New HUD Rule Allows for Surplus Cash Distributions for Multifamily Borrowers

September 16, 2022

In an effort to make HUD-insured financing more attractive to multifamily borrowers, HUD issued Mortgagee Letter 2022-16 on September 7, changing a decades-old policy on surplus cash distributions. Multifamily borrowers may now, subject to certain conditions, take distributions of surplus cash monthly instead of annually or semi-annually, as was historically the case.

“This much-needed change better aligns FHA-insured mortgage financing with other capital sources, helping to maintain FHA’s products as competitive offerings to finance the rental housing that so many communities need,” said Deputy Assistant Secretary for Multifamily Housing Programs Ethan Handelman.

According to HUD, this change will free up capital more frequently for use by borrowers in future multifamily development and will align FHA income distribution rules “with those used in private industry.”

Conditions to permitting more frequent distributions of surplus cash include, among others, that the loan be endorsed after September 7; the property not be subject to a project-based Section 8 HAP contract; the project meets the minimum Debt Service Coverage Ratio (DSCR) established in Program Obligations for its most recent annual financial statement; and the project’s most recent REAC inspection score(s) must be 80 or above with no score(s) below 60 during the three fiscal years immediately preceding the fiscal year in which distributions are to be made.

For newly-endorsed projects, new construction and substantial rehabilitation properties and properties with transfers of ownership would require two full fiscal years seasoning from the date of final endorsement or transfer prior to permitting monthly distributions, and newly-endorsed Section 223(f) properties require one full fiscal year of seasoning prior to permitting monthly distributions, with additional applicable conditions.

Review the Mortgagee Letter 2022-16 for more detail on this change.