Finding Text
2023-001 Lacking 3-Months Required Monthly Deposit on Replacement Reserve Account
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
Type of Finding: Federal Award Finding
Compliance Requirements: Special Tests and Provisions
Criteria: In accordance with the 2023 Compliance Supplement and 2 CFR Part 200, an amount as required by HUD (Regulatory Agreement, item 5(a)) will be deposited monthly into the reserve fund. The Regulatory Agreement stipulates that the mortgagor is obligated to establish and maintain a reserve fund for replacements in a separate bank account. This agreement mandates a monthly deposit unless alternative terms are approved in writing by HUD. Ivy Plaza Housing Corporation, as indicated by the HUD-approved Form 9250, was required to deposit $6,407 monthly into the reserve fund. Additionally, according to the HUD Handbook 4350.1 Rev-1, owners are advised to periodically analyze the amounts in their Reserve Fund considering anticipated replacement needs. The handbook emphasizes the importance of maintaining a
recommended minimum threshold to ensure funds are available for emergencies or unforeseen contingencies, such as major roof failure or infrastructure issues like water or sewer main breaks.
Condition: As part of the Compliance Supplement 2023 procedure to ascertain whether the required monthly deposits have been made to the replacement reserve account, it was observed that there was a deficit of 3 months' worth of required deposits for the calendar year, totaling $19,221.
Cause of Condition: Due to cash flow issues, there were delays in the required monthly payments to the replacement reserve as of 12/31/2023. Furthermore, the Co-Manager was out of the office due to medical reasons during the months of September and October.
Potential Effect of Condition: Underfunded replacement reserves may lead to noncompliance with regulations, necessitating a lump sum deposit to rectify the shortfall and potentially impacting operational cash flow. Prolonged underfunding could compromise property stability and maintenance, delaying essential repairs and capital purchases due to insufficient reserve funds, thereby affecting financial viability and compliance status.
Questioned Costs: The auditor has identified $19,221 of known questioned costs in the calendar year 2023.
Reporting Views of Responsible Officials: The Organization agrees with the findings and recommendations and will adhere to the corrective action plan Context: The replacement reserve balance must be equal to the required balance, and monthly required payments must be deposited into the account. During the year, a deficit of three months' worth of required deposits was noted.
Recommendation: To ensure compliance with HUD requirements outlined in HUD Handbook 4350.1, it is advised that the Organization monitor and review the deposit quarterly. Additionally, measures should be implemented to mitigate the risk of late deposits. Exploring the possibility of requesting a decrease in the monthly reserve deposits or a waiver using Form 9250, accompanied by thorough documentation and justification, is also recommended.
Management Response: Due to cash flow issues and excessive operating expenses, such as a sewer bill exceeding $11,000 and boiler repair costs surpassing $5,000, deposits made to replacement reserve accounts were impacted as of December 31, 2023. Deposits totaling $19,221 were made to the replacement reserve accounts in the 2024 calendar year. Additionally, the Co_x0002_Manager was absent from the office due to medical reasons during the months of September and
October. On February 5, 2024, a request for a waiver from HUD for the $6,407 monthly deposit to the replacement reserve accounts for 2024 was submitted to the HUD Account Executive, with the original email sent. However, as no response was received, the email was sent again on February 26, 2024. As of March 28, 2024, no response has been received from the Account Executive regarding the consideration of this request. Furthermore, a request for an increase in the HUD subsidy will also be submitted to the HUD Account Executive.