12.15.3 Working Capital Deposit

A. Working Capital Deposit (form HUD-92412M) escrow is established at initial closing with the Lender. It is the responsibility of the Borrower to advise the Lender how it plans to fund the escrow: either by cash, a letter of credit, excess mortgage proceeds, or excess land equity, if any.

• B. Purpose. The deposit is used to:

1. Defray the cost of initial marketing and rent-up including sales and advertising, model furnishing, and equipment and supplies essential to initial rent-up, etc.

2. Cover project expenses that are not covered by project income or the Initial Operating Deficit Escrow in the first operating year. The project expenses include real estate taxes, permanent property insurance premiums, mortgage insurance premium, ground rents and assessments.

3. Cover shortfalls in interest, taxes, property insurance premiums, mortgage insurance premiums, ground rents and assessments during construction after funds available under the Building Loan Agreement are exhausted.

4. Fund necessary change orders and construction cost overruns not caused by the contractor from the 2% new construction contingency portion of the working capital escrow.

C. Control and Release of Escrow. The Lender controls disbursements from the escrow and, in conducting its due diligence during initial occupancy, is required to fully document all expenditures from the escrow. In reviewing a Borrower’s request to release a partial amount of escrow, the Lender should consider the following.

1. Borrower's request for the release of such escrow funds must be by letter to the Lender, rather than on form HUD-92403.

2. None of the escrow can be used to defray any of the hard costs of construction applicable to the Total for All Improvements, Section G of form HUD-92264, Rental Housing Project Income Analysis and Appraisal (or other Firm Stage underwriting form applicable to the Section of Act the project is to be insured under).

3. Avoid premature disbursements and unnecessary expenditures.

MAP Guide, March 2021 Go to beginning of Chapter 12

Bookmarked Version Go to Acronym and Abbreviation List, Glossary, Index

Chapter 12 Page 12-34

To return to this page after clicking a link, press ALT + Back Arrow

Chapter 12 Construction Period 12.15 Escrowed Funds, Letters of Credit, Deposits, Holdbacks and Related Matters

Go to Table of Contents

4. As portions of a project are ready for occupancy, a partial disbursement may be permitted for reasonable opening expenses. However, the Lender must not exhaust the escrow prior to project completion but should retain a reasonable amount to offset funding needs through the remainder of the construction period and thereafter.

5. The HUD Office may direct that the deposit be used to cover any shortfall in interest, taxes, property insurance mortgage insurance premiums, ground rent and assessments.