PROCESSING SYSTEM (MIPS): An automated system used to monitor the receipt and review of annual and monthly financial statements.

NET INCOME: Revenues of a period minus the expenses of that period. If expenses exceed revenues it is called Net Loss.

OWNER'S EQUITY: The dollar balance of the amount of ownership interest of the owners of an entity.

PREPAID EXPENSES: Assets consisting of remaining portions of amounts which have been paid for in advance for short term future expenses. Example: unexpired insurance.

PROJECT: The mortgaged property and all its other assets used in or owned by the business conducted on said mortgaged property, which is providing housing and other such activities.

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PRORATE: To divide or apportion an amount according to the number of days or months during the period. Can relate to the amount of rent owed by a resident for occupying a unit for only a part of a month.

PURCHASE ORDER: A form used by a purchaser to record the details of an order for goods, services, equipment, etc. It authorizes delivery and billing by a vendor or supplier.

REGULATORY AGREEMENT: The regulatory agreement lists the management and reporting requirements that HUD and the lender impose upon the owner in return for their insuring the mortgage. The regulatory agreement also

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GLOSSARY

specifies what actions the lender and/or HUD may take if the owner does not carry out its obligations under the regulatory agreement so long as the mortgage insurance is in effect.

RESERVE: (1) An accounting term for a formal segregation (appropriation) of owner's equity or for a valuation deduction from an asset account. (2) Technically incorrect but common in HUD informal parlance: a fund of cash or cash equivalents retained for a specific purpose such as painting, replacements, or general contingencies. The correct term is "Cash (or Securities) - Reserve or "Reserve Fund for..."

RESERVE FOR REPLACEMENTS: The regulatory agreement requires an owner to establish and maintain a reserve for replacements. The reserve provides cash for the replacement of capital items (e.g. appliances). The reserve is funded from two sources (1) a lump sum deposit made at the time of loan closing and (2) monthly deposits made as part of the monthly mortgage payments.

RESIDUAL RECEIPTS: Any cash remaining at the end of a semi-annual or annual fiscal period after deducting from surplus cash the amount of all distributions. See also SURPLUS CASH.

REVENUE: The inflow of assets to an entity as a result of the rendering of services or delivering of goods.

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STATEMENT OF CASH FLOWS: The statement that shows the sources and uses of cash over a specific reporting period in conjunction with the Income Statement and Balance Sheet.

STATEMENT OF INCOME: A statement that shows the revenues and expenses of an enterprise over a specific time period, and the resultant net income or net loss (e.g., Form HUD-92410).

SURPLUS CASH:

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GLOSSARY

The cash remaining after all necessary and reasonable expenses of the project have been paid or funds have been set aside for such payment and all reserve requirements have been met.

TAX BASIS OF ACCOUNTING: The basis of accounting allowed for tax purposes. For example, a beneficiary of a homeowner's insurance policy may omit insurance proceeds as income; however, using the accrual basis of accounting, the proceeds would have to be included in the income.

TRANSACTION: Any event that changes assets, and/or liabilities and/or owner's equity.

VENDOR: Anyone who sells goods or services (store, wholesaler, supplier, utility company, service company, etc.).

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4370.2 REV-1 ___________________________________________________________________________

CHAPTER 2. FINANCIAL OPERATIONS AND ACCOUNTING

2-1. INTRODUCTION

2-2. OBJECTIVES OF THE HUD-PRESCRIBED ACCOUNTING SYSTEM

General objectives of the HUD accounting system include:

o Execution of all transactions in accordance with project management and where required, HUD's general or specific authorization.

o Reporting on all financial transactions using HUD guidelines and Generally Accepted Accounting Principles (GAAP).

o Safeguarding project assets.

o Providing timely, accurate and complete information for management decision making.

o Assisting with compliance with HUD specified accounting procedures, such as treatment of Low Income Housing Tax Credits.

2-3. MAINTENANCE OF BOOKS AND ACCOUNTS

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permit a speedy and effective audit. Further, the mortgagor or owner agrees that:

"The mortgaged property, equipment, buildings,

4 3 7 0 . 2 R E V - 1

CHAPTER 2 . F I N A N C I A L O P E R AT I O N S A N D A C C O U N T I N G

2 - 1 . I N T R O D U C T I O N

T h i s c h a p t e r p r o v i d e s a d e s c r i p t i o n o f t h e f i n a n c i a l o p e r a t i o n s a n d a c c o u n t i n g r e q u i r e m e n t s o f a H U D - i n s u r e d m u l t i f a m i l y p r o j e c t i n c l u d i n g : m a i n t e n a n c e o f b o o k s a n d a c c o u n t s , c o m p l e t e n e s s a n d a c c u r a c y o f b o o k s a n d a c c o u n t s ; a u d i t a b l e p a p e r t r a i l , i n v o i c e s , e t c . ; t r e a t m e n t o f s p e c i f i c t r a n s a c t i o n s s u c h a s s u r p l u s c a s h a n d r e s i d u a l r e c e i p t s ; d i s t r i b u t i o n t o o w n e r s ; c a s h c o n t r o l s a n d u s e o f m a n a g e m e n t a g r e e m e n t s .

2 - 2 . O B J E C T I V E S O F T H E H U D - P R E S C R I B E D A C C O U N T I N G SYSTEM

G e n e r a l o b j e c t i v e s o f t h e H U D a c c o u n t i n g s y s t e m i n c l u d e :

o E x e c u t i o n o f a l l t r a n s a c t i o n s i n a c c o r d a n c e w i t h p r o j e c t m a n a g e m e n t a n d w h e r e r e q u i r e d , H U D ' s g e n e r a l o r s p e c i f i c a u t h o r i z a t i o n .

o R e p o r t i n g o n a l l f i n a n c i a l t r a n s a c t i o n s u s i n g H U D g u i d e l i n e s a n d G e n e r a l l y A c c e p t e d A c c o u n t i n g P r i n c i p l e s ( G A A P ) .

o S a f e g u a r d i n g p r o j e c t a s s e t s .

o P r o v i d i n g t i m e l y , a c c u r a t e a n d c o m p l e t e i n f o r m a t i o n f o r m a n a g e m e n t d e c i s i o n m a k i n g .

o A s s i s t i n g w i t h c o m p l i a n c e w i t h H U D s p e c i f i e d a c c o u n t i n g p r o c e d u r e s , s u c h a s t r e a t m e n t o f L o w I n c o m e H o u s i n g T a x C r e d i t s .

2 - 3 . M A I N T E N A N C E O F BOOKS A N D ACCOUNTS

A . B o t h t h e R e g u l a t o r y A g r e e m e n t a n d t h e c e r t i f i c a t e e x e c u t e d b y t h e m o r t g a g o r , a t t h e t i m e t h e m o r t g a g e i s i n s u r e d , c o n t a i n p r o v i s i o n s t h a t a c c o u n t s o f m o r t g a g e d p r o p e r t y o p e r a t i o n s b e k e p t i n a c c o r d a n c e w i t h t h e r e q u i r e m e n t s o f t h e S e c r e t a r y a n d i n s u c h f o r m a s t o

2 - 1 5 / 9 2

4 3 7 0 . 2 R E V - 1

p e r m i t a s p e e d y a n d e f f e c t i v e a u d i t . F u r t h e r , t h e m o r t g a g o r o r o w n e r a g r e e s t h a t :

" T h e m o r t g a g e d p r o p e r t y , e q u i p m e n t , b u i l d i n g s ,

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4370.2 REV-1

2-4. PRESCRIBED ACCOUNTS

p l a n s , o f f i c e s , a p p a r a t u s , d e v i c e s , b o o k s , c o n t r a c t s , r e c o r d s , d o c u m e n t s , a n d o t h e r p a p e r s r e l a t i n g t h e r e t o s h a l l a t a l l t i m e s b e m a i n t a i n e d i n r e a s o n a b l e c o n d i t i o n f o r p r o p e r a u d i t a n d s h a l l b e s u b j e c t t o e x a m i n a t i o n a n d i n s p e c t i o n a t a n y r e a s o n a b l e t i m e b y t h e S e c r e t a r y o r h i s d u l y a u t h o r i z e d a g e n t s . O w n e r s s h a l l k e e p c o p i e s o f a l l w r i t t e n c o n t r a c t s o r o t h e r i n s t r u m e n t s w h i c h a f f e c t t h e m o r t g a g e d p r o p e r t y , a l l o r a n y o f w h i c h m a y b e s u b j e c t t o i n s p e c t i o n a n d e x a m i n a t i o n b y t h e S e c r e t a r y o r h i s d u l y a u t h o r i z e d a g e n t s . "

B . B o o k s a n d a c c o u n t s m u s t b e c o m p l e t e a n d a c c u r a t e . T h e b o o k s o f o r i g i n a l e n t r y m u s t b e k e p t c u r r e n t a t a l l t i m e s , a n d p o s t i n g s m u s t b e m a d e a t l e a s t m o n t h l y t o l e d g e r a c c o u n t s . S t a n d a r d j o u r n a l e n t r i e s m a y b e e s t a b l i s h e d f o r r e c u r r i n g i t e m s a n d p o s t e d m o n t h l y .

C. I n e s t a b l i s h i n g a f i n a n c i a l a c c o u n t i n g s y s t e m , a u d i t i n g p r o b l e m s c a n b e a v o i d e d b y k e e p i n g o p e r a t i n g f u n d s s e p a r a t e f r o m o t h e r p r o j e c t f u n d s . P a r t i c u l a r l y w h e n o c c u p a n c y o c c u r s p r i o r t o f i n a l c l o s i n g , c a r e m u s t b e t a k e n t o s e g r e g a t e c o n s t r u c t i o n a n d o p e r a t i n g f u n d s . A c c o u n t i n g o f a n y c o n s t r u c t i o n e x p e n s e s s h a l l b e i n a c c o r d a n c e w i t h H U D H a n d b o o k 4 4 7 0 . 1 , M o r t g a g e C r e d i t A n a l y s i s f o r P r o j e c t M o r t g a g e I n s u r a n c e , S e c t i o n 2 0 7 .

D. I n t h e f i r s t a n n u a l f i n a n c i a l s t a t e m e n t , w h e n e v e r c o n s t r u c t i o n c o s t s r e m a i n u n p a i d a f t e r f i n a l e n d o r s e m e n t , t w o S t a t e m e n t s o f C a s h F l o w s a r e r e q u i r e d . O n e s h a l l a p p l y t o p r o j e c t c o n s t r u c t i o n c o s t t r a n s a c t i o n s d u r i n g t h e f i r s t a n n u a l s t a t e m e n t p e r i o d . T h e s e c o n d s h a l l a p p l y s t r i c t l y t o p r o j e c t r e n t a l o p e r a t i o n s f r o m t h e d a y f o l l o w i n g t h e c o s t c e r t i f i c a t i o n c u t - o f f d a t e t o t h e e n d o f t h e f i s c a l y e a r .

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4 3 7 0 . 2 R E V - 1

2 - 4 . P R E S C R I B E D ACCOUNTS

I n o r d e r t o e n s u r e t h a t b o o k s a r e c o m p l e t e a n d r e p o r t i n g i s u n i f o r m , p r e s c r i b e d a c c o u n t s m u s t b e m a i n t a i n e d a s o u t l i n e d a n d d e s c r i b e d i n C h a p t e r 4 . W h i l e v a r i o u s i t e m s o f i n c o m e a n d e x p e n s e m u s t b e c l a s s i f i e d u n d e r t h e p r o p e r a c c o u n t s , n o s i n g l e p r o j e c t w i l l l i k e l y h a v e u s e f o r a l l a c c o u n t s . T h i s w i l l e s p e c i a l l y b e t r u e o f s m a l l e r p r o j e c t s . I n a d d i t i o n , s o m e a c c o u n t s w i l l b e a p p l i c a b l e o n l y t o n u r s i n g h o m e s a n d h e a l t h c a r e f a c i l i t i e s . H o w e v e r , a n y a c c o u n t s r e q u i r e d s h o u l d b e p l a c e d

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2-5. MINIMUM NUMBER OF BANK ACCOUNTS

Under terms of the regulatory agreement, each Project must maintain in Federally insured banks, the following minimum number of bank accounts:

o Regular Operating Account

o Replacement Reserve (Held by the mortgagee, except for Section 202s)

o Tenant Security Deposit Account (Only if security deposits are received)

o Residual Receipts Account (Held by mortgagee, except for Section 202)

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2-6. REGULAR OPERATING ACCOUNT

* 1. Managing agents must determine that the financial institution has a rating consistent at all times with current minimally acceptable ratings as established and published by Government National Mortgage Association (GNMA).

* 2. The managing agent must monitor the institution's ratings no less than on a quarterly basis, and change institutions when necessary. The managing agent must document the ratings of the institution where t.he funds are deposited and maintain the

i n t h e g r o u p i n g s a n d o r d e r s h o w n i n t h e C h a r t o f A c c o u n t s , C h a p t e r 4 . I f a d d i t i o n a l a c c o u n t s n o t o t h e r w i s e c o v e r e d i n t h e c h a r t a r e n e e d e d f o r r e c o r d i n g t r a n s a c t i o n s , t h e y s h o u l d b e s e t u p a n d c l a s s i f i e d i n a c c o r d a n c e w i t h a c c e p t e d a c c o u n t i n g p r i n c i p l e s . T h e c h a r t s h o u l d b e f o l l o w e d , h o w e v e r , a s f a r a s i t a p p l i e s .

N o t e : I t i s i m p o r t a n t f o r c o n s i s t e n c y t o e x i s t i n t h e c a t e g o r i z a t i o n o f a c c o u n t s . C o n s i s t e n c y a l l o w s H U D f i e l d o f f i c e s t o d i r e c t l y i n p u t d a t a r e c e i v e d f r o m t h e f i n a n c i a l s t a t e m e n t s i n t o t h e i r c o m p u t e r s y s t e m w i t h o u t a n y i n t e r p r e t a t i o n o f t h e a c c o u n t s . T h e r e f o r e , t h e c h a r t o f a c c o u n t s h a s a d i r e c t r e l a t i o n s h i p t o t h e M I P S s y s t e m .

2 - 5 . M I N I M U M NUMBER O F B A N K ACCOUNTS

U n d e r t e r m s o f t h e r e g u l a t o r y a g r e e m e n t , e a c h P r o j e c t m u s t m a i n t a i n i n F e d e r a l l y i n s u r e d b a n k s , t h e f o l l o w i n g m i n i m u m n u m b e r o f b a n k a c c o u n t s :

o R e g u l a r O p e r a t i n g A c c o u n t

o R e p l a c e m e n t R e s e r v e ( H e l d b y t h e m o r t g a g e e , e x c e p t f o r S e c t i o n 2 0 2 s )

o T e n a n t S e c u r i t y D e p o s i t A c c o u n t ( O n l y i f s e c u r i t y d e p o s i t s a r e r e c e i v e d )

o R e s i d u a l R e c e i p t s A c c o u n t ( H e l d b y m o r t g a g e e , e x c e p t f o r S e c t i o n 2 0 2 )

2 - 3 5 / 9 2 4 3 7 0 . 2 R E V - 1 C H G - 1

2 - 6 . R E G U L A R O P E R AT I N G ACCOUNT

A . T h e R e g u l a r O p e r a t i n g a c c o u n t i s a g e n e r a l o p e r a t i n g a c c o u n t f o r t h e p r o j e c t w h i c h i s u s e d f o r d e p o s i t i n g r e n t a l r e c e i p t s a n d o t h e r r e c e i v a b l e s n o t s p e c i f i c a l l y d e s i g n a t e d f o r t h e S e c u r i t y D e p o s i t s A c c o u n t . T h e a c c o u n t a l s o i s u s e d t o p a y o p e r a t i n g e x p e n s e s o f g e n e r a l a d m i n i s t r a t i o n i n c l u d i n g m o r t g a g e p a y m e n t s , m a n a g e m e n t f e e s , u t i l i t i e s a n d m a i n t e n a n c e . T h e R e g u l a t o r y A g r e e m e n t s t a t e s t h a t t h e f u n d s m u s t b e m a i n t a i n e d i n a s e p a r a t e a c c o u n t . H o w e v e r ,

* t h i s p a r a g r a p h s u s p e n d s t h e o p e r a t i o n a n d e f f e c t o f t h i s R e g u l a t o r y A g r e e m e n t p r o v i s i o n b y a u t h o r i z i n g t h e m a n a g e m e n t a g e n t t o h o l d f u n d s i n a c e n t r a l i z e d a c c o u n t , u p t o o r e x c e e d i n g $ 1 0 0 , 0 0 0 , i n i n s t i t u t i o n s u n d e r t h e c o n t r o l o f , a n d w h o s e d e p o s i t s a r e i n s u r e d b y , t h e F e d e r a l D e p o s i t I n s u r a n c e C o r p o r a t i o n , N a t i o n a l C r e d i t U n i o n A s s o c i a t i o n , o r o t h e r U . S . g o v e r n m e n t i n s u r a n c e c o r p o r a t i o n s u n d e r t h e f o l l o w i n g c o n d i t i o n s :

1 . M a n a g i n g a g e n t s m u s t d e t e r m i n e t h a t t h e f i n a n c i a l i n s t i t u t i o n h a s a r a t i n g c o n s i s t e n t a t a l l t i m e s w i t h c u r r e n t m i n i m a l l y a c c e p t a b l e r a t i n g s a s e s t a b l i s h e d a n d p u b l i s h e d b y G o v e r n m e n t N a t i o n a l M o r t g a g e A s s o c i a t i o n ( G N M A ) .

2 . T h e m a n a g i n g a g e n t m u s t m o n i t o r t h e i n s t i t u t i o n ' s r a t i n g s n o l e s s t h a n o n a q u a r t e r l y b a s i s , a n d c h a n g e i n s t i t u t i o n s w h e n n e c e s s a r y . T h e m a n a g i n g a g e n t m u s t d o c u m e n t t h e r a t i n g s o f t h e i n s t i t u t i o n w h e r e t h e f u n d s a r e d e p o s i t e d a n d m a i n t a i n t h e

CFS | 136

documentation in the administrative record for three years, including the current year.

12/95 2-4 4370.2 REV-1 CHG-1

* 4. Deposits to and disbursements from the centralized account must clearly be traceable to each project. The actual cash position of each and every project in the centralized account must be easily identifiable at all times without exception.

* 5. The managing agent must allow a project owner to require, at any time, that the particular owner's funds be kept isolated and separate from the funds of other projects held by the agent; that is, at all times an owner is to have the prerogative of not participating in the centralized account arrangement or of withdrawing from such an arrangement.

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d o c u m e n t a t i o n i n t h e a d m i n i s t r a t i v e r e c o r d f o r t h r e e y e a r s , i n c l u d i n g t h e c u r r e n t y e a r .

* 3 . I n t h e e v e n t t h a t t h e m a n a g i n g a g e n t f a i l s t o f o l l o w t h e s e p r o c e d u r e s a n d t h e b a n k f a i l s , t h e o w n e r / m a n a g i n g a g e n t w i l l b e e x p e c t e d t o m a k e u p l o s s e s s u s t a i n e d b y t h e v a r i o u s p r o j e c t a c c o u n t s h e l d b y t h e f a i l e d b a n k .

1 2 / 9 5 2 - 4

4 3 7 0 . 2 R E V - 1 C H G - 1

4 . D e p o s i t s t o a n d d i s b u r s e m e n t s f r o m t h e c e n t r a l i z e d a c c o u n t m u s t c l e a r l y b e t r a c e a b l e t o e a c h p r o j e c t . T h e a c t u a l c a s h p o s i t i o n o f e a c h a n d e v e r y p r o j e c t i n t h e c e n t r a l i z e d a c c o u n t m u s t b e e a s i l y i d e n t i f i a b l e a t a l l t i m e s w i t h o u t e x c e p t i o n .

5 . T h e m a n a g i n g a g e n t m u s t a l l o w a p r o j e c t o w n e r t o r e q u i r e , a t a n y t i m e , t h a t t h e p a r t i c u l a r o w n e r ' s f u n d s b e k e p t i s o l a t e d a n d s e p a r a t e f r o m t h e f u n d s o f o t h e r p r o j e c t s h e l d b y t h e a g e n t ; t h a t i s , a t a l l t i m e s a n o w n e r i s t o h a v e t h e p r e r o g a t i v e o f n o t p a r t i c i p a t i n g i n t h e c e n t r a l i z e d a c c o u n t a r r a n g e m e n t o r o f w i t h d r a w i n g f r o m s u c h a n a r r a n g e m e n t .

NOTE: T h e a b o v e l a n g u a g e i s n o t d e e m e d a m o d i f i c a t i o n o f t h e R e g u l a t o r y A g r e e m e n t . T h e r e f o r e , H U D r e s e r v e s t h e r i g h t t o i n v o k e t h i s R e g u l a t o r y A g r e e m e n t p r o v i s i o n a n d m a k e i t o p e r a t i o n a l i n t h e f u t u r e t h r o u g h n o t i c e o r h a n d b o o k c h a n g e , i f i t i s d e t e r m i n e d t h a t s u c h a p o l i c y i s n e c e s s a r y o r d e s i r a b l e .

* B . S u b s i d i a r y C e n t r a l i z e d A c c o u n t s . M a n y b u s i n e s s e s f i n d i t c o n v e n i e n t t o m a i n t a i n s e p a r a t e , s u b s i d i a r y a c c o u n t s f o r p a y r o l l . S e p a r a t e p a y r o l l a c c o u n t s u s u a l l y f a c i l i t a t e a u d i t i n g a n d r e c o r d k e e p i n g , p a r t i c u l a r l y w h e r e f r e q u e n t d e p o s i t s a r e m a d e t o t h e s p e c i a l e s c r o w s r e q u i r e d f o r p a y r o l l w i t h h o l d i n g t a x e s . T h e D e p a r t m e n t h a s d e c i d e d t o a l l o w t h e e s t a b l i s h m e n t o f s e p a r a t e , s u b s i d i a r y p a y r o l l a c c o u n t s w i t h i n t h e c e n t r a l i z e d a c c o u n t a r r a n g e m e n t .

2 - 5 1 2 / 9 5 4 3 7 0 . 2 R E V - 1 C H G - 1

* C . S p e c i a l F e e s . E s t a b l i s h i n g a c e n t r a l i z e d a c c o u n t e l i m i n a t e s s o m e s t a f f r e s o u r c e r e q u i r e m e n t s f o r m a n a g i n g a g e n t s . F o r e x a m p l e , s e p a r a t e c h e c k s d o n o t n e e d t o b e m a i n t a i n e d f o r e a c h p r o j e c t . F e w e r c h e c k s n e e d t o b e i s s u e d b e c a u s e o n e v e n d o r , m o r t g a g e e , o r t r a d e a c c o u n t c a n b e p a i d w i t h o n e c h e c k t h a t c o v e r s i n v o i c e s f o r s e v e r a l p r o j e c t s . B y i n c r e a s i n g p r o d u c t i v i t y a n d e f f i c i e n c y a n d b y r e d u c i n g o v e r h e a d e x p e n s e s , m a n a g i n g a g e n t s a r e a b l e t o a c h i e v e h i g h e r p r o f i t m a r g i n s w h e n t h e y u s e a c e n t r a l i z e d a c c o u n t . F o r t h i s r e a s o n , t h e D e p a r t m e n t g e n e r a l l y d i s c o u r a g e s i n c r e a s i n g a m a n a g i n g a g e n t ' s f e e w h e n t h e r a t i o n a l e f o r t h e f e e i n c r e a s e i s a c e n t r a l i z e d a c c o u n t . W h e r e a m a n a g i n g a g e n t h a s a d o p t e d c e r t a i n i n v e s t m e n t s t r a t e g i e s r e q u i r i n g a g r e a t d e a l o f s t a f f t i m e i n o r d e r t o o p t i m i z e i n t e r e s t e a r n e d o n f u n d s h e l d i n c e n t r a l i z e d a c c o u n t s , a t t h e d i s c r e t i o n o f t h e l o c a l H U D O f f i c e , t h e m a n a g i n g a g e n t c o u l d b e p e r m i t t e d a c a s h m a n a g e m e n t f e e n o t t o e x c e e d 1 % p e r y e a r b a s e d o n t h e a v e r a g e o f f u n d s i n v e s t e d .

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2-7. REPLACEMENT RESERVE

A. The Replacement Reserve account provides cash for the replacement of capital items. Generally, those items are major capital investments such as heating, ventilation, air conditioning, re-

plumbing, roofing, sprinkler systems, etc. The reserve is not intended to pay for routine maintenance costs. The regulatory agreement establishes the requirements for the Replacement Reserve account.

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* D . S e c t i o n 8 D e p o s i t s . S e c t i o n 8 r e c e i p t s m a y b e d e p o s i t e d d i r e c t l y i n t o c e n t r a l i z e d a c c o u n t s ( w i t h o u t p a s s i n g t h r o u g h a p r o j e c t ' s s e p a r a t e b a n k a c c o u n t ) p r o v i d e d t h e a m o u n t s o f t h e S e c t i o n 8 f u n d s a r e c l e a r l y i d e n t i f i e d a s b e l o n g i n g t o e a c h p r o j e c t a t a l l t i m e s .

E . A l l d i s b u r s e m e n t s f r o m t h e R e g u l a r O p e r a t i n g A c c o u n t ( i n c l u d i n g c h e c k s , w i r e t r a n s f e r s a n d c o m p u t e r g e n e r a t e d d i s b u r s e m e n t s ) m u s t b e s u p p o r t e d b y a p p r o v e d i n v o i c e s / b i l l s o r o t h e r s u p p o r t i n g d o c u m e n t a t i o n . T h e r e q u e s t f o r p r o j e c t f u n d s s h o u l d o n l y b e u s e d t o m a k e m o r t g a g e p a y m e n t s , m a k e r e q u i r e d d e p o s i t s t o t h e R e s e r v e f o r R e p l a c e m e n t s , p a y r e a s o n a b l e e x p e n s e s n e c e s s a r y f o r t h e o p e r a t i o n a n d m a i n t e n a n c e o f t h e p r o j e c t , p a y d i s t r i b u t i o n s o f s u r p l u s c a s h p e r m i t t e d a n d r e p a y o w n e r a d v a n c e s a u t h o r i z e d b y H U D .

1 2 / 9 5 2 - 6 4 3 7 0 . 2 R E V - 1

F. A n i n d e p e n d e n t p u b l i c a c c o u n t a n t ( I P A ) a u d i t s t h e b o o k s a n d r e c o r d s o f t h e m o r t g a g o r t o f u r n i s h a n o p i n i o n o n t h e a n n u a l f i n a n c i a l s t a t e m e n t s . A s p a r t o f t h e I P A ' s a u d i t , t h e a c c o u n t a n t w i l l c o n f i r m , d i r e c t l y w i t h t h e b a n k t h e c u r r e n t b a l a n c e i n t h e R e g u l a r O p e r a t i n g a c c o u n t , p e r f o r m a r e c o n c i l i a t i o n b e t w e e n t h e a m o u n t s h o w n o n t h e b o o k s a n d t h e a m o u n t r e p o r t e d b y t h e b a n k , a s w e l l a s e x a m i n e s u p p o r t i n g d o c u m e n t a t i o n a u t h o r i z i n g t h e d i s b u r s e m e n t s o f f u n d s f r o m t h e a c c o u n t .

2 - 7 . R E P L A C E M E N T R E S E RV E

A . T h e R e p l a c e m e n t R e s e r v e a c c o u n t p r o v i d e s c a s h f o r t h e r e p l a c e m e n t o f c a p i t a l i t e m s . G e n e r a l l y , t h o s e i t e m s a r e m a j o r c a p i t a l i n v e s t m e n t s s u c h a s h e a t i n g , v e n t i l a t i o n , a i r c o n d i t i o n i n g , r e - p l u m b i n g , r o o f i n g , s p r i n k l e r s y s t e m s , e t c . T h e r e s e r v e i s n o t i n t e n d e d t o p a y f o r r o u t i n e m a i n t e n a n c e c o s t s . T h e r e g u l a t o r y a g r e e m e n t e s t a b l i s h e s t h e r e q u i r e m e n t s f o r t h e R e p l a c e m e n t R e s e r v e a c c o u n t .

B . T h e r e g u l a t o r y a g r e e m e n t s t a t e s t h a t t h e r e s e r v e m u s t b e m a i n t a i n e d i n a s e p a r a t e a c c o u n t w i t h t h e m o r t g a g e e o r i n a s a f e a n d r e s p o n s i b l e d e p o s i t o r y d e s i g n a t e d b y t h e m o r t g a g e e . C e r t a i n S e c t i o n 8 p r o j e c t s a r e r e q u i r e d t o h a v e r e p l a c e m e n t r e s e r v e s i n v e s t e d i n i n t e r e s t b e a r i n g F e d e r a l l y i n s u r e d s e c u r i t i e s o r a c c o u n t s .

C. T h e a m o u n t a n d f r e q u e n c y o f d e p o s i t s t o t h e R e p l a c e m e n t R e s e r v e a c c o u n t i s r e g u l a t e d b y t h e r e g u l a t o r y a g r e e m e n t . T h e r e s e r v e i s f u n d e d f r o m t w o s o u r c e s , a l u m p s u m d e p o s i t m a d e a t t h e t i m e o f l o a n c l o s i n g a n d m o n t h l y d e p o s i t s m a d e a s p a r t o f t h e m o n t h l y m o r t g a g e p a y m e n t s .

2 - 7 5 / 9 2 4 3 7 0 . 2 R E V - 1

D. A l l r e q u e s t s , b y t h e o w n e r , f o r w i t h d r a w a l s f r o m t h e R e p l a c e m e n t R e s e r v e a c c o u n t m u s t b e i n w r i t i n g a n d s u p p o r t e d b y i n v o i c e s s h o w i n g w h a t w a s p u r c h a s e d a n d t h e c o s t o f t h e p u r c h a s e . T h e r e q u e s t m u s t l i s t t h e i t e m s f o r w h i c h t h e w i t h d r a w a l i s r e q u e s t e d , t h e n u m b e r o f e a c h i t e m a n d t h e d o l l a r a m o u n t r e q u e s t e d f o r e a c h

CFS | 138

item.

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is to identify any available cash to be distributed to project owners or transferred to the Residual Receipts account.

1. The payment of all sums due under the terms of any mortgage, all amounts required for funded reserve accounts, and all obligations of the project, and

2. The segregation of an amount equal to the aggregate of all special funds required to be maintained by the project and the segregation of all tenant security deposits held.

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i t e m .

E . A n i n d e p e n d e n t p u b l i c a c c o u n t a n t ( I P A ) a u d i t s t h e b o o k s a n d r e c o r d s o f t h e m o r t g a g o r t o f u r n i s h a n o p i n i o n o n t h e a n n u a l f i n a n c i a l s t a t e m e n t s . A s p a r t o f t h e I P A ' s a u d i t , t h e a c c o u n t a n t w i l l c o n f i r m , d i r e c t l y w i t h t h e m o r t g a g e e ( o r b a n k , i n t h e c a s e o f S e c t i o n 2 0 2 p r o j e c t s ) , t h e c u r r e n t b a l a n c e i n t h e R e p l a c e m e n t R e s e r v e a c c o u n t , p e r f o r m a r e c o n c i l i a t i o n b e t w e e n t h e a m o u n t s h o w n o n t h e b o o k s a n d t h e a m o u n t r e p o r t e d b y t h e m o r t g a g e e o r b a n k , a s w e l l a s e x a m i n e s u p p o r t i n g d o c u m e n t a t i o n a u t h o r i z i n g t h e r e l e a s e s o f f u n d s f r o m t h e r e s e r v e .

2 - 8 . S U R P L U S C A S H A N D R E S I D U A L R E C E I P T S . A p p e n d i x 2 , F o r m H U D - 9 3 4 8 6 C o m p u t a t i o n o f S u r p l u s C a s h D i s t r i b u t i o n s a n d R e s i d u a l R e c e i p t s . c o n t a i n s a w o r k s h e e t t o b e u s e d f o r t h e C o m p u t a t i o n o f S u r p l u s C a s h , D i s t r i b u t i o n s a n d R e s i d u a l R e c e i p t s . T h e p u r p o s e o f t h i s w o r k s h e e t

5 / 9 2 2 - 8 4 3 7 0 . 2 R E V - 1

i s t o i d e n t i f y a n y a v a i l a b l e c a s h t o b e d i s t r i b u t e d t o p r o j e c t o w n e r s o r t r a n s f e r r e d t o t h e R e s i d u a l R e c e i p t s a c c o u n t .

A . B a s i c a l l y , s u r p l u s c a s h i s t h e c a s h r e m a i n i n g a f t e r a l l n e c e s s a r y a n d r e a s o n a b l e e x p e n s e s o f t h e p r o j e c t h a v e b e e n p a i d o r f u n d s h a v e b e e n s e t - a s i d e f o r s u c h p a y m e n t . S p e c i f i c a l l y , t h e r e g u l a t o r y a g r e e m e n t d e f i n e s s u r p l u s c a s h a s a n y c a s h r e m a i n i n g a f t e r :

1 . T h e p a y m e n t o f a l l s u m s d u e u n d e r t h e t e r m s o f a n y m o r t g a g e , a l l a m o u n t s r e q u i r e d f o r f u n d e d r e s e r v e a c c o u n t s , a n d a l l o b l i g a t i o n s o f t h e p r o j e c t , a n d

2 . T h e s e g r e g a t i o n o f a n a m o u n t e q u a l t o t h e a g g r e g a t e o f a l l s p e c i a l f u n d s r e q u i r e d t o b e m a i n t a i n e d b y t h e p r o j e c t a n d t h e s e g r e g a t i o n o f a l l t e n a n t s e c u r i t y d e p o s i t s h e l d .

B . S u r p l u s c a s h i s c o m p u t e d a s o f t h e e n d o f a n a n n u a l p e r i o d . H o w e v e r , s u r p l u s c a s h m a y b e c a l c u l a t e d s e m i a n n u a l l y i f t h e p r o j e c t ' s r e g u l a t o r y a g r e e m e n t p e r m i t s . S u r p l u s c a s h i s d e t e r m i n e d b y s u b t r a c t i n g c e r t a i n a c c o u n t s p a y a b l e f r o m a v a i l a b l e u n r e s t r i c t e d c a s h a n d l i k e i t e m s .

C. O n p r o f i t - m o t i v a t e d p r o j e c t s ( P M ) , a l l s u r p l u s c a s h i s a v a i l a b l e f o r d i s t r i b u t i o n t o p r o j e c t o w n e r s . O n m o s t n o n - p r o f i t ( N P ) p r o j e c t s , o n w h i c h d i s t r i b u t i o n s a r e n o t p e r m i t t e d , t h e r e g u l a t o r y a g r e e m e n t r e q u i r e s t h a t a l l s u r p l u s c a s h a v a i l a b l e a s o f t h e e n d o f a n a n n u a l f i s c a l p e r i o d b e d e p o s i t e d i n t h e R e s i d u a l R e c e i p t s a c c o u n t . O n l i m i t e d d i v i d e n d ( L D ) p r o j e c t s , t h e r e g u l a t o r y a g r e e m e n t p r o v i d e s t h a t s u r p l u s c a s h b e u s e d f i r s t t o p a y d i s t r i b u t i o n s ( u p t o t h e a m o u n t s p e c i f i e d i n t h e p r o j e c t ' s r e g u l a t o r y a g r e e m e n t ) , a n d t h a t a n y r e m a i n i n g s u r p l u s c a s h b e d e p o s i t e d i n t h e R e s i d u a l R e c e i p t s a c c o u n t . T h e R e g u l a t o r y A g r e e m e n t a n d a n y s u b s i d y c o n t r a c t s s h o u l d b e r e v i e w e d i n o r d e r t o t e s t c a s h r e s t r i c t i o n s f o r e a c h p a r t i c u l a r p r o j e c t .

2 - 9 5 / 9 2 4 3 7 0 . 2 R E V - 1

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or from the residual receipts account must be separately displayed in the Statement of Cash Flows.

2-9. SECURITY DEPOSIT ACCOUNT

D. T h e r e g u l a t o r y a g r e e m e n t p r o v i d e s t h a t a n y d e p o s i t d u e t h e r e s i d u a l r e c e i p t s f u n d b e d e p o s i t e d w i t h t h e m o r t g a g e e w i t h i n 6 0 d a y s a f t e r t h e e n d o f t h e f i s c a l y e a r i n w h i c h t h e r e c e i p t s w e r e g e n e r a t e d .

E . F u n d s m a y b e r e l e a s e d f r o m t h e r e s i d u a l r e c e i p t s f u n d s o n l y w i t h p r i o r w r i t t e n a p p r o v a l f r o m H U D . H U D h a s t h e a u t h o r i t y t o a p p r o v e , m o d i f y , o r r e j e c t t h e o w n e r ' s p r o p o s e d u s a g e f o r r e s i d u a l r e c e i p t s .

F o r c e r t a i n S e c t i o n 8 a s s i s t e d p r o j e c t s , w h e n a p r o j e c t ' s S e c t i o n 8 c o n t r a c t i s t e r m i n a t e d o r e x p i r e s a n d i s n o t r e n e w e d , H U D m a y r e q u e s t t h e p r o j e c t o w n e r o r m a n a g i n g a g e n t t o r e t u r n t o H U D t h e f u n d s r e m a i n i n g i n t h e R e s i d u a l R e c e i p t s a c c o u n t . T h e s e a m o u n t s m a y r e p r e s e n t a l o s s c o n t i n g e n c y a s d e f i n e d b y F A S B N o . 5 A c c o u n t i n g f o r C o n t i n g e n c i e s . I t i s r e a s o n a b l y p o s s i b l e ( i . e . , t h e c h a n c e o f t h e f u t u r e e v e n t o r e v e n t s o c c u r r i n g i s m o r e t h a n r e m o t e b u t l e s s t h a n l i k e l y ) t h a t H U D w i l l r e q u e s t a n y b a l a n c e o f r e s i d u a l r e c e i p t s t o b e t r a n s f e r r e d b a c k t o H U D .

F. A n i n d e p e n d e n t p u b l i c a c c o u n t a n t ( I P A ) a u d i t s t h e b o o k s a n d r e c o r d s o f t h e m o r t g a g o r t o r e n d e r a n o p i n i o n o n t h e a n n u a l f i n a n c i a l s t a t e m e n t s . A s p a r t o f t h e I P A ' s a u d i t , t h e a c c o u n t a n t w i l l c o n f i r m , d i r e c t l y w i t h t h e m o r t g a g e e o r b a n k , t h e c u r r e n t b a l a n c e i n t h e R e s i d u a l R e c e i p t s a c c o u n t , p e r f o r m a r e c o n c i l i a t i o n b e t w e e n t h e a m o u n t s h o w n o n t h e b o o k s a n d t h e a m o u n t r e p o r t e d b y t h e m o r t g a g e e o r b a n k , a s w e l l a s e x a m i n e s u p p o r t i n g d o c u m e n t a t i o n a u t h o r i z i n g t h e r e l e a s e s o f f u n d s f r o m t h e s e a c c o u n t s .

G. T h e a m o u n t t r a n s f e r r e d t o t h e r e s i d u a l r e c e i p t s a c c o u n t s h o u l d b e d e b i t e d t o t h a t a c c o u n t a n d c r e d i t e d t o t h e G e n e r a l O p e r a t i n g a c c o u n t . T h e n o t e s t o t h e f i n a n c i a l s t a t e m e n t s s h o u l d i n c l u d e a d i s c u s s i o n o f r e s i d u a l r e c e i p t s a c c o u n t a c t i v i t y a n d a d i s c l o s u r e t h a t u s e o f r e s i d u a l r e c e i p t s a c c o u n t f u n d s i s c o n t i n g e n t u p o n H U D ' s p r i o r w r i t t e n a p p r o v a l . I n a d d i t i o n , a n y f u n d s t r a n s f e r r e d t o

5 / 9 2 2 - 1 0 4 3 7 0 . 2 R E V - 1

o r f r o m t h e r e s i d u a l r e c e i p t s a c c o u n t m u s t b e s e p a r a t e l y d i s p l a y e d i n t h e S t a t e m e n t o f C a s h F l o w s .

2 - 9 . S E C U R I T Y D E P O S I T ACCOUNT

A . I n i n s t a n c e s w h e r e t h e R e g u l a t o r y A g r e e m e n t a l l o w s t h e r e c e i p t o f s e c u r i t y d e p o s i t s f r o m p r o j e c t t e n a n t s , a s e p a r a t e b a n k a c c o u n t s h o u l d b e e s t a b l i s h e d t o m a i n t a i n t h e s e f u n d s . I n a d d i t i o n , i n d i v i d u a l s t a t e s h a v e s p e c i f i c r e g u l a t i o n s g o v e r n i n g t h e h a n d l i n g o f t e n a n t s e c u r i t y d e p o s i t s a n d t h e s e r e g u l a t i o n s s h o u l d b e c o m p l i e d w i t h . T h e r e s h a l l b e o n e S e c u r i t y D e p o s i t A c c o u n t p e r p r o j e c t . F u n d s i n t h e s i n g l e S e c u r i t y D e p o s i t A c c o u n t m u s t n o t b e c o m m i n g l e d w i t h a n y o t h e r f u n d s , e . g . , s e c u r i t y d e p o s i t f u n d s o f o t h e r p r o j e c t s , o p e r a t i n g a c c o u n t s , m a n a g i n g a g e n t a c c o u n t s , e t c . I n c a s e s w h e r e t h e f u n d s i n t h e p r o j e c t ' s S e c u r i t y D e p o s i t b a n k a c c o u n t e x c e e d t h e a m o u n t t h a t m a y b e i n s u r e d b y t h e f e d e r a l g o v e r n m e n t ( $ 1 0 0 , 0 0 0 / b a n k ) , t h e p r o j e c t m a y o p e n a n o t h e r b a n k a c c o u n t f o r t h e e x c e s s a m o u n t s .

CFS | 140

2-10. DISTRIBUTIONS TO OWNERS

A distribution is any withdrawal or taking of cash or any assets of the project other than for the payment of reasonable expenses necessary to

2-11 5/92 4370.2 REV-1

the operation and maintenance of the project. The regulatory agreement for the project defines distributions and the circumstances under which distributions may be made from surplus cash.

Exhibit 2-1 presents guidelines for distribution allowances by project type. These are general guidelines for owner distributions and should be verified in the project regulatory agreement.

profit (NP) projects. On limited dividend (LD) or profit-motivated (PM) projects, the regulatory agreement provides that

B . A l l d i s b u r s e m e n t s f r o m t h e S e c u r i t y D e p o s i t a c c o u n t m u s t b e s u p p o r t e d b y a p p r o v e d i n v o i c e s / b i l l s o r o t h e r d o c u m e n t a t i o n . D i s b u r s e m e n t s m u s t b e o n l y f o r r e f u n d s t o t e n a n t s a n d f o r p a y m e n t o f a p p r o p r i a t e e x p e n s e s i n c u r r e d b y t h e t e n a n t .

C. A n i n d e p e n d e n t p u b l i c a c c o u n t a n t ( I P A ) e x a m i n e s t h e b o o k s a n d r e c o r d s o f t h e m o r t g a g o r t o r e n d e r a n o p i n i o n o n t h e a n n u a l f i n a n c i a l s t a t e m e n t s . A s p a r t o f t h e I P A ' s a u d i t , t h e a c c o u n t a n t w i l l c o n f i r m , d i r e c t l y w i t h t h e b a n k , t h e c u r r e n t b a l a n c e i n t h e S e c u r i t y D e p o s i t a c c o u n t , p e r f o r m a r e c o n c i l i a t i o n b e t w e e n t h e a m o u n t s h o w n o n t h e b o o k s a n d t h e a m o u n t r e p o r t e d b y t h e b a n k , a s w e l l a s e x a m i n e s u p p o r t i n g d o c u m e n t a t i o n a u t h o r i z i n g t h e r e l e a s e s o f f u n d s f r o m t h e s e a c c o u n t s .

2 - 1 0 . D I S T R I B U T I O N S T O OWNERS

A d i s t r i b u t i o n i s a n y w i t h d r a w a l o r t a k i n g o f c a s h o r a n y a s s e t s o f t h e p r o j e c t o t h e r t h a n f o r t h e p a y m e n t o f r e a s o n a b l e e x p e n s e s n e c e s s a r y t o

2 - 1 1 5 / 9 2 4 3 7 0 . 2 R E V - 1

t h e o p e r a t i o n a n d m a i n t e n a n c e o f t h e p r o j e c t . T h e r e g u l a t o r y a g r e e m e n t f o r t h e p r o j e c t d e f i n e s d i s t r i b u t i o n s a n d t h e c i r c u m s t a n c e s u n d e r w h i c h d i s t r i b u t i o n s m a y b e m a d e f r o m s u r p l u s c a s h .

F o r m H U D - 9 3 4 8 6 p r o v i d e s t h e b a s i s f o r c a l c u l a t i n g s u r p l u s c a s h . T h e t e r m d i s t r i b u t i o n s i n c l u d e s , f o r e x a m p l e , s u p e r v i s o r y f e e s p a i d t o g e n e r a l p a r t n e r s a n d a n y s a l a r i e s o r o t h e r f e e s p a i d t o t h e s p o n s o r o r m o r t g a g o r , u n l e s s t h o s e s a l a r i e s o r f e e s h a v e b e e n a p p r o v e d b y H U D a s e s s e n t i a l t o t h e o p e r a t i o n o f a p r o j e c t ( e . g . , a m a n a g e m e n t f e e a p p r o v e d b y H U D a n d p a i d o n a n O w n e r - M a n a g e d p r o j e c t ) .

M o n e y t a k e n f r o m s y n d i c a t i o n p r o c e e d s t o p a y f o r s u c h e x p e n s e s , f o r e x a m p l e , a r e n o t c o n s i d e r e d d i s t r i b u t i o n s . P a y m e n t s o f r e s i d u a l r e c e i p t s n o t e s m a y o r m a y n o t b e c o n s i d e r e d d i s t r i b u t i o n s . T h e c l a s s i f i c a t i o n o f t h e s e p a y m e n t s d e p e n d s o n t h e f i n a n c i a l c o n d i t i o n o f t h e p r o j e c t a n d d e c i s i o n s m a d e b y t h e H U D O f f i c e .

E x h i b i t 2 - 1 p r e s e n t s g u i d e l i n e s f o r d i s t r i b u t i o n a l l o w a n c e s b y p r o j e c t t y p e . T h e s e a r e g e n e r a l g u i d e l i n e s f o r o w n e r d i s t r i b u t i o n s a n d s h o u l d b e v e r i f i e d i n t h e p r o j e c t r e g u l a t o r y a g r e e m e n t .

A . S u r p l u s c a s h d i s t r i b u t i o n s m a y n o t b e p a i d f r o m b o r r o w e d f u n d s , p r i o r t o t h e c o m p l e t i o n o f t h e p r o j e c t o r w h e n a p r o j e c t i s i n d e f a u l t o r u n d e r a f o r b e a r a n c e a g r e e m e n t . I f t h e o w n e r t a k e s d i s t r i b u t i o n s w h e n t h e p r o j e c t i s i n d e f a u l t o r w h e n t h e p r o j e c t i s i n a n o n - s u r p l u s c a s h p o s i t i o n , t h e o w n e r i s s u b j e c t t o c r i m i n a l a n d / o r c i v i l p e n a l t i e s . ( S e e A p p e n d i x 1 - C r i m i n a l S t a t u t e s f o r a l i s t i n g o f c i v i l a n d c r i m i n a l s t a t u t e s ) .

T h e f i r s t y e a r ' s d i s t r i b u t i o n m a y n o t b e p a i d u n t i l a l l r e q u i r e d c o s t c e r t i f i c a t i o n s u b m i s s i o n s h a v e b e e n m a d e . D i s t r i b u t i o n s a r e e a r n e d b e g i n n i n g w i t h t h e d a y f o l l o w i n g t h e c u t - o f f d a t e f o r c o s t c e r t i f i c a t i o n . D i s t r i b u t i o n s t o o w n e r s a r e n o t p e r m i t t e d o n n o n - p r o f i t ( N P ) p r o j e c t s . O n l i m i t e d d i v i d e n d ( L D ) o r p r o f i t - m o t i v a t e d (PM) p r o j e c t s , t h e r e g u l a t o r y a g r e e m e n t p r o v i d e s t h a t

CFS | 141

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distributions can be paid without prior HUD approval only:

o if paid from surplus cash,

o if paid as of and after the end of an annual or, if specified in the regulatory agreement, semiannual fiscal period.

D. Some regulatory agreements permit distributions to be paid out of surplus cash available as of the end of a semi-annual period. Before determining whether surplus cash is available for

2-13 5/92 4370.2 REV-1

E. On limited distribution projects, the right to distribution is cumulative. Authorized distributions for which surplus cash is not available must be shown as a liability of the project on the

5 / 9 2 2 - 1 2 4 3 7 0 . 2 R E V - 1

d i s t r i b u t i o n s c a n b e p a i d w i t h o u t p r i o r H U D a p p r o v a l o n l y :

o i f p a i d f r o m s u r p l u s c a s h ,

o i f p a i d a s o f a n d a f t e r t h e e n d o f a n a n n u a l o r , i f s p e c i f i e d i n t h e r e g u l a t o r y a g r e e m e n t , s e m i a n n u a l f i s c a l p e r i o d .

I n e f f e c t , s u r p l u s c a s h g e n e r a t e d a t t h e e n d o f o n e f i s c a l p e r i o d i s n o t a v a i l a b l e f o r d i s t r i b u t i o n u n t i l t h e n e x t f i s c a l p e r i o d . S t a t e d d i f f e r e n t l y , d i s t r i b u t i o n s p a i d o u t e a r l y i n f i s c a l y e a r 1 9 9 1 , f o r e x a m p l e , m a y n o t e x c e e d s u r p l u s c a s h a v a i l a b l e a s o f t h e e n d o f f i s c a l y e a r 1 9 9 0 .

B . A l l d i s t r i b u t i o n s m u s t b e c o m p u t e d a s o f t h e e n d o f t h e p e r i o d a n d o n l y a s p e r m i t t e d b y t h e l a w o f t h e a p p l i c a b l e j u r i s d i c t i o n . I f t h e o w n e r e l e c t s t o c o l l e c t d i s t r i b u t i o n s s e m i - a n n u a l l y , i f p e r m i t t e d b y t h e r e g u l a t o r y a g r e e m e n t , t h e n t h e o w n e r m u s t a l s o c o m p u t e s u r p l u s c a s h a s o f t h e e n d o f e a c h s e m i - a n n u a l f i s c a l p e r i o d . T h e s e c o m p u t a t i o n s a r e a u d i t e d a n d t h e F o r m ( s ) H U D - 9 3 4 8 6 a r e i n c l u d e d i n t h e a n n u a l r e p o r t . R e s t r i c t i o n s o n d i s t r i b u t i o n s d e p e n d o n t h e t y p e o f p r o j e c t ( i . e . , l i m i t e d d i v i d e n d o r p r o f i t m o t i v a t e d ) . T h e r e s t r i c t i o n s p l a c e d o n d i s t r i b u t i o n s a r e d i s c u s s e d i n m o r e d e t a i l i n t h e p r o j e c t ' s r e g u l a t o r y a g r e e m e n t .

C. O n p r o j e c t s o w n e d b y p r o f i t - m o t i v a t e d ( P M ) e n t i t i e s , d i s t r i b u t i o n s may b e p a i d u p t o t h e a m o u n t o f s u r p l u s c a s h a v a i l a b l e . F o r p r o j e c t s o w n e d b y l i m i t e d d i v i d e n d ( L D ) m o r t g a g o r s , d i s t r i b u t i o n s a r e s u b j e c t t o a n a d d i t i o n a l r e s t r i c t i o n . I n a n y o n e y e a r , d i s t r i b u t i o n s m a y n o t e x c e e d t h e a m o u n t e a r n e d t h a t y e a r p l u s a n y d i s t r i b u t i o n s u n p a i d f r o m p r e v i o u s y e a r s . I t s h o u l d b e n o t e d t h a t l i m i t e d d i v i d e n d m o r t g a g o r s a r e s u b j e c t t o b o t h t h i s l i m i t a t i o n a n d t h e s u r p l u s c a s h l i m i t a t i o n . S e e E x h i b i t 2 - 1 f o r m o r e s p e c i f i c i n f o r m a t i o n .

D. S o m e r e g u l a t o r y a g r e e m e n t s p e r m i t d i s t r i b u t i o n s t o b e p a i d o u t o f s u r p l u s c a s h a v a i l a b l e a s o f t h e e n d o f a s e m i - a n n u a l p e r i o d . B e f o r e d e t e r m i n i n g w h e t h e r s u r p l u s c a s h i s a v a i l a b l e f o r

2 - 1 3 5 / 9 2 4 3 7 0 . 2 R E V - 1

d i s t r i b u t i o n , t h e p r o j e c t b o o k s m u s t b e t e n t a t i v e l y c l o s e d i n a c c o r d a n c e w i t h t h e d i s t r i b u t i o n p e r i o d s t a t e d i n t h e r e g u l a t o r y a g r e e m e n t o r C o r p o r a t e C h a r t e r . I f a n o w n e r p a i d d i s t r i b u t i o n s f o l l o w i n g t h e e n d o f t h e f i r s t s i x m o n t h s o f t h e f i s c a l y e a r c o v e r e d b y t h e a n n u a l s t a t e m e n t , a s u r p l u s c a s h c o m p u t a t i o n r e p o r t e d a s o f t h e e n d o f t h a t s e m i - a n n u a l p e r i o d m u s t b e s u b m i t t e d w i t h t h e a n n u a l s t a t e m e n t . T h i s c o m p u t a t i o n w o u l d b e i n a d d i t i o n t o t h e c o m p u t a t i o n r e q u i r e d a s o f t h e e n d o f t h e f i s c a l y e a r .

E . O n l i m i t e d d i s t r i b u t i o n p r o j e c t s , t h e r i g h t t o d i s t r i b u t i o n i s c u m u l a t i v e . A u t h o r i z e d d i s t r i b u t i o n s f o r w h i c h s u r p l u s c a s h i s n o t a v a i l a b l e m u s t b e s h o w n a s a l i a b i l i t y o f t h e p r o j e c t o n t h e

CFS | 142

audited Statement of Financial Position (Balance Sheet) under Account No. 2140, Dividends or Distributions Payable - Current.

NOTE 2: If this is the case, the notes to the financial statements should so disclose. The IPA should note any waivers in the notes to the annual audit report.

F. Distributions may be made only if owners have been in compliance with all provisions of the Regulatory Agreement, including the requirement for the project to be in good repair and condition.

G. Form HUD-93486, Computation of Surplus Cash, Distributions and Residual Receipts, shall be used to compute distributions to owners.

5/92 2-14 4370.2 REV-1

Exhibit 2-1

Distributions Earned by Type of Project

Type of Project Annual Distribution Earned

and partially assisted projects (i.e., projects with more than 50 units and less than 20% assistance).

c. Elderly projects 6% of initial equity investment d. Non-elderly 10% of initial equity investment

a u d i t e d S t a t e m e n t o f F i n a n c i a l P o s i t i o n ( B a l a n c e S h e e t ) u n d e r A c c o u n t N o . 2 1 4 0 , D i v i d e n d s o r D i s t r i b u t i o n s P a y a b l e - C u r r e n t .

NOTE 1 : T h e a b o v e s t a t e m e n t s r e f l e c t t h e n o r m a l p o l i c y o n d i s t r i b u t i o n s . A n o w n e r m a y h a v e a g r e e d t o w a i v e p a y m e n t o f d i s t r i b u t i o n s a n d t o u s e a l l s u r p l u s c a s h t o r e p a y f l e x i b l e s u b s i d y g r a n t s / l o a n s . N e a r l y a l l f l e x i b l e s u b s i d y c o n t r a c t s c o n t a i n s u c h c l a u s e s . E v e n i f t h e p r o j e c t d i d n o t r e c e i v e F l e x i b l e S u b s i d y , t h e o w n e r m a y s t i l l h a v e a g r e e d t o w a i v e p a y m e n t o f d i s t r i b u t i o n s i n r e t u r n f o r H U D ' s a p p r o v a l o f o t h e r f o r m s o f m o r t g a g e r e l i e f ( e . g . , p r o v i s i o n a l w o r k o u t , m o d i f i c a t i o n , p a r t i a l p a y m e n t o f c l a i m , e t c . ) .

NOTE 2 : I f t h i s i s t h e c a s e , t h e n o t e s t o t h e f i n a n c i a l s t a t e m e n t s s h o u l d s o d i s c l o s e . T h e I P A s h o u l d n o t e a n y w a i v e r s i n t h e n o t e s t o t h e a n n u a l a u d i t r e p o r t .

F. D i s t r i b u t i o n s m a y b e m a d e o n l y i f o w n e r s h a v e b e e n i n c o m p l i a n c e w i t h a l l p r o v i s i o n s o f t h e R e g u l a t o r y A g r e e m e n t , i n c l u d i n g t h e r e q u i r e m e n t f o r t h e p r o j e c t t o b e i n g o o d r e p a i r a n d c o n d i t i o n .

G. F o r m H U D - 9 3 4 8 6 , C o m p u t a t i o n o f S u r p l u s C a s h , D i s t r i b u t i o n s a n d R e s i d u a l R e c e i p t s , s h a l l b e u s e d t o c o m p u t e d i s t r i b u t i o n s t o o w n e r s .

5 / 9 2 2 - 1 4 4 3 7 0 . 2 R E V - 1

E x h i b i t 2 - 1

D i s t r i b u t i o n s E a r n e d b y T y p e o f P r o j e c t

Ty p e o f P r o j e c t A n n u a l D i s t r i b u t i o n E a r n e d

1 . S e c t i o n 8 - N e w C o n s t r u c t i o n S u r p l u s C a s h p r o j e c t s w h o s e n o t i f i c a t i o n o f s e l e c t i o n w a s i s s u e d b e f o r e 1 1 / 5 / 7 9 a n d S e c t i o n 8 S u b s t a n t i a l R e h a b i l i t a t i o n p r o j e c t s w h o s e n o t i f i c a t i o n o f s e l e c t i o n w a s i s s u e d b e f o r e 2 / 2 0 / 8 0 .

2 . S e c t i o n 8 - N e w C o n s t r u c t i o n p r o j e c t s w h o s e n o t i f i c a t i o n o f s e l e c t i o n w a s i s s u e d o n o r a f t e r 1 1 / 5 / 7 9 a n d S e c t i o n 8 S u b s t a n t i a l R e h a b i l i t a t i o n p r o j e c t s w h o s e n o t i f i c a t i o n o f s e l e c t i o n w a s i s s u e d o n o r a f t e r 2 / 2 0 / 8 0 . a . N o n - p r o f i t b . S m a l l p r o j e c t s ( u n d e r 5 0 u n i t s )

a n d p a r t i a l l y a s s i s t e d p r o j e c t s ( i . e . , p r o j e c t s w i t h m o r e t h a n 50 u n i t s a n d l e s s t h a n 2 0 % a s s i s t a n c e ) .

c . E l d e r l y p r o j e c t s d . N o n - e l d e r l y

No d i s t r i b u t i o n p e r m i t t e d S u r p l u s C a s h

6% o f i n i t i a l e q u i t y i n v e s t m e n t 10% o f i n i t i a l e q u i t y i n v e s t m e n t

CFS | 143

3. Other projects. a. Profit-motivated (PM) Surplus Cash b. Limited dividend (LD) 6% of initial equity investment c. Non-profit (NP) No distribution permitted

Note: (1) Above represents general rules. Always check the amount specified in the regulatory agreement.

(2) Owners may have waived their rights to accrue or pay distributions in return for subsidies or mortgage relief. Be sure to check subsidy and mortgage relief contracts for such clauses.

2-15 5/92 4370.2 REV-1

2-11. REPAYMENT OF OWNER ADVANCES

surplus cash position will subject the owner to criminal and civil monetary penalties. (See Appendix 1, Criminal Statutes.)

1. Approval for scheduled repayment can be made for short- term operating advances made on behalf of the welfare of

the tenants (e.g., necessary emergency repairs, security measures), or to avoid a claim by the lender for insurance benefits, or default by the mortgagor under the mortgage, or in the payment of a project operating expense (e.g., taxes, utility bills).

2. Prior HUD approval is required for an owner to receive repayment on a monthly basis.

C. Periodically, project owners are required by HUD to make additional equity contributions to sustain the project. Such contributions are not repaid unless the agreement stipulates otherwise.

5/92 2-16 4370.2 REV-1 CHG-1

NOTE: While owner advances appear on the Statement of Financial Position in the Liabilities Section, (could be long

3 . O t h e r p r o j e c t s . a . P r o f i t - m o t i v a t e d ( P M ) b . L i m i t e d d i v i d e n d ( L D ) c . N o n - p r o f i t ( N P )

N o t e :

4 3 7 0 . 2 R E V - 1

S u r p l u s C a s h 6% o f i n i t i a l e q u i t y i n v e s t m e n t No d i s t r i b u t i o n p e r m i t t e d

(1) A b o v e r e p r e s e n t s g e n e r a l r u l e s . A l w a y s c h e c k t h e a m o u n t s p e c i f i e d i n t h e r e g u l a t o r y a g r e e m e n t .

(2) O w n e r s m a y h a v e w a i v e d t h e i r r i g h t s t o a c c r u e o r p a y d i s t r i b u t i o n s i n r e t u r n f o r s u b s i d i e s o r m o r t g a g e r e l i e f . Be s u r e t o c h e c k s u b s i d y a n d m o r t g a g e r e l i e f c o n t r a c t s f o r s u c h c l a u s e s .

2 - 1 5 5 / 9 2

2 - 1 1 . R E P A Y M E N T O F OWNER ADVANCES

A . A d v a n c e s m a d e f o r r e a s o n a b l e a n d n e c e s s a r y o p e r a t i n g e x p e n s e s may b e p a i d f r o m s u r p l u s c a s h a t t h e e n d o f t h e a n n u a l o r s e m i - a n n u a l p e r i o d . S u c h r e p a y m e n t i s n o t c o n s i d e r e d a n o w n e r d i s t r i b u t i o n . I t i s c o n s i d e r e d a r e p a y m e n t o f a d v a n c e s . R e p a y m e n t o f o w n e r a d v a n c e s w h e n t h e p r o j e c t i s i n a n o n - s u r p l u s c a s h p o s i t i o n w i l l s u b j e c t t h e o w n e r t o c r i m i n a l a n d c i v i l m o n e t a r y p e n a l t i e s . ( S e e A p p e n d i x 1 , C r i m i n a l S t a t u t e s . )

B . T o e n c o u r a g e o w n e r s t o m a k e a d v a n c e s t o p r o j e c t s i n c r i t i c a l s i t u a t i o n s , t h e D e p a r t m e n t m a y a p p r o v e o n a c a s e - b y - c a s e b a s i s r e q u e s t s t o m a k e a d v a n c e s a n d f o r r e p a y m e n t o f s u c h a d v a n c e s o n a m o n t h l y b a s i s . R e p a y m e n t s u n d e r t h i s p a r a g r a p h a r e n o t c o n s i d e r e d o w n e r d i s t r i b u t i o n s .

1 . A p p r o v a l f o r s c h e d u l e d r e p a y m e n t c a n b e m a d e f o r s h o r t - t e r m o p e r a t i n g a d v a n c e s m a d e o n b e h a l f o f t h e w e l f a r e o f t h e t e n a n t s ( e . g . , n e c e s s a r y e m e r g e n c y r e p a i r s , s e c u r i t y m e a s u r e s ) , o r t o a v o i d a c l a i m b y t h e l e n d e r f o r i n s u r a n c e b e n e f i t s , o r d e f a u l t b y t h e m o r t g a g o r u n d e r t h e m o r t g a g e , o r i n t h e p a y m e n t o f a p r o j e c t o p e r a t i n g e x p e n s e ( e . g . , t a x e s , u t i l i t y b i l l s ) .

2 . P r i o r H U D a p p r o v a l i s r e q u i r e d f o r a n o w n e r t o r e c e i v e r e p a y m e n t o n a m o n t h l y b a s i s .

3 . T h e s c h e d u l e d r e p a y m e n t m a y n o t b e m a d e i f i t w o u l d c a u s e a d e f a u l t o r , i f t h e p r o j e c t i s a l r e a d y i n d e f a u l t , t h e r e p a y m e n t m a y n o t b e m a d e i f i t w o u l d h a v e a n a d v e r s e e f f e c t o n a n e x i s t i n g w o r k o u t a g r e e m e n t .

C. P e r i o d i c a l l y , p r o j e c t o w n e r s a r e r e q u i r e d b y H U D t o m a k e a d d i t i o n a l e q u i t y c o n t r i b u t i o n s t o s u s t a i n t h e p r o j e c t . S u c h c o n t r i b u t i o n s a r e n o t r e p a i d u n l e s s t h e a g r e e m e n t s t i p u l a t e s o t h e r w i s e .

5 / 9 2 2 - 1 6 4 3 7 0 . 2 R E V - 1 C H G - 1

NOTE: W h i l e o w n e r a d v a n c e s a p p e a r o n t h e S t a t e m e n t o f F i n a n c i a l P o s i t i o n i n t h e L i a b i l i t i e s S e c t i o n , ( c o u l d b e l o n g

CFS | 144

term or short term), additional infusions of capital are reflected as Owner's Equity (i.e., 3000 series in the Chart of Accounts).

2-12. CASH MANAGEMENT CONTROLS

A. GENERAL

3. As insurance against loss, the owner or his designated agent must obtain a fidelity bond in an amount at least equal to

2-17 12/95 4370.2 REV-1

potential collections for two months. Blanket coverage should extend to all employees handling cash.

4. Numbered rent receipts shall be used and reconciled to actual collections.

5. The person making up deposits shall not handle the accounts receivable or the general ledger.

6. Disbursement checks shall be identified with all relevant account numbers and amounts applicable to each account when one check is for more than one invoice/bill.

7. The person preparing the payroll shall not handle the related pay checks.

8. Unissued checks should be locked up and access to checks should be restricted to a limited number of authorized personnel.

A. RECEIPT CONTROLS

1. Collections and all other funds held within an office, whether

t e r m o r s h o r t t e r m ) , a d d i t i o n a l i n f u s i o n s o f c a p i t a l a r e r e f l e c t e d a s O w n e r ' s E q u i t y ( i . e . , 3 0 0 0 s e r i e s i n t h e C h a r t o f A c c o u n t s ) .

2 - 1 2 . C A S H MANAGEMENT CONTROLS

A . G E N E R A L

1 . A l l c a s h r e c e i p t s ( i n c l u d i n g t h o s e c o l l e c t e d b y m a n a g e m e n t a g e n t s ) m u s t b e d e p o s i t e d i n t h e n a m e o f t h e p r o j e c t i n a b a n k o r b a n k s w h o s e d e p o s i t s a r e f e d e r a l l y i n s u r e d . W h e n t h e $ 1 0 0 , 0 0 0 i n s u r a n c e l i m i t w o u l d b e e x c e e d e d , t h e o w n e r / m a n a g i n g a g e n t s h a l l f o l l o w t h e b a n k i n g p r o c e d u r e s d e s c r i b e d i n p a r a g r a p h 2 - 6 o f t h i s H a n d b o o k 4 3 7 0 . 2 . S u c h f u n d s s h a l l b e w i t h d r a w n o n l y i n a c c o r d a n c e w i t h t h e p r o v i s i o n s f o r p r o j e c t e x p e n s e s o r f o r d i s t r i b u t i o n s o f s u r p l u s c a s h . A n y o w n e r r e c e i v i n g f u n d s o f t h e p r o j e c t , o t h e r t h a n b y s u c h d i s t r i b u t i o n o f s u r p l u s c a s h , s h a l l i m m e d i a t e l y d e p o s i t s u c h f u n d s i n t h e p r o j e c t b a n k a c c o u n t .

2 . A n y f u n d s c o l l e c t e d a s s e c u r i t y d e p o s i t s m u s t b e k e p t s e p a r a t e a n d a p a r t f r o m a l l o t h e r p r o j e c t f u n d s i n a n a c c o u n t m a i n t a i n e d i n t h e n a m e o f t h e p r o j e c t . T h e b a l a n c e o f t h e a c c o u n t m u s t n o t a t a n y t i m e b e l e s s t h a n t h e a g g r e g a t e o f a l l o u t s t a n d i n g o b l i g a t i o n s u n d e r t h e a c c o u n t f o r s e c u r i t y d e p o s i t s .

3 . A s i n s u r a n c e a g a i n s t l o s s , t h e o w n e r o r h i s d e s i g n a t e d a g e n t m u s t o b t a i n a f i d e l i t y b o n d i n a n a m o u n t a t l e a s t e q u a l t o

2 - 1 7 1 2 / 9 5 4 3 7 0 . 2 R E V - 1

p o t e n t i a l c o l l e c t i o n s f o r t w o m o n t h s . B l a n k e t c o v e r a g e s h o u l d e x t e n d t o a l l e m p l o y e e s h a n d l i n g c a s h .

4 . N u m b e r e d r e n t r e c e i p t s s h a l l b e u s e d a n d r e c o n c i l e d t o a c t u a l c o l l e c t i o n s .

5 . T h e p e r s o n m a k i n g u p d e p o s i t s s h a l l n o t h a n d l e t h e a c c o u n t s r e c e i v a b l e o r t h e g e n e r a l l e d g e r .

6 . D i s b u r s e m e n t c h e c k s s h a l l b e i d e n t i f i e d w i t h a l l r e l e v a n t a c c o u n t n u m b e r s a n d a m o u n t s a p p l i c a b l e t o e a c h a c c o u n t w h e n o n e c h e c k i s f o r m o r e t h a n o n e i n v o i c e / b i l l .

7 . T h e p e r s o n p r e p a r i n g t h e p a y r o l l s h a l l n o t h a n d l e t h e r e l a t e d p a y c h e c k s .

8 . U n i s s u e d c h e c k s s h o u l d b e l o c k e d u p a n d a c c e s s t o c h e c k s s h o u l d b e r e s t r i c t e d t o a l i m i t e d n u m b e r o f a u t h o r i z e d p e r s o n n e l .

A . R E C E I P T CONTROLS

1 . C o l l e c t i o n s a n d a l l o t h e r f u n d s h e l d w i t h i n a n o f f i c e , w h e t h e r

CFS | 145

pending regular deposit or in imprest funds, shall be completely controlled under proper safeguards, preferably in a fire-resistant combination safe or safe-cabinet. 2. An adequate recording system shall be employed to note all checks received and deposited. 3. Insofar as is possible, all collections shall be promptly deposited on the day received. 4. Bank statements shall be reconciled promptly to the formal accounting records by persons other than those recording or handling cash, or preparing and signing checks. B. DISBURSEMENT CONTROLS. 5/92 2-18 4370.2 REV-1 1. A request for a check must have supporting documentation (i.e., invoice itemizing amount requested with an authorized signature) in order for approval to be obtained to make the disbursement. 2. Checks must be approved by an individual authorized to approve checks. 3. The authorized check signer shall review supporting documentation before signing the check. 4. Supporting vouchers shall be marked canceled to prevent resubmission. 5. A monthly reconciliation shall be performed to ensure that all checks disbursed are accounted for (i.e., cashed, outstanding, or void). 6. Invoices should be marked "paid" and the check number and date should be posted to the invoice. Supporting vouchers shall also be marked "paid" to prevent resubmission. 2-13. MANAGEMENT AGREEMENTS A. The management agreement is a contract which establishes the rights and obligations between the management agent, the project owner and any identity-of-interest or independent fee manager. The agreement also establishes the management fee and conditions for payment of the management fee. It is the mortgagor's responsibility to ensure that the management agent performs his duties in accordance with the management agreement. B. The management agreement shall state that it is subject to termination: 1. For failure to comply with the provisions of the Management Certification or for other good

p e n d i n g r e g u l a r d e p o s i t o r i n i m p r e s t f u n d s , s h a l l b e c o m p l e t e l y c o n t r o l l e d u n d e r p r o p e r s a f e g u a r d s , p r e f e r a b l y i n a f i r e - r e s i s t a n t c o m b i n a t i o n s a f e o r s a f e - c a b i n e t .

2 . A n a d e q u a t e r e c o r d i n g s y s t e m s h a l l b e e m p l o y e d t o n o t e a l l c h e c k s r e c e i v e d a n d d e p o s i t e d .

3 . I n s o f a r a s i s p o s s i b l e , a l l c o l l e c t i o n s s h a l l b e p r o m p t l y d e p o s i t e d o n t h e d a y r e c e i v e d .

4 . B a n k s t a t e m e n t s s h a l l b e r e c o n c i l e d p r o m p t l y t o t h e f o r m a l a c c o u n t i n g r e c o r d s b y p e r s o n s o t h e r t h a n t h o s e r e c o r d i n g o r h a n d l i n g c a s h , o r p r e p a r i n g a n d s i g n i n g c h e c k s .

B . D I S B U R S E M E N T C O N T R O L S .

5 / 9 2 2 - 1 8

4 3 7 0 . 2 R E V - 1

1 . A r e q u e s t f o r a c h e c k m u s t h a v e s u p p o r t i n g d o c u m e n t a t i o n ( i . e . , i n v o i c e i t e m i z i n g a m o u n t r e q u e s t e d w i t h a n a u t h o r i z e d s i g n a t u r e ) i n o r d e r f o r a p p r o v a l t o b e o b t a i n e d t o m a k e t h e d i s b u r s e m e n t .

2 . C h e c k s m u s t b e a p p r o v e d b y a n i n d i v i d u a l a u t h o r i z e d t o a p p r o v e c h e c k s .

3 . T h e a u t h o r i z e d c h e c k s i g n e r s h a l l r e v i e w s u p p o r t i n g d o c u m e n t a t i o n b e f o r e s i g n i n g t h e c h e c k .

4 . S u p p o r t i n g v o u c h e r s s h a l l b e m a r k e d c a n c e l e d t o p r e v e n t r e s u b m i s s i o n .

5 . A m o n t h l y r e c o n c i l i a t i o n s h a l l b e p e r f o r m e d t o e n s u r e t h a t a l l c h e c k s d i s b u r s e d a r e a c c o u n t e d f o r ( i . e . , c a s h e d , o u t s t a n d i n g , o r v o i d ) .

6 . I n v o i c e s s h o u l d b e m a r k e d " p a i d " a n d t h e c h e c k n u m b e r a n d d a t e s h o u l d b e p o s t e d t o t h e i n v o i c e . S u p p o r t i n g v o u c h e r s s h a l l a l s o b e m a r k e d " p a i d " t o p r e v e n t r e s u b m i s s i o n .

2 - 1 3 . MANAGEMENT AGREEMENTS

A . T h e m a n a g e m e n t a g r e e m e n t i s a c o n t r a c t w h i c h e s t a b l i s h e s t h e r i g h t s a n d o b l i g a t i o n s b e t w e e n t h e m a n a g e m e n t a g e n t , t h e p r o j e c t o w n e r a n d a n y i d e n t i t y - o f - i n t e r e s t o r i n d e p e n d e n t f e e m a n a g e r . T h e a g r e e m e n t a l s o e s t a b l i s h e s t h e m a n a g e m e n t f e e a n d c o n d i t i o n s f o r p a y m e n t o f t h e m a n a g e m e n t f e e . I t i s t h e m o r t g a g o r ' s r e s p o n s i b i l i t y t o e n s u r e t h a t t h e m a n a g e m e n t a g e n t p e r f o r m s h i s d u t i e s i n a c c o r d a n c e w i t h t h e m a n a g e m e n t a g r e e m e n t .

B . T h e m a n a g e m e n t a g r e e m e n t s h a l l s t a t e t h a t i t i s s u b j e c t t o t e r m i n a t i o n :

1 . F o r f a i l u r e t o c o m p l y w i t h t h e p r o v i s i o n s o f t h e M a n a g e m e n t C e r t i f i c a t i o n o r f o r o t h e r g o o d

CFS | 146

2-19 5/92 4370.2 REV-1

3. HUD's and the lender's rights and requirements will prevail in the event the management agent conflicts with HUD's or the lender's requirements or restricts HUD's or the lender's rights; and

4. The management agent must turn over to the owner all of the project's cash, trust accounts, investments, and records within thirty days after the date the management agreement is terminated.

2-14. EXCESS RENTAL COLLECTIONS

5/92 2-20 4370.2 REV-1

2-15. DISPOSITION OF EXCESS RENTAL COLLECTIONS

A. In a Section 236 project, the total of all excess rents collected from units charged in excess of the basic monthly rent shall be remitted monthly to:

Excess Rental Income P.O. Box 360333M Pittsburgh, PA 15250.

2 - 1 9 5 / 9 2 4 3 7 0 . 2 R E V - 1

c a u s e u p o n w r i t t e n H U D r e q u e s t 3 0 d a y s i n a d v a n c e . U p o n s u c h r e q u e s t , o w n e r s s h a l l i m m e d i a t e l y a r r a n g e t o t e r m i n a t e t h e a g r e e m e n t w i t h i n a p e r i o d o f n o t m o r e t h a n 3 0 d a y s a n d s h a l l i m m e d i a t e l y m a k e a r r a n g e m e n t s s a t i s f a c t o r y t o H U D f o r c o n t i n u i n g p r o p e r m a n a g e m e n t o f t h e p r o j e c t .

2 . I n t h e e v e n t o f a d e f a u l t u n d e r t h e m o r t g a g e n o t e o r r e g u l a t o r y a g r e e m e n t , i m m e d i a t e l y u p o n H U D ' s i s s u a n c e o f a N o t i c e o f T e r m i n a t i o n t o t h e o w n e r o r a d m i n i s t r a t o r . T h e a g r e e m e n t m u s t a l s o c o n t a i n a c l a u s e a c k n o w l e d g i n g t h e f o l l o w i n g :

3 . H U D ' s a n d t h e l e n d e r ' s r i g h t s a n d r e q u i r e m e n t s w i l l p r e v a i l i n t h e e v e n t t h e m a n a g e m e n t a g e n t c o n f l i c t s w i t h H U D ' s o r t h e l e n d e r ' s r e q u i r e m e n t s o r r e s t r i c t s H U D ' s o r t h e l e n d e r ' s r i g h t s ; a n d

4 . T h e m a n a g e m e n t a g e n t m u s t t u r n o v e r t o t h e o w n e r a l l o f t h e p r o j e c t ' s c a s h , t r u s t a c c o u n t s , i n v e s t m e n t s , a n d r e c o r d s w i t h i n t h i r t y d a y s a f t e r t h e d a t e t h e m a n a g e m e n t a g r e e m e n t i s t e r m i n a t e d .

C. H U D r e q u i r e s a w r i t t e n m a n a g e m e n t a g r e e m e n t i n c a s e s w h e r e a q u a l i f i e d m a n a g e m e n t a g e n t , o n b e h a l f o f t h e p r o j e c t , h a n d l e s r e c o r d k e e p i n g , c o l l e c t i o n o f r e n t s , p a y m e n t o f b i l l s a n d m o r t g a g e p a y m e n t s , e t c . T h e t e r m s o f t h e a g r e e m e n t s h a l l b e c o m p l e t e a s t o t h e e x t e n t o f t h e a g e n t ' s d u t i e s a n d t h e a m o u n t o f h i s f e e .

2 - 1 4 . E X C E S S R E N TA L C O L L E C T I O N S

A . R e n t a l c o l l e c t e d i n e x c e s s o f b a s i c r e n t a l c h a r g e s f r o m t e n a n t s i n a S e c t i o n 2 3 6 p r o j e c t m u s t b e r e m i t t e d m o n t h l y t o N O . E x c e s s r e n t i s t h e a m o u n t b y w h i c h t h e r e n t c o l l e c t e d o n a d w e l l i n g u n i t e x c e e d s t h e a p p r o v e d b a s i c r e n t a l f o r t h a t u n i t .

5 / 9 2 2 - 2 0 4 3 7 0 . 2 R E V - 1

B . R e n t a l s c o l l e c t e d i n e x c e s s o f b a s i c r e n t a l c h a r g e s f r o m t e n a n t s i n a S e c t i o n 2 2 1 ( d ) ( 3 ) B M I R p r o j e c t m u s t b e a c c o u n t e d f o r s e p a r a t e l y a n d m a d e a v a i l a b l e f o r d e p o s i t t o t h e R e s i d u a l R e c e i p t s A c c o u n t w i t h t h e m o r t g a g e e .

2 - 1 5 . D I S P O S I T I O N O F E X C E S S R E N TA L C O L L E C T I O N S

A . I n a S e c t i o n 2 3 6 p r o j e c t , t h e t o t a l o f a l l e x c e s s r e n t s c o l l e c t e d f r o m u n i t s c h a r g e d i n e x c e s s o f t h e b a s i c m o n t h l y r e n t s h a l l b e r e m i t t e d m o n t h l y t o :

E x c e s s R e n t a l I n c o m e P. O . B o x 3 6 0 3 3 3 M P i t t s b u r g h , P A 1 5 2 5 0 .

CFS | 147

Refer to Handbook 4350.5, Occupancy Requirements of Subsidized Multifamily Housing for additional information and procedures for completing and submitting Form HUD-93104.

B. In a limited distribution BMIR project, excess rental collections:

2-21 5/92 4370.2 REV-1

1. Shall not be distributed to stockholders,

2. Shall not be used to pay authorized dividends or distributions, and

3. Shall not be used to meet operating expenses at the time project income is distributed to owners or stockholders.

5/92 2-22

F o r m s H U D - 9 3 1 0 4 , M o n t h l y R e p o r t o f E x c e s s I n c o m e a n d A c c r u e d U n p a i d E x c e s s I n c o m e a n d H U D - 9 3 1 0 4 A , S c h e d u l e f o r C a l c u l a t i n g E x c e s s I n c o m e a n d R e p o r t o f E x c e s s I n c o m e D e l i n q u e n c i e s , a r e i n c l u d e d i n A p p e n d i x 3 a n d a r e t o b e u s e d f o r t h i s p u r p o s e .

NOTE: F o r m H U D - 9 3 1 0 4 i s d e s i g n e d t o c a l c u l a t e t h e f o l l o w i n g t w o a m o u n t s : 1 ) a m o u n t o f f u n d s c o l l e c t e d f r o m t e n a n t s w h i c h a r e i n e x c e s s o f t h e b a s i c r e n t d u e a n d 2 ) t o t r a c k a c c r u e d u n p a i d e x c e s s r e n t o v e r t h e b a s i c w h i c h h a s n o t b e e n p a i d b y t e n a n t s w h o d o n o t q u a l i t y f o r t h e b a s i c r e n t . F o r m H U D - 9 3 1 0 4 A , s h o u l d b e u s e d t o a s s i s t w i t h t h e c o m p l e t i o n o f F o r m H U D - 9 3 1 0 4 . N o t e , h o w e v e r , t h a t o n l y F o r m H U D - 9 3 1 0 4 i s r e q u i r e d t o b e s u b m i t t e d t o H U D . F o r m H U D - 9 3 1 0 4 A s h o u l d b e a t t a c h e d t o t h e p r o j e c t f i l e c o p y o f t h e H U D - 9 3 1 0 4 . A l s o n o t e t h a t F o r m H U D - 9 3 1 0 4 m u s t b e s u b m i t t e d e v e n i f n o f u n d s a r e d u e H U D .

R e f e r t o H a n d b o o k 4 3 5 0 . 5 , O c c u p a n c y R e q u i r e m e n t s o f S u b s i d i z e d M u l t i f a m i l y H o u s i n g f o r a d d i t i o n a l i n f o r m a t i o n a n d p r o c e d u r e s f o r c o m p l e t i n g a n d s u b m i t t i n g F o r m H U D - 9 3 1 0 4 .

B . I n a l i m i t e d d i s t r i b u t i o n B M I R p r o j e c t , e x c e s s r e n t a l c o l l e c t i o n s :

2 - 2 1 5 / 9 2 4 3 7 0 . 2 R E V - 1

1 . S h a l l n o t b e d i s t r i b u t e d t o s t o c k h o l d e r s ,

2 . S h a l l n o t b e u s e d t o p a y a u t h o r i z e d d i v i d e n d s o r d i s t r i b u t i o n s , a n d

3 . S h a l l n o t b e u s e d t o m e e t o p e r a t i n g e x p e n s e s a t t h e t i m e p r o j e c t i n c o m e i s d i s t r i b u t e d t o o w n e r s o r s t o c k h o l d e r s .

C. A s p a r t o f t h e I P A ' s a u d i t o f t h e f i n a n c i a l s t a t e m e n t s , t h e I P A s h o u l d c o n f i r m t h e t r a n s f e r o f t h e s e e x c e s s r e n t a l s f o r S e c t i o n 2 3 6 p r o j e c t s w i t h t h e E x c e s s R e n t a l I n c o m e O f f i c e i n P i t t s b u r g h , P A F o r S e c t i o n 2 2 1 p r o j e c t s , t h e I P A ' s a u d i t o f t h e R e s i d u a l R e c e i p t s A c c o u n t B a l a n c e s s h a l l i n c l u d e a t e s t f o r a n y e x c e s s r e n t a l c o l l e c t i o n s a n d c o n f i r m a t i o n o f t h e R e s i d u a l R e c e i p t s A c c o u n t B a l a n c e w i t h t h e m o r t g a g e e .

5 / 9 2 2 - 2 2

CFS | 148

4370.2 REV-1 ___________________________________________________________________________

CHAPTER 4. HUD CHART OF ACCOUNTS

4-1. INTRODUCTION

This chapter lists and defines the prescribed uniform system of accounts used by owners of all HUD-insured, HUD-held, cooperative and Section 202 direct loan projects. To assure that project accounting transactions are properly recorded and classified, project bookkeepers must familiarize themselves with the account definitions contained in this chapter. Cooperative projects must use the same accounts as other rental projects, as well as the special asset and member equity accounts defined specifically for Cooperative projects.

4-2. ORGANIZATION OF THE CHART OF ACCOUNTS

The HUD Chart of Accounts uses account categories prescribed by generally accepted accounting principles.

A. The HUD Chart of Accounts is organized to provide complete and comprehensive project records. Since the project's annual financial statements are prepared on an accrual basis, HUD encourages owners/managing agents to keep project books and records on an accrual basis. Owners/managing agents are responsible for making any necessary year-end adjusting entries before the annual project audit using the accounts prescribed in the HUD Chart of Accounts.

B. Additional accounts not included in the HUD Chart of Accounts should be established as needed, following generally accepted accounting principles and classified under the appropriate groupings in the HUD Chart of Accounts.

C. An explanation of the Chart of Accounts appears in the Manual of Accounts.

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4-3. CHART OF ACCOUNTS

A. 1000 ASSET ACCOUNTS.

1100 CURRENT ASSETS: 1110 Petty Cash 1120 Cash in Bank 1130 Tenant/Member Accounts Receivable

CFS | 149

(Coops) 1140 Accounts Receivable (Other) 1150 Notes Receivable 1160 Accrued Receivables 1170 Investments (Short Term) 1190 Miscellaneous Current Assets 1191 Tenant Security Deposits - Held in Trust

1200 PREPAID EXPENSES: 1210 Fuel Inventory 1220 Gasoline and Oil Inventory 1230 Supplies Inventory 1240 Prepaid Property & Liability

Insurance 1250 Prepaid Mortgage Insurance 1260 Prepaid Advertising 1270 Prepaid Taxes

1290 MISCELLANEOUS PREPAID EXPENSES

1300 FUNDED RESERVES: 1310 Mortgagee Escrow Deposits 1320 Cash, Replacement Reserve 1321 Securities, Replacement Reserve 1330 Cash, Painting Reserve 1331 Securities, Painting Reserve 1340 Cash, Residual Receipts Reserve 1341 Securities, Residual Receipts Reserve 1350 Cash, General Reserves 1360 Securities, General Reserves 1365 General Operating Reserve (Coops) 1370 Apartment Rehabilitation Deposits,

(Coops) 1380 Project Improvement Account

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___________________________________________________________________________

1400 FIXED ASSETS: 1410 Land 1420 Buildings 1430 Building Equipment (Fixed) 1440 Building Equipment (Portable) 1450 Furniture for Project/Tenant Use 1460 Furnishings 1470 Maintenance Equipment 1480 Motor Vehicles 1490 Miscellaneous Fixed Assets

1500 INVESTMENTS

1600 DEPOSITS RECEIVABLE

CFS | 150

1700 SUSPENSE ACCOUNTS

1800 ORGANIZATION EXPENSES

1900 OTHER ASSETS

B. 2000 LIABILITY ACCOUNTS

2100 CURRENT LIABILITIES: 2110 Accounts Payable 2112 Accounts Payable - Project Improvement

Items 2115 Accounts Payable - HUD 2120 Accrued Wages and Payroll Taxes Payable 2130 Accrued Interest Payable 2140 Dividends or Distributions Payable 2150 Accrued Property Taxes 2160 Notes Payable (Short Term) 2190 Miscellaneous Current Liabilities 2191 Tenant Security Deposits Held in Trust

(Contra)

2200 PREPAID REVENUES: 2210 Prepaid Rent 2220 Prepaid Rent Revenue 2230 Apartment Rehabilitation Deposits

(Coops)

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2290 Miscellaneous Prepaid Revenues

2300 LONG TERM LIABILITIES: 2310 Notes Payable (Long-Term) 2311 Notes Payable - Surplus Cash 2320 Mortgage Payable 2330 Bonds Payable 2340 Flexible Subsidy Loan Payable 2350 Capital Improvement Loan Payable 2360 Operating Loss Loan Payable 2390 Miscellaneous Long Term Liabilities

C. 3000 MEMBERS EQUITY (NET WORTH)

3100 OWNER EQUITY 3105 Certificates Subscribed (Coops) 3110 Capital Stock - Preferred 3120 Capital Stock - Common 3130 Owner Equity or Certificates Held in

Treasury (Coops)

CFS | 151

3140 Certificates of Initial Capital Value Issued and Outstanding (Coops)

3200 EARNINGS 3210 Retained Earnings or Surplus or

Deficiency from Operations (Coops) 3215 Amortized Mortgage (Coops) 3220 Replacement Reserve (Coops) 3230 Painting Reserve 3235 General Operating Reserve (Coops) 3241 Paid-in Surplus (Coops) 3250 Profit or Loss (Net Income or Loss)

D. 4000 VALUATION ACCOUNTS

4100 ACCUMULATED DEPRECIATION 4120 Reserve for Depreciation - Building 4130 Reserve for Depreciation - Building

Equipment - Fixed 4140 Reserve for Depreciation - Building

Equipment - Portable

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___________________________________________________________________________

4150 Reserve for Depreciation - Furniture for Project and Tenant Use

4160 Reserve for Depreciation - Furnishings 4170 Reserve for Depreciation - Maintenance

Equipment 4180 Reserve for Depreciation - Motor

Vehicles 4190 Reserve for Depreciation - Miscellaneous

Fixed Assets

4200 OTHER RESERVES: 4210 Reserve for Collection Losses

E. 5000 REVENUE ACCOUNTS.

5100 RENT REVENUE - GROSS POTENTIAL: 5120 Rent Revenue - Apartments or Member

Carrying Charges (Coops) 5121 Tenant Assistance Payments 5130 Rent Revenue - Furniture and Equipment 5140 Rent Revenue - Stores and Commercial 5170 Garage and Parking Spaces 5180 Flexible Subsidy Revenue 5190 Rent Revenue Miscellaneous

5200 VACANCIES: (See 6370 Also) 5220 Apartments

CFS | 152

5230 Furniture and Equipment 5240 Stores and Commercial 5270 Garage and Parking Space 5290 Miscellaneous

5300 ELDERLY AND CONGREGATE SERVICES REVENUE

5400 FINANCIAL REVENUE: 5410 Interest Revenue - Project Operations 5420 Interest Reduction Payments (Section 236

only) 5430 Revenue from Investments - Residual

Receipts

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5440 Revenue from Investments - Replacement Reserve

5490 Revenue from Investments - Miscellaneous

5900 OTHER REVENUE: 5910 Laundry and Vending Revenue 5920 NSF and Late Charges 5930 Damages and Cleaning Fees 5940 Forfeited Tenant Security Deposits 5990 Other Revenue (specify)

F. 6000 PROJECT EXPENSE ACCOUNTS

6200/6300 ADMINISTRATIVE EXPENSES. 6210 Advertising 6235 Apartment Resale Expense (Coops) 6250 Other Renting Expenses 6310 Office Salaries 6311 Office Supplies 6312 Office or Model Apartment Rent 6320 Management Fee 6330 Manager or Superintendent Salaries 6331 Manager or Superintendent Rent Free

Unit 6340 Legal Expense - Project 6350 Audit Expense 6351 Bookkeeping Fees/Accounting Services 6360 Telephone and Answering Service 6370 Bad Debts 6390 Miscellaneous Administrative Expenses

(specify)

6400 UTILITIES EXPENSES:

CFS | 153

6420 Fuel Oil/Coal 6450 Electricity 6451 Water 6452 Gas 6453 Sewer

6500 OPERATING & MAINTENANCE EXPENSE: 6510 Janitor and Cleaning Payroll

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___________________________________________________________________________

6515 Janitor and Cleaning Supplies 6517 Janitor and Cleaning Contract 6519 Exterminating Payroll/Contract 6520 Exterminating Supplies 6525 Garbage and Trash Removal 6530 Security Payroll/Contract 6535 Grounds Payroll 6536 Grounds Supplies 6537 Grounds Contract 6540 Repairs Payroll 6541 Repairs Material 6542 Repairs Contract 6545 Elevator Maintenance/Contract 6546 Heating/Cooling Repairs and

Maintenance 6547 Swim Pool Maintenance/Contract 6548 Snow Removal 6560 Decorating Payroll/Contract 6561 Decorating Supplies 6570 Vehicle and Maintenance Equipment

Operation and Repairs 6590 Miscellaneous Operating and Maintenance

Expenses

6600 DEPRECIATION EXPENSES 6620 Depreciation - Buildings 6630 Depreciation - Fixed Building Equipment 6640 Depreciation - Building Equipment

- Portable 6650 Depreciation - Furniture for Project and

Tenant Use 6660 Depreciation - Furnishings 6670 Depreciation - Maintenance Equipment 6680 Depreciation - Motor Vehicle 6690 Depreciation - Miscellaneous

6700 TAXES & INSURANCE 6710 Real Estate Taxes 6711 Payroll Taxes (Project's Share) 6719 Miscellaneous Taxes, Licenses, and

CFS | 154

Permits 6720 Property & Liability Insurance (Hazard)

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6721 Fidelity Bond Insurance 6722 Workmen's Compensation 6723 Health Insurance and Other Employee

Benefits 6729 Other Insurance

6800 FINANCIAL EXPENSES: 6810 Interest on Bonds Payable 6820 Interest on Mortgage Payable 6830 Interest on Notes Payable (Long Term) 6840 Interest on Notes Payable (Short Term) 6850 Mortgage Insurance Premium/Serv Chg 6890 Miscellaneous Financial Expenses

6900 ELDERLY AND CONGREGATE SERVICES EXPENSES:

6930 Dietary Salaries 6932 Food 6933 Dietary Supplies 6940 Registered Nurses Payroll 6941 Licensed Practical Nurses Payroll 6942 Other Nursing Salaries 6950 Housekeeping Salaries 6951 Housekeeping Supplies 6952 Other Housekeeping 6960 Drugs and Pharmaceuticals 6961 Medical Salaries 6962 Other Medical 6970 Laundry and Linen 6980 Recreation and Rehabilitation 6990 Other Service Expenses

G. 7000 CORPORATE, MORTGAGOR, OR COOPERATIVE EXPENSES:

7110 Officer's Salaries 7120 Legal Expenses 7130 Federal Income Tax 7131 State Income Tax 7132 Other Taxes (Entity) 7190 Other Expense

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5/92 4-8

CFS | 155

_____________________________________________________________________ 4370.2 REV-1

___________________________________________________________________________

4-4. MANUAL OF ACCOUNTS

1000 ASSET ACCOUNTS:

1100 CURRENT ASSETS:

1110 Petty Cash. This account represents the established size of the imprest fund used to make small cash payments for items such as postage and small amounts of supplies. The account is debited with the amount of the disbursement establishing or increasing the size of the fund. As cash is used, agents place receipts for the amount withdrawn in the cash drawer. Disbursements made to replenish the petty cash fund are debited directly to the appropriate project expense accounts at the time the reimbursement check is recorded in the Cash Disbursements Journal. At all times, total petty cash on hand plus the receipts for the bills paid must equal the amount of the established fund.

1120 Cash in Bank. This account reflects the balance of cash in the project's bank account(s). Debits to the account are posted at least monthly from the Cash Receipts Journal and credits are posted at least monthly from the Cash Disbursements Journal.

1130 Tenant/Member Accounts Receivable (Coops). This account reflects the total rents receivable from tenants. The account balance is supported by the Tenant Accounts Receivable subsidiary ledger. The account is debited by journal entry at the end of each month for the total rent roll from the following month. The off-setting credit is made to the rental revenue accounts in the 5000 series. Agents must make an additional credit for Section 236 projects to Account 2115, Accounts Payable - HUD for any rents due from tenants in excess of the basic

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monthly rent. Credits to the Tenant Accounts Receivable accounts come from the Cash

CFS | 156

Receipts Journal or from journal entries which record concessions to tenants in lieu of rent (see Account 6250). 1140 Accounts Receivable - Other. This account represents amounts due the project other than tenant rents receivable and accrued revenue. It is a controlling account supported by a subsidiary ledger. When there are other accounts receivable, agents should record each type separately in accounts numbered 1141 to 1149. For example, Accounts Receivable - Rent Supplement may be numbered Account 1143; Accounts Receivable, Section 8 Assistance Payment, Account 1144; Fire Loss Draft Receivable, Account 1145, etc. 1150 Notes Receivable. This account records an notes receivable as they are acquired through debits to the General Journal. Credits to the account come from the Cash Receipts Journal when payment is received. When there are several types of notes receivable, agent should record each type separately in accounts numbered from 1151 to 1159. 1160 Accrued Receivables. This account reflects any accrued revenue, other than from rent. The account is established by year end journal entry debiting the account for income earned but not received. The offsetting credit is to the appropriate revenue account. After the books are closed, the adjusting entry is reversed. Agents may subdivide the account into accounts 1161, 1162, etc., as necessary. 1170 Investments (Short Term). This account records the amount of project funds invested in short term investments other than those in the Funded Reserves (1300) accounts. When the ___________________________________________________________________________ 5/92 4-10 _____________________________________________________________________ 4370.2 REV-1 ___________________________________________________________________________ project has more than one type of short-term investment, agents should record each type separately in accounts numbered 1171 to 1179. The account is credited when the project disposes of any of the investments. 1190 Miscellaneous Current Assets. This account records current assets not otherwise described

CFS | 157

above. If necessary, agents may subdivide this account into specific current asset accounts numbered from 1192 to 1199.

1191 Tenant Securely Deposits - Held in Trust. This account records tenant security deposits held by the project, in the name of the project and in a separate bank account. Agents may use deposits to pay for tenant damages and delinquent rents when a tenant vacates. Total funds in the account must at all times equal or exceed the corresponding liability account, 2191 Tenant Security Deposits - Held in Trust.

1200 PREPAID EXPENSES:

1210 through 1230, Inventory Accounts. Agents record inventory accounts only when the amount on hand at year-end is significant when compared to the total expense for the fiscal year. For example, if stored heating fuel at the end of the fiscal year represents 20% of the total fuel expense for the year, agents should debit by a journal entry the value of the fuel on hand to Fuel Inventory (Account 1210) with an offsetting credit to Fuel Expense (Account 6420). Agents reverse the adjusting entry at the beginning of the next accounting period.

1240 Prepaid Property and Liability Insurance. This account records the unexpired portion of prepaid insurance policies. The account is debited from the Cash Disbursement Journal when an insurance policy is purchased or when

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monthly payments are made on the policy with the mortgage payment. At the close of the accounting period, agents make an adjusting journal entry crediting the cost of the expired insurance and debiting Account 6720, Property and Liability Insurance expense.

1250 Prepaid Mortgage Insurance. This account reflects the balance of the mortgage insurance premium (MIP) paid to HUD that is applicable to the following fiscal period. At the close of the accounting period, the account is debited for any prepaid mortgage insurance with an offsetting credit to Account 6850, Mortgage

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Insurance Premium. The entry is reversed at the beginning of the next accounting period.

1260 Prepaid Advertising. This account reflects the cost of any unused advertising. Similar to the inventory accounts, the unused cost is recorded only when the amount at year-end is significant. The account is established by an adjusting journal entry debiting any unused advertising and crediting Account 6210, Advertising Expense. The entry is reversed at the beginning of the following accounting period.

1270 Prepaid Taxes. This account reflects tax payments that apply to future fiscal periods. The account is established by an adjusting journal entry debiting the taxes paid for future periods and crediting Account 6710, Real Estate Taxes. The entry is reversed at the beginning of the following accounting period.

1290 Miscellaneous Prepaid Expenses. This account records expenses, other than insurance and taxes, that are paid in advance. The cost of the asset is distributed through journal entry over the usage period.

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1300 FUNDED RESERVES:

1310 Mortgagee Escrow Deposits. When used, this clearing account transfers monthly payments of taxes, insurance and replacement reserve escrows to the appropriate expense, prepaid expense or funded reserve account.

1320 Cash Replacement Reserve. This records the monthly payments to the mortgagee, or, for Section 202 Projects, funds deposited in special bank accounts, as required by the Regulatory Agreement.

1321 Securities - Replacement Reserve. This account records replacement reserve funds that are invested. Section 202 projects deposit replacement reserve funds in a special bank account(s). Credits to the account come from the Cash Receipts Journal supported by HUD-approved releases from the Replacement Reserve account. Interest earned on the

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account is credited to Account 5440, Income from Investments - Replacement Reserve.

1330 Cash - Painting Reserve. This account records all deposits made by the project to the painting reserve. This account is used to pay costs related to painting the project's exterior and common space. Costs related to painting individual tenant units are charged to Accounts 6560 and 6561, Decorating Payroll and Supplies.

1331 Securities - Painting Reserve. The balance of the account reflects the total funds held or invested in securities for the painting reserve account.

1340 Cash - Residual Receipts Reserve. This account records any required deposits to the Residual Receipts Fund held by the mortgagee

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or, in the case of Section 202 projects, in a separate Residual Receipts Account. Mortgagors credit the account for disbursements from the fund in amounts authorized by HUD. Interest earned on the account is credited to Account 5430, Revenue from Investments - Residual Receipts.

1341 Securities - Residual Receipts Reserve. The balance of this account reflects total funds held or invested in securities by the mortgagee using funds from the Residual Receipt Account or, in the case of Section 202 projects, funds held in separately identified investments.

1350 Cash - General Reserves. This account records amounts paid in by the mortgagor for general purposes. Credits to the account come from disbursements for debt service or other accounts paid from the fund.

1360 Securities - General Reserves. These accounts record funds which are held or invested in securities for general purpose as required by the Certificate of Incorporation.

1365 General Operating Reserve (GOR). This account records monthly deposits made to a special escrow account under the control of the

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cooperative mortgagor entity. The amount of the required monthly deposit varies by both the GOR account balance and the total amount of monthly member carrying charges. See Paragraph 3 of the cooperative regulatory agreement to determine: (1) what percentage of monthly carrying charges the cooperative must deposit to the account; and (2) conditions for withdrawal from the account. The account provides for contingencies that a cooperative would otherwise meet only through a special assessment to its members. For example, cooperatives may make disbursements from the ___________________________________________________________________________ 5/92 4-14 _____________________________________________________________________ 4370.2 REV-1 ___________________________________________________________________________ account to repurchase stock of withdrawing members or to meet short-term operating deficits because of delinquent receivables from cooperative members. The account is reimbursed (debited) when the cooperative resells the unit or when the cooperative collects the delinquent member carrying charges. Also see Account 3235, General Operating Reserve (contra) and Account 3241, Paid-in Surplus for recording amounts paid by members in excess of the initial capital value of their membership. 1370 Apartment Rehabilitation Deposits. This account records deposits received from tenants who rent units owned by the cooperative. The offsetting credit is to Account 2230. 1380 Project Improvement Account. Owners must establish this account for all projects receiving Flexible Subsidy assistance. HUD may also require owners to establish this account as a condition for approving a workout agreement or transfer of physical assets. The restricted asset account is debited when funds are deposited and is credited when funds are transferred from the account. Sources of funds include owner contributions, releases from reserves, Flexible Subsidy payments, retroactive mortgage relief, etc. When Flexible Subsidy assistance is deposited to the Project Improvement Account, the offsetting credit is to Flexible Subsidy Loan Payable (2340), or Capital Improvement Loan Payable (2350), or an Owner's Equity Account (3100).

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1400 FIXED ASSETS:

1410 Land. The purchase price of the land plus the cost of improvements to the land are charged to this account. Costs of excavating for basements and expenses applicable to the buildings are not included. The balance of the account represents the total outlay necessary to obtain the land and to make the improvements to it. In some instances, it may be desirable to charge depreciation on certain land improvements. These are charged to a separate account beginning with Account 1411. This also requires setting up additional accounts in both depreciation reserves and depreciation expenses. Agents should assign these additional accounts numbers 4110 and 6610, respectively.

1420 Buildings. The total cost of the buildings, exclusive of building equipment, furniture, and furnishings, is charged to this account. Agents should also charge improvements to the buildings to this account. Credits are made when the building is disposed of. The balance represents the original cost of the buildings plus enhancements.

1430 Building Equipment - Fixed. The balance of this account represents the installed cost of all fixed building equipment in use. When necessary, this account may be subdivided for different groups of assets. For example, Account 1432 may be titled "Building Equipment Fixed - Plumbing Fixtures" and include items such as kitchen sinks, garbage disposals, and bath tubs. Account 1433 may be titled "Building Equipment Fixed - Utility Systems" and include project assets such as heating or cooling units and hot water heaters. When this account is subdivided, agents should establish additional depreciation reserve and expense accounts for each sub-group.

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___________________________________________________________________________ 1440 Building Equipment - Portable. The balance of this account represents the total cost of the portable equipment in use. Costs include any transportation or installation charges. Assets in this account include items such as stoves, refrigerators and fire extinguishers. The account is credited as equipment is withdrawn from project use. 1450 Furniture - For Project and Tenant Use. The net cost of all equipment and furniture purchased by the project for use in the project office, lobbies, halls, lawns, and sundecks, plus the freight and drayage on the furniture, is charged to this account. The cost of furniture purchased from project funds for rental to tenants is charged to Account 1451. The account is credited as furniture is withdrawn for project or tenant use. 1460 Furnishings. The cost of furnishings (window shades, venetian blinds shower curtains, hall carpets, etc.) not charged to the cost of the building is recorded in this account. Credits to the account are made when furnishings are withdrawn from use. The balance of the account represents the cost of the furnishings in use. 1470 Maintenance Equipment. The balance of this account represents the cost of project maintenance equipment in use. The account includes items such as janitor's tools, vacuum cleaners, lawn mowers or snow blowing equipment. The cost of equipment is credited when the asset is withdrawn from use. 1480 Motor Vehicles. The cost of buses, trucks, passenger cars, etc., is recorded in this account. Each vehicle is shown separately and given an account number in the 1480 group. Equipment withdrawn from use is credited to this account. ___________________________________________________________________________ 4-17 5/92 _____________________________________________________________________ 4370.2 REV-1 ___________________________________________________________________________ The balance represents the cost of each vehicle in use. 1490 Miscellaneous Fixed Assets. Agents may record

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fixed assets for which no other provision is made in this account. If necessary, agents should subdivide this account into specific fixed asset accounts in the 1490 group.

1500 INVESTMENTS:

This account records long-term investments (those expected to be held for more than one year) other than those included in the Fund Reserves (1300) Series. The account is credited when the project disposes of the investment.

1600 DEPOSITS RECEIVABLE:

This account reflects the amount of security and other deposits which are due from tenants, but not received. The account is credited when deposits are collected.

1700 SUSPENSE ACCOUNTS:

This account reflects charges for items that are temporarily left unadjusted, such as bad checks from tenants. When the item (check) is cleared, the account is credited.

1800 ORGANIZATION EXPENSES:

This account reflects the cost of organizing or forming the mortgagor entity. These costs may include filing fees, attorney's fees and other recording costs. The account is credited through general journal entries amortizing the original organization costs.

1900 OTHER ASSETS:

This account records non-current assets that are not otherwise classified above. Agents should give a descriptive title to any asset included in the 1900 Series.

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2000 LIABILITY ACCOUNTS:

2100 CURRENT LIABILITIES:

2110 Accounts Payable. This account reflects the total of unpaid bills other than bills to be paid from the Project Improvement Account. (See Accounts 1380 and 2112). The account is a controlling account supported by an Accounts Payable subsidiary ledger or by the file of unpaid vouchers. The account is credited by

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journal entry for the total of the bills invoiced for payment. Debits to the account come from the Cash Disbursements Journal. After posting, the total of the accounts payable ledger or unpaid vouchers in the voucher file should equal the balance of this controlling account.

2112 Accounts Payable - Project Improvement Items. This account reflects the total of bills vouchered for work items under the Flexible Subsidy Program to be paid from funds transferred from the Project Improvement Account (1380) to the project bank account (1120). Credits to the account come from work items included on Lines 1a through d of Part II, Section C of the Management Improvement and Operating (MIO) Plan, Form HUD-9835B.

2115 Accounts Payable - HUD. Used only for Section 236 projects, this account reflects any amount due HUD for rents collected in excess of the allowable basic rents. The account is credited monthly from the Rent Roll and is debited monthly from the Cash Disbursements Journal when a check for the amount of excess rents is sent to HUD. The amount due HUD for the reporting month is shown on Line 6 of the Form HUD-93104, Monthly Report of Excess Income. When no payment is due HUD for the reporting month (i.e., when Line 7 of

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the HUD-93104 is a positive amount), the balance in the account is debited with an offsetting credit to Account 5190, Rental Income Miscellaneous.

2120 Accrued Wages and Payroll Taxes Payable. This account records by Journal entry the gross amount of payroll and payroll taxes that has been accrued, but not paid, at the end of the accounting period. If necessary, agents may subdivide the account to accrue for the different types of accrued taxes payable (e.g., Account 2121, Federal Withholding Taxes Payable; Account 2122, FICA Taxes Payable; etc.). This entry is reversed at the beginning of the next following accounting period.

2130 Accrued Interest Payable. This account records

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by adjusting journal entry, interest accrued but unpaid on the mortgage and other interest-bearing obligations at the end of the accounting period. For Section 236 projects, agents should include only the mortgagor's portion of the interest liability on the mortgage. At the beginning of the following accounting period the entry is reversed. 2140 Dividends or Distributions Payable. This account is used by profit-motivated and limited dividend mortgagor entities. The account records, through journal entry, dividends or distributions declared by the owner but not yet paid. The offsetting debit is to Account 3210, Retained Earnings. The amount of the dividend or distribution paid during the present period should agree with total(s) from Line 4, "Amount Available for Distribution During the Next Fiscal Period," of the Form HUD-93486, Computation of Surplus Cash, Distributions and Residual Receipts, prepared for the prior period (or periods, where the distribution may ___________________________________________________________________________ 5/92 4-20 _____________________________________________________________________ 4370.2 REV-1 ___________________________________________________________________________ be made semiannually). The account is debited when the dividend or distribution is paid. 2150 Accrued Property Taxes. This account records by journal entry the accrual of property taxes incurred and payable in the subsequent year. If necessary, the account may be subdivided to include different types of property taxes accrued (e.g., local real estate, county real estate, personal property taxes, etc.). The entry is reversed at the beginning of the next accounting period. 2160 Notes Payable (Short-Term). This account records liabilities on notes due within one year. The account is credited when a cash loan is secured by a short-term note. When a note is secured to cancel another project payable, the account is credited through journal entry. The account is debited from the Cash Disbursements Journal when payment is made on the note. 2190 Miscellaneous Current Liabilities. This account records current liabilities not otherwise

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described above. If necessary, owners may subdivide this account into specific current liability accounts numbered from 2192 to 2199.

2191 Tenant Securely Deposits - Held in Trust (Contra). This account records the offsetting liability resulting from transactions recorded in Account 1191.

2200 PREPAID INCOMES:

2210 Prepaid Rents. This account records rents received from tenants (including commercial tenants) that apply to future accounting periods. When the rent is received in advance, this account is credited and Cash (1120) is debited. As the rent becomes due, agents make a

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journal entry debiting this account and crediting Tenant Accounts Receivable (1130).

2220 Prepaid Interest Revenue. This account records by journal entry all interest revenue received but not earned at the close of the accounting period. A corresponding debit is made to the Interest Revenue (5400 Series) account. The entry is reversed at the beginning of the next accounting period.

2230 Apartment Rehabilitation Deposits. Cooperatives establish this account contra to Account 1370. The balance reflects the cooperative's obligation to refund the deposit if rehabilitation of the rented unit is unnecessary.

2290 Miscellaneous Prepaid Revenues. This account records any prepaid revenue other than rents or interest. Agent should establish specific accounts in the 2290 Series to record any miscellaneous prepaid incomes.

2300 LONG-TERM LIABILITIES:

2310 Notes Payable (Long-Term). This account reflects amounts on notes due more than one year from the date of the balance sheet. The amount due within one year is recorded in Account 2160. The account is credited when long-term notes are issued and is debited as

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principal payments are made on the notes. Interest paid on the note is charged to Account 6830, Interest on Notes Payable (Long-Term).

2311 Notes Payable - Surplus Cash. This account records project obligations (1) payable only from available surplus cash, and (2) in accordance with the terms of the note. The account is credited when the note is issued and debited when payments are made on the note from available surplus cash.

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2320 Mortgage Payable. This account reflects the unpaid principal balance of the mortgage. The account is debited by the amount of regular amortization payments made on the mortgage. Interest payments on the mortgage are charged to Account 6820, interest on Mortgage Payable.

2330 Bonds Payable. When the project is permanently financed through bond issue, the par value of the bonds is charged to this account. The account is debited as payments are made on the bonds or if the bonds are canceled, Interest paid on the bonds is charged to Account 6810, Interest on Bonds Payable.

2340 Flexible Subsidy Loan Payable. This account reflects the total amount of the unpaid balance of flexible subsidy Operating Assistance loans. Credits to the account are made when the proceeds of a loan is received and an agreement has been executed. The balance in the account is decreased (debited) for the amount of the principal paid each time a payment is made.

2350 Capital Improvement Loan Payable. This account balance represents the unpaid balance of a capital improvement loan. Funds from this account are used to repair or replace major systems in low and moderate income multi-family buildings. The balance is reduced by the amount of principal paid with each loan payment made.

2360 Operating Loss Loan Payable. This account represents the unpaid balance of a loan obtained to sustain operations due to a prior year operating loss. The use of the proceeds from this type of loan is restricted to expenditures for operating expenses. The account

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balance is decreased by the amount of the principal paid with each loan payment. 2390 Miscellaneous Long-Term Liabilities. This account records long-term liabilities not ___________________________________________________________________________ 4-23 5/92 _____________________________________________________________________ 4370.2 REV-1 ___________________________________________________________________________ otherwise described above. If necessary, agents should subdivide the account into specific long-term liability accounts numbered from 2391 through 3000 EQUITY ACCOUNTS: 3100 OWNER EQUITY: 3105 Certificates Subscribed. This account reflects the par or assigned value of subscribed membership certificates or capital stock. Charges (debits) are made to the account when the cooperative issues membership certificates or stock to new members. The offsetting credit is to Account 3140, Certificate of Initial Capital Value Issued and Outstanding. 3110 Capital Stock - Preferred. This account normally is used by mortgagors controlled by HUD through a Corporate Charter rather than through a Regulatory Agreement. 3120 Capital Stock - Common. The class of capital stock which has all the residual interests in the corporation with no limitations nor preferences in distribution of retained earnings or ultimate distribution of assets. In Cooperatives with only one class of shares, it is the same as the Capital Stock (Account 3110). 3130 Owner Equity or Certificate Held in Treasury. These control accounts reflect the total amount of capital invested in the project by its owners. Subsidiary accounts are normally maintained for each class of stock or owner. The accounts are credited as additional capital is contributed to the project by the owner(s). Cooperatives debit this account when the outgoing member's unit is resold. ___________________________________________________________________________ 5/92 4-24

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_____________________________________________________________________ 4370.2 REV-1 ___________________________________________________________________________ 3140 Certificate of Initial Value Issued and Outstanding. This account reflects the initial value of all subscribed and outstanding membership certificates or stock. The account is credited when the cooperative issues subscribed certificates or stock to new members. The account is debited when certificates are returned to the Treasury (Account 3130) pending resale of the units. 3200 EARNINGS: 3210 Retained Earnings or Surplus or Deficiency from Operations (Coops). This control account reflects the accumulated earnings of a mortgagor entity that are not distributed to owners. The account is debited when dividends or distributions are declared and for any net loss from operation of the project. The account is credited with any net income from operations of the project. In the case of cooperatives, this account records by Journal entry the surplus (debit) or deficiency (credit) from the cooperative's operation during the reporting year. The appropriate offsetting debit or credit comes from Account 3250, Profit or Loss. The balance of this account represents the cooperative's surplus or deficiency from operations since the initial occupancy of the cooperative. This account also records by journal entry any patronage refunds the cooperative makes to members. 3215 - 3235 RESERVE ACCOUNTS: These accounts record appropriations of retained earnings for general or specific purposes. These accounts record through journal entry the monthly payments made to principal and the funded reserve accounts. The offsetting debit is to Account 3241, Paid-in Surplus. ___________________________________________________________________________ 4-25 5/92 _____________________________________________________________________ 4370.2 REV-1 ___________________________________________________________________________ 3215 Amortized Mortgage. For cooperatives, this account records amounts paid for mortgage amortization.

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Credit entries are made to this account with offsetting debit entries to Paid-in Surplus Account 3241.

3220 Replacement Reserve. This account is used to accrue funds for planned replacement of major capital items such as heating units, roofs, etc. Credit entries are made to this account with offsetting debit entries to the Paid-in Surplus Account 3241.

3230 Painting Reserve. This account is used to accrue funds for planned painting services. Credit entries are made to this account with offsetting debit entries to the Paid-in Surplus Account 3241.

3235 General Operating Reserve. This account is used to maintain a fund for general operating expenses. Credit entries are made to this account with offsetting debit entries to the Paid-in Surplus Account 3241.

3241 Paid-in Surplus. This account records amounts paid by member in excess of the initial value of their membership certificate or stock. Entries to this account separate paid-in surplus from member carrying charges (Account 5120). The account is credited by the total amount of monthly principal and reserve payments. The offsetting debit is to Account 5120, Member Carrying Charges, thereby reducing the cooperative's operating income by the amount of member capital contributions.

3250 Income or Loss. All project revenue (5000 Series) and expense (6000 and 7000 Series) are transferred to this account when the project's books are closed. After audit, this account is closed to Retained Earnings (3210) or Owner's Equity (3130).

4000 VALUATION ACCOUNTS:

4100 ACCUMULATED DEPRECIATION - (4120 - 4190):

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These accounts reflect the accumulated depreciation on the fixed assets currently in use by the project. The accounts are credited at the end of the accounting period by the amount of depreciation charged against operations (6600 Series) and based on the estimated useful life of the asset being depreciated. When the asset is withdrawn from project use, the account is debited

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through journal entry.

4200 RESERVE FOR COLLECTION LOSSES:

This account records the amount of tenant accounts receivable that agents estimate are uncollectible. This Allowance is increased (and an expense recorded) when full collection becomes doubtful. A journal entry is made crediting this account and debiting Bad Debt Expense (Account 6370) for the estimated amount of uncollectible Tenant Accounts Receivable. The Allowance is decreased when the receivables are formally written off. When all collection efforts have failed, the amount of the debt is "written off' by journal entry debiting this account and crediting Account 1130, Tenant Accounts Receivable.

5000 REVENUE ACCOUNTS:

Unless otherwise noted, the balance of all revenue accounts are closed to Account 3250, Profit and Loss at the end of the accounting period.

5100 RENT REVENUE - GROSS POTENTIAL:

5120 Rent Revenue - Apartments or Member Carrying Charges (Coop). Except for Section 236 and 221(d)(3) BMIR projects, this account records gross rent potential less tenant assistance payments for all residential units (including non-revenue producing units). For section 236 and 221(d)(3) BMIR projects, the

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account records basic rental charges due for tenants as shown on the latest Form HUD-92458, Rental Schedule, less tenant assistance payments. See Account 5190 for treatment of rents due or collected from tenants paying amounts greater than the basic rental charge. Offsetting debits to this account are Account 1130, Tenant Accounts Receivable, Account 5220, Vacancies - Apartments, and Account 6331, Manager or Superintendent Rent Free Unit.

5121 Tenant Assistance Payments. This account records tenant assistance payments received or earned by the project. Tenant assistance

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payment programs include the Rent Supplement, Rental Assistance Payment (RAP), and Section 8 programs, including vacancy and debt service special claims. 5130 Rent Revenue - Furniture and Equipment. This account records the gross rent revenue expectancy from furniture and equipment when the project provides furnished apartments. 5140 Rent Revenue - Stores and Commercial. This account records gross rental revenue expectancy from stores, offices, rented basement space or other commercial facilities. 5170 Garage and Parking Spaces. This account records the gross potential rental revenue from all garage and parking spaces. 5180 Flexible Subsidy Revenue. This account reflects the amount of Project Improvement Funds transferred from the Project Improvement Account (1380) to reduce mortgage or escrow deficiencies, to cover operating deficits or to meet working capital needs. These amounts are reported on form HUD-9823 A Requisition for Advance of Flexible Subsidy Funds. The ___________________________________________________________________________ 5/92 4-28 _____________________________________________________________________ 4370.2 REV-1 ___________________________________________________________________________ offsetting debit is to the relevant asset or expense account. At the close of the accounting period, agents must adjust the account by journal entry for any project expenses or releases awarded to pay accounts payable from prior fiscal periods. 5190 Rent Revenue - Miscellaneous. This account records gross rental revenue expectancy not otherwise described above. For Section 221(d)(3) BMIR projects, this account records rental collections due from over-income limit tenants in excess of the basic rental charge. For Section 236 projects, this account records excess rents collected from tenants when no payment is due HUD for the reporting month. Also see definition of Account 2115, Accounts Payable - HUD. 5200 Vacancies. These accounts (5220-5290) record rental revenue lost through vacancy of an apartment unit or

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otherwise revenue-producing space or equipment. Agents normally debit the accounts monthly. At the end of the accounting period, the balance of these accounts are closed to Account 3250 Net Income or Loss.

5300 Elderly and Congregate Services Revenue. These accounts (5300-5390) are used primarily by projects designed for the elderly. The accounts record revenues received other than rents for services provided to tenants (e.g., meal services, housekeeping and nursing care services). Service-related expenses are charged to the 6900 services accounts. A schedule shall be attached to the Statement of Income summarizing these accounts.

5400 FINANCIAL REVENUE:

5410 Interest Revenue - Project Operations. This account is used to record interest earned on funds in project operating accounts. This account will be credited for

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the interest amount and the appropriate interest generating asset account will be debited.

5420 Interest Reduction Payments. This account is used to record interest reduction payments made to the mortgagee by HUD on behalf of the project owner under Section 236 of the National Housing Act. This revenue account will be credited for the amount of the payment and the appropriate interest expense account will be debited.

5430 Revenue from Investments - Residual Receipts. This account records interest earned from residual receipts investments. The account will be credited for the interest amount and the appropriate interest generating asset account will be debited.

5490 Revenue from Investments - Miscellaneous. This account records interest earned from other miscellaneous investments. The account will be credited for the interest amount and the appropriate interest generating asset account will be debited.

5900 OTHER REVENUE:

5910 Laundry and Vending Revenue. This account records project revenues received from laundry and vending

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machines owned or leased by the project.

5920 NSF and Late Charges. This account records charges assessed to tenants for rent checks returned for insufficient funds and for late payment of rents.

5930 Damages and Cleaning Fees. This account records charges collected from tenants for damages to apartment units and for fees paid by tenants for cleaning of an apartment unit (other than regular housekeeping services).

5940 Forfeited Tenant Security Deposits. This account records any security deposits forfeited by tenants moving out of the project. The account is credited only when

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the tenant security deposit is deposited to the project operating account.

5990 Other Revenue. This account records project revenues not otherwise described in the above revenue accounts. If necessary, agents should subdivide the account into specific revenue accounts numbered 5991 through 5999.

6000 PROJECT EXPENSE ACCOUNTS: All project expense accounts are closed to Account 3250, Profit and Loss, at the end of the accounting period. Unless otherwise noted, all debits to the expense accounts are made from the Cash Disbursements Journal.

6200 AND 6300 ADMINISTRATIVE EXPENSES:

6210 Advertising. This account records the cost of advertising the rental property. The cost of any unused advertising, if significant, is transferred by journal entry to Account 1260, Prepaid Advertising, at the end of the accounting period.

6235 Apartment Resale Expense. This account records repair costs required following the sale of a cooperative unit less any portion of the seller's equity that was applied against repair costs.

6250 Other Renting Expenses. This account records miscellaneous expenses related to the rent-up of vacant units. For example, charges to this account may include reasonable payments to

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third parties for referring new tenants to the project or the cost of new locks after a tenant moves out. Agents may also charge this account for any allowance given tenants in lieu of rent (e.g., providing a new tenant a week's free rent in exchange for cleaning and painting the unit).

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6310 Office Salaries. This account records salaries paid to office employees (other than the resident manager) responsible for the front-line operation of the project regardless of whether the employee works on site or in the agent's office. Front-line responsibilities include for example, taking applications, verifying income and processing maintenance requests. The account does not include salaries paid to occupancy, maintenance and regional supervisors who carry out the agent's responsibility for overseeing for supervising project operations and personnel. These salaries are paid from the management fee. This account also does not include the project's share of payroll taxes (Account 6711) or other employee benefits (Account 6723) paid by the project.

6311 Office Supplies. This account records office expense items such as supplies, postage, stationery and copying.

6312 Office or Model Apartment Rent. This account records the rental value of an apartment, otherwise considered potentially rent-producing, but used as the project office or as a model apartment. The account is normally debited by journal entry.

6320 Management Fee. This account records the cost of management agent service contracted for by the project. This account does not include charges for bookkeeping or accounting services paid directly by the project to either the management agent or another third party (see account 6351).

6330 Manager or Superintendent Salaries. This account records salaries paid to a resident manager or superintendent. It doe not include the project's share of payroll taxes or other employee benefits or compensation given a resident manager or superintendent in lieu of

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salary payments. ___________________________________________________________________________ 5/92 4-32 _____________________________________________________________________ 4370.2 REV-1 ___________________________________________________________________________ 6331 Manager's or Superintendent's Rent Free Unit. This account records the contract rent of any rent free unit provided a resident manager or superintendent which would otherwise be considered revenue producing. 6340 Legal Expense. This account records legal fees or services incurred on behalf of the project (as distinguished from the mortgagor entity). For example, agents charge legal fees for eviction procedures to this account. 6350 Audit Expense - Project. This account records the auditing expenses incurred by the project that are directly related to HUD requirements for reviewed financial statements and reports. This account also includes the auditor's charge for preparing the mortgagor entity's Federal, State and Local tax returns. This account does not include the cost of routine maintenance or review of the project's books and records (see account 6351). 6351 Bookkeeping Fees/Accounting Services. This account records the cost of bookkeeping fees or accounting or computing services not included in the management fee but paid to either the agent or a third party. 6360 Telephone and Answering Service Expenses. This account records the cost of telephone or answering services provided on behalf of the project. 6370 Bad Debts Expense. This account records by journal entry the amount of tenant accounts receivable the agent estimates uncollectible at the end of the accounting period. The offsetting credit is to Account 4220, Allowance for Vacancy and Doubtful Tenant Accounts. ___________________________________________________________________________ 4-33 5/92 _____________________________________________________________________ 4370.2 REV-1

CFS | 177

___________________________________________________________________________

6390 Miscellaneous Administrative Expenses. This account records administrative expenses not otherwise classified in the 6300 Series. If necessary, agents should subdivide the account into specific accounts numbered 6391 through 6399.

6420-6453 UTILITIES EXPENSE:

These accounts record the costs of utility charges billed the project. If the amount of fuel oil at year end is significant compared to the total fuel oil expense for the year, agents should credit the account by journal entry for the value of the fuel oil and debit Account 1210, Fuel Inventory.

6500 OPERATING AND MAINTENANCE EXPENSES:

6510 Janitor and Cleaning Payroll. This account records the salaries of janitors employed by the project. Agents should also include any compensation given in lieu of salary (such as a rent-free or reduced-rate rental unit) in Account 6510. This account should not include the project's share or payroll taxes (FICA and Unemployment) or other employee benefits paid to the project.

6515 Janitor and Cleaning Supplies. This account records all costs of janitor supplies charged to the project.

6517 Janitor and Cleaning Contract. This account records the cost of janitor or cleaning contracts the owner or agent executes with third parties on behalf of the project.

6519 Exterminating Payroll Contract. This account records the charges to a project for labor or costs associated with an exterminating contract executed with a third party by the owner or agent.

___________________________________________________________________________

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_____________________________________________________________________ 4370.2 REV-1

___________________________________________________________________________

6520 Exterminating Supplies. This account records the costs charged to the project for materials used in exterminating.

CFS | 178

6525 Garbage and Trash Removal. This account records the cost of removing garbage and rubbish from the project. The account does not include salaries paid to janitors who collect the trash. 6530 Securely Payroll/Contract. This account records the project's payroll cost attributable to the protection of the project or the costs of a protection contract that the owner or agent executes on behalf of the project. 6535 Grounds Payroll. This account records the salaries of project employees whose primary responsibility is caring for project grounds. Project payroll costs related to permanent improvement to project grounds is capitalized and not charged to this account. This account does not include the project's share of payroll taxes or other employee benefits paid by the project. 6536 Grounds Supplies. This account records the cost of equipment and supplies used in maintaining projects grounds. Charges to this account include the costs of shovels, rakes, seed, sod and shrubbery. 6537 Grounds Contract. This account records charges to the project for grounds service contracts executed by the owner or agent. 6540 Repairs Payroll. This account records the salaries of project employees who repair project owned equipment or other assets. This account does not include the project's share of payroll taxes or other employee benefits paid by the project. ___________________________________________________________________________ 4-35 5/92 _____________________________________________________________________ 4370.2 REV-1 ___________________________________________________________________________ 6541 Repairs Material. This account records the costs charged to the project for material used in repairs. 6542 Repairs Contract. This account records the cost of contract repairs to project assets. Agents should capitalize repairs of significant amounts which extend the useful life of the asset.

CFS | 179

6545 Elevator Maintenance/Contract. This account records the cost of maintaining or repairing elevators by project employees or charges to the project for an elevator maintenance contract executed by the owner or agent.

6546 Heating/Cooling Repairs and Maintenance. This account records the cost of repairing and maintaining heating or air conditioning equipment owned by the project. Agents should capitalize repairs of significant amounts which extend the useful life of the equipment.

6547 Swim Pool Maintenance/Contract. This account records the costs of maintaining and operating the swimming pool by project employees or the charges to the project for any swimming pool contract executed by the owner or agent.

6548 Snow Removal. This account records the cost of removing snow from project sidewalks and parking areas.

6560 Decorating Payroll/Contract. This account records the salaries of project employees whose responsibility is decorating rental units, common space or the building's exterior.

6561 Decorating Supplies. This account records the cost of project labor and supplies in decorating rental units, common space or the building's exterior or charges to the project for any

___________________________________________________________________________

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_____________________________________________________________________ 4370.2 REV-1

___________________________________________________________________________

decorating contract executed by the owner or agent.

6570 Vehicle and Maintenance Equipment Operation and Repairs. This account records the cost of operating and repairing project motor vehicles and maintenance equipment. Motor vehicle insurance is not included in this account but is charged to Account 6720, Property and Liability Insurance (Hazard).

6590 Miscellaneous Operating and Maintenance Expenses. This account records the cost of maintenance and repairs not otherwise classified in the 6400 and 6500 account Series. If necessary, agents should subdivide the

CFS | 180

account into specific accounts numbered 6591 through 6599.

6600-6690 DEPRECIATION:

HUD does not prescribe the method of depreciation for fixed assets of the project. The method of depreciation, however, must conform to GAAP.

These accounts represent depreciation charged for the fixed asset accounts during the accounting period. Agents make the corresponding credit to accounts in the 4100 Series, Accumulated Depreciation.

6700 TAXES AND INSURANCE:

6710 Real Estate Taxes. This account records payments made for real estate taxes of the project. At the end of project fiscal year, the account is credited by journal entry for any taxes paid but due in the following year. The corresponding debit is to Account 1270, Prepaid Taxes.

___________________________________________________________________________

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_____________________________________________________________________ 4370.2 REV-1 ___________________________________________________________________________

6711 Payroll Taxes (Project's Share). This account records the project's share of FICA and State and Federal Unemployment taxes.

6719 Miscellaneous Taxes, Licenses and Permits. This account records any taxes, licenses or permit fees assessed the project and not otherwise categorized in the 6700 Series.

6720 Property and Liability Insurance (Hazard). This account records the cost of project property and liability insurance. The account is debited through journal entry when funds are not escrowed by a mortgagee or when Section 202 projects deposit funds in a special escrow account.

6721 Fidelity Bond Insurance. This account records the cost of bonding project employees who handle cash.

6722 Workmen's Compensation. This account records the cost of workmen's compensation

CFS | 181

insurance for project employees. The account is debited through journal entry. 6723 Health Insurance and Other Employee Benefits. This account records the cost of any health insurance and other employee benefits paid and charged to the project. 6729 Other Insurance. This account records the cost of insurance not otherwise classified in the 6700 Series. 6800 FINANCIAL EXPENSES: 6810 Interest on Bonds Payable. This account records interest paid or accrued on bonds issued lo construct or permanently finance the project. ___________________________________________________________________________ 5/92 4-38 _____________________________________________________________________ 4370.2 REV-1 ___________________________________________________________________________ 6820 Interest on Mortgage Payable. This account records interest paid or accrued on a mortgage issued to construct or permanently finance the project. The account is debited through journal entry. 6830 Interest on Notes Payable. These accounts and record interest and discounts paid on short 6840 term (5830) and long term (6840) notes. 6850 Mortgage Insurance Premium/Service Charges. This account records payments to the mortgagee for insurance on the mortgage. In the case of HUD-held mortgages, the payment is in the form a service charge. At the close of the accounting period, agent credits the account for any premiums paid but due the following year. The offsetting debit is to Account 1250, Prepaid Mortgage Insurance. 6890 Miscellaneous Financing Expenses. This account records financial expenses not otherwise classified in the 6800 Series. If necessary, agents should subdivide the account into specific financial expense accounts numbered 6891 through 6899. 6900 ELDERLY AND CONGREGATE SERVICE EXPENSES: Accounts in this Series are use primarily by

CFS | 182

projects designed for the elderly. The accounts record expenses directly related to special services provided the tenant (e.g., nursing expenses, drugs, food, etc.). See Section 4-3 for a detailed listing of service expenses in the 6900 Series. A schedule of accounts in this series shall be attached to the Statement of Income summarizing these expense accounts. ___________________________________________________________________________ 4-39 5/92 _____________________________________________________________________ 4370.2 REV-1 ___________________________________________________________________________ 7000 CORPORATE OR MORTGAGOR EXPENSES: These accounts record expenses applicable to the mortgagor entities distinguished from expenses necessary and reasonable to the operation of the project. In addition, these accounts record expenses for community shared facilities. Owners and agents may charge expenses included in the 7000 Series against project operations only with the prior written approval of HUD. 7110 Officers' Salaries. This account records salaries paid to officers for performing corporate duties. It should also include the value of any services given in an officer in lieu of a salary. 7120 Legal Expenses (Entity). This account records legal expenses related solely to the corporation or mortgagor entity. 7130 through 7132 - Taxes. These accounts record federal and state income tax and other corporate/entity taxes through expense of the mortgagor entity for the tax year. 7190 Other Expenses (Entity). This account records mortgagor entity expense items not otherwise classified in the 7100 Series. The account includes fees for preparation of federal, state and local income tax returns for individuals or limited partners, fees paid to partners other than from available surplus cash and office rent and supplies used exclusively for mortgagor entity purposes. 7700 Trustee. This account records expenses paid to an independent third party to manage the affairs of the long term debt and protect both the interests of the lender and the borrower. ___________________________________________________________________________

CFS | 183

5/92 4-40

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4381.5 REV-2

CHAPTER THREE

ALLOWABLE MANAGEMENT FEES FROM PROJECT FUNDS

3.1 GENERAL

Management agents operating HUD-insured and HUD-assisted properties are paid a management fee for their services. Management fees may be paid only to the person or entity approved by HUD to manage the project. Management agents must cover the costs of supervising and overseeing project operations out of the fee they receive.

Owners determine the actual amount of fee to be paid to the management agent. As provided for in project Regulatory Agreements and rental assistance contracts, for certain projects HUD determines the amount of fee that may reasonably be paid out of project funds.

NOTE: Unless otherwise specified, the term 'management fee' in this chapter references to the management fee payable out of project funds.

This chapter addresses reviews of management fees requiring HUD approval.

Section 1: Management Fees and Review Requirements discusses the types of fees that are allowed and summarizes review requirements.

Section 2: Procedures for Performing Management Fee Reviews covers procedural steps in the review process.

Section 3: Assessing Reasonableness of Management Fees provides guidance on the technical review of proposed fees.

Section 4: Special Provisions for Fees Approved On or Before August 1, 1986 highlights special rules for certain 'held harmless' projects.

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4381.5 REV-2

SECTION 1: MANAGEMENT FEES AND REVIEW REQUIREMENTS

3.2 TYPES OF MANAGEMENT FEES

a. There are five major types of fees that, when added together, make up the overall management fee for a project. The five types of fees are:

(1) Residential income fee;

(2) .Commercial income fee;

(3) Miscellaneous income fee;

(4) Special fees; and

(5) Add-on fees.

b. Fees derived from project income (residential, commercial, and miscellaneous) must be quoted and calculated as a percentage of the amount of income collected by the agent. Multiplying the fee percentage by the income collected gives the actual amount of fee paid to the agent This requirement serves two purposes.

(1) It gives the agent an incentive to maximize collections; and

(2) It automatically increases the agent's potential fee yield as project rents increase. These increases help offset increases in the agent's cost due to inflation.

c. Both special fees and add-on fees are quoted as dollar per unit amounts because they relate to project conditions that are not a function of project rents or income.

3.3 RESIDENTIAL INCOME FEE

HUD specifies the kinds of income that may be treated as residential income when determining the residential income fee. In general, income received from the rental of housing units may be counted as residential income. Figunii 3-1 indicate the types of income that mely and may not be included in the residential income base amount used when calculating this fee.

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4381.5 REV-2

Figure 3-1 Determining Residential Income

DO COUNT DO NOT COUNT

1. Apartment rents. 1. Section 8 Special Claims: a) unpaid rents

2. Cooperative carrying charges. b) vacancy loss C) debt service

3. Rent Supplement payments. d) resident damages.

4. RAP payments. 2. Excess rents and charges for Section 236 when the unit rent paid is greater

5. Section 8 regular tenant assistance than the unit Basic Rent. (This payments (including utility condition applies regardless of reimbursement payments made to whether the excess income is due to residents whose Total Tenant Payment is less than the utility allowance).

HUD.)

3. Section 236 Interest Reduction Payments (IRPs) made to mortgagees on Section 236 projects.

3.4 COMMERCIAL INCOME FEE

Most sources of commercial income may be counted when establishing the income base for this fee. Figure 3-2 shows the types of income that may be counted as commercial income.

Figure 3-2

Determining Commercial income

DO COUNT DO NOT COUNT

1. Rent receipts from commercial space.

2. Fees for parking spaces or garages. '

3. Charges collected by the agent for additional services not included in project rents.

1. Charges for services paid directly to an outside vendor or contractor.

3-3

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4381.5 REV-2

3.5 MISCELLANEOUS INCOME FEE

a. HUD will allow management agents to earn fees only on selected types of miscellaneous income. Figure 3-3 lists the types of income that may and may not be counted in the miscellaneous income base amount.

Figure 3-3

Determining Miscellaneous Income

DO COUNT DO NOT COUNT

1. Laundry and concession income (e.g., coin machines, car wash, cable TV, etc.).

1. Interest earned on invested security deposits, reserves, or other project funds.

2. Charges collected from residents, such as fees for damages, bad checks, and

2. Section 8 Special Claims for unpaid rent, vacancy loss, debt service, or resident

late payments. damages.

3. Proceeds from Loss of Rents Insurance 3. Flexible Subsidy Funds, except as policies. provided for in the MIO plan.

4. Income from furniture, equipment, and 4. Refunds from property tax or utility rate other charges shown on the HUD- approved . Rent Schedule (Form HUD-

appeals.

92458). 5. Proceeds from property damage or liability insurance policies.

5. Pet fees - for clean-up, etc. (not pet deposits). 6. Recovered legal fees and court costs.

7. Replacement reserve and residual receipts reimbursements to the project

3.6 SPECIAL FEES

a. Use of Special Fees. In addition to the percentage-based fees described above, owners may agree to pay special management fees if a project has special needs or problems. Proposing special fees (rather than adjusting the fee percentage) is an appropriate and cost effective way to addre3s specific project conditions that should be temporary in nature.

b, • Circumstances When Special Fees Are Allowed. Agents may earn special management fees only if all six conditions listed below are met

(1) The agent did not cause the problem the fee is designed to address.

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4381.5 REV-2

(2) The fee is tied to the correction of specific problems or the accomplishment of specific tasks. Examples of such tasks include:

(a) Renting-up the project (unless compensation for this is provided from a supplemental management fund);

(b) Obtaining or renewing a lease for commercial space at the project;

(d) Reducing vacancies or improving rent collections;

(e) Reducing a specific excessive expense (e.g., utility costs or property taxes); and

(f) Processing membership transfers at cooperatives.

NOT: Normally, Loan/Asset Management staff should not approve incentive fees tied solely to an agent's performance in increasing net income, or decreasing total expenses. Such fees might encourage agents to forego necessary maintenance or expenditures.

(3) The fee is structured so that it is payable only if the agent completes the required actions or obtains the required results.

EXAMPLE: A new agent might receive a special fee for satisfactorily correcting all items of deferred maintenance by a specific date.

(4) The fee does not include services that are covered by residential, commercial, or miscellaneous management fees, or by other sources of compensation.

EXAMPLE: An agent may not collect a special management fee for supervising rehabilitation work if those services are being paid for through BSPRA (Builders/Sponsors Profit and Risk Allowance), a construction oversight fee.

(5) The fee is reasonably related to the time, effort, and expertise required of the agent.

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4381.5 REV-2

(6) The fee is paid only for a limited period of time. The length of this period should be no longer than the time required to resolve a specific problem or complete a certain task.

c. Bookkeeping Expenses Are Treated as a Proiect Cost. The cost of bookkeeping services for a project performed as part of a centralized bookkeeping system are treated as a project cost and should not treated as a special fee. Such expenses are paid out of project funds based on actual costs attributable to the project. Further guidance on the treatment of such costs and the amount payable out of project funds is provided in Chapter Six, paragraph 6.37.

3.7 ADD-ON FEES

NOTE: ONLY AFTER computation of the permitted percentages for residential, commercial and miscellaneous income have been determined and approved by HUD, may add-on fees be considered. in approving the permissible percentage fees, the PUPM Yield must fit within the range established by the Area Office. Although the total yield including the add-on fees may exceed the range, add-on fees may not be !red to increase this range and in turn increase the percentage fee.

a. Add-on fees are a flat dollar per unit fee paid to agents managing projects with long-term project characteristics/conditions that require additional management effort beyond than the activities covered by the residential management fee. For example, scattered site projects will often will often require greater management effort than single site projects.

(1) HUD Area Offices will establish a schedule of project characteristics/ conditions that warrant add-on fees and a flat fee amount (PUPM) for each characteristic/condition (see paragraph 3.21). Area Offices will make this schedule available to owners/agents of projects within its jurisdiction.

(2) Figure 3-4 list examples of project characteristics/conditions that may warrant the use of add-on fees.

(3) For short-term or temporary project conditions, owners/agents should seek special management fees (see paragraph 3.6). Area Offices will not approve add-on fees for temporary projects conditions.

(4) HUD Area Offices must not establish add-on fees for project characteristics/conditions that are already covered in its residential management fee range. For example, an add-on fee for a subsidy contract would not be appropriate if a significant number of the projects used to establish the residential fee range were Section 8 New Construction or Substantial Rehabilitation projects.

12/94 3-6

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4381.5 REV-2

Figure 3-4

Examples of Long-Term Project Conditions That Could Justify Add-On Fees

A. High Density Projects: A high percentage of units with three or more bedrooms increases the population density and can increase the cost of managing a project

B. Location:

1. Remote location. A higher fee may be justified if:

• No local management is available and agent will incur unusually high travel costs. • Special outreach is required to attract residents.

2. Scattered site. The agent may be paid additional compensation for the extra travel expenses incurred in overseeing several sites.

3. Adverse neighborhood conditions (e.g., high incidence of crime or vandalism, or large concentration of deteriorated or substandard housing) These characteristics tend to increase maintenance and repair problems, resident turnover, vacancies, and rent collection losses.

NOTE: While higher fees may be allowed for these conditions, Area Offices should not elbow higher fees for collection losses caused by these conditions if the owner and agent used a collections base of less than 95 percent to estimate the residential management fee yield.

C. Type of ownership: Because owners of nonprofit projects may be less experienced In property management or because cooperative projects have additional legal and organizational responsibilities, management of these projects may require extra knowledge and effort on the pan of the agent.

EXAMPLE: To manage a cooperative, the agent must understand State and local cooperative laws, the cooperative subscription process, how homeownership works in cooperative housing, and other requirements specific to cooperative housing.

D. Subsidy mix: A higher fee may be appropriate if

1 A project has more than one type of subsidy.

AND

2. The combination of subsidies to the project requires more administrative oversight than the projects that were used to establish the residential fee range.

EXAMPLE A: An agent who manages a 236 project with a Rent Supplement RAP, or Section 8 contract may receive a higher fee than an agent who manages an otherwise comparable 236 project with no tenant-based subsidy.

EXAMPLE B: An agent who manages a 236 project with both Rent Supplement and Section 8 may receive a higher fee than an agent who manages an otherwise comparable 236 project with only one tenant-based subsidy. (NOTE:, This does not apply if the project has both AAP and Section 8. Since the rules for these two programs are so similar, having both subsidies does not require significantly more work from the agent.)

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4381.5 REV-2

a. Owner/Aaent Requests for Add-on Fees. Owners/agents requesting add-on fees for a project must submit a new Management Certification (From HUD- 9839-A, or B) and list the requested fees under the Special Fees section of Attachment 1 of this form. In completing Attachment 1 of the Management Certification, owners/agents must clearly distinguish any add-on fees requested from any special fees listed on the form. The owner may request any dollar amount for a specific add-on so long as the amount does not exceed the dollar limit established for that add-on fee by the appropriated Area Office.

3.8 PROJECTS SUBJECT TO HUD MANAGEMENT FEE REVIEWS

a. General. Whether a project is subject to a management fee review depends upon several key factors:

(1) Type of Ownership (i.e., whether the ownership is profit motivated, limited dividend, or nonprofit.)

(2) Management Agent: (e.g., whether the agent has previously received approval from the Area Office or has outstanding findings of noncompliance.)

(3) Project Conditions: (i.e., whether the project's financial, physical, or administrative problems suggest the need for a review.)

Projects subject to review may be reviewed either up-front (before the project is obligated to pay the management agent) or after-the-fact (in conjunction with other servicing activities). Figure 3-5 summarizes the requirements and timing of management fee reviews.

b. Types of Ownership

(1) Profit-Motivated Proiect. A profit-motivated (PM) project is one in which the ownership entity is legally allowed to distributed surplus cash to its members.

(2) Limited Distribution Project. A limited distribution (l..0) project is one in which distributions of surplus cash to the ownership are limited and certain conditions must be met before the project's surplus cash can be distributed.

(3) Nonprofit Project. A nonprofit project is one in which the ownership entity generally does not receive distributions of surplus cash from the property. Surplus funds from the operation of these projects are used for project-related improvements or services.

12/94 3-8

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4381.5 REV-2

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3-9

CFS | 193

4381.5 REV-2

In certain cases nonprofit entities, such as those receiving Title II or Title VI Preservation funding, are allowed to receive distributions. Such projects retain their nonprofit designation even though the organization is allowed to receive distributions of project funds. For detailed guidance regarding Preservation projects, see Processing Plans of Action under the Low-Income Housing Preservation and Resident Homeownership Act of 1990, HUD Handbook 4350.6.

(4) Determining the type of ownership. The applicable Regulatory Agreement or rental assistance contract for the project will indicate the extent to which surplus cash can or cannot be distributed to the owner.

NOTE: Generally speaking, Section 8 projects issued a notice of selection after November 5, 1979 (for New Construction) and February 20, 1980 (for Substantial Rehabilitation) should be LD projects.

c. Protects Not Subject to HUD Management Fee Reviews. Owners of the following types of projects do not have to obtain HUD approval of the management fee payable out of project funds unless the project is in default under a mortgage or other approved payment program or HUD determines a review is necessary to protect its interests. See Figure 3-5 for examples of project conditions that might trigger the requirement for a review.

(1) PM projects that do not have rental assistance contracts.

(2) PM projects that hold Section 8 contracts and use the Annual Adjustment Factor (AAF) to compute rental adjustments for Section 8 units.

NOTE: If owners of this type of project request a special rent increase or have their rents set through a budget, HUD will process the rent increase request using the lower of:

(a) The project's actual management fee (as shown on the current management certification); or

(b) The maximum fee that would be allowed under this chapter's procedures, if the fee were subject to HUD review.

(3) PM Preservation projects that use the Operating Cost Adjustment Factor (OCAF) to determine rent adjustments.

(4) Unsubsidized cooperatives and Section 234 (d) condominium projects.

12/94 3- 10

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4381.5 REV-2

3.9 APPUCABLE MANAGEMENT FEE FOR RENT INCREASE REQUESTS

a. Budget-based Rent Increases. For projects where rents are set through an expense-based rent formula, HUD will use the approved management fee percentage in processing all rent increase requests. The approved fee percentage is used regardless of the fee yield provided by this percentage tee, except in cases where the provisions of paragraphs (b) or (c) below apply.

EXAMPLE: Last year HUD approved a management fee of five percent for Property X. At that time, this management fee provided a potential fee yield of $25 per unit per month (PUPM). This year the owner is applying for a budgeted rent increase.

In processing this request, Loan Management staff will use the management fee of five percent. If the five percent fee would result in a potential fee yield of $28 PUPM and this amount exceeded the upper limit of the reasonableness range of $26 PUPM for that area (see Section 3), Loan Management staff would use the approved fee percentage and no cap would be placed on the fee yield.

b. Calmed Fee Percentage for Projects Receivino Significant Rent increases. When a project will receive a rent increase equal to 20 percent or more of its current rent potential (e.g., as a result of large increases in project costs, capital improvement activities, or preservation incentives), the management fee percentage must be adjusted. Figure 3-6 illustrates when an owner request for a rent increase affects the residential management fee percentage.

(1) In such cases, the residential management fee yield . is limited to the yield that would be allowed under a 20 percent rent increase using the current management fee percentage.

(2) The residential management fee percentage is then adjusted to reflect the maximum allowable yield under the new rent structure for the project.

(3) This adjustment to the fee percentage will not be subject to a reasonableness review as described in Sections 2 of this chapter. It is merely an adjustment of the percentage fee which will occur at the same time the rent increase is approved by HUD.

(4) This adjusted percentage fee will apply to all future rent potentials without regard to the fee range limits until such time as the agent requests a change in the percentage fee.

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4381.5 REV-2

Figure 3-6

EFFECT OF A RENT INCREASE ON THE MANAGEMENT FEE

Owner requests a rent increase

RANGES DO NOT APPLY

If the increase is 20% or less of the current rent potential

If the increase is greater than 20% of the current rent potential

Calculate the fee yield using the

the current fee percentage and net

rent potential for a 20% increase.

Adjust the management fee

percentage by dividing the

calculated yield by the new net

rent potential.

Use the new fee percentage

for future rent increases.

(See paragraph 3.19b.)

The current management fee

percentage is applied to the new

potential, even if the yield which

is derived is greater than the

established range.

12/94 3-12

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Figure 3-7 illustrates the method for determining the revised residential management fee for these projects and adjusting the residential fee percentage for these projects.

c. Adjusting the Management Fee for Rent Decreases. When project rents are reduced as a result of refinancing or other reason permitted by HUD regulation, HUD will also adjust the residential management fee percentage in order to ensure that agents retain their current yield. In readjusting the percentage, the following formula should be used:

Revised Management Fee Percentage

Current Fee Yield x Number of Units

Collections Percentage x Reduced Monthly Rent Potential (0.95 or other factor determined by HUD)

This adjusted percentage fee wiN apply to all future rent poteritials without regard to the fee range limits until such time as the agent requests a change in the percentage fee.

d. Capped Fee Yield In Hold -Harmless Proiects. For projects where the residential management fee yield has been capped pursuant to the hold-harmless provisions set forth in paragraphs 3.24 and 3.27, Loan Management staff must use the capped fee yield when processing rent increases. (NOTE: This only applies to Pre-1986 contracts covered by paragraphs 3.24 and 3.27)

3.10 OWNER REQUESTS FOR CHANGES IN EXISTING FEES

a Owner Submission. To initiate a change in the management fee percentage, the owner and agent must submit a new Management Certification showing the revised management fee(s).

(1) For projects subject to up-front reviews, the fee can be changed only after the HUD Area Office has given written approval of the fee.

(2) Owners of projects subject to after-the-fact reviews may negotiate and implement revised fees with in-place agents without HUD approval, as long as the fee complies with the reasonableness standards described in Section a A new Management Certification must be submitted before the revised fee can be charged.

(3) For projects not subject to HUD review, owners may negotiate fees and revise fees without HUD review or approval. However, the owner/agent must submit a new Management Certification.

b. HUD Review. When HUD receives a request from an owner to change the management fee for an in-place agent, Loan/Asset Management staff should take the following steps:

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METHODOLOGY

Step 1: DETERMINE ALLOWABLE FEE YIELD

Allowable Fee Yield se Projected Fee Yield" Under a 20% Rent Increase Using Current Management Fee Percentage

Step 2: CALCULATE REVISED MANAGEMENT FEE PERCENTAGE

Allowable Fee Yield Under New Project Rents 12

Annual Net Rent Potential Under New Project Rents

" Projected Fee Yield Yield Under New Rent Structure Using Applicable Occupancy Factor Adjustment

!EXAMPLE

ABC Apartments Assumptions:

A 30% rent increase has been approved Annual Gross Rent Potential Under 30% Rent Increase = $1,300,000 Annual Gross Rent Potential Under 20% Rent Increase = $1,200,000 Current Management Fee = 7.00%

Step 1: Determine Allowable Fee Yield Under New Project Rents

$1,200,000 (Annual Gross Rent Potential Assuming 20% Increase) x .95 (Standard Occupancy Adjustment Factor *1

1,114,000 (Adjusted Gross Rent Potential) x .07 'Current Management Fee)

$ 79,800 (Ala/able Fee Yield)

Step 2: Revise Fee Percentage

$1,300,000 (Annual Gross Rent Potential Assuming 30% Increase) x .95 'Standard Occupancy Adjustment Factor ••

$1,235,000 (Adjusted Gross Rent potential)

$79,800 (Allowable Fee Yield) + $1,235,000 (Adjusted Gross Rent Potential) = 6.46%

Standard Occupancy Adjustment factor of 95% is used in this example. However, the factor normally used in the budgeted rent increase process and/or in processing the Management Fee percentage should be used.

Revised Management Fee Percentage

4381.5 REV-2

Figure 3-7

Adjusting the Residential Management Fee Percentage for Projects Receiving Significant Rent Increases

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4381.5 REV-2 •

(1) Review the Management Certification to determine the type of review required, if any.

(2) Write the applicable review category (i.e., up-front, after-the-fact, or no review) on the first page of the Management Certification.

(3) For projects not subject to up-front reviews, Loan/Asset Management staff should update the office computer system with data items used in determining reasonableness ranges. This information will be used when revising residential fee ranges.

(4) Follow the procedures in Section 2 to assess the reasonableness of the proposed changes in the existing management fees.

3.11 TERM OF HUD-APPROVED MANAGEMENT FEES

a. Once HUD has reviewed and approved the percentage management fees for a project (i.e., completed an up-front or after-the-fact review), these management fees will not be subject to further review unless:

(1) There is a change in management agents; or

(2) Owners/agents request a change in the approved management fee percentage (see paragraph 3.10).

b. Rents increases do not trigger HUD management fee reviews. Large rent increases may require an adjustment of the fee percentage (see paragraph 3.9).

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SECTION 4: FINANCIAL COMPLIANCE

6.34 OVERVIEW

a. Purpose. Management agents are charged with protecting the financial viability of HUD-insured multifamily projects. The purpose of financial reviews is to verify that owners and management agents are in compliance with HUD Handbook 4370.2, Financial Operations and Accounting Procedures for Insured Multifamily Projects, and related HUD requirements and guidelines. This section provides an overview of the financial compliance review requirements for Loan/Asset Management staff.

Inadequate internal controls and procedures for financial operations and accounting can result in

• insufficient funds to pay for maintenance and emergency repairs;

• willful misappropriation of project funds; and/or

• claims and losses against the FHA Insurance Fund.

To prevent these occurrences, Loan/Asset Management staff are responsible for determining that owners and management agents observe HUD guidelines and maintain an effective set of reporting systems and internal controls.

b. Applicability. All HUD-insured and HUD-assisted properties are subject to some degree of financial review. HUD Handbook 4370.2 describes the review procedures that must be performed for different types of projects and who is responsible for conducting the review (i.e., HUD, the mortgagee, or Contract Administrators other than HUD).

6.35 RELATIONSHIP TO MANAGEMENT REVIEW

Part B of the HUD-9834, Management Review of Multifamily Projects, addresses financial management. Questions on Part B of the HUD-9834 relate directly to the following paragraphs. See Appendix 4.

6.36 REVIEWING ANNUAL FINANCIAL STATEMENTS

a. Purpose. Annual financial statements show the project's financial condition. Loan/Asset Management staff may review the statements, which are sent to the Area Office, to measure the current and near-term financial stability of the

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project by using financial ratios and other indicators. (Reports from existing MIPS applications may provide additional detail.) Loan/Asset Management staff should determine whether project assets and liabilities, rates of rent collection, accounts payable, etc., appear reasonable given the project's size and history. This information may suggest areas where increased oversight is needed.

b. Review requirements. Loan/Asset Management staff must verify that annual financial statements are prepared and submitted to the Area Office in compliance with the following procedures and with HUD Handbook 4370.2.

(1) Preparation

(a) Each annual financial report must be based on books and accounts for that project only.

(b) The annual financial report must cover the project's entire fiscal period under review.

(d) The annual financial report must be audited by an Independent Public Accountant (IPA) who is a Certified Public Accountant or who has been licensed or registered on or prior to December 31, 1970.

(2) Submission, Chapter 3 of HUD Handbook 43702 REV-1 provides a detailed listing of the required annual reports. Audited financial statements must be submitted annually for each project. The Regulatory Agreement requires submission within 60 days following the end of each fiscal year.

6.37 ASSIGNING MANAGEMENT COSTS

a. HUD allows owners to charge certain management costs to the project's operating account. However, other management costs may be paid only out of the management fee. The assignment of these costs is discussed in paragraphs 6.38 and 6.39. Asset management costs-for the project must be paid out of distributions to the owner. The assignment of asset management costs is described in paragraph 6.41.

b. In reviewing a project's financial statements, Loan/Asset Management staff should follow the procedures in paragraphs 6.38 through 6.41 and in

7--

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Handbook 4370.2 to ensure that management costs have been properly assigned.

c. Rather than maintaining separate payroll and separate fringe benefits plans for each property, some agents consolidate payroll and fringe benefit plans in order to reduce costs for the properties. In such a system, all personnel for several properties are listed under a single Federal Employer I.D. Number. The salary and fringe benefits costs are prorated to the various properties in the following ways.

(1) Salaries and fringe benefits of personnel performing front-line duties are prorated among the properties served in proportion to actual use.

(2) The agent may not impose surcharges or administrative fees in addition to actual costs.

(3) The properties served may make reimbursement payments to the consolidated employer upon issuance of payroll checks.

(4) Discounts, rebates, dividends, commissions, or other recoveries of fringe benefits costs must be prorated among the properties served in proportion to actual use during the period to which the recovery applies.

6.38 MANAGEMENT COSTS CHARGED TO THE PROJECT'S OPERATING ACCOUNT

a. Front-line Costs and Day-to-Day Activities

(1) Reasonable expenses incurred for front-line management activities may be charged to the project operating account. HUD Handbook 4370.2, Financial Operations and Accountina Procedures for Insured Multifamily Projects, provides a complete listing of allowable expenses. Front-line activities include:

• taking applications;

• screening, certifying, and recertifying residents;

• maintaining the project; and

• accounting for project income and expenses.

Figure 6-2 provides examples of front-line management costs.

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4381.5 REV-2

Figure 6-2

Examples of Costs Paid from Management Fee and Project Account

Costs Paid from Fee Costs Paid from Project Account

The selection and establishment of an accounting system and internal management control procedures. Visits to spot check performance of on-site staff (e.g., reviews of occupancy files, office procedures, etc.).

Reimbursement of all costs related to maintaining a centralized or project- based accounting functions of the project, including resident certifications, worksheets, and monthly subsidy billings, as well as monthly accounting reports required by the owner or HUD. Includes prorated costs on a per- unit basis for centralized accounting systems, including hardware, software and technical support. Agent can be reimbursed for the prorated cost to the project of personnel providing property-specific accounting and computer services. The coat to the project for such services provided by the agent may not exceed the cost of procuring comparable services from an independent vendor. Each year, the agent must determine that these costs are at or below the market and maintain such evidence on-site.

Fidelity bond coverage for the agent's supervisory staff

Fidelity bond coverage for front-line employees and principal management staff.

Bookkeeping expenses attributable to agent's company

Overhead expenses (e.g., supplies and equipment, transportation and phone calls to projects, regularly scheduled long distance calls from project to agent. office space, data processing, etc).

Costs of front-line project operations — e.g., managers and their apartments. legal and auditing expenses, bookkeeping and associated expenses, occupancy clerks, project management delinquency notices, evictions, project checks, envelopes, postage, air express delivery charges, copying, unscheduled long distance calls to agent, costs of IRS Section 401-K, 125, and 403-B, and related retirement and health plans for on-site staff so long as they are comparable with Industry standands and In compliance with the guidelines set forth in paragraph 6.38(e), and the salary of a supervisory employee of the agent designated to replace a project employee for hours worked at the project above and beyond the first 40 consecutive hours of the assignment.

Directing the investment of project funds.

Reasonable brokerage fees and interest costs incurred in investing project funds

Agent's travel expenses to visit project and meet with owners. Training and travel expenses for agent's supervisory staff.

Travel expenses incurred by front-line staff's responsibilities (e.g., making bank deposits, meeting with contractors, attending training, etc.).

Agent office phone lines not dedicated to TRACs or the project, and automation equipment not required by HUD.

Dedicated line and modem for transmitting TRACs data (such lines can be shared with FAX machines). Automation required by HUD (e.g., equipment for the implementation of TRACs). Reasonable costs for on- site equipment, software, and technical support necessary for performing other front-line activities of the project, including FAX machines, automated credit terminals, and other telephones and electronic transmission devices at the site.

Recruiting costs for agent's staff, including roving staff members.

Recruiting costs for on-site staff.

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(2) If front-line management functions for several properties are performed by staff of the agent operating out of a single office, the following conditions apply.

(a) The agent must prorate the total associated costs among the projects served in proportion to the actual use of services. Allowable total associated costs include:

(i) Salaries and fringe benefits of personnel performing front- line duties; and

(ii) Actual office expenses, fees, and contract costs directly attributable to the performance of front-line duties.

(b) The agent may not impose surcharges or administrative fees in addition to actual costs.

(c) The cost of performing front-line management functions off-site may not exceed the total cost of performing these functions at the property.

(3)

The salaries of the agent's supervisory personnel may not be charged to project accounts, with the exception of supervisory staff providing oversight for centralized accounting and computer services for the project.

b. Agent Staff Performing Front-Line Functions

A management agent employing generalist staff members specifically designated to assume front-line responsibilities on an as-needed basis may bill the project's operating account for time spent on front-line activities for the property if each of the following conditions are met.

(1) Salaries of an agent's supervisory personnel may not be charged to the project's operating account (See exceptions to this rule in paragraph 6.39).

(2) The agent develops a job description for each generalist position outlining the front-line and non-front-line responsibilities of the position. The non-front-line responsibilities in the generalist description may not include supervisory functions.

(3) The agent develops a reasonable hourly rate, which will be used to bill individual projects for time spent on front-line functions. A reasonable hourly rate includes the hourly salary for the position and an allocation

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for overhead expenses, and should not exceed the amount that would be paid to an on-site staff member with similar experience.

(4) An agent's generalist staff must document hours spent and duties performed on front-line activities for each project and those spent on the central office functions. Weekly timesheets are an acceptable method of documenting hours spent on front-line tasks.

c. Training Costs for Front-Line Staff

(1) Project funds may be used to obtain project related training for front-line management staff.

(2) Loan/Asset Management staff may use the following guidelines to assess whether amounts proposed for training are reasonable.

(a) At a minimum, the budget amount should be sufficient to allow one staff person from each functional area to attend a minimum of one project related training session per year.

(b) As a rule of thumb for most projects, a reasonable training budget would not exceed the greater of $5,000 or one half of one percent (0.005) of gross rents.

(c) Loan/Asset Management staff have the authority to approve training budgets that exceed the guidelines in paragraph (b) above if the owner/agent can clearly document the conditions that necessitate more extensive training for project staff.

d. Training Costs for Board Members of Resident-Owned/Co-og Housing

(1) Project funds may be used to provide project related training for the Board of Directors of a housing cooperative.

(2) Project funds approved by the Board may be used to pay for each board member to attend one project related training session or conference per year.

(3) The guidelines presented in paragraph 6.38c(2)(b) and 6.38c(2)(c) should be used in evaluating whether the amounts proposed for training are reasonable.

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Previous versions obsolete Page 1 of 2 form HUD-93486-ORCF (06/2014)

Computation of Surplus Cash, Distributions and Residual Receipts Section 232

U.S. Department of Housing and Urban Development

Office of Residential Care Facilities

OMB Approval No. 2502-0605 (exp. 06/30/2017)

Public reporting burden for this collection of information is estimated to average 0.5 hour(s). This includes the time for collecting, reviewing, and reporting the data. The information is being collected to obtain the supportive documentation which must be submitted to HUD for approval, and is necessary to ensure that viable projects are developed and maintained. The Department will use this information to determine if properties meet HUD requirements with respect to development, operation and/or asset management, as well as ensuring the continued marketability of the properties. This agency may not collect this information, and you are not required to complete this form, unless it displays a currently valid OMB control number. Warning: Any person who knowingly presents a false, fictitious, or fraudulent statement or claim in a matter within the jurisdiction of the U.S. Department of Housing and Urban Development is subject to criminal penalties, civil liability, and administrative sanctions.

Project Name: Fiscal Period Ended: ___/___/___ FHA Project Number: PART A – Compute Surplus Cash Cash

1. Cash (Accounts 1120, 1170, 1191) $ 2. Medicare/Medicaid Receivables to be received within 60 days

and not encumbered by Accounts Receivable Financing (optional for non-profit projects)

3. Other (describe) $ (a) Total Cash (Add Lines 1, 2 and 3) $

Current Obligations 4. Accrued Mortgage Interest Payable $ 5. Delinquent Mortgage Principal Payments $ 6. Delinquent Deposits to Reserve for Replacements $ 7. Accounts Payable (due within 30 days) $ 8. Loans and Notes Payable (due within 30 days) $ 9. Deficient Tax Insurance or MIP Escrow Deposits $

10. Accrued Expenses (not escrowed) $ 11. Prepaid Revenue (Account 2210) $ 12. Tenant Security Deposits Liability (Account 2191) $ 13. Other (describe) $

(b) Total Current Obligations (add Lines 4 through 13) $ (c) Surplus Cash (Deficiency) (Line 3(a) minus Line 13(b)) $

PART B – Compute Distribution to Owners and Required Deposit to Residual Receipts 1. Surplus Cash (Deficiency). (For-profit projects) $ 2. Residual Receipts (Non-profit projects) (must be deposited with Lender within 60

days after Fiscal Period ends, as governed by applicable Regulatory Agreement) $

Preparer (Signature, Name and Title):

Date: Approver (Signature, Name and Title): Date:

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Previous versions obsolete Page 2 of 2 form HUD-93486-ORCF (06/2014)

Instructions for Preparation of Form HUD-93486-ORCF, Computation of Surplus Cash, Distributions and Residual Receipts

Part A

Line 1. Do not include escrow deposits or HUD required reserves.

Line 2. Medicare/Medicaid Receivables (to be received within 60 days) (optional for non-profit projects)

Line 3. Include amounts related to replacement reserve draws for items which have:

• Been paid from project funds, and • Approved by HUD prior to the end of the

fiscal year, but • For which reimbursement has not been

received from the lender.

Line 4. For projects current under the mortgage, include the interest payment due the first of the next month (Account 2130). Remember interest is paid in arrears: interest for the month of December is payable January 1. For projects in default under the mortgage, include delinquent interest payments shown on the Form HUD-92426, Notice of Default; use the Form HUD-92426 for the month following the last month covered by the financial statement. For HUD- held projects, include delinquent interest shown on the Form HUD-92771, Notice of Mortgage Payment Due; use the HUD-92771 for the month following the last month covered by financial statements.

Line 5. Include principal delinquent under the mortgage. This should be the difference between the unpaid balance shown on the amortization schedule and the amount shown in Account 2320 as the Balance Sheet date.

Line 6. Include any delinquent deposits to the reserve for replacement account (Account 1320). Be sure to include any lump-sum deposits required by special workout agreements or subsidy contracts.

Line 7. Exclude accounts payable related to replacement reserve draws which were:

• Approved by HUD prior to the end of the fiscal year, but

• Which have not yet been released by the lender and deposited in the project account.

Line 9. Include any deficiency reported in the mortgage escrow deposits schedule of the Supplemental Data to the financial statement. Note that replacement reserve deposits are not included; delinquent replacement reserve deposits are included in Line 6.

Part B

Line 1. If the amount on Line 13(c) of Part A was zero or negative, enter zero. If the amount on Line 13(c) of Part A was positive, enter that amount here. This amount is available for distribution during the next fiscal period (for-profit projects only).

Line 2. If the amount on Line 13(c) of Part A was zero or negative, enter zero. If the amount on Line 13(c) of Part A was positive, enter that amount here. This amount must be deposited with Mortgagee within 60 days after Fiscal Period ends (non-profit projects only).

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