HUD Audits: What is Cost Certification?

When a new multifamily project is constructed under the Housing and Urban Development (HUD) programs, the project typically is required to undergo a cost certification performed by an independent accountant before the HUD’s final endorsement of the project’s insured mortgage loan.

Benefits of the HUD Program

There are many HUD programs available to real estate developers and owners of multifamily construction projects and several reasons why they may want to explore a HUD insured loan. First, these loans are not just for not-for profit entities but are available to for-profit businesses. They also allow distribution of surplus cash on a semiannual and annual basis in accordance with the HUD regulatory agreement. These loans follow a high loan-to-value ratio, meaning, according to the U.S. Department of Housing and Urban Development, developers can receive a larger loan with less money down. The loan is also non-recourse, so investors do not have to sign a personal guarantee. Additionally, the loans have low fixed rates over a long period of time since they are backed by HUD.

Eligibility

As HUD insures mortgages made by private lending institutions, projects must pass a series of tests to be eligible. The auditors’ job is to make sure the multifamily project follows the proper guidelines and protocol of allowable or certifiable costs incurred during construction. This is used to determine the project’s actual costs and establish the maximum insurable mortgage at final endorsement, so that HUD approves the project’s insured mortgage loan. Once HUD signs off on the trip report, the project is considered substantially complete after the final inspection of the construction phase. Then, the project leads have approximately 90 days to complete the cost certification that includes an audit performed by an independent accountant for submission to HUD at final endorsement.

Construction properties are eligible for a HUD loan if they are a new construction project or a substantial rehabilitation of a multifamily rental or cooperative housing for moderate-income households or displaced families.

The minimum HUD loan amount is set at $2 million, although, typical loan amounts exceed $15 million. To qualify for a maximum loan amount, there are separate requirements.

Cost Certifications

Owners and general contractors both perform a cost certification when they have a related business partner or relationship. In the case of mortgagors, a cost certification must always be done for these investors. Contractors, on the other hand, are required to have a cost certification audit when an identity of interest exists with the mortgagor or the contractor used the Construction Contract-Cost Plus. Per the Department of HUD, a subcontractor must cost certify when the total of all subcontracts, purchases and leases is greater than 0.5% of the mortgage, and an identity of interest exists between such subcontractor, equipment lessor, material supplier or manufacturer of industrialized housing and either:

• The mortgagor, or
• The contractor, where the contractor must cost certify.

For More Information

At Sikich, we perform cost certifications year-round. As this is a crucial step in your due diligence process, we encourage you to speak with one of our team members to make sure your construction project can be a success. Contact us today.

Follow us on LinkedIn