HB-2-3560 

5.1 INTRODUCTION 

The existing portfolio of multi-family housing projects constitutes a major asset of the 

Government and the Agency, but the value of this asset depends upon the quality of its upkeep. 

This chapter describes the responsibilities of borrowers to maintain the physical condition of the 

project and of the Agency to exercise appropriate oversight of these responsibilities. The chapter 

describes the components of adequate physical maintenance, the role of the management plan, 

and the performance of a physical inspection of the project. 

SECTION 1: PROJECT MAINTENANCE [7 CFR 3560. 103]

5.2 PURPOSE 

The Agency has issued performance standards that describe the physical condition of a 

properly managed project. The Agency’s interest in protecting the physical condition of projects 

that it has financed includes: 

• Providing decent, safe, and sanitary affordable housing to the occupants; 

• Protecting and enhancing the security of its investment; and 

• Assuring compliance with all applicable State and local laws. 

5.3 MAINTENANCE REQUIREMENTS AND STANDARDS OF PHYSICAL 

CONDITIONS 

A. Standards of Physical Conditions 

Borrowers are responsible for the long-term, cost-effective preservation of the 

housing project. The Agency has specified two types of requirements borrowers must 

meet: 

• Performance standards for the project; and 

• Procedures and systems that property managers must design and follow. 

B. Performance Standards 

The regulations in 7 CFR 3560.103(a)(3) specify the performance standards for 

meeting acceptable physical conditions. The performance standards describe the 

characteristics the Agency expects to see in a particular component or system, for 

example: 

CHAPTER 5: PROJECT PHYSICAL CONDITIONS 

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“The housing project must have a foundation that is free of evidence of 

structural failure, such as uneven settlement indicated by horizontal 

cracks or severe bowing of the foundation wall. Structural members must 

not have evidence of rot or insect or rodent infestation. 

The housing project must have a roof that is free of leaks, defective 

covering, curled or missing shingles and which is not sagging or 

buckling.” 

The performance standards have been incorporated into a physical inspection form to 

be completed by Agency staff during a site visit. They also have been incorporated into 

the certifications that accompany the management agreement for the project. 

The standards include the following major categories: 

• Standards that apply to the site on which the project is located; 

• Standards that apply to the exterior maintenance of the building and of the common 

areas; 

• Standards that apply to the interior of the building or buildings; and 

• Standards that apply to common areas, such as hallways or elevators. 

C. Maintenance Systems and Procedures 

Effective maintenance is partly the result of regular routines and partly the result of 

promptly fixing small problems before they become major ones. Proper maintenance has 

a direct effect on the tenants’ perception of the quality of the housing project. Therefore, 

the Agency requires borrowers to institute a number of systems and procedures that the 

borrower must describe in the project’s management plan. The requirements for a 

management plan are described in Chapter 3. 

Several systems are part of a sound management program: 

• Preventive maintenance. Most maintenance work can be predicted and scheduled—

this is typically described as preventive maintenance. The Agency requires managers 

to spell out procedures for scheduling routine tasks, such as garbage and trash 

removal, snow and ice removal, grounds upkeep, routine painting, and minor repairs. 

Procedures are also required for the routine maintenance of equipment consistent with 

service information provided by the manufacturer—biweekly or monthly routine 

oiling, adjusting, replacement of filters, safety checks of alarms, and outside lighting, 

etc. 

• Response to calls. Good upkeep requires a speedy response to complaints or 

unforeseen problems. The Agency requires managers to establish a system for 

responding to tenant complaints or to unexpected malfunctions or damage, such as 

leaks, broken windows, etc. 

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• Work orders. Managers must know what has happened from the time a complaint 

has been received or a problem has been noted, to an inspection confirming the 

condition has been corrected. The Agency requires the project to have a work-order 

system that tracks the date a complaint is received, the inspection to verify the 

complaint, a report describing the required repair or corrective action, the assignment 

of the repair, the completion report, and final inspection noting satisfactory 

completion of the work. 

• Inspections. Frequent, regular inspections are a major component of an effective 

maintenance system. The Agency requires management, at a minimum, to perform 

an annual inspection of each occupied unit and to inspect each unit at move-in and 

move-out. Inspecting a unit with the tenant at move-in and move-out establishes the 

condition of the unit at the time the tenant takes possession, and may help clarify 

responsibility for any damages that have occurred in the unit during the occupancy 

period. 

• Energy conservation. Energy conservation efforts are an ongoing responsibility of 

project management. The Agency requires managers to establish effective systems to 

reduce energy consumption. These may include energy audits to determine costeffective techniques of energy conservation, energy-efficient lighting, water-saving 

fixtures, low-flow toilets, energy-efficient appliances, insulation, caulking and 

weather-stripping, storm doors and windows, and regular cleaning and replacement of 

filters and other equipment. 

• Tenant damages. The Agency requires management to establish a policy and 

implement a system to obtain reimbursement for damage caused by the tenant to the 

property beyond normal wear and tear. The policy is to be stated in the tenant’s lease 

as described in Chapter 6 of this Handbook. 

• Accessibility issues. The Agency requires the borrower and/or management to 

establish a policy regarding project and unit accessibility for applicants, tenants, and 

employees in accordance with applicable civil rights legislation. 

◊ In projects that were ready for occupancy on or before January 26, 1993, when 

public areas are altered, they must be altered to Americans with Disabilities Act 

Accessibility Guidelines (ADA/AG) standards. (Public areas are those areas used 

by individuals other than tenants and their guests. This includes offices used to 

pay bills or to inquire about service or employment, public restrooms, and 

buildings used for voting or public meetings.) 

◊ In projects that were ready for occupancy after January 26, 1993, public areas 

must be designed and constructed to ADA/AG standards. 

◊ In accordance with the Fair Housing Act, in Multi-Family Housing projects that 

were ready for occupancy on or before March 31, 1991, FHA/AG architectural 

requirements do not apply, even during project rehabilitation. 

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◊ In Accordance with the Fair Housing Act, in multi-family housing projects that 

were ready for occupancy after March 11, 1991: 

♦ All ground floor units in buildings with four or more dwelling units must be 

designed and constructed in a manner that is adaptable to individuals with 

disabilities. 

♦ All units must be adaptable if there is an elevator. 

♦ Covered Multi-Family Housing projects must have: 

9 An accessible entrance on an accessible route; 

9 Accessible public and common-use areas; 

9 Usable doors; 

9 Accessible routes into and through the dwelling unit; 

9 Accessible light switches, electrical outlets, and environmental controls; 

9 Reinforced bathroom walls; and 

9 Usable kitchens and bathrooms. 

 Projects that were constructed (or which had substantial alterations) after June 11, 

1982 must be constructed in accordance with the UFAS standards. 

• 5 percent of the units or one unit whichever is greater must be fully accessible 

• The mix of units are to be comparable to the variety of other project (i.e., 1,2,3 

bedrooms 

• All common area must be accessible per UFAS 

The electronic Multi-Family Housing Project Management and Occupancy Review 

Form available in Multi-Family Information System (MFIS) includes space for the Loan 

Servicer to comment on the adequacy of the maintenance systems adopted by project 

management. 

D. Requirements for Labor Housing 

There are no separate performance standards for year-round labor housing and rental 

or cooperative housing. Seasonal labor housing must meet conventional performance 

standards and must have insulation as necessary to protect the facility during the offseason period. 

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5.4 CORRECTING DEFICIENCIES 

There are a number of ways in which the need for maintenance is identified: 

• Management staff may uncover, anticipate, or expect such maintenance; 

• Tenants may make complaints; and 

• Agency staff may identify defects in the course of a site visit. 

No matter how the problem was identified, the borrower is responsible for 

correcting it. 

The borrower is responsible for adequate maintenance and upkeep of the project that 

complies with Agency performance standards. The Agency understands, however, that property 

maintenance is an ongoing process and that there may be instances when diligent borrowers are 

temporarily unable to achieve 100 percent compliance with Agency standards. In such instances, 

the Agency will not penalize borrowers—as long as it is evident that the borrower is actively 

striving to return to full compliance, as soon as possible (see the standards listed in 

7 CFR 3560.103). 

This flexibility is not extended to projects where the deficiencies are so extensive that the 

property would be declared in substantial noncompliance. In these instances, the projects’ 

viability is called into question, as well as the effectiveness of the management’s maintenance 

program. The Agency should coordinate with and or report to State and local inspection 

authorities, where applicable, when health and safety issues exist at a property. 

The borrower shall immediately inform the Agency of any deficiency for which 

correction requires repairs that cannot be paid out of project operating funds and immediately 

initiate procedures to access project reserves (see Chapter 4 of this Handbook). The Agency will 

in turn provide the borrower with a timeframe for completing the repairs. If the borrower cannot 

meet the Agency required timeframe, then they must provide documentation and justification 

why they cannot meet such a timeframe. 

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Rule-of-Thumb

A capital expenditure is typically defined 

as an expenditure on an item for which the 

useful life is greater than one year. For 

example: 

• Repaving the parking lot is a capital cost; 

fixing a pothole is an operating cost. 

• Repainting the exterior of the entire 

project is a capital expenditure; 

repainting units on a routine basis is 

considered routine maintenance. 

5.5 PAYING FOR MAINTENANCE EXPENSES 

MAINTENANCE IS PAID FOR IN TWO 

WAYS: 

• Routine physical maintenance, such 

as repainting an empty unit, replacing 

a broken window, snow removal or 

grounds upkeep, is part of the 

operating budget and paid for out of 

annual operating income. 

• Major capital expenditures are paid 

for by withdrawals from the reserve 

account. Capital expenditures are 

addressed as long-term improvements 

on the front of the operating budget. 

Chapter 4 of this Handbook describes the process for accessing the reserve account to pay 

for major capital improvements.

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SECTION 2: CAPITAL PLANNING

5.6 OVERVIEW 

This section describes how borrowers, with assistance from Agency staff, can plan for 

major capital expenses and how to pay for them. This type of planning can take many forms. 

The two most common forms used by the Agency are an annual capital expenditure budget and a 

capital needs assessment. Refer to Chapter 4 of this Handbook for preparation of an annual 

capital expenditure budget. 

5.7 CAPITAL NEEDS ASSESSMENT 

A. Overview 

A capital needs assessment (CNA) identifies the immediate and future capital needs 

of a project. It is based on a physical inspection and a life-cycle analysis of a project’s 

major building components systems, equipment, and exterior amenities, such as the site 

lighting and parking lots. The CNA includes a replacement schedule that anticipates the 

useful life of each item, and estimates when they will need to be replaced and the cost. 

Preparation of a CNA is an eligible project expense. 

B. General Criteria: 

• A capital needs assessment should be prepared at a reasonable cost by an individual 

or firm with professional experience in multi-family housing design, construction, 

cost estimating or similar qualification. 

• The CNA should be prepared in accordance with generally accepted industry 

practices. 

• The assessment should include the detailed items listed on the Form RD 3560-11

Multi-family Housing Physical Inspection Report. The assessment time period 

should be between 10 and 20 years. 

• The estimated repair and replacement costs and estimated useful life spans for the 

components should be based on data from a nationally recognized source, such as RS 

Means “Repair and Remodeling Cost Data” and Marshall and Swift “Residential Cost 

Handbook”. 

C. Determining a Project’s Capital Needs 

The amount required for deposit into the replacement reserve account is established 

for new projects during the loan origination phase, based in part on a life-cycle cost 

analysis of selected materials going into the project (see 7 CFR 3560.65). For 

information on conducting life-cycle analyses, refer to Chapter 3 of HB-1-3560. 

For existing projects, the Agency may require the development of a capital needs 

assessment in the following circumstances: 

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• When ownership of the project is transferred; 

• When the loan is reamortized; 

• When there is a writedown of the project loan; or 

• At the borrower’s request. 

D. Agency Review 

Capital needs assessments and a proposed, updated annual operating budget, 

including a revised capital plan and any proposed increase in contributions to 

replacement reserves and project rents, are submitted to the Field Office for Agency 

review. Loan Servicing Staff should review the requests based on Agency guidance and 

the budget review procedures in Chapter 4. 

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SECTION 3: AGENCY OVERSIGHT OF BORROWER PERFORMANCE 

5.8 OVERSIGHT DURING DESIGN AND CONSTRUCTION 

Agency oversight of the borrower’s capacity to maintain the physical project in 

compliance with its standards and requirements begins during the loan origination phase. As 

part of its design review, the Agency examines plans and working drawings to see whether the 

project has been designed for easy maintenance and long-term durability. 

Borrowers must describe the systems and procedures that will be used to maintain the 

project during the occupancy period in the management plan. Agency staff reviews the proposed 

management plan for compliance in accordance with procedures described in Chapter 3. Agency 

staff should analyze the description of the maintenance systems in the management plan, noting 

any points that appear unrealistic, incomplete, or incorrect. 

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