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RESERVE ADVISORS 5. METHODOLOGY Reserves for replacement are the amounts of money required for future expenditures to repair or replace Reserve Components that wear out before the entire facility or project wears out. Reserving funds for future repair or replacement of the Reserve Components is also one of the most reliable ways of protecting the value of the property's infrastructure and marketability. Arden Hills City Hall can fund capital repairs and replacements in any combination of the following: 1. Increases in the operating budget during years when the shortages occur 2. Loans using borrowed capital for major replacement projects 3. Level annual reserve assessments annually adjusted upward for inflation to increase reserves to fund the expected major future expenditures 4. Special assessments We do not advocate special assessments or loans unless near term circumstances dictate otherwise. Although loans provide a gradual method of funding a replacement, the costs are higher than if the Association were to accumulate reserves ahead of the actual replacement. Interest earnings on reserves also accumulate in this process of saving or reserving for future replacements, thereby defraying the amount of gradual reserve collections. We advocate the third method of Level Monthly Reserve Assessments with relatively minor annual adjustments. The method ensures that Owners pay their "fair share" of the weathering and aging of the commonly owned property each year. Level reserve assessments preserve the property and enhance the resale value of the homes. This Reserve Study is in compliance with and exceeds the National standards' set forth by the Association of Professional Reserve Analysts (APRA) fulfilling the requirements of a "Level I Full Reserve Study." These standards require a Reserve Component to have a "predictable remaining Useful Life." Estimating Remaining Useful Lives and Reserve Expenditures beyond 30 years is often indeterminate. Long -Lived Property Elements are necessarily excluded from this analysis. We considered the following factors in our analysis: • The Cash Flow Method to compute, project and illustrate the 30-year Reserve Funding Plan • Loca12 costs of material, equipment and labor • Current and future costs of replacement for the Reserve Components • Costs of demolition as part of the cost of replacement • Local economic conditions and a historical perspective to arrive at our estimate of long-term future inflation for construction costs in Arden Hills, Minnesota at an annual inflation rate3. Isolated or regional markets of Identified in the APRA "Standards - Terms and Definitions" and the CAI "Terms and Definitions". 2 See Credentials for additional information on our use of published sources of cost data. 3 Derived from Marshall & Swift, historical costs and the Bureau of Labor Statistics. Page 5.1 - Methodology