FHA Allows More Frequent Surplus Cash Distributions

New Opportunity to Free Up Capital

The Federal Housing Administration (FHA) announced on September 7 that it had increased the frequency of allowable surplus cash distributions with most FHA-insured multifamily mortgages. Distributions can now be taken as often as once per month, updated from two times per accounting year historically. The new policy, which aligns with private sector income distribution rules, will give borrowers the opportunity to free up capital more often during future multifamily development projects.

Flexibility Makes HUD-Insured Loans More Attractive

“The ability to receive cash flow distributions on a monthly basis more closely reflects the needs of multifamily owners,” said Arbor’s Brian Blue, Managing Director, FHA Production. “This change, coupled with lower overall interest rates, higher LTV thresholds, and lower debt service coverage ratio requirements, makes a HUD-insured mortgage a more competitive play across the board for multifamily investors.”

New Policy Effective September 7

The FHA’s new requirements are an update to the Department of Housing & Urban Development’s (HUD) Regulatory Agreement (Form HUD-92466M) Section 13, which previously required borrowers to calculate and submit Surplus Cash Distributions to HUD with their fiscal year annual reports or as of the last day of the sixth month of their fiscal year. The change is only effective on loans endorsed after September 7, 2022. Additionally, the change is limited to FHA-insured multifamily properties that are not subject to a Section 8 project-based rental assistance payments contract or a HUD-held mortgage note.

First Update in Over 50 Years

“The previous semi-annual distribution frequency had been in place since 1970,” said Arbor’s Jonathan Boldin, Managing Director, Chief Underwriter for FHA Lending. “This change reflects that modern accounting software allows for all involved parties to monitor property finances with greater efficiency.”

Eligibility Criteria for More Frequent Surplus Cash Distributions

To qualify for increased frequency of surplus cash distributions, a borrower must be compliant with all applicable HUD obligations and business agreements. They also cannot have any outstanding violations relating to their financial management and annual financial reporting obligations.

A borrower must be able to demonstrate a positive surplus of cash for each fiscal year in which a monthly distribution is made. The project for which the loan will be used must meet the minimum Debt Service Coverage Ratio (DSCR) established in the HUD Regulatory Agreement as of its most recent financial statement.

Borrowers’ multifamily projects need to have received a Real Estate Assessment Center (REAC) inspection score of 80 or above in their most recent inspection, and not have received a score below 60 during the three previous fiscal years immediately preceding the fiscal year in which distributions are to be made.

Two years of full fiscal years seasoning from the date of final endorsement or transfer are required before permitting monthly distributions for newly endorsed new construction, substantial rehabilitation, and properties with transfers of ownership.

One full fiscal year of seasoning prior to permitting monthly distributions is required for newly endorsed Section 223(f) properties, unless the borrower or its active principal(s) have owned at least two FHA-insured projects for the prior five full fiscal years and have had no Active Partners Performance System (APPS) flags or regulatory violations during that time.

Explore Your Lending Options with Us

The FHA’s new requirements update offers an opportunity for borrowers of most FHA-insured multifamily mortgages. If you are exploring an FHA multifamily loan, you may be eligible for more frequent surplus cash distributions during your next project.

Interested in the multifamily real estate investment market? Learn about our array of multifamily and single-family rental financing options and view our other market research and multifamily posts in our research section.