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On March 29, 2023, HUD published Housing Notice 2023-03: Capital Needs Assessment (CNA) eTool for Asset Management. The bottom line is that starting on June 27, 2023, 90 days from the publication of the notice, use of the CNA eTool is required for all CNA submissions, with a limited number of exceptions. The Notice provides guidance to lenders and servicers, third-party needs assessors, property owners, and HUD staff on the policy for submission and review of CNAs required for 10-year updates for Federal Housing Administration (FHA) insured properties, Rental Assistance Demonstration (RAD) Conversions, and several eligible asset management milestones.

Add the CNA eTool to Your Toolbox

Mandatory use of the eTool applies to all FHA-insured properties with a 10-year CNA update requirement. It also applies to CNAs required for RAD Conversions, Housing Assistant Payment contract assignment requests where HUD has requested a CNA, and other eligible asset management milestones, such as Budget Based Rent Increase, for Sections 202 and 811 Project Rental Assistance Contracts, Partial Payment of Claims, or Transfer of Physical Assets. The CNA eTool is not required for non-insured properties that have thirty (30) units or less. FHA-insured properties, regardless of size, are subject to the requirements in the notice. Since it estimates the useful life of each property component, a Capital Needs Assessment is used to calculate the replacement reserve requirements for a loan. Typically, these average between $200- $300/unit per year but can vary based on property type and location. In addition, updated CNAs are generally required on a 10-year basis to check the condition of a property, to ensure that any critical maintenance issues have been addressed, and, if needed, to re-adjust the property’s replacement reserve requirements.

Evolution of the eTool

The CNA eTool, which automates CNAs, was jointly developed by the U.S. Department of Housing and Urban Development (HUD) and the U.S. Department of Agriculture (USDA) to align agency and industry practices for preparing and standardizing required capital needs assessments. The CNA eTool enumerates immediate repairs and estimates required initial and annual deposits to the Reserve for Replacement (RfR) while allowing for appropriate assumptions concerning variables such as inflation, interest on reserve balances, and minimum required balances or contingency allowances.

HUD launched the CNA eTool in December 2016, with an original implementation date of November 1, 2017, for mandatory use in conducting CNAs for FHA Multifamily mortgage insurance applications, including 10-year CNA updates.

This implementation date was delayed for 10-year update CNAs for FHA-insured Multifamily Properties and other eligible asset management milestones. The delay was due to the technological limitations of the earlier version of the tool. Version 3.0 was deployed in late 2020, allowing HUD to begin training and distributing guidance for using the tool before lifting the suspension for eligible programs.

The current version of the CNA eTool helps generate reports that can be used to:

  1. Identify and describe physical deficiencies of the property;
  2. Identify and describe immediate/short-term repair needs;
  3. Estimate long-term capital replacement costs; and
  4. Support a financing plan to source identified repairs and capital needs

Scott Precourt is the Managing Partner and Founder of US Housing Consultants.