5.10.8 Escrow Agreement for Deferred Repairs

A. The costs of the deferred repairs (including materials, labor, permits, profits, etc., trended to the start of repairs) must be estimated and withheld in cash from mortgage proceeds and placed in escrow. In this context, deferred repairs include all immediate repairs identified in the CNA that are proposed for

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completion after endorsement, including both Non-Critical repairs and any accessibility remedies that cannot be completed prior to endorsement. A letter of credit may not be substituted for this escrow.

B. An additional cash amount (or letter of credit, at the option of the Lender) of not less than 20 percent of the repair cost estimate will also be placed in escrow as an assurance of completion of deferred repairs, provided however, that;

1. For Section 223(a)(7) transactions and Section 223(f) for affordable properties, the additional amount shall be 10% of the repair cost; and,

2. For Section 223(f) applications, the additional deposit may be reduced to 10% of the cost for any repairs and alterations where:

   • a design professional has prepared construction drawings, and the Borrower has engaged a nonidentity of interest General Contractor to execute the work; and

• the contract provides for the withholding of retainage in the amount of 10% of the value of work completed.

C. The Lender may release funds from the mortgage proceeds portion of the escrow in proportion to the cost of work completed consistent with HUD’s instructions for disbursements from repair escrows. See Chapter 12, Section 12.17.

• D. Funds remaining in the escrow may be released to the Borrower when:

1. All repairs have been satisfactorily completed as determined by HUD or Lender when delegated to an approved Lender;

2. Evidence of clear title has been provided to HUD; and,

3. In cases where the cost of repairs and alterations included in the Repairs Escrow exceeds $400,000, the Borrower (or the General Contractor in cases where a construction contract was executed) has provided latent defects assurance in the form of an escrow in cash or letter of credit or surety bond (at the option of the Lender) equal to 2½% (or a greater percentage, as warranted) of the repair cost, to be maintained for fifteen months from completion of repairs. See paragraphs 8 and 9 of form HUD92476.1M for further details.

E. Except in the case of existing insured projects, where the current balance in the RfR)escrow may exceed the initial deposit otherwise required to provide a balanced financial plan for future capital replacement needs, funds deposited in the RfR escrow account at or after endorsement shall not be used for the completion of any immediate repairs and alterations.

F. See form HUD-92476.1M, Escrow Agreement for Deferred Repairs, as well as Chapter 8, Section 8.11.1.A.2.c and Chapter 12, Section 12.17.1 for greater detail on repair escrows.

G. If proposed repairs or alterations require occupancy or cash flow disruption, the Lender should estimate such losses by month and add the aggregate total to an operating deficit escrow, not the repair escrow.

H. In cases where completion of repairs is deferred and the mortgage amount exceeds the costs of refinancing and all required costs, including repairs (“cash-out transactions”), the Lender shall withhold 50% of the excess proceeds until all repairs and alterations are completed in a manner acceptable to the

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Lender and HUD. The withheld funds will be added to the repair escrow. (See Chapter 8 for more detailed description of the calculation of surplus cash withheld and escrow release instructions).