4350.1 REV-1

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CHAPTER 26. GENERAL OPERATING RESERVE

SECTION 1. GENERAL

26-1. INTRODUCTION. The establishment and maintenance of a

general operating reserve (GOR) fund is a program

requirement applicable to cooperative housing projects

insured by HUD. A cooperative housing project may have

been insured under Section 213, which was authorized in

1950 under the National Housing Act, or, in later

years, more commonly insured as a 221(d)(3), both

market rate and BMIR, or 236 project.

a\. Purpose of the general operating reserve account:

this accumulative reserve is intended to provide a

measure of financial stability and may be used to

finance the sale of memberships, to meet

deficiencies arising from time to time as a result

of delinquent payment by individual cooperators

and other contingencies, and to provide funds for

repurchase of membership of withdrawing members,

etc.

b\. The requirement for GOR funding for cooperative

housing projects is separate and apart from other

project-related financial obligations, including

reserve fund for replacements. Though they are

both considered funded reserves, the two serve

very different purposes.

c\. Please note that the general operating reserve is

listed as a separate line item under \"Reserves and

Escrows\" on the Management Review Questionnaire,

form HUD-9834. See Chapter 6, entitled Project

monitoring.

NOTE. HUD Handbook 4550.1, entitled Basic

Cooperative Housing Insurance Handbook (1973), is

a cross-reference guide to this Chapter. The

reader should keep a copy of this manual handy in

case there is a need for more detailed

information, further technical direction, or if

primary source materials, such as important legal

documents and forms which outline specific

obligations and requirements, incorporated in the

Handbook as appendices, need to be reviewed.

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4350.1 REV-1

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26-2. ELIGIBILITY OF MORTGAGORS. The GOR funding requirement

is imposed upon cooperative mortgagors of Section 213,

Section 221 and Section 236 projects. For Section 213

eligible mortgagors must be a public or private

mortgagor of: (1) a management project; (2) a sales

project; (3) an investor project; or (4) an existing

construction project. For sections 221 and 236

mortgagor entities must be a non-profit cooperative

ownership housing corporation.

26-3. BACKGROUND INFORMATION.

a\. Residents are referred to as \"members\" (or

subscribers) under a cooperative corporation

ownership model, and they sign occupancy

agreements instead of leases.

b\. An elected board of directors for the corporation

has the prime responsibility of adopting an annual

budget. Each member pays a proportionate share of

the budget, which is an estimate by the board of

the annual cost to operate the corporation.

c\. The assigned fees that members pay to the

corporation under the operating budget are

referred to in technical terms as \"carrying

charges\" and are paid monthly. Carrying charges

include but are not limited to:

o the amount of principal, interest, mortgage

insurance premiums, if any, and other

required payments on the insured mortgage

(i.e., debt service payments);

o the amount of any taxes and assessments

levied against the project;

o the cost of fire and extended coverage

insurance on the project;

o the cost of furnishing water, electricity,

heat, air conditioning, gas, garbage and

trash collection and other utilities, if

furnished by the corporation;

o all reserves set up by the board of

directors, including the general operating

reserve and reserve for replacements;

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4350.1 REV-1

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o the estimated cost of repairs, maintenance

and replacements of the project property;

o the cost of all operating expenses of the

project and services furnished;

o the cost of necessary management and

administration.

d\. The above breakdown should prove useful for

general informational purposes. This way, when

the GOR funding requirement, set at a flat

percentage rate of carrying charges, is defined

below in Section 2, the reader will have a better

understanding of what costs are actually

represented in the calculation.

SECTION 2. TECHNICAL REQUIREMENTS.

26-4. FUNDING REQUIREMENT. The Regulatory Agreement requires

that, commencing with occupancy, monthly deposits must

be made to the general operating reserve, in an amount

equal to not less than 3 percent of the monthly amount

otherwise chargeable to the regular members pursuant to

their occupancy agreements. When the GOR account

reaches 15 percent of the annual carrying charges, the

monthly accrual rate may be reduced to 2 percent

(provided that monthly deposits will be immediately

restored to 3 percent in the event withdrawals from the

account reduce it below the 15 percent accrual); and

when the GOR account equals 25 percent of annual

carrying charges, such monthly accruals may be

discontinued until the account is reduced below 25

percent.

For example:

a\. If the annual carrying charges are \$2,000,000 as

estimated by the board,

b\. then this amount divided by 12 gives the monthly

total (sum of all individual members\'

contributions) of \$166,666.

c\. Thus, the funding requirement is set, initially,

at 3 percent of the sum of monthly carrying

charges for all members, so in this case monthly

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4350.1 REV-1

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deposits to the fund must be made in an amount of

\$5,000 (.03 X \$166,666) until the accumulated

reserve exceeds the thresholds specified above, in

which case deposits may then be scaled back.

26-5. REPLACEMENT OF WITHDRAWALS. Disbursements totaling not

in excess of 20 percent of the total balance in the

reserve as of the close of the preceding annual period

may be made by the cooperative without the approval of

the Housing Management Division Director. Any

disbursement in excess of this amount may be made only

following approval of the Housing Management Division

Director.

Provision must be made for replacing withdrawals

with deposits during the next fiscal year (or in

accordance with a previously approved repayment

plan).

a\. Funds withdrawn from the reserve to meet cash

deficits caused by delinquent carrying charges, or

to finance the purchase of memberships or stock,

shall be repaid on collection of the delinquencies

or resale of the memberships or stock. The

schedule of carrying charges for the next fiscal

year must provide sufficient funds to replace all

withdrawals for which reimbursement has not been

made.

b\. However, when the reserve funds are used for

capital improvements, the amount may be

replenished by augmented monthly payments over a

reasonable period of years.

26-6. ACCOUNT MAINTENANCE AND INVESTMENT. The general

operating reserve will be maintained in a special

account and may be in the form of a cash deposit or

invested in the same manner as replacement reserve

funds, except that the GOR account will be under the

control of the mortgagor. HUD investment requirements

for funded reserves and applicable conditions are

discussed in Handbook 4350.4 entitled Insured

Multifamily Mortgagee Servicing and Field Office Remote

Monitoring, and Chapter 4 of this Handbook.

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