You’ve signed scores of forms for your HUD refinancing, and you now have a HUD Section 232 mortgage on your nursing home property. Before you know it, you’re preparing for your first HUD audit. Here are things you should do to make the initial audit a good experience.
1. Gather all signed documents in one place.
The first thing your auditors will request is the full, signed HUD closing binder. Not only do the auditors need it, but you should also have a copy for your own records. It spells out all your responsibilities and obligations. If you didn’t get it, contact your servicer.
Included in the HUD closing binder are the regulatory agreements for both the borrower and the operator, the mortgage note, lease documents, and closing statement. If you had debt owed to owners, HUD may convert it or the accrued unpaid interest into a surplus Cash note.
Please don’t pick and choose what you provide. Send the whole thing. You may inadvertently omit sending something the auditor needs and would not know otherwise
Also gather documents for any notes receivable or payable.
2. Be aware your initial audit is not for a full year.
Your initial audit covers the period from the day you closed on your loan to December 31. If your closing date was on or after September 1, you can get an automatic deferral on your initial audit. For example, if you close on your loan on November 3, 2026, your initial audit will be from November 3, 2026, through December 31, 2027.
3. Prepare your HUD opening trial balance
The HUD opening trial balance is what it looked like after expensing any debt issuance costs from your existing mortgage and just before the refinance transaction. It includes the old mortgage balance.
You should make sure this trial balance is as clean as possible. Some things to do:
- Make sure cash balances are reconciled to the transaction date.
- Collect any outstanding lease receivables. Note that HUD expects the borrower to collect all required lease payments when due.
- Record depreciation through the transaction date.
- Record any goodwill amortization, if you’ve elected the practical expedient, to the transaction date.
- If any preclosing costs were paid by a related party, make sure your Trial Balance includes these deposits as an asset.
- Most property companies do not carry accounts payable. If your entity has an accounts payable balance, make sure it is accurate; adjust if necessary.
- Accrue interest paid at closing on your old mortgage so the expense is not in the HUD audit period.
- Update your analyses of related party balances, including with the operator.
- Lease revenue on leases with payments that increase over time are straight-lined to recognize lease revenue evenly over the lease term. If that was done to your lease, you will carry an unbilled lease receivable on your trial balance. If that lease terminates as of the HUD refinancing date and is replaced with a new lease, expense the remaining balance.
- Recognize lease revenue through the closing date.
We often see property companies record all transactions at the end of the month. If that is your practice, you will need to push back revenue and expenses as appropriate to either before or after HUD. If your closing date is near the beginning or end of the month, proration may not be necessary.
4. HUD escrow accounts belong on the property company’s books, not on the operating company’s books.
Many companies record the escrows on the operator’s books. HUD requires them on the property company’s trial balance. Your auditors will make you move them back, as HUD will otherwise reject your submission.
Doing these four things will help your initial HUD audit go smoother.
Questions? Ask our HUD team.