HUD CLARIFIES MARK-TO-MARKET RULES ON CRP AND SURPLUS CASH
In the last
few weeks we have requested clarification from HUD regarding the
inclusion of earned but unpaid CRP in the computation of surplus cash
(CSC). The 2005 Letter in question 7 indicated ".... CRP payments that
are due but that have not been paid may be included as obligations on the
computation of surplus cash only if, as of fiscal year end, the preconditions
for payment had been satisfied."
The question
being consistently asked is: "Does the CSC change based on the inclusion of the
CRP amounts? In other words if, by including the CRP as an obligation on
the CSC results in negative surplus cash, is the project still eligible to
receive the CRP payments?"
The 2006
letter made a slight clarification by indicating "If, as of the FYE date,
the pre-conditions for payment of these CRP installments have been satisfied,
reflect the unpaid installments as obligations on the Surplus Cash schedule. Otherwise,
do not reflect the unpaid installments as obligations on the Surplus Cash
schedule. Also see the 2005 Letter, question #7."
This issue
was made even more of a gray area by the 2007 supplemental letter, question 14
which indicated, "The correct treatment is that all unpaid CRP
should be listed as obligations, whether or not the preconditions have been
satisfied. While CRP may accrue (and will reduce surplus cash by the amount of
that accrual) even if the preconditions for payment are not met, it cannot be
distributed until a period in which all of the preconditions are met. (Previous
instructions to include CRP as obligations only if the preconditions for
payment had been satisfied were incorrect.)
Many
practitioners questioned the inclusion of all earned, but unpaid CRP as an
obligation in the CSC as doing so virtually guarantees that such amounts
will never be paid as surplus cash must exceed the entire unpaid CRP to pay
even one year of CRP.
Today we
received the following response from OAHP:
"Thank-you
for your Accounting Question addressing the issue of earned but unpaid CRP.
You raise a very good question: Does HUD require owners to include all
earned but unpaid CRP as an obligation on the computation of Surplus Cash. The
short answer is yes. All earned but unpaid CRP payments must be
accounted for on the fiscal year end statement of cash flow:
S1200-417
principal
S1200-195 interest
That
said it is understandable to interpret this requirement to mean that in the
event surplus cash in a particular Fiscal Year End statement were not to exceed
the entire accrued unpaid CRP balance then no CRP payments can be made. This is
where there is a misinterpretation of the intent of this accrual. The
actual procedure is to allow payment in the current fiscal year of CRP to the
extent there is available surplus cash after all other expenses have been
paid. This last statement is correct to the extent that all
pre-conditions to payment of CRP have been satisfied. Of course one of
those preconditions is that the annual financial statement reflects positive
surplus cash. An accrued balance of unpaid CRP which exceeds the available
surplus cash at fiscal year-end would theoretically push surplus cash into a
negative balance. However payment of CRP is still allowed to the extent of
available surplus cash.
Accounting
Letter Q&A 2007 #14
This question has been addressed in prior
years, but warrants clarification here. The correct treatment is that all
unpaid CRP should be listed as obligations, whether or not the preconditions
have been satisfied. While CRP may accrue (and will reduce surplus cash
by the amount of that accrual) even if the preconditions for payment are not
met, it cannot be distributed until a period in which all of the preconditions
are met. (Previous instructions to include CRP as obligations only if the
preconditions for payment had been satisfied were incorrect.) Therefore
the property may, when reconciling accounts in the preparation of the
annual financial statement, use cash to pay the accrued CRP up to the point
where the surplus cash calculation would result in zero..
For
example: If the CRP accrual account has a balance of $25,000, and not counting
the CRP accrual the FYE surplus cash would be $15,000 then the property will be
able to make a CRP payment of $15,000 which would leave an unpaid CRP accrual
of $10,000 to carry over to the next fiscal year. This last statement is
correct to the extent that all pre-conditions to payment of CRP have been
satisfied. "
