Finding Text
Noncompliance with Reserve for Replacement Funding Requirements Criteria The Regulatory Agreement and related HUD program requirements require the Organization to make monthly deposits to the Reserve for Replacement account in the amount specified by HUD. These funds are required to be maintained in a separate restricted account to provide for future capital repairs and replacements of the property. Condition During our audit, we noted the Organization did not make all required deposits to the Reserve for Replacement account during the fiscal year ended December 31, 2025. Cause Management indicated the Organization experienced cash flow limitations during the year and did not have adequate monitoring procedures in place to ensure compliance with HUD reserve funding requirements. Effect Failure to maintain the required Reserve for Replacement funding balance constitutes noncompliance with the Regulatory Agreement and HUD requirements. Continued noncompliance may result in increased HUD oversight, restrictions on operations, or other regulatory actions. Questioned Costs None noted. Recommendation We recommend management implement procedures to ensure required Reserve for Replacement deposits are made timely and that reserve balances are regularly monitored for compliance with HUD requirements. Management should also communicate with HUD and the lender, if applicable, regarding a plan to restore the reserve balance to the required level. Views of Responsible Officials and Planned Corrective Action Management acknowledges the finding and the Organization has been making installment transfers to the reserves in 2026. The Organization intends to fulfill the installments by December 31, 2026.