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USDA-RHS published the final rule to change the Reserve Account for new construction in the Section 514/516 and Section 515 programs in the Federal Register. This action will not affect reserve accounts for existing portfolios/properties. The new rule is effective September 7, 2012.
Under the new rule, RHS will now base the reserve account amount for new construction in the Section 514/516 and 515 programs on a life-cycle analysis or Capital Needs Assessment (CNA). Either reserve account analysis that meets RHS approval will be prepared by a third-party. The reserve account analysis will be used to determine the expected useful life of the building components and furnishings and to determine which building components or furnishings are the most cost efficient over the life of the building. The reserve account deposit level will be maintained through steady deposits to meet the needs of the project as they become due. The exact contribution amounts will be articulated in the borrower’s loan agreement. Adjustments may be made at five or ten year intervals, either CNA or as part of the original analysis. Any adjustments that were not reflected in the original loan agreement will be reflected in an amendment to the loan agreement.
The new requirement is intended to assure quality construction as well as long term viability of the complexes. Reserve levels will be based on life cycle costs or capital needs in order to ensure necessary resources are available when needed to replace essential building components.
Current agency regulations require an annual minimum deposit of 1 percent of the TDC be put in a reserve account for FLH and RRH programs. USDA-RHS has found over the years that the 1 percent requirement does not necessarily correlate to the long term needs of the property. This final regulatory change will ensure that reserve accounts properly sized to meet the capital needs anticipated at the time of construction.
A copy of the final rule may be found here: http://www.gpo.gov/fdsys/pkg/FR-2012-07-09/pdf/2012-16731.pdf