Exposure-based Financial Reporting Standards for Federally Assisted Multifamily Properties
The Rental Policy Working Group, a collaboration of HUD, USDA, Treasury, NEC, OMB and the DPC, began the Alignment initiative in early 2011 as a way to seek out ways to streamline and align federal rental housing policy across agencies and reduce the burden on owners and operators of affordable housing. Through various stakeholder convenings and focus groups, affordable housing stakeholders have consistently highlighted the burden of providing third party audited financials for small properties with limited federal assistance (rather than owner-certified audited financials).
The notice enacting a change in this area, which is slated to go into effect on 12/31/2013, will allow properties with less than $500,000 in combined federal funding to submit owner-certified financial statements rather than third-party audited statements. This threshold of $500,000 in federal funding was reached in collaboration between HUD and USDA-RD to bring both into alignment with OMB circular A-133, which applies to non-profit entities receiving federal funding (USDA-RD already exempts small properties from audited financial but defines small properties based on unit count). This notice will affect thousands of properties and tens of thousands of units, and is expected to save $7.5-9 million for owners of small federally subsidized affordable housing, many of whom are “mom and pop” organizations or small owners. The savings from this policy change can be used by the owners to preserve and maintain their properties.
In order to highlight the effect the “Exposure-based Financial Reporting Standards for Federally Assisted Multifamily Property Owners” notice will have on property owners and tenants, please find the following illustrative examples below:
Property #1 – Carthage, MO
Highland Meadows is a senior community in Carthage, MO with 44 units managed by Preservation of Affordable Housing (POAH), a non-profit. Highland Meadows’ financial audit costs nearly $7,000 each year, which represents 3.4% of the complex’s entire annual revenue. Highland Meadows is currently operating at a deficit of slightly more than $5,000 per year, meaning that the removal of the audit requirement would allow this property to be cash flow positive, positioning it for long-term financial self-sufficiency.
Property #2 – Smithfield, VA
Cedar Street Apartments in Smithfield, Virginia, is a 24 unit affordable housing developed using both low income housing tax credits and section 515 USDA-RD funding. It is owned and operated by Byron Bailey through his small business Bailey Enterprises. This development current spends 4.6% of its operating costs on its financial audit. Allowing Byron Bailey to self-certify his financials will free up additional capital to make improvements on the property and reduce the financial risk to USDA-RD, and ensure that this asset continues to be an asset to Smithfield, VA.
Financial Alignment Update
The goal of the Financial Reporting alignment team is to harmonize audit exemption requirements for USDA 515 & HUD Section 8 properties to reduce the audits required and audit reviews. HUD published a notice to exempt all HUD properties that have Rural Development (RD) financing from their audit requirements. This will eliminate any chance of duplicate requirements for audits.
On August 8, 2013 HUD published Notice H2013-23. This notice allows owners of HUD assisted projects that receive less than $500,000 in federal financial assistance to submit unaudited, owner-certified, financial statements in lieu of audited reports. On February 14, 2014 HUD released a new version of the FASS-MF system which implemented the functionality allowing these owners to submit owner-certified financial statements electronically.
Both Agencies agreed to require audits based on financial risk using $500,000 as the threshold for federal financial assistance. RD also agreed to eliminate the requirement for the AUP.
USDA-RD has been working with a CPA group to help with the handbook update which eliminates the AUP requirements and uses the $500,000 threshold for required audits. The CPA group has provided the updates to the Handbook and these are being reviewed. RD has also prepared a workplan which has been approved as part of the process of updating the regulations that would allow for the risk-based audit requirements and eliminate the AUP requirements. The updated regulations and proposed rule are in process.
