Estimating the Allowance for Reserves

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To accurately estimate the subject property's expenses, the appraiser should research and analyze past and present reserves.  Additionally, the appraiser should be aware of replacement costs and the expected life of the short-lived items.

 

Because the property may have been over-maintained or under-maintained, the actual historic and current expenses are used to assist in predicting future reserve requirements.

 

Past and present reserves or replacement costs are significance only as indicators of probable future expenses.

 

To accurately estimate the subject's historical reserves or replacement costs, the appraiser should analyze, if available, expense statements for previous years.  Expense statements should not be accepted as historical fact without close analysis.

 

Expense statements may not reflect "competent management" by the owner, an essential assumption in the appraisal process.

 

Expense statements may not cover all items that should have been covered.
Statements may not accurately indicate what should have been spent on property.

 

Reserves may be estimated using the straight-line method or the sinking-fund method.

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