Surplus Cash: How HUD Limits Owner Distributions

Key points

• Calculated from project cash and short-term investments, less amounts due in the next month and other obligations due within 30 days.
• Reserve for replacements and other HUD-required reserves are excluded from available cash.
• No distributions from borrowed funds, during a default or forbearance, or while required repairs or services are outstanding.
• Distributions not taken in the allowed window stay with the property.
• Subordinate debt payments are typically limited to 75% of surplus cash under HUD rules.

How surplus cash is calculated

Section 13 of the multifamily Regulatory Agreement (form HUD-92466M) defines surplus cash as the sum of project cash and cash equivalents (excluding the replacement reserve and other HUD-required reserves), short-term investments, project-based Section 8 payments earned but not yet received, and reserve withdrawals approved but not yet taken, after deducting:

• All amounts due in the calendar month after the calculation date under the note and security instrument, including principal, interest, MIP, reserve deposits and tax and insurance escrows.
• Segregated special funds, including tenant security deposits.
• All other project obligations payable within the next 30 days, unless set aside, paid subject to surplus cash, or deferred with HUD approval.

When distributions can be taken

The borrower must calculate surplus cash as of the last day of its fiscal year and may, where program rules permit, also calculate it as of the last day of the sixth month. The calculation is reported to HUD with the annual financial report. Distributions must be taken from the appropriate project account within the accounting period immediately following the calculation and before the next calculation. If not taken in that window, the funds remain part of the mortgaged property.

For owners coming from bridge loans with monthly cash sweeps, this rhythm is a significant change. Plan investor distributions on an annual or semiannual cadence.

When distributions are prohibited

Section 14 of the agreement bars distributions in several situations, even if the arithmetic shows surplus cash: from borrowed funds, before project completion, after HUD has given notice of a violation, after an event of default, during a forbearance, when required services such as utilities or trash removal are not being provided, and when notices of physical deficiencies or code violations remain uncured. HUD may allow a distribution to be escrowed pending a reinspection after repairs are completed. Any improper distribution must be returned to the project immediately.

Repayment of owner advances follows Section 15: only with HUD's prior written approval, or from funds allowable for distribution at times when distributions are permitted.

Surplus cash in a bridge-to-HUD capital plan

Sponsors often finance a bridge-to-HUD business plan with mezzanine debt or preferred equity, then expect to keep some of it after the HUD closing. HUD rules shape what is possible. The MAP Guide limits payments on permitted subordinate financing to surplus cash, and repayment from project assets is limited to 75% of surplus cash, documented with HUD forms such as the Surplus Cash Note. The Section 232 Handbook has a parallel limit for healthcare deals. Preferred equity with mandatory redemption or current pay can conflict with these rules.

The practical answer is to retire most bridge-era subordinate capital at the HUD closing, using HUD proceeds and cash out where available, and to restructure anything that remains into a form HUD approves.

Common surplus cash mistakes

Each of these can become a Regulatory Agreement violation, and the first category of Section 50 liability is for funds a party was not entitled to retain.

• Distributing before the annual audit is complete and the calculation is reported.
• Ignoring payables due within 30 days, such as large insurance or tax installments.
• Repaying owner loans from operating cash without HUD approval.
• Paying affiliated companies above-market fees that function as disguised distributions.
• Taking distributions while a physical inspection deficiency remains open.

How it connects to other HUD terms

Surplus cash ties together the Regulatory Agreement, the annual financial statement that reports it, the replacement reserve that is excluded from it, and the non-recourse carve-outs that make improper distributions personal. NSPIRE inspection results matter too, since open physical deficiencies can block distributions.

Where to go next

For common questions about owning a property with a HUD loan, see HUD loan FAQ.

For how HUD's distribution rules compare with other permanent debt, see HUD vs agency and bank loans.

Related guides: After the HUD Closing: Asset Management Obligations; Bridge-to-HUD at Portfolio Scale; Using a HUD Refinance to Buy Out a Partner.

Related terms: Regulatory Agreement: The HUD Contract That Governs Operations; Annual Financial Statement: HUD's Audited Reporting Rule; Non-Recourse Carve-Outs: Where HUD Personal Liability Applies; Replacement Reserve: How HUD Sizes and Controls It.

For portfolio figures by state, metro and program, see the HUD multifamily data hub. Bravo Capital’s record: all 26 HUD firm commitments received since April 2022 have closed, totaling $526.0 million (HUD Closing Scorecard).