1. (a) Maintenance. The Department will require Development Owners to provide regular maintenance to keep housing sanitary, safe and decent by maintaining a reserve for replacement in accordance with Texas Government Code, §2306.186. The reserve must be established for each Unit in a Development of 25 or more rental units regardless of the amount of rent charged for the Unit. The Department shall, through cooperation of its divisions responsible for asset management and compliance, ensure compliance with this section.

2. (b) Escrow Agent to Reserve Funds. The First Lien Lender shall maintain the Reserve Account through an escrow agent acceptable to the First Lien Lender to hold reserve funds in accordance with an executed escrow agreement and the rules set forth in this section and Texas Government Code, §2306.186.

   1. (1) Where there is a First Lien Lender other than the Department or a Bank Trustee as a result of a bond trust indenture or tax credit syndication, the Department shall:

      1. (A) be a required signatory party in all escrow agreements for the maintenance of reserve funds;
      2. (B) be given notice of any asset management findings or reports, transfer of money in Reserve Accounts to fund necessary repairs, and any financial data and other information pursuant to the oversight of the Reserve Account within thirty (30) days of any receipt or determination thereof; and
      3. (C) subordinate its rights and responsibilities under the escrow agreement, including those described in this subsection, to the First Lien Lender or Bank Trustee through a subordination agreement subject to its ability to do so under the law and normal and customary limitations for fraud and other conditions contained in the Department's standard subordination clause agreements as modified periodically, to include subsection (c) of this section.
   2. (2) The escrow agreement and subordination agreement, if applicable, shall further specify the time and circumstances under which the Department can exercise its rights under the escrow agreement in order to fulfill its obligations under Texas Government Code, §2306.186 and as described in this section.
   3. (3) Where the Department is the First Lien Lender and there is no Bank Trustee as a result of a bond trust indenture or tax credit syndication, or where there is no First Lien Lender but the allocation of funds by the Department and Texas Government Code, §2306.186 requires that the Department oversee a Reserve Account, the Development Owner shall provide at their sole expense for appointment of an escrow agent acceptable to the Department to act as Bank Trustee as necessary under this section. The Department shall retain the right to replace the escrow agent with another Bank Trustee or act as escrow agent at a cost plus fee payable by the Development Owner due to breach of the escrow agent's responsibilities or otherwise with thirty (30) days prior notice of all parties to the escrow agreement.

3. (c) Final Certification Submission. If the Department is not the First Lien Lender with respect to the Development, each Development Owner receiving Department assistance for multifamily rental housing shall submit on an annual basis within the Department's required Development Owner's Financial Certification packet a signed certification by the First Lien Lender including:

   1. (1) reserve for replacement requirements under the first lien loan agreement (if applicable);
   2. (2) monitoring standards established by the First Lien Lender to ensure compliance with the established reserve for replacement requirements; and

   3. (3) a statement by the First Lien Lender indicating:

      1. (A) the Development Owner has met all established reserve for replacement requirements; or
      2. (B) the plan of action to bring the Development in compliance with all established reserve for replacement requirements.

4. (d) Repair Reserve. If the establishment of a Reserve Account for repairs has not been required by the First Lien Lender or Bank Trustee, each Development Owner receiving Department assistance for multifamily rental housing shall set aside the repair reserve amount as described in subsection (e)(1) - (3) of this section through the date described in subsection (f)(2) of this section through the appointment of an escrow agent as further described in subsection (b)(3) of this section. The Development Owner shall submit on an annual basis within the Department's required Development Owner's Financial Certification packet a signed certification by the First Lien Lender including:

   1. (1) financial statements, audited if available, with clear identification of the replacement Reserve Account balance and all capital improvements to the Development within the fiscal year;
   2. (2) identification of costs other than capital improvements funded by the replacement Reserve Account; and

   3. (3) signed statement of cause for:

      1. (A) use of replacement Reserve Account for expenses other than necessary repairs, including property taxes or insurance;
      2. (B) deposits to the replacement Reserve Account below the Department's or First Lien Lender's mandatory levels as defined in subsections (c) - (e) of this section; and
      3. (C) failure to make a required deposit.

5. (e) Reserve Account. If the Department is the First Lien Lender with respect to the Development, each Development Owner receiving Department assistance for multifamily rental housing shall deposit annually into a Reserve Account through the date described in subsection (f)(2) of this section.

   1. (1) For New Construction Developments, not less than $250 per Unit; or
   2. (2) For Adaptive Reuse, Rehabilitation and Reconstruction Developments, the greater of the amount per Unit per year either established by the information presented in a Property Condition Assessment in conformance with Subchapter D of this chapter (relating to Underwriting and Loan Policy) or $300 per Unit per year.

   3. (3) For all Developments, the Development Owner of a multifamily rental housing Development shall contract for a Third-Party Property Condition Assessment and the Department will re-evaluate the annual reserve requirement based on the findings and other support documentation. Submission by the Development Owner to the Department will occur within thirty (30) days of completion of the Property Condition Assessment and must include the complete Property Condition Assessment, the First Lien Lender and/or Development Owner response to the findings of the Property Condition Assessment, documentation of repairs made as a result of the Property Condition Assessment, and documentation of adjustments to the amounts held in the replacement Reserve Account based upon the Property Condition Assessment. A Property Condition Assessment will be conducted:

      1. (A) at appropriate intervals that are consistent with requirements of the First Lien Lender, other than the Department; or
      2. (B) at least once during each five (5) year period beginning with the eleventh (11th) year after the awarding of any financial assistance for the Development by the Department, if the Department is the First Lien Lender or the First Lien Lender does not require a Third-Party Property Condition Assessment.

6. (f) Land Use Restriction Agreement (LURA). A Land Use Restriction Agreement or restrictive covenant between the Development Owner and the Department must require:

   1. (1) the Development Owner to begin making annual deposits to the Reserve Account on the later of:

      1. (A) the date that occupancy of the Development stabilizes as defined by the First Lien Lender or, in the absence of a First Lien Lender other than the Department, the date the Property is at least 90 percent occupied; or
      2. (B) the date that permanent financing for the Development is completely in place as defined by the First Lien Lender or in the absence of a First Lien Lender other than the Department, the date when the permanent loan is executed and funded;

   2. (2) the Development Owner to continue making deposits until the earliest of:

      1. (A) the date on which the Development Owner suffers a total casualty loss with respect to the Development;
      2. (B) the date on which the Development becomes functionally obsolete, if the Development cannot be or is not restored;
      3. (C) the date on which the Development is demolished;
      4. (D) the date on which the Development ceases to be used as a multifamily rental property; or
      5. (E) the later of the end of the Affordability Period specified by the Land Use Restriction Agreement or restrictive covenant; or the end of the repayment period of the first lien loan.
7. (g) Change of Ownership Responsibilities. The duties of the Development Owner under this section cease on the date of a change in ownership of the Development; however, the subsequent Development Owner of the Development is subject to the requirements of this section.

8. (h) Penalties and Material Non-Compliance. If a request for extension or waiver is not approved by the Department then a penalty of up to $200 per dwelling Unit in the Development and/or characterization of the Development as being in Material Non-Compliance, as defined in §10.3 of this chapter (relating to Definitions) may be taken when:

   1. (1) a Reserve Account, as described in this section, has not been established for the Development;
   2. (2) the Department is not a party to the escrow agreement for the Reserve Account, if required;

   3. (3) money in the Reserve Account:

      1. (A) is used for expenses other than necessary repairs, including property taxes or insurance; or
      2. (B) falls below mandatory deposit levels;
   4. (4) Development Owner fails to make a required deposit;
   5. (5) Development Owner fails to contract for the Third-Party Property Condition Assessment as required under this section; or
   6. (6) Development Owner fails to make necessary repairs in accordance with the third party property condition assessment or §10.616 of this chapter (relating to Property Condition Standards).

9. (i) Department-Initiated Repairs. The Department or its agent may make repairs to the Development if the Development Owner fails to complete necessary repairs indicated in the submitted Property Condition Assessment or identified by physical inspection. Repairs may be deemed necessary if the Development is notified of the Development Owner's failure to comply with federal, state, and/or local health, safety, or building code. Payment for necessary repairs must be made directly by the Development Owner or through a replacement Reserve Account established for the Development under this section. The Department or its agent will produce a Request for Bids to hire a contractor to complete and oversee necessary repairs. On a case-by-case basis, the Department may determine that the money in the Reserve Account may be used for expenses other than necessary repairs, including property taxes or insurance, if:

   1. (1) Development income before payment of return to Development Owner or deferred developer fee is insufficient to meet operating expense and debt service requirements; and the funds withdrawn from the Reserve Account are replaced as Cash Flow after payment of expenses, but before payment of return to Development Owner or Developer; or
   2. (2) Development income after payment of operating expenses, but before payment of return to Development Owner or deferred developer fee is insufficient to fund the mandatory deposit levels; and subsequent deposits to the Reserve Account exceed mandatory deposit levels as Cash Flow after payment of operating expenses, but before payment of return to Development Owner or deferred developer fee is available until the Reserve Account has been replenished to the mandatory deposit level less capital expenses to date.
10. (j) Exceptions to Reserve Account. This section does not apply to a Development for which the Development Owner is required to maintain a Reserve Account under any other provision of federal or state law.

Source Note:The provisions of this §10.404 adopted to be effective January 8, 2013, 38 TexReg 70.