221(d)(4) Working Capital and Initial Operating Deficit (IOD) Requirements
Working Capital
The total working capital gross number needed is 4% of the mortgage amount, which is made up by:
2% to defray the cost of initial marketing and rent-up. The lender then may release any unused balance in the working capital escrow, subject to HUD approval, to the borrower one year after Final Endorsement where the project is not in default and when the operations of the project have demonstrated to the Regional Center or Satellite Office Director’s satisfaction that the project has achieved six (6) consecutive months of break-even occupancy. Break-even occupancy is defined as 1.0 debt service coverage, based on all sources of project income including ancillary income.
2% for cost overruns and approved change orders. At the borrower’s request, any unused portion is released after Final Endorsement. This is also not withstanding that one may want to pad lines in the construction budget as well.
Initial Operating Deficit (IOD)
For all new construction and for substantial rehabilitation projects in which there will be significant resident displacement resulting in negative cash flow during the rehabilitation period, the operating deficit escrow will be the greater of:
What the appraisal and underwriting analysis determines to be appropriate; or
3% of the mortgage amount; or
Four months of debt service (Principal & Interest and Mortgage Insurance Premium) if the property is a garden apartment, or 6 months debt service (Principal & Interest and Mortgage Insurance Premium) if the property is an elevator building where a single Certificate of Occupancy will be issued before any of the units or any of the entire floors can be rented.
When loan amounts equal or exceed $75 million, minimum operating deficit reserve amounts are as follows:
For loans >$75MM, the reserve amount shall be the greater of 12 month amortizing debt service plus MIP or the amount calculated per the MAP Guide Chapter 7, Section 7.14.
For loans >$100MM, the reserve amount shall be the greater of 12 month amortizing debt service plus MIP or the amount calculated per the MAP Guide Chapter 7, Section 7.14, or such amount identified through HUD analysis of the risks and the mitigants appropriate to the particular loan application.
The IOD escrow is not mortgageable and the unused portion must be returned to the borrower. Unused amounts will be released upon the lender’s request at the later of 12 months after Final Endorsement or when the project has demonstrated, to the HUD field office’s satisfaction that the project has achieved six (6) consecutive months of break-even occupancy.
