USDA Rural Development Multifamily Housing Programs

USDA Rural DevelopmentMultifamily Housing Programs

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• Agency of US Dept of Agriculture (USDA)• 15,000 section 515 rural multi-family

projects• 1,000 section 514 projects

3Section 515 Program

• M/F housing in rural areas• 30 year term with 50 year amortization• Rate established by agency based on

market

4Section 514 Program

• Affordable housing for farmworkers• Terms comparable to 515

5Types of Projects

• Family• Elderly• Congregate homes• Group homes• Coops

6Section 521 Overview

• Rental assistance• Used with both 515 and 514 programs• Tenant pays no more than 30% of income

7General Program Requirements

• Civil Rights• Nondiscrimination• Limited English proficiency• Environmental Requirements• Construction standards

8Management Plan

• Management plan• Policy and procedure manual• Initially submitted at application• Certify every 3 years

9Management Certification

• Form RD 3560-13• Operate project according to

management plan• No inducement payments• Management agreement complies• Disclose IOIs

10Management 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

11Management Fee

• Occupied unit fee– Based on established state rates

• Add-on fees– Flat PUPM– Cannot cover conditions already covered in

base fee

12Items Paid from Fee

• Managing compliance• Establishing policies and procedures• Implementing policies and supervision of

on-site staff

13Paid from Income

• Project-related items– Salaries & benefits– Office expenses– Maintenance– Processing tenants

• Must be reasonable

14Financial Reporting Requirements

7 CFR Part 3560Subpart G 3560.308

andHB-2-3560 Section 4.32

and Attachment 4-B

15Project Accounting – System Requirements

• 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

16Project Accounting – System Requirements, con’t

• 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

17General 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

18Tax and Insurance Account

• Deposited from mortgage payments monthly

• May be kept in operating acct• Must be tracked separately

19Reserve 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

20Security Deposits

• 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

21Initial 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

22Other Borrower Advances

• 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

23Repayment of Initial Operating Capital

• Requires RD approval• May be removed in installments or lump-

sum between 2nd and 7th year• Must have been operating for at least 2

years• Must be repaid before end of 7th year

24Borrower 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

25Return on Investment

• 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

26Replacement Reserves

• Used for major capital expenditures• Interest –bearing account• Begins with 1st loan payment; adjusted

throughout project’s life

27Replacement 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

28Reserve 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

29Uses 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

30Reserve 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

31Requirements 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

32Annual 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

33Additional Budget Items

• Must include narrative• Describe project, including indicators of

status• Statement of compliance• Description of financial status• Projected capital expenditures

34Reasonableness 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

35Annual Reporting

• 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

36The Engagement Report

• 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”

37The Limited Scope Engagement Report

• 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

38Audit vs Agreed-Upon Procedures

• 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.


• 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.


• 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.

41SSAE 10

• 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

42Analysis of Financial Reports

• 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 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?


• 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.


– 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.


– 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.


– 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.


– 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.

49AUP Step #1

• 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

50AUP Step #2

• Confirm balance in reserve account– Not encumbered– Federally insured– Withdrawals agree to approvals

• Follow testing procedures

51AUP Step #3

• Obtain IOI listing• Sample invoices• Any undisclosed IOIs• Follow sample selection criteria• Following reporting guidelines

52Small Projects

• 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

53Performance Standards

• 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.


• 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;


• 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.

56Financial Summary

• See chart is a summary of the financial reporting requirements under Regulation 3560, effective December 31, 2007.

57Other Financial Reports

• 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.

58Other Audits

• 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.

59Other 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.

60Monitoring Physical Condition

• Quality must be maintained• Requires systems

– Preventative maintenance– Response to calls– Workorder system– Inspections– Energy Conservation– Tenant Damages

61Correcting Deficiencies

• Systemic review• Tenant complaints• Comply with standards• May require reserve funds

62Project Occupancy

• Eligible household• Meet income requirements• Meet screening requirements

63Income Requirements

• Established by RD• Very low income – 50% of median income• Low-income – 80% of median income• Moderate – add $5,500 to low-income

limit

64Eligible Household

• Elderly – at least 62 • Disabled• Resident assistant• Foster children• Remaining family members• Students

65Calculating Income

• Owner must verify income expenses, assets, deductions, family and other factors

• Sign consent forms• SSNs• 3rd party verifications• Recertifications • Comply with Privacy Act

66Tenant Income

• 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

67Adjusted Income

• Deductions– Dependents– Child Care– Elderly– Disability– Medical

68Applicant’s Assets

• Reporting Assets• Calculating Market and Cash value• Retirement assets• Income from assets

69Verification 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

70Occupancy Policies

• Unit density – how many people• Occupancy rules• Must allow pets unless rules violated• Consult with tenants on policy changes• Must reasonable and written

71Fair Housing

• Maintain FMHP• Approved at application• Affects marketing efforts• Educate staff• Systemic

72Tenant Application

• Name & address• Household information• Handicaps• Certifications• SSN• Income & adjustments• Signature• Race• Disclosure Notice

73Wait List

• 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)

• 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

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75Tenant Recertification

• 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)

• 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

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Tenant Recertification (con’t)

• 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

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Rents and Shelter Costs

• 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)

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Rent by Project Type 79

Utility Allowances

• 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

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Determining Tenant Rent Payment

• 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

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Unit Rents

• 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.

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Security Deposits

• 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

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Rent Collection

• 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

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Late Fees

• 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

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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

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