Avoid Charging Ineligible Legal Expenses to Site's Operating Account
Assisted sites can amass a lot of legal expenses for site-related matters like evicting problem residents or drafting letters to comply with certain HUD rules. You can charge site-related legal expenses to your site's operating accounts, but only if you comply with HUD's rules on handling these expenses.
Auditors pore through your site's records to make sure you have the documentation to back up the legal expenses you've charged to the site and that you haven't charged any ineligible legal expenses. If auditors aren't satisfied that you've complied with HUD rules on handling legal expenses, you could end up having to repay the site out of your own pocket for hefty legal fees, warns CPA and affordable housing expert Seth Strongin. Here are four tips for complying with HUD rules and avoiding having to repay your site's operating account for ineligible legal expenses.
Tip #1: Make Sure Legal Expenses Are Site-Related
You may charge legal expenses to site accounts as long as they're site-related, says Strongin. Legal expenses are considered site-related if they relate to frontline operations or otherwise benefit the site and not the owner or management company, he notes. For example, you can charge the site for the cost of legal expenses associated with:
· Drafting letters to residents, contractors, or HUD;
· Preparing for and conducting eviction trials;
· Recovering costs of damages from residents;
· Drafting lease amendments;
· Enforcing a contract with a contractor;
· Appealing property tax assessments on the site;
· Defending against fair housing lawsuits; and
· Lead paint litigation, but only after the owner has fully complied with HUD's requirements and is “successful” in defending against the lawsuit [HUD Handbook 4350.1, par. 19-10].
Tip #2: Don't Charge Owner-Related Legal Expenses to Site Accounts
You can't charge the site for legal expenses that relate to issues of ownership, such as drafting partnership agreements or transferring ownership interest. Generally, legal expenses that benefit the owner and not the site are ineligible and shouldn't be paid from the site's operating account, says Strongin. Instead, the owner must pay these expenses out of distributions or other non-site funds, he says. Other examples of ineligible owner-related legal expenses are those associated with:
· Converting a partnership to a limited liability corporation;
· Resolving disputes between partners; and
· Defending mortgage foreclosure actions [Handbook 4350.1, par. 10-17].
What if the matter indirectly benefits the site as well as the owner? These legal expenses aren't eligible either, Strongin warns. For example, you can't charge the site for legal expenses associated with:
· Filing bankruptcy petitions;
· Drafting and negotiating loan workout agreements [Handbook 4350.1, par. 10-17]; and
· Prepaying or refinancing mortgages and loans.
You also can't charge legal expenses for matters that pertain exclusively to management company operations, such as defending nonsite-related employment discrimination lawsuits. If you do, auditors will most likely require the management company to repay site accounts [HUD Audit Rept. 95-PH-212-1012].
Tip #3: Make Sure Legal Expenses Are “Reasonable”
HUD rules require that all site expenses, including legal expenses, be “reasonable.” This means that you can't charge legal expenses for an attorney who charges excessively high fees or whose fees aren't related to the amount of work the attorney put into a specific matter. And you can't charge the site flat fees for in-house legal work that exceeds the cost of outside attorneys’ fees in the area. If you do, HUD may require you to repay the site for excessive legal fees.
This happened to the managing agent of several assisted sites in Michigan. The agent used its own legal staff to handle evictions, rather than hiring outside attorneys. The staffers wrote and filed eviction notices and attended court hearings. The agent charged the sites a flat fee of $35 for each case the staffers worked on plus an hourly rate for staff time ranging from $40 to $110. HUD auditors said these charges were too high.
To prove this, the auditors checked the bills of the agent's outside attorneys (the agent later started using outside attorneys to do the same eviction work its in-house staff had done). Unlike the agent, the outside attorneys simply charged a fee based on hourly rates, with no flat fee added. The average fee for a case was $37, far less than the agent's fees. The auditors calculated that the excessive legal expenses totaled $102,385. The auditors said the agent had to repay this amount to the sites' operating accounts [HUD Audit Memo 96-CH-212-1807].
To make sure you're not charging excessively high legal expenses to your site's operating account, do some research into legal fees in your area. For example, call your local bar association, and ask other sites in the area what they pay their attorneys. Also, take steps, such as setting fee caps or limiting telephone conversations with your attorney, to limit your legal expenses.
Tip #4: Demand Detailed Bills to Support Site Charges
It's important to keep sufficient documentation of your site's legal expenses so auditors can determine the nature of the legal work and whether or not the expenses qualify as site-related, says Strongin. If they can't make this determination, you could end up having to repay any unsupported amounts, he warns.
So ask your attorney to give you a bill that carefully itemizes the services performed and the cost assigned to each service, says Strongin. How much detail is enough? Auditors should be able to tell what work was performed, when it was performed, the site to which the work related, and the names of any residents involved. Don't accept a shorthand description like “trial preparation” or “lease drafting.” Instead, the bill should say something like:
“Aug. 9, 2012: Preparation for Aug. 23, 2012, trial re eviction of resident Poe from Unit 5J at Shady Acres—$500”; or
“Sept. 7, 2012: Drafting lease amendment for Shady Acres re drug-related activity by residents—$250.”
Seth Strongin, CPA: Seth D. Strongin, CPA, PC, 704 Sharon Valley Ct., Atlanta, GA 30360; email@example.com.