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Linear Funding

There are two forms of linear funding:

A linear funding model provides for a consistent contribution to the reserve account for each year over the planning horizon. This method asks the question: “If the owners fund at level x, what special assessments will result?

Examples:
Listed below are some examples of linear funding:
  • "Our reserve contribution is $95,000 each year for the next 30 years"
  • Our reserve contribution is $60,000 in the current year and will increase by 2% every year thereafter.
This method of linear funding asks the question: "If we fund at this level, what special assessments with result". The alternative question, which is asked by lumpy funding, is: "What should our funding level be to avoid special assessments".


Attributes:
Linear funding is characterized by the following:

  • Inflows will remain consistent each fiscal year, despite the need for outflows (for capital expenses) that are not consistent. Special assessments are required to make up for shortfalls.
  • A portion of the capital costs are amortized or smoothed using moving averages.

Evaluation:
Listed below are some of the merits and advantages of linear funding:
  • It is predictive in nature.
  • It is simple model that can be easily generated.
  • It is easy to manage and administer over time.
  • It is easy to implement in the early lifecycle stages of a building.
It provides the owners with regularity in the annual funding contributions. Linear funding models are best suited to younger buildings where the capital projects do not yet have proximity and the owners have not yet accumulated a significant unfunded liability
Listed below are some of the limitations of linear funding:
  • Linear funding may not be adequate to scale "lumps" in the funding requirements, particularly if the projects have close proximity.
  • Linear funding must be started early in the lifecycle of a building to mitigate the long-term financial hardship for the owners.
  • Special assessments will be required to make up for any shortfalls.
Linear funding models are less helpful for older building as the funding level will not be adequate to scale “lumps” associated with capital projects that have close proximity, particularly if they are significant in value.
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Fig. Annual funding with the same contribution amount each successive fiscal year.


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Fig. Linear funding with cumulative balances shown as blue bars. There are no expenses shown on this graph and the funding accumulates at a consistent rate.

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Fig. Linear funding contributions with equal incremental adjustments each fiscal year


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Fig. Overlay of the two types of linear funding approaches. Generally, incremental funding starts at a lower point and crosses the uniform line about 50% into the planning horizon.


Funding Trajectories
Fig. Overlay of four different funding approaches with linear funding options shown in green and purple.

See also:
Compare with:


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