A 202 project must fund a replacement reserve monthly at HUD's rate, add all interest to it, and draw on it only with HUD's approval

s202prac.financial.replacement_reserve_monthly_deposits_and_hud_controlled_withdrawals · v1.0.0

The owner must establish and maintain a replacement reserve to fund extraordinary maintenance and repair and the replacement of capital items, and must make MONTHLY deposits in an amount HUD determines. The reserve must be built up to and held at a level HUD finds sufficient for projected requirements; once it reaches that level the deposit may be reduced, but only with HUD's approval. The reserve sits with HUD or in a federally insured interest-bearing account whose balance is fully insured at all times, and ALL earnings including interest must be added to the reserve rather than taken into project income. Funds may be drawn and used only in accordance with HUD guidelines and with HUD's approval or at HUD's direction. With HUD approval the reserve may also be used to REDUCE THE NUMBER OF DWELLING UNITS, but only where the purpose is retrofitting obsolete or unmarketable units. One source of the reserve is easy to miss: an owner whose actual development costs came in under the fund reservation keeps 50 percent of the saving in the Replacement Reserve Account, rising to 75 percent where the owner added energy efficiency features.

Confidence

high

Effective from

1996-03-22

Consequence model

contract remedy

Last reviewed

2026-08-22