Preparing for Your Next HUD Audit
If you own an affordable property with a HUD-backed loan, you need to be prepared for this intensive annual review.
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What is a HUD Audit?
If you own a property with a HUD-insured loan, you’re likely very familiar with the Department of Housing and Urban Development’s audit processes. Conducted annually, a HUD audit ensures that you — and your residents — are in compliance with the eligibility requirements of your affordable community.
These audits can present challenges, but preparation is the key. The third chapter of HUD’s audit handbook outlines what an audit will entail for your multifamily asset, but it is generally wise to ensure you have engaged a tax professional experienced with HUD audits to oversee your preparation before the actual audit commences.
First, it’s important to understand the timeline involved in such an audit. HUD requires audited financial statements — along with the auditor’s opinion and a report on ownership and compliance — no later than 90 days after the end of the fiscal year.
So, when you’re making your preparations for an upcoming HUD audit, consider some of the documentation you will need to have on hand:
It sounds obvious, but the main part of the audit will be in analyzing your financial records. This includes all documents like your property’s balance sheet, statement of profit and loss, statement of cash flows, and descriptions of accounting policies. Year-end statements for associated bank accounts — for your operating account, your replacement reserve account, and your security deposit account — are also essential.
Ownership, Management Changes
You will need to outline and document any changes in the ownership structure of your asset, even if it’s something as simple as a change of address. If a joint venture partner has exited or entered the ownership structure, you will need to clearly state these changes and may need to provide relevant forms, like HUD’s Form 2530.
This is also true if there are changes within how your property is managed. Should you change management companies, you will need to provide, at a minimum, details of the new property manager along with proof of certification.
Insurance, Tax Information
This category would include insurance declarations, which must clearly state the period — and amount — during which your property is covered, along with the overall cost of premiums for your real estate insurance coverage. In terms of taxes, you will also need to provide evidence of all property taxes that the owner has paid throughout the year, with relevant invoices.
You will need to have all of your loan documentation, including the note and its deed of trust, plus the amortization schedule. The audit will assess your process for making mortgage payments and your performance in paying during the fiscal year. Most auditors will need at least one monthly mortgage statement or invoice as part of this process. If any part of your debt has been refinanced, you will need to provide evidence of this as well.
The audit will also assess how the property is handled with respect to its tenants — both present and those applying or waitlisted. The auditor will need to fully understand the procedure for accepting applications, determining eligibility, and how rental rates are set.
As part of this process, the auditor will generally examine a sample of tenant files, which include accepted and rejected tenants, from the past fiscal year. These files will be used to ensure processes are in place, are working correctly, and are not violating HUD requirements on discrimination.
Other documentation which is generally required includes the results of the past fiscal year’s audit — including specific feedback and observations — along with details of any legal issues, IRS or state tax notices, and many others. For properties that utilize Low-Income Housing Tax Credits or rural development credits, additional requirements, like providing HAP contracts, will also apply.
While the list of documentation necessary to fulfill the requirements of your property’s HUD audit is long, and, as you can see, in many cases goes beyond what would be required in a standard audit of a multifamily property, it is an essential part of ensuring your asset qualifies for its HUD-insured affordable housing loan.