Capital Reserve Planning
Reserve fund requirements, emergency provisions, and cash flow buffers.
1. Build-Out TI Amortization
Initial Tenant Improvement Investment
Per Phase 7 analysis, net build-out costs after landlord TI allowance:
| Suite Type | SF | Build-Out Cost | TI Allowance | Net TI Cost | Count | Total TI |
|---|---|---|---|---|---|---|
| Standard | 100 | $12,500 | $3,000 | $9,500 | 8 | $76,000 |
| Plus | 130 | $16,250 | $3,900 | $12,350 | 5 | $61,750 |
| Large | 160 | $20,000 | $4,800 | $15,200 | 3 | $45,600 |
| Executive | 200 | $25,000 | $6,000 | $19,000 | 2 | $38,000 |
| Facility Total | 3,000 | $375,000 | $90,000 | $285,000 | 18 | $221,350 |
Note: Facility total includes ~700 SF common area at $125/SF = $87,500 - $21,000 TI = $66,500 net.
Amortization Schedule (7-Year Straight Line)
GAAP standard for leasehold improvements is shorter of useful life or lease term. Assuming 10-year lease with 7-year useful life.
| Item | Net Cost | Annual Amort | Monthly Amort |
|---|---|---|---|
| Suite Build-Outs | $221,350 | $31,621 | $2,635 |
| Common Area | $66,500 | $9,500 | $792 |
| Total TI | $287,850 | $41,121 | $3,427 |
Amortization by Year
| Year | Beginning Balance | Amortization | Ending Balance | % Amortized |
|---|---|---|---|---|
| 1 | $287,850 | $41,121 | $246,729 | 14% |
| 2 | $246,729 | $41,121 | $205,608 | 29% |
| 3 | $205,608 | $41,121 | $164,487 | 43% |
| 4 | $164,487 | $41,121 | $123,366 | 57% |
| 5 | $123,366 | $41,121 | $82,245 | 71% |
| 6 | $82,245 | $41,121 | $41,124 | 86% |
| 7 | $41,124 | $41,121 | $0 | 100% |
Note: This is a non-cash expense for internal tracking. For tax purposes, consult CPA on 179 deduction vs. depreciation schedule.
2. Equipment Replacement Reserve Requirements
2.1 Suite-Level Equipment
Styling Chairs:
- Cost: $500/suite average (owner provides basic chair, tenant upgrades)
- Count: 18 suites
- Useful life: 7 years
- Annual reserve: (18 x $500) / 7 = $1,286/year
Shampoo Bowls (Hair Suites Only):
- Cost: $300/unit installed
- Count: ~10 hair suites
- Useful life: 10 years
- Annual reserve: (10 x $300) / 10 = $300/year
Suite Lighting:
- Cost: $200/suite (LED fixtures)
- Count: 18 suites
- Useful life: 8 years
- Annual reserve: (18 x $200) / 8 = $450/year
Suite Flooring (LVP):
- Cost: $500/suite (100-200 SF at $2.50-5/SF)
- Count: 18 suites
- Useful life: 10 years
- Annual reserve: (18 x $500) / 10 = $900/year
2.2 Common Area & Facility Equipment
HVAC System:
- Cost: $15,000 (2.5-ton unit, zoned)
- Count: 1 system
- Useful life: 15 years
- Annual reserve: $15,000 / 15 = $1,000/year
Common Area Flooring:
- Cost: $5,000 (~700 SF at $7/SF installed)
- Useful life: 10 years
- Annual reserve: $5,000 / 10 = $500/year
Washer/Dryer (2 sets):
- Cost: $2,000 (commercial units)
- Useful life: 7 years
- Annual reserve: $2,000 / 7 = $286/year
Water Heater:
- Cost: $2,500 (commercial)
- Useful life: 12 years
- Annual reserve: $2,500 / 12 = $208/year
Access Control System:
- Cost: $4,000 (per Phase 4)
- Useful life: 8 years
- Annual reserve: $4,000 / 8 = $500/year
Security Cameras (8-camera system):
- Cost: $3,000
- Useful life: 6 years
- Annual reserve: $3,000 / 6 = $500/year
Common Area Furniture:
- Cost: $3,000 (reception, break room)
- Useful life: 7 years
- Annual reserve: $3,000 / 7 = $429/year
2.3 Annual Reserve Summary by Category
| Category | Items | Annual Reserve |
|---|---|---|
| Suite Equipment | Chairs, bowls, lighting, flooring | $2,936 |
| HVAC & Mechanical | HVAC, water heater | $1,208 |
| Technology | Access control, cameras | $1,000 |
| Common Area | Flooring, furniture, laundry | $1,215 |
| Total Annual Reserve | $6,359 | |
| Monthly Reserve | $530 |
Rounded budget: $530/month ($6,360/year)
3. Unexpected Repairs Contingency
Industry Benchmark
- Small commercial: 1-2% of property value annually
- Salon suites (rental business): 2-3% of gross revenue recommended
Contingency Calculation
| Basis | Amount | Contingency Rate | Annual Amount |
|---|---|---|---|
| Build-out cost ($375K) | $375,000 | 1.5% | $5,625 |
| Gross revenue (85% occ) | $230,928 | 2.0% | $4,619 |
| Blended estimate | $5,000 |
Recommended contingency: $5,000/year ($417/month)
Combined Reserve & Contingency
| Component | Monthly | Annual |
|---|---|---|
| Equipment Replacement | $530 | $6,360 |
| Unexpected Repairs | $417 | $5,000 |
| Total Capital Reserve | $947 | $11,360 |
Rounded for budgeting: $1,000/month ($12,000/year)
4. Reserve Funding Schedule
Year-by-Year Funding Plan
Rationale:
- Year 1: Reduced funding during ramp-up (cash conservation)
- Years 2-10: Full funding at stabilized occupancy
- Build reserve ahead of major capital events
| Year | Monthly Funding | Annual Funding | Cumulative Reserve |
|---|---|---|---|
| Year 1 | $250 | $3,000 | $3,000 |
| Year 2 | $750 | $9,000 | $12,000 |
| Year 3 | $1,000 | $12,000 | $24,000 |
| Year 4 | $1,000 | $12,000 | $36,000 |
| Year 5 | $1,000 | $12,000 | $33,000* |
| Year 6 | $1,000 | $12,000 | $45,000 |
| Year 7 | $1,000 | $12,000 | $37,000* |
| Year 8 | $1,000 | $12,000 | $49,000 |
| Year 9 | $1,000 | $12,000 | $61,000 |
| Year 10 | $1,000 | $12,000 | $48,000* |
*After major capital events (see Section 5)
Funding Source Integration
From facility-pl.md, maintenance budget is $1,800/month:
- $1,200/month: Routine maintenance (repairs, cleaning, supplies)
- $600/month: Capital reserve (currently budgeted)
Gap Analysis:
- Current P&L budget: $600/month ($7,200/year)
- Recommended reserve: $1,000/month ($12,000/year)
- Gap: $400/month ($4,800/year)
Options to Close Gap:
- Increase maintenance line item by $400/month (reduces gross profit by $4,800/year)
- Fund gap from gross profit when available (Year 2+)
- Maintain lower reserve and accept higher risk
Recommendation: Budget $600/month in Year 1 (cash-constrained), increase to $1,000/month in Year 2 when cash flow stabilizes.
5. Major Capital Events (Years 1-10)
Scheduled Capital Expenditures
| Year | Event | Cost | Reserve Impact | Notes |
|---|---|---|---|---|
| Year 5 | Interior Refresh | $15,000 | ($15,000) | Paint, common area update |
| Year 7 | Equipment Cycle | $20,000 | ($20,000) | Replace first-wave suite equipment |
| Year 10 | HVAC/Major Systems | $25,000 | ($25,000) | HVAC replacement, electrical updates |
Interior Refresh (Year 5) - $15,000
| Item | Cost |
|---|---|
| Common area paint | $3,000 |
| Suite touch-up paint (18 @ $150) | $2,700 |
| Reception furniture refresh | $2,500 |
| Break room updates | $1,500 |
| Signage refresh | $1,000 |
| Minor repairs/patching | $2,000 |
| Contingency | $2,300 |
| Total | $15,000 |
Equipment Cycle (Year 7) - $20,000
| Item | Count | Unit Cost | Total |
|---|---|---|---|
| Styling chairs | 18 | $500 | $9,000 |
| Shampoo bowls | 5 | $300 | $1,500 |
| Washer/dryer | 2 | $1,000 | $2,000 |
| Suite lighting | 18 | $200 | $3,600 |
| Access control update | 1 | $2,000 | $2,000 |
| Contingency | $1,900 | ||
| Total | $20,000 |
HVAC/Major Systems (Year 10) - $25,000
| Item | Cost |
|---|---|
| HVAC replacement | $15,000 |
| Water heater | $2,500 |
| Common area flooring | $5,000 |
| Electrical updates | $2,500 |
| Total | $25,000 |
6. 10-Year Reserve Balance Projection
Detailed Annual Projection
| Year | Start Balance | Funding | Capex | End Balance | Min Threshold |
|---|---|---|---|---|---|
| 1 | $0 | $3,000 | $0 | $3,000 | $3,000 |
| 2 | $3,000 | $9,000 | $0 | $12,000 | $5,000 |
| 3 | $12,000 | $12,000 | $0 | $24,000 | $7,000 |
| 4 | $24,000 | $12,000 | $0 | $36,000 | $10,000 |
| 5 | $36,000 | $12,000 | ($15,000) | $33,000 | $12,000 |
| 6 | $33,000 | $12,000 | $0 | $45,000 | $15,000 |
| 7 | $45,000 | $12,000 | ($20,000) | $37,000 | $18,000 |
| 8 | $37,000 | $12,000 | $0 | $49,000 | $20,000 |
| 9 | $49,000 | $12,000 | $0 | $61,000 | $22,000 |
| 10 | $61,000 | $12,000 | ($25,000) | $48,000 | $25,000 |
Reserve Balance Visualization
Reserve Balance ($K)
$60 | *
$55 | *
$50 | * | *
$45 | * |
$40 | * | +----
$35 | *----+----
$30 | *
$25 |
$20 |
$15 |
$10 | *
$ 5 |+
$ 0 +----------------------------------
Y1 Y2 Y3 Y4 Y5 Y6 Y7 Y8 Y9 Y10
* = Year-end balance
+ = Post-capex balance
Reserve Adequacy Analysis
| Metric | Calculation | Result | Status |
|---|---|---|---|
| Year 5 post-capex balance | $36K - $15K | $33,000 | ADEQUATE |
| Year 7 post-capex balance | $45K - $20K | $37,000 | ADEQUATE |
| Year 10 post-capex balance | $61K - $25K | $48,000 | ADEQUATE |
| Minimum reserve ratio | End balance / Next capex | 1.3-2.4x | ADEQUATE |
Finding: Reserve funding schedule maintains adequate balances through all major capital events.
7. Sensitivity Analysis
7.1 Impact of Reduced Funding
Scenario: $500/month funding (vs. $1,000 recommended)
| Year | Cumulative at $500/mo | Major Capex | Post-Capex Balance |
|---|---|---|---|
| 5 | $30,000 | ($15,000) | $15,000 |
| 7 | $27,000 | ($20,000) | $7,000 |
| 10 | $25,000 | ($25,000) | $0 |
Risk: Year 10 depletes reserve entirely. Would require one-time capital call or financing.
7.2 Impact of Accelerated Equipment Failure
Scenario: Major HVAC failure in Year 4 ($15,000)
| Year | Base Balance | Accelerated Failure | Post-Failure Balance |
|---|---|---|---|
| 4 | $36,000 | ($15,000) | $21,000 |
| 5 | + refresh ($15K) | $18,000 |
Risk: Still manageable but reduces buffer. Would skip Year 5 refresh or scale it down.
7.3 Impact of Higher Unexpected Repairs
Scenario: 3% of revenue contingency (vs. 2%)
| Metric | Base Case | Higher Contingency |
|---|---|---|
| Annual contingency | $5,000 | $7,500 |
| Total annual reserve | $12,000 | $14,500 |
| Monthly funding | $1,000 | $1,208 |
| 10-year total funding | $108,000 | $130,500 |
Impact: $22,500 additional over 10 years ($2,250/year). Reduces owner cash by $188/month.
8. Reserve Fund Management
Recommended Account Structure
| Account | Purpose | Target Balance |
|---|---|---|
| Operating Account | Day-to-day expenses | 1-2 months operating costs |
| Capital Reserve Account | Equipment replacement, major repairs | Per funding schedule |
| Emergency Fund | Unexpected large expenses | 3 months operating costs |
Investment Guidelines
Capital Reserve Fund:
- Priority: Preservation of principal
- Liquidity: Accessible within 30 days
- Recommended vehicle: High-yield savings or money market
- Do not invest in equities or long-term instruments
Withdrawal Protocol
- Routine equipment replacement: No approval required if budgeted
- Unbudgeted repairs < $2,500: Owner approval
- Unbudgeted repairs $2,500-$10,000: Document and track
- Major capex > $10,000: Competitive bids, documented approval
9. SBA Presentation Summary
Capital Reserve Adequacy Statement
Luxa Salon Suites demonstrates prudent capital planning:
-
Annual Reserve Funding: $12,000/year ($1,000/month) dedicated to equipment replacement and repairs
-
10-Year Projection: Reserve balance maintained above $25,000 throughout projection period, with planned drawdowns for:
- Year 5: Interior refresh ($15,000)
- Year 7: Equipment cycle ($20,000)
- Year 10: HVAC/systems ($25,000)
-
Reserve Coverage Ratio: Post-capex balances maintain 1.3-2.4x coverage of next major expenditure
-
Funding Source: Capital reserve funded from operating cash flow, included in facility P&L projections
Reserve Fund Summary Table (For SBA)
| Year | Beginning | Additions | Withdrawals | Ending | Adequacy |
|---|---|---|---|---|---|
| 1 | $0 | $3,000 | $0 | $3,000 | Building |
| 2 | $3,000 | $9,000 | $0 | $12,000 | Building |
| 3 | $12,000 | $12,000 | $0 | $24,000 | Adequate |
| 4 | $24,000 | $12,000 | $0 | $36,000 | Adequate |
| 5 | $36,000 | $12,000 | ($15,000) | $33,000 | Adequate |
| 6 | $33,000 | $12,000 | $0 | $45,000 | Strong |
| 7 | $45,000 | $12,000 | ($20,000) | $37,000 | Adequate |
| 8 | $37,000 | $12,000 | $0 | $49,000 | Strong |
| 9 | $49,000 | $12,000 | $0 | $61,000 | Strong |
| 10 | $61,000 | $12,000 | ($25,000) | $48,000 | Adequate |
10. Key Findings & Recommendations
Critical Findings
-
Recommended Reserve Funding: $1,000/month ($12,000/year) covers equipment replacement ($6,360) plus contingency (~$5,000).
-
Current P&L Gap: Facility P&L includes $600/month capital reserve. Recommend increasing to $1,000/month in Year 2.
-
TI Amortization: $41,121/year non-cash expense for 7 years. Consider for tax planning.
-
Major Capital Events: Three events totaling $60,000 over Years 5-10 are fully funded by reserve schedule.
-
Reserve adequacy maintained: Post-capex balances never drop below $33,000 after Year 5.
Recommendations
| Priority | Recommendation |
|---|---|
| 1 | Fund $250/month in Year 1, increase to $1,000/month starting Year 2 |
| 2 | Maintain separate capital reserve account (not commingled with operating) |
| 3 | Review reserve adequacy annually and adjust funding if actual expenses differ |
| 4 | Defer non-critical capex if occupancy drops below 75% |
| 5 | Build $15,000+ reserve before Year 5 interior refresh |
Integration with Debt Service
From debt-service.md, Year 2+ cash available after debt service:
- Scenario 2 ($228K loan): $19,828/year
Capital reserve funding at $12,000/year is serviceable from this cash flow, leaving ~$7,800 for owner draw or additional reserves.
Capital Reserve Schedule Complete Phase 8: Facility Financial Model - Plan 02 Task 2 Complete
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