Follow HUD Rules When Determining Residential Income for Management Fee Calculations
In last month's issue of the Insider, we told you of HUD's efforts to clamp down on excessive pay at public housing authorities by setting caps that extend and expand limits imposed by Congress. With increased HUD attention on salaries, this may be a good time for owners and managers to go over HUD rules on calculating management fees. If you try to include income from sources that HUD says aren't allowed, you could get in trouble with HUD auditors for excessive income and be forced to pay back a portion of your fee.
Your management contract with the owner determines your management fee, subject to HUD review. HUD rules permit managing agents of assisted sites to collect five types of fees:
1. Residential income fee. This is based on a percentage of income received from the rental units, including rental assistance payments.
2. Commercial income fee. This is based on a percentage of income from commercial sources, such as parking fees and rents from commercial space.
3. Miscellaneous income fee. This is based on a percentage of certain eligible miscellaneous income.
4. Special fees. These are extra fees, set at a flat amount per unit, that compensate a managing agent for correcting a specific site problem or handling a specific temporary task.
5. Add-on fees. These are extra fees, also set at a flat amount per unit, to compensate managing agents that face long-term expenses beyond the expenses the basic percentage-based management fee covers.
Residential income, commercial income, and miscellaneous income fees are derived from site-related income and are calculated as a percentage of the amount of income collected by the agent. And special fees and add-on fees are flat fees paid on a per-unit basis, and you must get HUD approval before you can collect them [HUD Handbook 4381.5, par 3.2].
Calculating Residential Income
Most likely, the management fee you're allowed to collect on “residential income” will generate the bulk of what you get paid for managing the site. To calculate the management fee you're allowed to collect on residential income, you total the residential income generated by the site you manage and multiply the total by the HUD-approved fee percentage. The result of this calculation is called your “residential income fee.”
Although this calculation may sound straightforward, it's easy to make a mistake. HUD permits you to count only certain income as residential income for purposes of this calculation. If you try to include income from sources that HUD says aren't allowed, you could get into trouble with HUD auditors and be forced to pay back a portion of your fee. To make sure you're not required to pay back a portion of your fee due to an error, we'll tell you about the sources of residential income that HUD lets you count when calculating your residential income fee. We'll also tell you about which sources you shouldn't count [Handbook 4381.5, par. 3.3, and fig. 3-1].
Income Sources You May Count
HUD rules allow you to count the following types of residential income when calculating your residential income fee:
Apartment rents. Include the rent payments you get from residents.
Cooperative carrying charges. If you manage a HUD-assisted cooperative, include the carrying charges you get from site residents. Carrying charges are what cooperatives call rent, explains Stewart A. Grubman, a CPA and affordable housing expert.
Rent supplement payments. If a site you manage gets rent supplement payments (a program similar to but pre-dating project-based Section 8 and only used for Section 236 sites), include these payments.
RAP payments. These are rent supplement payments that normally apply only to uninsured Section 236 sites. You may collect a residential income fee on them.
Section 8 payments. Include any Section 8 payments you get from HUD.
Income Sources You May Not Count
HUD Handbook rules don't allow you to include the following income when calculating a residential income fee:
Special claims. Don't collect a residential income fee on special claims payments even if HUD reimburses you for unpaid rent. HUD permits five types of special claims—unpaid rent claims, damage claims, vacancy claims during “rent-up,” regular vacancy claims, and debt service claims [Handbook 4350.3, par. 9-14(B)(3)].
Excess income. Some residents at 236 sites pay rent based on their incomes. These rents may exceed the basic rent that HUD sets for their units, which is the lower of the HUD-approved market rent or the fair market rent for your area. HUD calls the difference between what these residents pay and their units' basic rent “excess income.” Even though excess income is sometimes called “rent revenue,” you may not collect a residential income fee on it.
Interest reduction payments. Some 236 sites get interest reduction payments (IRP). This assistance can be considerable—HUD normally pays the difference between the interest rate on the site's mortgage and a 1 percent rate. Don't collect a residential income fee on IRP.
Stewart A. Grubman, CPA: Grubman Anand, PC, 101 Chestnut St., Ste. 120, Gaithersburg, MD 20897; www.grubmancpas.com.