On September 6, 2022, Rural Development published a Notice in the Federal Register announcing a new calculation for the Section 538 Guaranteed Rural Rental Housing Lease-up Reserve.
Agency regulations require the project to either attain a minimum level of acceptable occupancy of 90% for 90 continuous days within the 120-day period immediately preceding the issuance of the permanent guarantee or establish a lease-up reserve in an amount the Agency determines is necessary to cover projected shortfalls.
The new lease up reserve calculation will represent an on-average savings to the borrower of approximately $100,000 per transaction, while adding a truer level of protection for project operations.
To calculate the new required minimum lease-up reserve amount, add the monthly amount of the Operations and Maintenance (O&M) expense, the monthly amount of the Debt Service Cost, and the monthly amount of the Reserve Deposit, then multiply this sum by three.
The written formula for the calculation follows:
(Monthly O&M Expense + Monthly Debt Service Amount + Monthly Reserve Deposit) x 3 = Minimum Required 538 Lease-Up Reserve Amount.
For questions regarding the Lease-up reserve calculation please contact Tammy Daniels, Finance and Loan Analyst, Multi-Family Housing Production and Preservation Division, Rural Housing Service, e-mail: tammy.daniels@usda.gov.