2-12. DISTRIBUTIONS

• A. Limitations on Distributions.

  1. The old regulation, LMSA, Pension Fund, and Property Disposition (PD) Section 8 contracts typically have no limitations on distributions. If applicable, any limitation on distributions is based on a current HUD Regulatory Agreement or a similar controlling document imposed by the Housing Finance Agency or another interested lender.

  2. The new regulation Section 8 contracts for new construction or substantial rehabilitation limits an owner’s right to distributions.

     • a. A nonprofit owner is not entitled to distributions of excess project funds unless HUD approves the nonprofit owner’s request for a waiver. See sections 2-12.C and 2-18. A below.

     • b. A profit-motivated owner may receive distributions from surplus cash in the amounts as follows:

       • 1. For projects for elderly families: 6 percent of the initial equity investment established when the project was newly constructed or substantially rehabilitated;
       • 2. For projects for non-elderly families: 10 percent of the initial equity investment established when the project was newly constructed or substantially rehabilitated.

     • c. Owners of “small projects” and owners of “partially-assisted projects,” as defined in 24 CFR Part 880.201, 881.201 and 883.302, are exempt from any section 8 limitation on distributions. 24 CFR Parts 880.205(f), 881.205(f), and 883.306(f).

     • d. Owner Distributions for Partially-assisted Projects that qualify for increased distributions under Section 2-12 D.

       • 1. For partially-assisted projects that are not insured under Section 236, 221(d)(3) BMIR, or do not have mortgages under Rural Housing Service’s (RHS) Section 515/8:

         • a) For profit owners of these projects may keep surplus cash generated on all units.

         • b) The Section 8 rents must not exceed the rents on the unassisted units.

       • 2. For partially-assisted projects that are insured under Section 221(d)(3) BMIR, 236, or have mortgages under and RHS Section 515/8:
         • a) For profit owners of these projects are eligible for an increased distribution on the Section 8 units.

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• b) This amount will be added to the current limited distribution in the FHA regulatory agreement on the unassisted units to reach the total distribution.

• e. If the form of ownership changes so does the right to receive distributions under the Section 8 contract. For example, if a nonprofit owner, who is prohibited by regulation and under the HAP contract from receiving distributions, sells the project to a for profit entity, the for profit buyer may receive distributions, provided that all administrative conditions are met.

3. Nothing in this Chapter limits a nonprofit owner’s entitlement to excess project funds generated by non-Section 8 assisted units in a partially assisted project.

• B.

• For profit Owners.

A for profit owner with a new regulation Section 8 contract may qualify for increased distributions. (See Section 2-12.D.)

• C.

• Distribution for Nonprofit Owners

By regulation (24 CFR Parts 880.205(a), 881.205(a), and 883.306(a)) nonprofit owners who have New Regulation Section 8 HAP contracts are not allowed to receive distributions of project funds.

• D.

• Increased For Profit Owner Distributions.

1. To encourage owners to preserve affordable housing, HUD will allow

   • increased distributions for owners with Section 8 project-based assistance that are currently subject to limited distributions (i.e., the new construction and substantial rehabilitation new regulation contracts), if:

   • a. In accordance with 24 CFR Parts 880.205(h), 881.205(h) or 883.306(g) the project’s rents are below market, or at or below market for an Option Two project, before the Section 8 contract is renewed; and either:

     • 1. Under Option One, the owner will receive access to increased distributions, even if the term of the contract is less than 20 years; or
     • 2. Under Option Two, the owner enters into a 20-year Section 8 contract can receive access to increased distributions.

   • b. Owners with Section 8 contracts currently renewed under Option Two may receive increased distributions, for the term of the renewal contract if:

     • 1. The owner terminates the existing contract and renews the Section 8 contract for 20 years; and
     • 2. The project’s current rents are below comparable market rents.

Note: The AE/CA must check the existing contract to make sure it contains Exhibit B, Distributions Limitation. If Exhibit B is missing, modify the contract by adding the exhibit which is found in the current Multi-Year Basic Renewal Contract.

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2. Owner Distributions for 100 percent Section 8 Assisted Properties.

   • a. Owners should follow existing guidance in paragraph 2-8 of Handbook 4370.2 REV-1, Financial Operations and Accounting for Insured Multifamily Projects, for computing surplus cash.

   • b Owners may keep all surplus cash available each year for distribution during the term of the contract.

3. The above statements reflect the normal policy on increased distributions. However, an owner may have agreed to waive payment of distributions and to use all surplus cash to repay flexible subsidy grants/loans. Nearly all flexible subsidy contracts contain such clauses. Even if the project did not receive flexible subsidy, the owner may still have agreed to waive payment of distributions in return for HUD’s approval of other forms of mortgage relief (e.g. provisional workout, modification, partial payment of claim, etc.).

If these scenarios exist, the amount of increased distributions may be reduced by the owner’s repayment obligation to HUD.

• E.

• Access to Increased Owner Distributions.

1. The owner may continue to receive the increased distributions during the term of the Section 8 Renewal Contract provided:

   • a. If applicable, all material Financial Assistance Subsystem (FASS) findings are closed or under a HUD-approved corrective action plan;

• b. The owner maintains the project in good condition, as demonstrated by a REAC score of 60 or higher on the project’s most recent inspection, with no uncorrected Exigent Health and Safety (EHS) violations;

  • c. The owner is not suspended or debarred.

  • d. The owner has no open or unresolved items on the most recent:

    • Physical Inspection Report; or

    • Management & Occupancy Review (MOR);

  • e. The project has not been referred to Recap for restructuring; and

  • f. The owner is complying with the terms of the FHA Regulatory Agreement, Note, and Mortgage and is current in debt service and all escrow payments, including the reserve for replacement account (RFR).