The Operating Reserve is intended to prevent capital calls by “reserving” the required funds during profitable months to cover upcoming months of negative levered cash flows. The operating reserve does not begin functioning until stabilization has been met. The month of stabilization is the first month in which the forward 12 average monthly occupancy meets or exceeds the Stabilized Occupancy % input. The Stabilized Occupancy % input can be found at the top of the Pro Forma Assumptions section on the Inputs tab.
The Operating Reserve feature can be turned off using the Y/N dropdown in the header row of the first table of the Operating Reserve section on the Inputs tab.
When Operating Reserve is in use, the user may enter an initial balance for the Operating Reserve, which will be included in total acquisition uses. Required draws will be taken from this balance as needed before reserving additional funds. Also, the user may enter a Maximum Reserve Balance, meaning the Operating Reserves will not exceed this amount in any given month, regardless of upcoming negative cash flows. Required reserves are determined 12 months in advance of a month of projected negative levered cash flow. This input should be left blank if there is no intended maximum reserve amount*. Note: The Initial Balance input can be greater than the Maximum Reserve Balance. In such case, the Initial Balance would be drawn monthly as needed, and from the month that the Operating Reserve balance is below the Maximum Reserve Balance, contributions to the Operating Reserve will then be subject to the Maximum Reserve Balance.* For example, if the Initial Balance entered is $400,000 and the Maximum Reserve Balance is $250,000, from the beginning of the analysis, the Operating Reserve will draw from the $400,000 initial balance (without making any monthly contributions) until the Operating Reserve balance is below $250,000; at which point monthly contributions to the Operating Reserve will begin as needed, and without exceeding a maximum balance of $250,000.
The Projected Monthly Operating Shortfalls table displays up to the first 10 months of operating shortfalls after the Operating Reserve has been applied. In the example below, there are only 8 months in which there is an operating shortfall. The total row shows the total of all operating shortfalls throughout the analysis. Note: Since this table only shows the first 10 months of operating shortfalls, the total amount will be greater than the sum of the $ required column if there are more than 10 months of shortfalls.
The Projected Annual Operating Shortfalls table displays the required reserves, draws from reserves, and shortfall for each year of the analysis. The requirements column displays the total amount from reserves needed each year to prevent any capital calls. This column represents the total negative cash flow that would be projected if the Operating Reserve feature was not in use. The draws column displays the total amount of Operating Reserve funds used each year to cover the requirements. The shortfall column displays the difference between draws and requirements – the remaining required amounts that could not be covered by the Operating Reserve. In the example below, there is a total of $208,793 negative levered cash flow projected for year 1, however only $200,000 of Operating Reserve was available. Since Operating Reserve does not begin accruing positive cash flows until stabilization, and stabilization does not begin until month 22 in this example, the only Operating Reserve amount available is from the $200,000 initial balance.
If an Initial Balance amount is entered which exceeds the amount required for all shortfalls after reserves, a warning message will appear to the right of the Initial Balance input. In the example below, the $3,500,000 Initial Balance exceeded the requirements to cover any shortfall after operating reserves, and thus, upon sale in Year 8, the $50,160 in excess is distributed as positive cash flow.
