12.15.4 Initial Operating Deficit Deposit

A. Initial Operating Deficit Deposit must be established with the Lender at initial closing. The Borrower must advise the Lender how it plans to fund the escrow, by cash, a letter of credit, excess mortgage proceeds, or excess land equity, if any.

B. The purpose of the operating deficit escrow is to provide funding for operating expenses, noncapitalized property taxes, insurance and interest and principal payments when income is insufficient during the initial lease up period. This escrow is not mortgageable and the unused portion must be returned to the Borrower.

C. Release of the Initial Operating Deficit Escrow. HUD will consider Lender’s request using form HUD92464M, Request for Approval of Advance of Escrow, for all initial operating deficit draws during leaseup. The Lender’s request must be accompanied by:

1. A review and analysis of the monthly accounting reports detailing progress on lease up as compared to the lease up projections used in underwriting, and

2. An updated calculation of the sufficiency of the escrow. This analysis and calculation are particularly important if the project is experiencing substantial variations from its lease up projections.

D. Unused amounts will be released upon the Lender’s request when the project has demonstrated to the Regional Production Director’s satisfaction that the project has achieved six consecutive months of sustaining occupancy as defined in Chapter 3, Section 3.1.25.

1. The HUD Underwriter will consult with Asset Management (AM) staff prior to approval of a release to obtain AM’s approval.

2. HUD offices should exercise caution to be certain that monthly results are not erratic or seasonal and that 1.0 or better debt service coverage will be sustainable after release of the escrow funds.

MAP Guide, March 2021 Go to beginning of Chapter 12

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

Chapter 12 Page 12-35

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

3. For garden-style apartment projects consisting of separate buildings, each of which is leased up separately, HUD will consider partial releases of the operating deficit escrow as individual buildings achieve 6 consecutive months of sustaining occupancy.

4. It is the Lender’s responsibility to fully document all expenditures from the escrow fund to ensure that funds are used solely for project operating needs.