The adequacy of the reserve for replacement is an important factor in determining the profitability and viability of a project. To help you ensure that your annual contribution to the reserve for replacement is realistic, the Template includes two tests of the adequacy of the reserve for replacement:

• The Average Capital Needs Test, which determines whether your yearly funding of the reserve for replacement meets your anticipated needs; and
  
  
• The $720 per Unit, per Year Test, which determines whether your yearly funding of the reserve for replacement will amount to at least $720 per unit, per year.

If the Template calculates that your annual contribution to the reserve for replacement is insufficient to pass these tests, increase your annual contribution.

The Average Capital Needs Test

This test determines whether your yearly funding of the reserve for replacement will meet your anticipated capital needs. In the Average Capital Needs for Operations per Year field, enter the average yearly cost of large or unexpected rehabilitation for your project. The Template automatically provides your annual contribution to the reserve for replacement in the Reserve for Replacement per Year field.

Once you have provided the necessary information, the "Average Capital Needs Test cell" will notify you whether your reserve for replacement will be adequate to meet your anticipated capital needs.

The $720 per Unit, per Year Test

This test determines whether your yearly funding of the reserve for replacement will amount to at least $720 per unit, per year.

Once you have provided the necessary information, the "$720 per Unit, per Year Test cell" will notify you whether your reserve for replacement will be adequate to meet this criterion.

Additional Reserve for Replacement Funds

As noted earlier, some projects make larger-than-average withdrawals from the reserve for replacement during the first five years of operations, especially if existing structures require rehabilitation. Under Additional Reserve for Replacement Funds (Years 1-5), enter the additional funds you anticipate using to replenish the reserve for replacement during these years. These amounts are in addition to the standard reserve for replacement contribution you entered under Taxes / Insurance / Reserves / and Other Expenses.