USDA Rural Development
Multifamily Housing Programs
2
• Agency of US Dept of Agriculture (USDA)
• 15,000 section 515 rural multi-family
projects
• 1,000 section 514 projects
Section 515 Program
• M/F housing in rural areas
• 30 year term with 50 year amortization
• Rate established by agency based on
market
3
Section 514 Program
• Affordable housing for farmworkers
• Terms comparable to 515
4
Types of Projects
•
•
•
•
•
Family
Elderly
Congregate homes
Group homes
Coops
5
Section 521 Overview
6
• Rental assistance
• Used with both 515 and 514 programs
• Tenant pays no more than 30% of income
General Program Requirements
•
•
•
•
•
Civil Rights
Nondiscrimination
Limited English proficiency
Environmental Requirements
Construction standards
7
Management Plan
•
•
•
•
Management plan
Policy and procedure manual
Initially submitted at application
Certify every 3 years
8
Management Certification
• Form RD 3560-13
• Operate project according to
management plan
• No inducement payments
• Management agreement complies
• Disclose IOIs
9
Management Agent
•
•
•
•
Borrower/Manager
IOI
Independent Fee Management Agent
Must have 2 years experience to be
approved
• Follow management plan
• Must also certify to compliance
• Form RD 3560-30
10
Management Fee
• Occupied unit fee
– Based on established state rates
• Add-on fees
– Flat PUPM
– Cannot cover conditions already covered in
base fee
11
Items Paid from Fee
12
• Managing compliance
• Establishing policies and procedures
• Implementing policies and supervision of
on-site staff
Paid from Income
• Project-related items
–
–
–
–
Salaries & benefits
Office expenses
Maintenance
Processing tenants
• Must be reasonable
13
Financial Reporting Requirements
7 CFR Part 3560
Subpart G 3560.308
and
HB-2-3560 Section 4.32
and
Attachment 4-B
14
Project Accounting – System
Requirements
15
• Must establish appropriate accounting system
• Must be approved by RD (notify if major
changes)
• May use cash, accrual or modified accrual (must
be consistent with guidance)
• Retain financial records for at least 3 years and
available to 3rd party
• Bank accounts must be in US accounts and
insured
Project Accounting – System
Requirements, con’t
16
• Funds must be held in trust by borrower
• May not be used as collateral
• Systems must maintain identity of each
project
• Establish minimum # of bank accounts
– Operating, tax & insurance, reserve, security
deposit
General Operating Account
• All revenues and expenses
• Initial operating capital (2% of total
development costs)
– May be released between the 2nd and 7th
year
• Will be deemed to have a surplus when
balance > 20% of operating and
maintenance expenses
• Surplus must be used for capital,
reserves, reduce debt or reduce rents
17
Tax and Insurance Account
• Deposited from mortgage payments
monthly
• May be kept in operating acct
• Must be tracked separately
18
Reserve Account
• Payments in monthly amounts and are
paid with mortgage
• Major repairs or other improvements
• Must be in supervised account and
require agency counter signature
19
Security Deposits
•
•
•
•
20
Uses outlined in management plan
Used to fix repairs on damaged units
Unused funds returned to tenant
May be transferred to operating account
is unclaimed
• Interest in handled in accordance with
state law
Initial Operating Capital
• Borrower must provide initial operating
capital = 2% of loan amount
• Uses have to be approved by RD
• Not treated as excess funds if in
operating account
21
Other Borrower Advances
22
• Require written approval
• If not short-term, project budget must be
reviewed
• May not use for reserve funds, or initial
operating capital or rent increase
Repayment of Initial Operating
Capital
23
• Requires RD approval
• May be removed in installments or lumpsum between 2nd and 7th year
• Must have been operating for at least 2
years
• Must be repaid before end of 7th year
Borrower Submission of Request
• Submit request with transmission of
annual financial report
• In writing
• Document that criteria is met
–
–
–
–
Stable financial condition
90% occupancy over last 12 months
Reserves adequate
No outstanding compliance violations
• Describe method of repayment
24
Return on Investment
25
• Owner may take ROI before withdrawing
IOG
• Positive net cash flow
• Reserves up-to-date
• Excess cash is determined from Form RD
3560-7 that exceeds 20% of operating
and maintenance expense
• May consider A/P and reserve
withdrawals to cover operating expenses
Replacement Reserves
• Used for major capital expenditures
• Interest –bearing account
• Begins with 1st loan payment; adjusted
throughout project’s life
26
Replacement Reserves, con’t
• Deposits continue until amount reaches
the specified limit in loan agreement
• Payments resume after withdrawals
• May change based on revised capital
needs assessment
27
Reserve Account Principles
• May be held in checking, savings or
similar federally-insured account
• Must be readily marketable
• Securities must be backed by Feds
including triple-A rated GNMA bonds
• Actual costs of securities must be
disclosed in report
28
Uses of Reserves
• Withdrawals requested on RD Form
3560-12 before they are needed
• Should be included in budgets at least
annually
• Unexpected uses must be approved by
RD
• See list for approval process
29
Reserve Withdrawal Process
•
•
•
•
•
•
Form RD 3560-12
Statement of purpose
Current balance in account
Estimated costs (bids, if obtained)
RD completes process
Excess reserves may be transferred to
operating account
30
Requirements for Budgets
•
•
•
•
•
•
Required for projects > 8 units
Submitted through MINC
Reasonable and realistic
Only necessary expenses
Not include organizational expenses
NFP or Coops may request asset
management fee
31
Annual Capital Budget
• Identify needs during budgeting cycle
• Must be submitted 60 days before year
end
• RD approves 30 days before year end
• Rent increases must be submitted 90
days before
• Tenants have 30-day comment period
• See additional procedures
32
Additional Budget Items
• Must include narrative
• Describe project, including indicators of
status
• Statement of compliance
• Description of financial status
• Projected capital expenditures
33
Reasonableness Review
• RD will review
–
–
–
–
Operating expenses within 10%
Income sources within 10%
Vacancy allowance < 15% if 15 units
Utility allowance documented
• If any of above = no, then review
additional items
• Borrower may have to submit revision
34
Annual Reporting
•
•
•
•
35
Applies to all projects
Requirement vary by project size
Hardship exceptions are available
Engagement or Limited Scope
Engagement Report - due within 90 days
of the end of the
• Requirements of Handbook were revised
by PN 413 for all year ends after
12/31/2007 for projects > 24 units
The Engagement Report
36
• Based on the RHS/OIG Audit Program
• 16 units or more = Engagement
• Use Agency-approved engagement letter
(Handbook Letter 209)
• Report the results of the AUP’s
• Must use a CPA
• All engagements must be prepared for
use by the Agency
• Borrowers certification that project meets
the “Performance Standards”
The Limited Scope Engagement
Report
•
•
•
•
37
Based on the RHS/OIG Audit Program
8 - 15 units = Limited Scope Engagement
May use a CPA
Borrowers must self-certify that the
project meets the “performance
standards” as shown in Exhibit 4-6 of the
HB-2-3560
Audit vs Agreed-Upon
Procedures
38
• Difference Between an Audit of Financial
Statements and Agreed-Upon Procedures
• An audit is a comprehensive process that
includes planning, testing, verification,
confirming, documenting, and adjusting the
financial statements in order to be able to issue a
report on whether the financial statements as a
whole are materially in accordance with GAAP
• AS WELL AS to issue a report on the entity’s
internal control and compliance with major
programs.
Audit vs Agreed-Upon Procedures
39
• Agreed-upon procedures are simply procedures
prescribed by the client for the CPA to perform
and conclude upon.
• The report
– Description of the procedures
– CPA’s conclusion on those procedures.
• AUP’s do not include:
–
–
–
–
Financial data (i.e. Balance Sheet)
Report on the financial statements
Internal controls
Compliance with major programs.
Audit vs Agreed-Upon Procedures
40
• The agreed-upon procedures report to
RD must accompany forms 3560-7 and
3560-10; (formerly 1930-7 and 1930-8),
due to RD within 90-days of the project’s
year-end.
SSAE 10
41
• Agreed-upon procedure engagement:
– CPA is engaged by a client to issue a report
of findings based on specific procedures.
– The specified parties and the CPA agree
upon the procedures to be performed
– Report clearly indicates its uses is restricted
to specified parties
Analysis of Financial Reports
42
• Loan Servicers must review financial
statements :
– Confirm that the engagement was conducted
by a qualified person;
– Confirm that the performance standards were
certified;
– Confirm that nonprofit and public bodies have
submitted the OMB-required annual financial
statements; and
– Note any problems identified in the
examination, and determine appropriate
corrective actions.
Analysis of Financial Reports
43
– Analysis of Income and Expenses:
– Did the expenses in any of the main categories
(maintenance & operating, utilities, admin., and taxes
and insurance) differ by more than 10 percent from
their proposed levels?
– Did the actual sources of income (rental, subsidy, and
non-rental) differ by more than 10 percent from their
proposed levels?
– Was the vacancy allowance in the permissible range?
– Were debt payments and reserve payments correct?
– Was non-operational cash use reasonable (as
compared to last year)?
– Was the cash flow positive?
Analysis of Financial Reports
44
• Account maintenance, tracking, and
disclosure – Record in MFIS the account
balances from the report and confirm that
the financial report states that:
– Required accounts are maintained and
tracked separately; and
– Payments from operating accounts are
disclosed and accurately represented.
Analysis of Financial Reports
– Reserve account status.
• Confirm that the financial report states that the
reserve account is current and that there are no
encumbrances on the reserve account funds.
– Tenant security deposit account status.
• Confirm that the report shows that the tenant
security deposit balance meets liabilities and
• The funds are maintained in a separate account
and in accordance with state law.
45
Analysis of Financial Reports
46
– Payment of return to owner.
• Confirm that the payment of the owner's return was
consistent
with the terms of the loan agreement or resolution.
• Record in MFIS the actual return paid and its effect
on cash flow, using the actual project budget.
Analysis of Financial Reports
47
– Insurance status.
• Confirm that all relevant insurance requirements
were met.
– Taxes and other assessments.
• Confirm that taxes and other assessments are
current.
• List any taxes or assessments that are not current.
Analysis of Financial Reports
48
– Issues of financial compliance and conditions.
• Confirm that any funds used for unauthorized
purposes have been repaid.
– Payment of management fees.
• Confirm that the management fee was paid in
accordance with the management certification, and
• The management agent is not charging the project
for agent expenses.
AUP Step #1
49
• Examine selected receipts, invoices and
cancelled checks for admin, operating &
maintenance to determine if they are
project expenses
• Follow testing criteria
• See sample size tables
• Obtain supporting documentation
• See reporting requirements
AUP Step #2
• Confirm balance in reserve account
– Not encumbered
– Federally insured
– Withdrawals agree to approvals
• Follow testing procedures
50
AUP Step #3
•
•
•
•
•
Obtain IOI listing
Sample invoices
Any undisclosed IOIs
Follow sample selection criteria
Following reporting guidelines
51
Small Projects
52
• Projects between 8 to 15 Units
• Limited Scope Engagement
• Borrower’s certify compliance with
“Performance Standards”
• No AUP required
• May use CPA to prepare forms.
• 3560-10 must be submitted through MINC
Performance Standards
53
• These 9 standards must each be
addressed by a CPA in the Engagement
(certified to in a Limited Scope
engagement).
• Questions stress compliance with RD
regulations regarding reserve, return to
owner, security deposit accounts and
insurance maintenance.
Performance Standards
54
• Required accounts are properly maintained and
tracked separately;
• Payments from operating accounts are disclosed
and accurately represented;
• Reserve amount is current (i.e., contributions are
on schedule and balance accounts for
contributions less authorized withdrawals), and
there are no encumbrances;
• Tenant security deposit accounts are fully funded
and are maintained in separate accounts;
Performance Standards
55
• Payment of owner return was consistent with the
terms of the applicable loan agreement or loan
resolution;
• Borrower/grantee has maintained proper
insurance in accordance with the requirements
of 7 CFR 3560.105; and
• All financial records are adequate and suitable
for examination.
• There have been no changes in ownership
• The real estate taxes are paid in accordance
with state and/or local requirements.
Financial Summary
56
• See chart is a summary of the financial
reporting requirements under Regulation
3560, effective December 31, 2007.
Other Financial Reports
57
• In addition to the Engagement or Limited
Scope engagement, nonprofits must
comply with A-133 requirements.
• Agency retains authority to require an
audit on any Borrower.
• Any audits independently obtained by the
Borrower must be provided to the Agency
if paid with project funds.
Other Audits
58
• May be required -– To satisfy the requirements for nonprofit and
public bodies under OMB Circular A-133.
– To satisfy the requirements of limited
partnership agreements.
– Possibly to satisfy the requirements of a HUD
Section 8 Contract.
– To satisfy the requirements of any other
regulatory agency or agreements that require
the issuance of audited financial statements.
Other Audits
• If required by a 3rd party…
– the property can pay for it;
– does not replace the engagement;
• If independently obtained by the
borrower…
– the audit must be provided to the Agency if
paid with project funds.
– the audit does NOT replace the required
engagement.
59
Monitoring Physical Condition
• Quality must be maintained
• Requires systems
–
–
–
–
–
–
Preventative maintenance
Response to calls
Workorder system
Inspections
Energy Conservation
Tenant Damages
60
Correcting Deficiencies
•
•
•
•
Systemic review
Tenant complaints
Comply with standards
May require reserve funds
61
Project Occupancy
• Eligible household
• Meet income requirements
• Meet screening requirements
62
Income Requirements
•
•
•
•
63
Established by RD
Very low income – 50% of median income
Low-income – 80% of median income
Moderate – add $5,500 to low-income
limit
Eligible Household
•
•
•
•
•
•
Elderly – at least 62
Disabled
Resident assistant
Foster children
Remaining family members
Students
64
Calculating Income
• Owner must verify income expenses,
assets, deductions, family and other
factors
• Sign consent forms
• SSNs
• 3rd party verifications
• Recertifications
• Comply with Privacy Act
65
Tenant Income
•
•
•
•
•
66
Determine eligibility and ability to pay rent
Determine rental assistance
Annual income – all household members
Adjusted income – see 6.8C in 3560
Zero income – generally not eligible
Adjusted Income
• Deductions
–
–
–
–
–
Dependents
Child Care
Elderly
Disability
Medical
67
Applicant’s Assets
•
•
•
•
Reporting Assets
Calculating Market and Cash value
Retirement assets
Income from assets
68
Verification Procedures
•
•
•
•
•
•
•
•
3rd party verifications
Signed consent forms
Valid for 90 days
Temporarily accept paystubs or other
documentation
Award or benefit letter
Verify disability, household, Income
Release and consent form
SSNs
69
Occupancy Policies
•
•
•
•
•
Unit density – how many people
Occupancy rules
Must allow pets unless rules violated
Consult with tenants on policy changes
Must reasonable and written
70
Fair Housing
•
•
•
•
•
Maintain FMHP
Approved at application
Affects marketing efforts
Educate staff
Systemic
71
Tenant Application
•
•
•
•
•
•
•
•
•
Name & address
Household information
Handicaps
Certifications
SSN
Income & adjustments
Signature
Race
Disclosure Notice
72
Wait List
73
• All applicants placed on wait list
• Documents final disposition of all
applications
• Should include date and time of complete
application
• Race and ethnicity collected for information
purposes only
• Electronic waiting lists
– Data backups
– Printed record at least monthly
– Family statuses recorded as occurred
Wait List (con’t)
74
• Applicant must submit a complete
application and an authorization to verify
employment
• Selection from the wait list will be made
according to date and time in the
following order:
– Very low income
– Low income
– Moderate income
Tenant Recertification
75
• 75 – 90 days prior to certification
expiration tenant must receive notice in
writing that they must recertify to remain
eligible
• Second letter 30 days prior to
recertification date
• Must recertify at least annually or
whenever a change in household income
of $100 per month occurs
Tenant Recertification (con’t)
76
• The tenant must:
– Provide income and other household
information
– Authorize borrower to verify income eligibility
– Report all changes in household status that
may affect eligibility
– Failure to do so will result in ineligibility
Tenant Recertification (con’t)
77
• The borrower must:
– Verify household income and other relevant
data
– Review all reported household changes that
affect eligibility
– Must submit updated certification forms to RD
– Failure to perform these procedures may
result in overages charged
– Must maintain documentation for at least 3
years or until the next agency visit, whichever
is longer
Rents and Shelter Costs
78
• Major Rent Levels
– Note rent (rent established to cover approved
expenses and loan costs at interest charged
on promissory note)
– Basic rent (rent established to cover
expenses and loan costs reduced by interest
credit agreement)
– HUD rent (rent established for Sec 8
subsidies)
– LIHTC rent (rent established by LIHTC
requirements)
Rent by Project Type
79
Utility Allowances
80
• Borrowers must establish a utility
allowance that is deducted from total
shelter cost
• May be issued on a joint check payable to
tenant and utility company
• Based on expected costs
• Must be reviewed annually during budget
process
• Approved by field office staff
• Review tenant during supervisory visits
Determining Tenant Rent Payment
81
• Follow Form 3560-8 Tenant Certificate to
determine individual rents
• Must be adjusted for changes in household
status sufficient to generate a new certification
• Tenant rent must not exceed the highest of:
– 30% of monthly adjusted income adjusted for utility
allowances
– 10% of gross monthly income adjusted for utility or
– If household is receiving public assistance the portion
of such payment designated to meet shelter costs
– The basic rent unless Rural Housing Service
assistance is provided
• See example
Unit Rents
82
• Note Rents – tenant pays note rent regardless of
income unless they are ineligible (Plan II projects
experiencing vacancies may be approved for
special rents)
• Basic Rents – tenant will pay the net tenant
contribution, but no less than basic rent and no
more than note rent
• Rental Assistance Rents – tenant pays net
tenant contribution
• HUD Section 8 – tenant pays total tenant
payment (TTP) which is the greater of 30% of
monthly adjusted income or 10% of gross
income, welfare rent or $25. HUD rent should
never be less that basic rent.
Security Deposits
83
• Must be specified in management plan and
approved by RD
• May charge customary for the area, but may not
exceed the higher of tenant contribution for 1
months rent or the basic rent
• HUD projects must comply with HUD
• COOPs pay one month’s rent
• Increases may only be charged to new tenants
• May be paid on a payment plan
• Held in separate federally insured account
• Interest follows state law but may never accrue
to the borrower
• Unclaimed amounts go to operating account
Rent Collection
84
• Collect rent monthly on first day of month
• Borrower must have a collection system
that:
– Uses serially numbered receipts
– Tenant ledger
– If collections are onsite they must be secure
• Description of procedures must be in
management plan
Late Fees
85
• Borrowers may charge late fees
according to schedule approved by RD
• Must provide for 10-day grace period
• Not exceed the higher $10 or 5% of gross
tenant contribution
• Tenants receiving housing benefits form
other agencies may be subject to
additional late fee requirements
Reporting of Rents
• Borrowers must report to RD on Form
3560-29 for all collection activities
• Form also includes occupancy status of
each unit
• Overage is the amount that total rental
payments exceed total basic rent
• Overage is returned to the agency
• Tenant contributions are first applied to
rental charges
86