Replacement Reserves and the HUD 221(d)(4) Loan Program
Replacement reserves consist of money set aside to replace building equipment and components which wear out over time. All HUD multifamily loans require replacement reserves, but these requirements vary with different loan types. HUD 221(d)(4) loans require 2-4% (often 4%) of the total loan amount in working capital reserves. This is designed to pay for general building repairs. 221(d)(4) loans also require 3% of the total loan amount as an operating deficit reserve, which can help supplement a project’s finances if unexpected expenses or a reduced occupancy level result in an operating deficit. Both of these funds will be placed in escrow until they are needed.
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