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Replacement Reserve Escrow Guidelines

Typical RR escrow account releases are primarily reviewed on a "reimbursement" basis for capital replacement work which has been pre-approved by HFA after the Owner submits a Reserve for Replacement Request. Depending on the current financial condition of the project, the current escrow balances and compliance status, the Agency may advance RR funds or pay RR funds on "as completed basis". Current Agency policy (memorialized in the Regulatory Agreement) allows for the replenishment of RR funds withdrawn from the account depending on the project's cash flow and the maintenance of a recommended minimum threshold for the RR account. The main purpose of having a recommended minimum threshold is to have funds readily available for an emergency or unforeseen contingency, such as a major roof failure or sewer main break.

In attempt to review the Agency's current RR practices and determine the Agency's compatibility with affordable housing industry standards, a survey was completed with other comparable subsidized housing lenders. Overall, the survey revealed that HFA's requirements are more conservative most likely due to the bond financing and the typical 30 year mortgage terms the Agency offers. In an attempt to achieve compatibility within the industry and somewhat liberalize the Agency's reserve requirements, the following revisions will be made to our existing RR guidelines:

HFA Pre-approval

Owners are required to secure the Agency's pre-approval for RR releases in excess of $20,000 prior to the funds being expended. For reimbursement releases less than $20,000, Owners are required to submit copies of paid invoices, cancelled checks and a written certification before HFA can release the funds.

Timing and Amount

For new construction projects, no release from the project's RR fund will be permitted within the first five years following the permanent closing of the HFA loan. The five year restriction is not applicable for rehabilitation or preservation projects. Owners are not permitted to make requests for withdrawals more often than quarterly unless an emergency exists. Owners should make reimbursement requests during the same fiscal year in which the expenditures occurred, preferably at least sixty days prior to the close of the project's fiscal year. No replacement items over one year old will be considered eligible for reimbursement. The amount of the withdrawal should not be less than $5,000. If there capital items less than $5,000, the Owner should combine the requests and submit items collectively.

Recommended Minimum Threshold

HFA strongly recommends, but does not mandate, that Owners maintain a minimum amount to be held in the Replacement Reserve fund that would equal:

A. At least $1,000 per unit (Multifamily Housing )

B. At least $2,500 per unit (Congregate, Special Needs and Assisted Living Housing)

Adjustments to Recommended Minimum Threshold

The dollar amount calculated above may need to be adjusted for the following variables:

A. Physical Condition of the Project
Projects in Poor or Fair condition would require larger balances.

B. Geographic Location
Exposure to severe or unusual weather conditions (e.g. Western NY, North Country) and replacement cost variances may have important consequences.

C. Immediate Replacement Needs
A project may have to do capital replacements upon financing or in the relatively near future (within five years).

D. Unit Composition
Projects with more units of larger size typically would require larger amounts in the reserve fund.

E. Project Size
Larger projects (100 units and above) with more common areas, elevators, interior and exterior amenities, etc. typically need larger reserves than smaller projects

F. Urban vs. Rural
Inner City projects often need larger reserves than rural projects due to larger unit sizes, turnover of residents, safety and building code requirements, etc.

Right to Modify Escrow Payments

The Agency will retain the discretion to adjust the monthly escrow based on the variables and conditions outlined in the HFA Regulatory Agreement.

Earnings

All interest earned by investments of the Replacement Reserve Account accrue to the account and is kept in the account unless released by HFA for permissible uses under the Regulatory Agreement.

Compliance Checklist

Prior to disbursing reserves, the asset manager is required to complete a compliance checklist in order to secure outstanding or past due reports (e.g. Mortgage Arrears, MOR's, Owners Certifications, Financial Statements, Field Visit Review responses, etc.)

Owner Certification

The owner is to sign and submit to HFA a mortgagor certification which covers the accuracy, correctness and quality of the repairs and expenses. HUD form of certification can be utilized for all projects.

The above guidelines are for all Agency loans financed with FHA, SONYMA and Risk Share mortgage insurance. Letter of Credit, FNMA and Freddie Mac projects reserve accounts are administered under the Regulatory Agreements and by separate mortgage servicing entities.

Last updated: 11/14/2008 6:13:36 PM