Finding Text
2024-001 Strengthening Compliance with Replacement Reserve Deposit Requirements
(Repeated Finding 2023-001)
Program Name/Assistance Listing Title: Supportive Elderly Housing Section 202
Federal Assistance Listing No: 14.157
Federal Agency: U.S. Department of Housing and Urban Development (HUD)
Type of Finding: Federal Award Finding
Compliance Requirements: Special Tests and Provisions – Reserve for Replacements Deposits
Finding Resolution Status: In Process
Information on Universe Population Size: 1
Sample Size Information: 1
Criteria: In accordance with the 2024 Compliance Supplement and 2 CFR Part 200, the
Regulatory Agreement (Item 5(a)) requires that an amount specified by HUD be deposited
monthly into the replacement reserve fund. The agreement stipulates that the mortgagor must
establish and maintain a reserve fund for replacements in a separate bank account, with monthly
deposits unless alternative terms are approved in writing by HUD.
Per HUD-approved Form 9250, Ivy Plaza Housing Corporation was required to deposit $6,407
monthly into the reserve fund until November 30, 2024, after which the required deposit would
be $3,200 starting December 1, 2024.
Additionally, HUD Handbook 4350.1 Rev-1 advises owners to periodically assess their Reserve
Fund against anticipated replacement needs. The guidance emphasizes maintaining a
recommended minimum threshold to ensure funds are available for unforeseen contingencies
such as major infrastructure repairs.
Statement of Condition: As part of the Compliance Supplement 2024 procedures, it was
observed that four months of reserve deposits were temporarily delayed, resulting in a shortfall
of $22,421.
Cause: The shortfall occurred due to overlapping payments for a prior-year deficit. Management
continued making monthly deposits, but a portion of these payments was applied to settling the
previous year's shortfall. This may have led to the assumption that all current-year deposits were
made, resulting in the unintentional omission of four months' funding.
Potential Effect of Condition: A temporary delay in funding replacement reserves may require
a catch-up deposit to maintain compliance with HUD requirements. If left unaddressed,
prolonged underfunding could impact financial planning for property maintenance.
Questioned Costs: $22,421
Reporting Views of Responsible Officials: The Project acknowledges the finding and is
committed to ensuring compliance with HUD reserve requirements. Steps are being taken to
enhance monitoring and reconciliation processes to prevent future deficits. Additionally, only
repairs and replacements are consistently withdrawn from the Reserve and Replacement Account
with prior approval from HUD.
Context: The replacement reserve fund must maintain the required balances, with timely
monthly deposits. A four-month shortfall occurred in the reported period; however, management
is implementing measures to ensure timely deposits.
Recommendation:
1. Prioritize funding any deficit balances as soon as possible to ensure compliance with
HUD requirements.
2. Make timely deposits into the replacement reserve to meet funding obligations and avoid
potential compliance issues.
3. Conduct quarterly reviews of reserve balances to identify and address shortfalls
proactively, rather than waiting for the annual reconciliation.
4. Implement a monitoring sheet to track monthly deposits and ensure no payments are
missed.
5. Schedule a check-in meeting with the accounting firm by the end of the third quarter to
review reserve balances, address any potential deficits early, and maintain compliance.
6. Ensure that the replacement reserve is used exclusively for repairs and replacements. Any
withdrawal from the replacement reserve must obtain prior HUD approval.
Management Response: Due to cash flow issues and high operating expenses, some
replacement reserve deposits were delayed as of December 31, 2024. The shortfall happened
because part of the deposits was used to cover a prior-year deficit, leading to an assumption that
all current-year deposits were made. HUD approved reducing the monthly deposit from $6,407
to $3,200 starting December 1, 2024, which will help manage cash flow and reduce deficits.
We acknowledge the findings and will ensure timely deposits moving forward. To prevent future
shortfalls, we will track payments using a monitoring sheet, conduct quarterly reviews, and meet
with our accounting firm by the third quarter to maintain compliance.