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Straight-Line Depreciation Analysis

Following is an example of a Straight-Line Depreciation Analysis report.  The purpose of a Straight-Line Depreciation Analysis report is threefold:

Determine what is the annual depreciation cost for all reserve components such as roofs, streets, pools, tennis courts, etc.  For example, if a roof has a 30 year life and it costs $300,000, then the annual depreciation liability for that roof would be $10,000 per year.  

If the association saves $10,000 every year for 30 year, they will have $300,000 in their reserve fund for their roof replacement.  Keep in mind, however, that due to inflation, the roof probably won't cost $300,000 at the time of replacement, so a more appropriate variant of a typical straight-line depreciation analysis incorporates inflation into the annual reserve allocation.  Our reserve studies use this type of analysis that we refer to as an "Inflation-Adjusted Straight-Line Depreciation Analysis."

Determine the Reserve Fund Status, commonly known as the "Percent-Funded Estimate."  This is a ratio of how much cash your association has in reserves compared to how much depreciation of all reserve components has occurred to-date.  For example, if the total of your association's depreciation of its reserve component assets is $100,000 and the association only has $50,000 in reserves, then it is considered to be "50% funded."  The Percent-Funded Estimate is a measure of the strength of your reserves relative to the depreciation of your capital assets.

If your association isn't 100% funded, determine the "Unfunded Depreciation Liability"  In the foregoing example, the association has $50,000 in reserves, but there is $100,000 depreciation-to-date, so their unfunded depreciation liability would be $50,000 because they would need that amount in order to be %100 funded.

In the following Straight-Line Depreciation Analysis sample report, you can see that the sample  association has the following measures of reserve fund status:

The FY 2005 Funding Requirement ( annual depreciation) is:  $41,275
The Percent-Funded Estimate is:  18.3%  (poor financial condition)
The Cumulative Depreciation to-date is:  $286,560
The Fiscal Year End Reserve Balance is:  $52,540
The Unfunded Depreciation Liability is:  $234,020


 STRAIGHT-LINE DEPRECIATION ANALYSIS & PERCENT FUNDED

Inflation-Adjusted Method

R E S E R V E    C O M P O N E N T S

Estimated
Useful
Life (years)

Estimated
Remaining
Life (years)

Estimated
Current Cost
to Replace

End FY 2004
Recommended
Fund Balance

FY 2005
Beginning
Fund Balances

FY 2005
Funding
Requirement*

 

 

 

 

 

 

 

R O O F I N G

Tile Roof - Phase I

30

27

$178,500

$17,850

$3,273

$6,129

Tile Roof - Phase II

30

10

$178,500

$119,000

$21,818

$6,129

Pool Composite Shingle Roof

30

27

$2,655

$266

$49

$91

Pool Solar Panels - Reinstall

30

27

$1,500

$150

$28

$52

Roof Vent Pipe Caulking

6

3

$4,000

$2,000

$367

$687

P A V I N G

Asphalt Sealcoat

3

0

$3,950

$3,950

$724

$1,356

Asphalt Overlay - 1998 Phase

12

8

$17,328

$5,776

$1,059

$1,487

Asphalt Overlay - Entrances

12

6

$7,272

$3,636

$667

$624

Asphalt Overlay - 2002 Phase

12

10

$27,264

$4,544

$833

$2,340

Asphalt Curbing - Replace

30

10

$6,255

$4,170

$765

$215

P A I N T I N G

Paint Exterior Wood Trim

6

0

$19,000

$19,000

$3,484

$3,262

Paint Under Eaves & Fascia

20

0

$27,000

$27,000

$4,950

$1,391

Paint/Repair Chimney Caps

6

0

$1,600

$1,600

$293

$275

Front Doors - Paint

6

0

$5,000

$5,000

$917

$858

Pool Iron Fence - Paint

4

1

$3,750

$2,813

$516

$966

Stucco Fogcoat/Seal

10

5

$8,000

$4,000

$733

$824

Stucco Walls/Chimney Powerwash

6

0

$2,000

$2,000

$367

$343

Utility Doors/Lights/Pipes Paint

6

5

$1,000

$167

$31

$172

S W I M M I N G   P O O L

Pool Resurface

20

19

$8,500

$425

$78

$438

Pool DE Filter

20

18

$1,100

$110

$20

$57

Pool Furniture - Replace

12

1

$1,000

$917

$168

$86

Pool Solar System Replace

25

7

$5,000

$3,600

$660

$206

Pool Deck-O-Seal

5

0

$1,378

$1,378

$253

$284

Pool Skimmers - Replace

30

10

$3,000

$2,000

$367

$103

Pool Pumps - Replace 50%

8

0

$800

$800

$147

$103

Solar System Maintenance

4

2

$800

$400

$73

$206

L A N D S C A P I N G

Landscaping & Irrigation Replace

1

0

$1,000

$1,000

$183

$1,030

Irrigation Controllers

15

14

$900

$60

$11

$62

Tree Trim/Remove/Replace

3

2

$2,000

$667

$122

$687

Irrigation System Renovation

10

7

$10,000

$3,000

$550

$1,030

T E R M I T E   C O N T R O L

Termite Eradicate Phase I

12

6

$7,200

$3,600

$660

$618

Termite Eradicate Phase II

12

7

$7,200

$3,000

$550

$618

Termite Eradicate Phase III

12

8

$7,200

$2,400

$440

$618

Termite Eradicate Phase IV

12

9

$13,450

$3,363

$617

$1,154

Termite Eradicate - Duplex

12

10

$2,650

$442

$81

$227

Termite Eradicate Pool House

12

5

$1,500

$875

$160

$129

M I S C E L L A N E O U S

Tennis Court Resurface

6

5

$3,500

$583

$107

$601

Pool Iron Fence Replace

30

11

$8,840

$5,599

$1,026

$304

Residence Entrance Lights

30

0

$4,000

$4,000

$733

$137

Exterior Lighting-Globes/Posts

25

6

$3,000

$2,280

$418

$124

Patio Wall Post Repairs

5

3

$5,250

$2,100

$385

$1,082

Major Patio Wall Repairs

10

7

$30,000

$9,000

$1,650

$3,090

Front Utility Doors - Replace

5

3

$500

$200

$37

$103

Atrium Drain Repair/Replace

5

3

$500

$200

$37

$103

Sewage Line Failure/Repair

5

3

$1,000

$400

$73

$206

Wood Planter Shelves

10

3

$2,400

$1,680

$308

$247

Wood Perimeter Fencing

22

4

$6,600

$5,400

$990

$309

Southside Fencing

40

3

$4,500

$4,163

$763

$116

TOTALS

 

 

$639,342

$286,560

$52,540

$41,275

 

Reserve Account Balance, estimated as of fiscal year end:

$52,540

Percent Funded Estimate ( reserves / recommended fund balance ):

18.3%

*Unfunded Liability - Deficit (recommended reserve balance minus actual reserve balance):

$234,020

RECOMMENDATIONS, IF 100% FUNDED:

Recommended Monthly Reserve Contribution:

$3,440

Recommended Average Monthly Reserve Contribution per Member:

$85.99

NOTE:  Year 2005 Funding Requirement is based on 3.0% inflation-adjusted straight-line depreciation
(Current Cost to Replace) / (Estimated Useful Life) X (Inflation for 1 Year)

 

To summarize what was said above so you can view the numbers in the above report:
The FY 2005 Funding Requirement (annual depreciation) is:  $41,275
The Percent-Funded Estimate is:  18.3% (poor financial condition)
The Cumulative Depreciation to-date is:  $286,560
The Fiscal Year End Reserve Balance is:  $52,540
The Unfunded Depreciation Liability is:  $234,020

NOTE:  Board members commonly make the mistake of choosing the Straight-Line Depreciation Analysis method of funding and assuming they only need to fund their reserve budget enough to offset their "FY2005 Funding Requirement" ($41,275 in this case) for depreciation expected to occur in FY 2005. This is fine if the association is 100% funded for depreciation-to-date.  

However if the association is running a reserve deficit, as in this example where they only have 18.3% of the cash in reserves necessary to offset depreciation-to-date, they also need to get serious about reducing their unfunded depreciation liability.  In other words, they'll need to supplement their reserve funding plan to offset the $41,275 of annual reserve depreciation with extra funds to reduce their unfunded depreciation liability.

The Optimized Cash Flow Analysis method determines a reserve funding plan that will help reduce the reserve deficit, but doesn't guarantee the association's reserves will be 100% funded during all years.  For more information, refer to the Cash Flow Analysis page.

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Do you have further questions about Reserve Studies?    
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