Recent
Announcements
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USDA RD Proposes Changes for Section 515 and 514/516 Reserve Accounts
In a notice published in the Federal Register on April 5, 2007, USDA Rural Development proposes changing the required contributions to reserve accounts for new construction projects funded by the Section 515 Rural Rental Housing or Section 514/516 Farm Labor Housing programs. Currently, a property owner must contribute 1 percent of total development cost each year to the property's reserve account. The new proposal would base contributions on an analysis of the life cycle costs of the project and its materials.
Comments on this proposal are due June 4, 2007.
HAC plans to submit comments and welcomes suggestions, observations, or questions from rural housing practitioners. To discuss the proposal, join the ruralhousing email list at http://lists.ruralhome.org and post a comment or question. To provide input for HAC’s comments, contact Leslie Strauss, HAC, 202-842-8600, leslie@ruralhome.org.
The following table summarizes the recent history of the regulation's provisions on reserves.
Provision |
Pre-reinvention regs |
6/2/03 proposed reg |
HAC comment on 6/2/03 proposed reg |
11/26/04 reg |
4/5/07 proposed reg |
Annual contribution |
1% of total devel costs. |
Based on life cycle cost analysis. |
For projects with long-lived materials, 1% of construction costs (not total devel costs) for 15 years, then adjusted if needed.
For projects with average materials, 1.5% of construction costs for 10 years, then adjusted if needed. |
1% of total devel cost (did not adopt 6/2/03 proposal). |
Determined by RD analysis that looks at capital needs over 20 years, based on capital needs assessment or life cycle cost analysis. |
Total/maximum contribution |
10% of total devel cost. |
Based on life cycle cost analysis. |
Based on analysis of need. |
10% of total devel cost (did no’t adopt 6/2/03 proposal). |
Determined by RD analysis that looks at capital needs over 20 years, based on capital needs assessment or life cycle cost analysis. |
Life cycle cost analysis required (for this or other reasons) |
No. |
Yes – annual budget must include capital needs assessment (CNA) looking at life cycle needs. |
Yes. |
Yes. Kept annual capital budgeting requirement from proposal 3560.103(c)(1) but deleted CNAs for transfers, rehab, etc., 3560.103(c)(3). |
Yes. |
When adjusted |
Borrowers permitted to request adjustments, no requirement for reevaluating reserves. |
Borrowers permitted to request adjustments. |
Year 15 or 10, depending on materials used. |
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5- or 10-year intervals, through updated comprehensive needs assessment or as part of original plan. |
Rationale |
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RD's 2004 portfolio analysis found average reserves too small, so subsequent loans or servicing actions (e.g., writedowns) would increase costs, which would increase rents, which would increase Rental Assistance (RA) costs. |
Flexibility needed. Construction costs more appropriate than devel costs because land purchase, etc. are not relevant to life cycle cost. Increased RA is an acceptable result of having adequate reserves. |
“The regulatory impact analysis for the proposed rule indicated that these provisions would increase rents and result in additional demand for rental assistance payments.” |
To ensure properly sized reserve accounts. Under the 1% rule, increased use of leveraged funds may lead to reserve accounts being artificially high. |
Posted: April 11, 2007
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