In late 2012, HUD issued a Mortgagee Letter (ML) H 2012-25: Revised Requirements for Project Capital Needs Assessments (PCNA), Estimated Reserves for Replacements and Remedies for Accessibility Deficiencies. PCNA reports have long been used to measure the capital requirements for major repairs and replacements of apartment building components during the life of an insured loan. In addition to increasing reserve requirements, the new rules require, for the first time, an accessibility assessment as part of the review.
The revised requirements apply to all applications for FHA mortgage insurance under the FHA Multifamily Housing program, all 10-year PCNA updates through the life of the loan for existing insured properties and other HUD Office of Multifamily Housing uses.
The new reserve for replacement requirements increase the owner’s cost for funding repairs for replacements and increases the term upon which reserves are based. For refinancing of existing loans, the reserves requirements increase by $100 per unit/per year to $250 for Section 223 (f) and also call for a new PCNA assessment every 10 years.
These new requirements also apply to Section 223(a)(7) refinance of existing FHA multifamily loans. Reserves can be set at up to $500 per unit/year before a waiver can be requested.
Of particular interest to apartment property owners is the inclusion of an accessibility assessment as part of the PCNA process. HUD identified the PCNA for HUD-insured or assisted housing as an opportunity to identify and remedy accessibility noncompliance. The needs assessor must identify as deficiencies all instances of noncompliance with the design and construction requirements of the Fair Housing Act, the Americans with Disabilities Act (ADA) and Section 504 of the Rehabilitation Act of 1973.
Accessibility deficiencies are considered critical repairs and as such must be included in a corrective action plan that will require completion on the most expeditious schedule possible. In addition, these critical repairs must be funded outside of the reserves for replacements. Corrective plans will describe physical remedies, estimate costs and set a specific schedule for completion. When necessary, repairs may be deferred beyond endorsement but no more than one year without HUD headquarter approval.
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