HUD 223(f) Escrow and Replacement Reserve Requirements
Like most other kinds of HUD multifamily loans, HUD 223(f) loans require monthly escrows. Taxes and insurance are escrowed monthly, as are required replacement reserves, which are established by a Project Capital Needs Assessment (PCNA). Replacement reserve amounts must follow HUD rules, which mandate that they be set at a minimum of $250/unit per year.
An initial replacement reserve deposit is also required at closing. However, this can be funded with proceeds from the loan.
Defined as “a deed, a bond, money, or a piece of property held in trust by a third party to be turned over to the grantee only upon fulfillment of a condition.” In general, an escrow agent or company holds something in escrow (funds, deeds, securities, etc.) until a transaction is finalized.
As stated above, HUD requires replacement reserves to be held in escrow. Since building components and equipment wear out over time, replacement reserves fund their replacement. By having these funds in reserve, a property owner already has money to replace equipment and components as they age and wear out.