RESERVE FOR REPLACEMENT GUIDELINES
REGION VIII - DENVER
SEPTEMBER 2014 

Throughout the history of the Department of Housing & Urban Development (HUD) Assisted Housing, the housing industry has complained with some validity, that HUD has not been consistent in its treatment of Reserve for Replacement requests.  This will always be somewhat of a problem because of the many different programs, managers, owners, properties, and Project Managers (PM’s) involved.  Each situation is unique and some flexibility is allowed and necessary to handle situations in a responsible manner. 

This statement is an attempt to define standard requirements for submission of Reserve for Replacement requests.  A PM may require more documentation for some properties, but unless otherwise notified, submissions meeting the stated requirements will be considered complete.  The Reserve for Replacement requirement is included in the Regulatory Agreements and/or Housing Assistance Payment (HAP) contracts in order to encourage long-term planning and upkeep of HUD Insured or Section 8 subsidized projects.  The Reserve for Replacement account is intended to help pay the cost of repairs to and/or replacement of building systems and components.  

As we all know, government and industry are now making a concerted effort to be Green - to help conserve energy and resources.  We are soliciting your help in reporting some details of that effort at your property by using the newly revised request forms.   We can then track how well the energy conscious owners and managers in our Region are moving toward this important and laudable concept.  Please do help us with the small effort and minimal information you find added to this package.  We all eventually benefit!  And, let your PM know if you have questions. 

REQUIRED DEPOSIT AND MINIMUM LEVEL 

The required monthly Reserve for Replacement deposit is property specific.  The initial requirement was determined, for each property, when the initial contracts or business agreements were executed.  Please note that some projects that have undergone mortgage restructuring and/or refinanced could be subject to a Use Agreement.  As a result, new Replacement for Reserve deposits may have been established. 

We recommend that every property perform a reserve analysis to determine a reasonable monthly deposit.  In general, the most appropriate approach is to determine, for any anticipated replacement, its average monthly cost during its useful life.  For example: 30 refrigerators costing $500 each, with an estimated average useful life of 10 years would require a monthly deposit of $125.  The total of the average monthly cost for all expected Reserve for Replacement replacements would give you a reasonable monthly deposit.  This is a simplified approach, which does not consider inflations or the current balance of the Reserve for Replacement account.  

The reserve analysis should be re-evaluated on a periodic basis as new information and technology becomes available.  The monthly Reserve for Replacement deposits for some properties, specifically for Section 8 projects are automatically adjusted when rents are increased.  

HUD Handbook 4350.1 (“the Handbook”) suggests a minimum Reserve for Replacement account level to the greater of 1) the initial monthly deposit multiplied by 144 months, or 2) $1,000 per unit.  These may be admirable goals for some properties; however, every property is unique.  Region VIII will continue to use the current Reserve for Replacement deposit multiplied 24 months as a recommended minimum level.  Your PM will, generally, approve eligible releases if the reserve level remains above the 24-month minimum level.  Property owners and managers should determine, as a part of the management/planning process, a reasonable minimum account level.  In most cases, this will be significantly higher than the 24-month amount. 

ELIGIBLE RESERVE FOR REPLACEMENT ITEMS 

The below list includes items for which a complete replacement will, generally, be considered eligible.  

Appliances

• Ranges
• Refrigerators
• Dishwashers
• Clothes Washers and Dryers
• Garbage Disposals
• Exhaust Fans
• Air Conditioners 

Exterior

• Doors including screen doors
• Windows with integral screens
• Roofs, complete replacement or extensive repairs
• Gutter/downspout, complete replacement or extensive repairs
• Paint, complete exterior
• Sprinkler system & irrigation, complete replacement or extensive repairs
• Siding, compete or extensive replacement 

Plumbing/Systems

• Toilets
• Bathtubs/Sinks and fixtures
• Kitchen sinks and fixtures
• Laundry tubs and fixtures
• Water Heaters
• Furnaces and Boilers 

Interior

• *Carpet
• Flooring – tile and/or linoleum
• Drapes, shades, and/or blinds
• Cabinet replacement 
• Bedbug eradication/management

Miscellaneous

• Elevator, complete replacement or extensive repairs
• Seal coating asphalt
• Resurfacing asphalt
• Concrete work, complete replacement or extensive repairs
• Swimming pool, complete or extensive repairs
• Office Computers
• Health/Safety items (such as smoke alarms, fire alarms, call systems) 

*The Handbook refers to carpet replacement as a non-traditional Reserve for Replacement item.  Region VIII has traditionally considered carpet replacement to be an eligible Reserve for Replacement item and will continue to do so.  If owners/managers anticipate that they will utilize Reserve for Replacement for carpet replacements, the reserve analysis should certainly include carpets.  

The listing above is provided as a guideline.  Eligible items are not limited to those listed.  Properties may, to a large extent, define eligible items by including them as replacement items in a reserve analysis (discussed above) and obtaining HUD concurrence on the analysis.

Another determination of Reserve for Replacement eligibility depends on whether the repair or replacement is considered to be routine maintenance.  There has always been some confusion regarding what items are normally considered repairs, and therefore not eligible for Reserve for Replacement.  This is quite often a judgment call.  In general, the replacement of small individual items will be considered a repair.  If a large number of these individual items are replaced over a short period of time, it may be considered a “program” for replacement; and therefore, eligible.  For example, we would normally consider the replacement of three kitchen faucets to be repairs.  If all kitchen faucets are replaced throughout the property, we would consider this a program; and therefore, eligible.  If you are not certain, we suggest you contact your PM. 

REQUIREMENTS FOR SUBMISSION 

The purpose for HUD approval of Reserve for Replacement releases is to ensure that the property is maintained, to the extent possible, in a condition similar to when it was initially insured or given a Section 8 contract. 

Previous guidance required a detailed description of the work done (or to be done), copies of paid invoices, and bids and specification for advances from the fund.  In 1999, Housing Notice, H99-13, streamlined the process to expedite Reserve for Replacement releases.  This notice allowed all releases to be processed using the Optional Method (found in paragraph 4-17 of the Handbook) except those meeting the following criteria:

• Those designated as Troubled by HUD; or
• Any property specifically notified (in writing) as being excluded; or
• Requests resulting in a remaining balance in the Reserve for Replacement account (after the approval of the withdrawal) which is below the 24-month minimum level (this is determined on a property specific basis; or
• Requests which include payment of special fees to the management agent, that did not have HUD’s prior approval; or
• Requests, which include payments for identity-of -interest transactions, where excessive costs for identity of interest entities are a problem. 

In summary, the Optional Method for processing releases from the Reserve for Replacement Account requires the following:

• A transmittal requesting release of funds, submitted by the Mortgagor/Agent to HUD.  (Suggested format found in Attachment A)
• A Mortgagor Certification with each request in accordance with the existing requirements of the Handbook’s Paragraph 4-17B 1-9. (Suggested format found in Attachment A)
• No more than one request will be processed each quarter. (Exceptions shall only be considered for properties experiencing cash flow problems and must be processed in accordance with Paragraph 4-15 of the Handbook)
• Copies of the invoices need not be submitted, as long as the request describes the work/items. However, to help us track energy efficient items in your reserve for replacement release request, we are asking you to identify those items using attachment B.  At some point we might need to inspect and verify reserve for replacement items.  Although invoices are not needed for all requests please note these invoices must be retained in the property’s file for three years and be available for HUD review.
• A form HUD-9250, Reserve Fund for Replacements Authorization, submitted by the Mortgagor/Agent for each quarterly request. (Attachment C) 

When the request for release of funds is for work that is to be done in advance, bids must be obtained and used to support the request.  For properties eligible to submit Reserve for Replacement using the Optional Method (see above to determine eligibility), copies of all bids are required to be submitted for prior approval only for requests, which exceed the following threshold:

                        100 units or less          $25,000

                        101-250 units              $50,000

                        over 250 units             $100,000 

For projects not eligible for the Optional Method (see above to determine eligibility), requests that exceed $10,000 must be supported with copies of at least three bids.  A PM may request the project utilize an even lower threshold depending on his/her knowledge of the condition of the property. 

The process of obtaining bids for the Reserve for Replacement work items must still comply with outstanding instructions relation to HUD bidding and contracting procedures, including, but not limited to, identity of interest issues.  And, owners/managers remain responsible for program operations and should institute reasonable controls and checks. 

ADVANCES FROM REPLACEMENT FOR RESERVE ACCOUNTS FOR SECTION 8 AND PRAC CONTRACTS 

It is sometimes necessary for Section 8 and Project Rental Assistance Contract(PRAC) properties to request an advance to make mortgage payments and/or for the continuance of general operations.  The process for requesting an advance is:

1. Owner/Management submits a written request to HUD to release funds.
2. HUD issues HUD Form-9250 to Owner and Servicing Agent with conditions of repayment, if applicable.
3. The Servicing Agent follows-up with repayment. 

GENERAL INFORMATION 

The typical processing time for a Reserve for Replacement approval, assuming all necessary paperwork is complete, is 30 days.  HUD may delay processing or refuse to process requests if an owner has not made a good faith effort to resolve outstanding issues from management reviews, physical inspections, or other HUD matters.  Requests will not be processed if audited financial statements are delinquent.  And, in most cases, invoices dated over one-year of the request submission date will not be processed. 

These instructions are not intended to replace the Handbook.  If you have questions, please refer the Handbook and discuss with your Project Manager.