| Operating Expenses but before return
to Development Owner or deferred Developer Fee until the mandatory
deposit level is replenished. The Department reserves the right to
re-evaluate payments to the reserve, increase such payments or require
a lump sum deposit to the reserve, or require the Owner to enter into
a separate Reserve Agreement if necessary to protect the long term
feasibility of the Development. On a case-by-case basis, the Department
may determine that the money in the Reserve Account may be used for
expenses other than necessary repairs, including property taxes or
insurance, if:
(A) Development income before payment of return to
Development Owner or deferred Developer Fee is insufficient to meet
operating expense and debt service requirements; or
(B) Development income after payment of operating expenses,
but before payment of return to Development Owner or deferred developer
fee is insufficient to fund the mandatory deposit levels.
(9) Exceptions to Replacement Reserve Account. This
section does not apply to a Development for which the Development
Owner is required to maintain a Reserve Account under any other provision
of federal or state law.
(10) In the event of paragraph (7) or (8) of this subsection
occurring, the Department reserves the right to require by separate
Reserve Agreement a revised annual deposit amount and/or require Department
concurrence for withdrawals from the Reserve Account to bring the
Development back into compliance. Establishment of a new Bank Trustee
or transfer of reserve funds to a new, separate and distinct account
may be required if necessary to meet the requirements of such Agreement.
The Agreement will be executed by the Department, Development Owner,
and financial institution representative.
(b) Lease-up Reserve Account. A lease-up reserve funds
start-up expenses in excess of the revenue produced by the Development
prior to stabilization. The Department will consider a reasonable
lease-up reserve account based on the documented requirements from
a third-party lender, third-party syndicator, or the Department. During
the underwriting at the point of the Cost Certification review, the
lease-up reserve may be counted as a use of funds only to the extent
that it represents operating shortfalls net of escrows for property
taxes and property insurance. Funds from the lease-up reserve used
to satisfy the funding requirements for other reserve accounts may
not be included as a use of funds for the lease-up reserve. Funds
from the lease-up reserve distributed or distributable as cash flow
to the Development Owner will be considered and restricted as developer
fee.
(c) Operating Reserve Account. At various stages during
the application, award process, and during the operating life of a
Development, the Department will conduct a financial analysis of the
Development's total development costs and operating budgets, including
the estimated operating reserve account deposit required. For example,
this analysis typically occurs at application and cost certification
review. The Department will consider a reasonable operating reserve
account deposit in this analysis based on the needs of the Development
and requirements of third-party lenders or investors. The amount used
in the analysis will be the amount described in the project cost schedule
or balance sheet, if it is within the range of two to six months of
stabilized operating expenses plus debt service. The Department may
consider a greater amount proposed or required by the Department,
any superior lien lender, or syndicator, if the detail for such greater
amount is reasonable and well documented. Reasonable operating reserves
in this chapter do not include capitalized asset management fees,
guaranty reserves, or other similar costs. In no instance will operating
reserves exceed 12 months of stabilized operating expenses plus debt
service (exclusive of transferred replacement reserves for USDA or
HUD financed rehabilitation transactions). Operating reserves are
generally for the term of the permanent loan. In no instance will
operating reserves released within five years be included as a cost.
(d) Special Reserve Account. If the funding program
requires or allows for the establishment and maintenance of a Special
Reserve Account for the purpose of assisting residents at the Development
with expenses associated with their tenancy, this will be established
in accordance with a written agreement with the Development Owner.
(1) The Special Reserve Account is funded through a
one-time payment or annually through an agreed upon percentage of
net cash flow generated by the Development, excess development funds
at completion as determined by the Department, or as otherwise set
forth in the written agreement. For the purpose of this account, net
cash flow is defined as funds available from operations after all
expenses and debt service required to be paid have been considered.
This does not include a deduction for depreciation and amortization
expense, deferred developer fee payment, except as allowed by §11.302(g)(4)
of this title (relating to Underwriting Rules and Guidelines), or
other payments made to Related Parties or Affiliates, except as allowed
by the Department for property management. Proceeds from any refinancing
or other fund raising from the Development will be considered net
cash flow for purposes of funding the Special Reserve Account unless
otherwise approved by the Department. The account will be structured
to require Department concurrence for withdrawals.
(2) All disbursements from the account must be approved
by the Department.
(3) The Development Owner will be responsible for setting
up a separate and distinct account with a financial institution acceptable
to the Department. A Special Reserve Account Agreement will be drafted
by the Department and executed by the Department and the Development
Owner.
(4) The Development Owner must make reasonable efforts
to notify tenants of the existence of the Special Reserve Account
and how to submit an application to access funds from the Special
Reserve. Documentation of such efforts must be kept onsite and made
available to the Department upon request.
(e) Other Reserve Accounts. At cost certification,
reserves may not include capitalized asset management fees, guaranty
reserves, tenant services reserves, working capital reserves, or other
similar costs.
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