Other Assumptions Section
Welcome to this video. In this video, I will cover the total reserve field in the other assumptions section in the ARGUS Multi Family Model. Let’s get into it.
The only variable in the other assumptions section is the total reserve, which is linked to the Capital Expenditure Reserve in the sources and uses section. Reserve is the funds that are put aside at the closing of a deal to pay for future expenses like renovation costs. Let’s go to the Annual CF Summary tab to see how the reserve is reflected in the cash flow. We can see that at the beginning of the holding period, the reserves are 1 million dollars. All the reserves are used up in the first year, so that the reserve at the end of period is zero. If the reserve is not fully used up, the unused portion of the reserve is refunded upon the exit of the deal.
To get a closer look at this, let’s move to the Monthly cash flow summary tab. In the first month of the first year, the withdraw from reserve is about 910,000 dollars, it was used to cover the renovation costs and operating shortfall in the first month. In the second month, there is only about 88,000 dollars left in the reserve to cover the shortfall. The rest of the shortfall needs to be funded through debt and equity.
I can see there are withdrawals and additions in the reserve section. In other words, I can also model when and how much I deposit additional funds from the cash flow into the reserve for a rainy day. Let’s go back to the Input tab. There are Reserve Deposits in the expense section. Click the INPUT EXPENSE button. An expense window pops up. This window functions the same way as a regular expense window. Let’s say I have a schedule to set funds aside for the reserve. 100 dollars per unit per month starts from the first month of the sixth year. I will click Copy Down and Across. Save. Go to the Annual Cash Flow Summary Tab. We can see that 8,900 dollars is put into the reserves from the sixth year. Going back to the input tab. Click the Input Expense button again and zero out these numbers. Save. I would not recommend inputting random numbers like I just did unless you have a clear reserve schedule beforehand. The main purpose of this reserve function in the ARGUS Multi Family Model is to offset negative cash flow.
This process is also called “smoothing out the cash flow”. Because of its complex nature, I would leave this job to the computer. This is also one of the most powerful features in the ARGUS Multi Family Model. One of the functions of the FIX EVERYTHING button is to identify the best reserve schedule automatically for me. The Fix Everything button will be covered in detail in another video later.
I finished the other assumptions section in the ARGUS Multi Family Model. Thanks for watching this video. I will see you in the next one.