HUD Surplus Cash Calculation: Formula, Caps, and Timing

The HUD surplus cash calculation is a balance-sheet snapshot: take the project’s available cash and near-term receivables as of the last day of the fiscal year, subtract everything the project owes within roughly the next 30 days, subtract segregated funds like tenant security deposits, and whatever remains is surplus cash. If the number is zero or negative, no money leaves the project. If it’s positive, that figure sets the ceiling on what a profit-motivated owner may distribute, subject to several additional conditions in the Regulatory Agreement.

The Formula

Section 13 of Form HUD-92466M, the current Regulatory Agreement for most multifamily projects, defines the calculation.¹ It is not a profit measure. Operating expenses don’t appear as a line item because they’ve already reduced the cash balance by the time the snapshot is taken.

Available cash includes project cash and cash equivalents, short-term investments, earned but unreceived Section 8 Housing Assistance Payments, and any Reserve for Replacement (R4R) draws HUD has approved that haven’t yet hit the project’s account. It excludes the R4R account itself and other HUD-required reserves.

Deductions fall into three buckets:

Sums due or required within the following calendar month: the next mortgage principal and interest payment, the mortgage insurance premium deposit, R4R and other reserve deposits, and tax and insurance escrow deposits. Because HUD mortgage interest is paid in arrears, a December year-end pulls out the January payment, which covers December’s interest.²
Segregated and trust funds. Tenant security deposits are the classic example. That money belongs to residents, not the project.
Other short-term obligations due within 30 days: accounts payable to vendors, accrued management fees, payroll taxes, and similar operating liabilities.³

A wrinkle worth flagging: payables tied to R4R draws that HUD approved before year-end but the lender hasn’t yet released aren’t deducted as payables. They’re added to available cash, because the project will receive them.⁴

Working Through Form HUD-93486

The calculation is filed on Form HUD-93486. Part A produces the surplus cash number; Part B allocates it between distributions (for profit owners) and residual receipts (for non-profits).

In Part A:

Lines 1 through 3 add up project cash in bank accounts (excluding escrows and HUD-required reserves), near-term receivables such as Medicare or Medicaid payments expected within 60 days, and approved but unreimbursed reserve draws. That total is available cash.
Lines 4 through 13 add up current obligations: accrued mortgage interest including the next month’s payment, delinquent principal, delinquent R4R deposits, accounts payable due within 30 days, escrow deficiencies, prepaid revenue, tenant security deposits, and other accrued expenses.
Line 13(c) subtracts total obligations from total cash. Positive is surplus. Zero or negative is not.⁴

Delinquent R4R deposits and escrow shortfalls hit as current obligations, which is why owners behind on reserves often show zero distributable surplus cash even when the operating account looks fine. R4R has its own minimum balance rule: the underwriting-established floor if one exists, otherwise a default of $1,000 per unit, and a lender cannot approve a draw that would breach that floor without HUD’s prior approval.⁵

Conditions That Block a Distribution

A positive surplus cash number is necessary but not sufficient. The Regulatory Agreement prohibits distributions when any of the following are true:

HUD has issued a Notice of Violation of the Regulatory Agreement, or the mortgage note is in default.
The project is operating under a forbearance or workout agreement.
Essential services (utilities, trash removal, security, and similar) are not being provided on a regular basis.
The proposed distribution would come from borrowed funds rather than from actual project surplus.¹

Physical condition matters here too. Properties are inspected under the Real Estate Assessment Center (REAC) program and scored zero to 100. A score below 60 fails HUD’s Physical Conditions Standards, and if HUD issues a Notice of Violation on that basis, distributions are barred until the violation is resolved. A successful appeal that raises the score to 60 or above can prompt HUD to withdraw the notice.⁶

Caps on the Amount

Even with a clean file and a positive number, the distribution amount may be capped by program rules. For Section 8 New Construction or Substantial Rehabilitation projects, federal regulations limit the annual return to a percentage of the owner’s approved initial equity: 6 percent for elderly housing and 10 percent for non-elderly projects. The Assistant Secretary may adjust those percentages over time.⁷

Other programs set their own caps in their regulatory documents. Surplus cash sets the outer ceiling; the return-on-equity limit can pull the ceiling lower.

Non-Profit Owners: Residual Receipts, Not Distributions

For non-profit and limited-dividend owners, the distribution amount is zero. Any surplus cash calculated at year-end must be deposited into a Residual Receipts account held by the lender.⁸

Those funds are restricted to HUD-approved purposes: covering legitimate operating deficits, funding repairs not eligible for R4R, or reducing rents. Balances may be pooled with R4R funds for investment purposes but remain restricted in use. Non-profit owners under Section 236, Section 221(d)(3), and Section 202 are all generally subject to this requirement.⁹

Timing: Annual, Semiannual, or Monthly

The default schedule under the Regulatory Agreement is annual, computed as of the last day of the fiscal year, with an option to compute again at the six-month mark if the executed agreement allows.¹ The Form HUD-93486 is submitted with the project’s annual audited financial statements, which are filed electronically through HUD’s REAC financial reporting system within 90 days of fiscal year-end.

Mortgagee Letter 2022-16, issued in September 2022, opened a monthly track for non-assisted (unsubsidized) HUD-insured properties. The formula is identical; only the frequency changes. Properties receiving project-based Section 8 or other HUD subsidies remain on the annual or semiannual schedule in their Regulatory Agreement.² Frequency does not relax the conditions: every distribution, monthly or annual, still requires no default, no violations, no service interruptions, and reserves in good standing.

What Happens If You Take Money You Shouldn’t

Unauthorized distributions escalate across three tracks.

Administratively, HUD can impose a Limited Denial of Participation barring a person from a specific program for up to 12 months, and can pursue suspension or debarment from all federal procurement and nonprocurement programs.¹⁰

Civilly, HUD can assess money penalties against mortgagors who knowingly and materially violate their obligations. For violations tied to non-project income commitments, reserve funding, or property condition, the maximum penalty per violation equals the loss HUD would experience at a foreclosure sale. For other knowing violations, the maximum penalty per violation is $62,829, subject to periodic inflation adjustments. These penalties cannot be paid from project income.¹¹

Criminally, the equity skimming statute at 12 USC 1715z-19 reaches any owner, agent, or manager who willfully uses project rents, assets, or income for purposes other than reasonable and necessary expenses while the project is in a nonsurplus cash position or the mortgage is in default. The penalty is a fine of up to $500,000, imprisonment for up to five years, or both. The statute defines “nonsurplus cash position” by reference to the Regulatory Agreement, so the same calculation on Form HUD-93486 determines whether a criminal line has been crossed.¹²

1
U.S. Department of Housing and Urban Development. Regulatory Agreement Multifamily Housing Projects HUD-92466M
2
U.S. Department of Housing and Urban Development. Mortgagee Letter 2022-16
3
Reginfo.gov. Computation of Surplus Cash, Distributions and Residual Receipts Annual
4
U.S. Department of Housing and Urban Development. Computation of Surplus Cash, Distributions and Residual Receipts Section 232
5
U.S. Department of Housing and Urban Development. Reserve for Replacement Lender Delegation Policy
6
U.S. Department of Housing and Urban Development. Servicing of Projects That Do Not Meet HUD Physical Condition Standards and Inspection Requirements
7
eCFR. 24 CFR 881.205 Limitation on Distributions
8
U.S. Department of Housing and Urban Development. Computation of Surplus Cash, Distributions and Residual Receipts Form HUD-93486 Instructions
9
U.S. Department of Housing and Urban Development. HUD Handbook 4350.1 Chapter 25 Residual Receipts
10
eCFR. 2 CFR Part 2424 Nonprocurement Debarment and Suspension
11
eCFR. 24 CFR Part 30 Civil Money Penalties Certain Prohibited Conduct
12
Office of the Law Revision Counsel. 12 USC 1715z-19 Equity Skimming Penalty