Sorry I should’ve been explicitly clear - “opportunity cost of capital” is not a cost as defined by accounting - it’s simply a theoretical mental concept used in finance and economics. I’ll show you below how to correctly factor it into your decision whether to buy the park - in a precise mathematical, standardized way that all accountants and finance folks would understand if you showed it to them in a print-out.

Opportunity cost of capital simply means "my money could be earning $5 in dividends as a share of Coca Cola stock instead of in this mobile home park. Therefore my “opportunity cost” of *not* owning the Coke stock is $5.

You absolutely cannot count **capital reserves** as **operating costs** in a pro forma - that would make a nonsensical pro forma. It’s gibberish. Definitions matter or other folk won’t understand what you’re saying. Keeping reserves (cash in a bank account or gold bars under your mattress) for a rainy day capital expenditure like replacing a leech field **has nothing to do with your NOI** and will not affect it one bit. Net Operating Income has a very specific definition: All revenue minus all operating expenses. The salary you pay to the secretary who accepts rent in the park office is an operating expense. The electric bill for the sewer pump is an operating expense. Interest on your loan is NOT an operating expense. Depreciation and Amortization are NOT operating expenses. Loan principal paydown is NOT an operating expense.

**Reserves are nothing more than capital (money) sitting in a pile for safe keeping.**

So why did I tell you to consider “opportunity cost”? Was it to confuse you? No. Your leech field rainy day gold pile comes into play in the equations that help you determine your overall return-on-investment through time. Read on:

The place in your investment analysis to consider what other places on planet earth your $200K for leech field reserves (opportunity cost) is NOT in the accounting pro forma but rather in the time-value-of-money metrics you should always be calculating when making investment decisions:

1 net present value

2 internal rate of return

3 modified internal rate of return (I prefer over simple IRR because you select your realistic reinvestment rate of cash flow - vs IRR which assumes you always have access to returns as good as that killer park deal you bought in year zero)

IRR and MIRR allow you to compare very different investments with very different cash flows and different times and make them become an apples-to-apples comparison (in theory - nothing is perfect but they help). Each formula requires you, the investor, to decide what return on your money you require to invest in this world. I don’t have the time or energy to explain them right now but these is finance-101-first-day-of-class stuff. Not insulting you but you need to know those metrics and how to use them if you are to make intelligent investment comparisons and decisions.

The accounting cash flow statement tells you how much moolah came in or out of your bank account at any given time.

So to calculate your IRR over say a 10 year period (and compare it with - whatevs man - rolling it into a Dogs of the Dow strategy or putting it on Bitcoin speculation) you do this:

Open a spreadsheet, any spreadsheet (google is free) and type in a column of numbers. At the top is your initial investment - your down payment plus those leech field reserves you mentioned! You see the IRR just sums up the in and out cash flows during each time period (year), “discounts” them back to the present (dollar tomorrow ain’t worth as much as a dollar today), works a math formula that assumes each time your park spits cash flow at you that you can find another investment just as juicy - nd then it rolls up those lumpy in and out cash flows through time to give you an approximation of a yearly return you can use to compare to any other investment held the same time period.

You could compare to a tech stock for example that you could have bought instead of your park at the same time. The tech stock may pay zero dividends but grow in value. If you buy it all on day 1, you do not see your money (investment) again for a decade in this example. In year 10 you sell your Fubarbook shares for 5 trillion dollars per share. So you can compare this to your park return - you just do another IRR calculation that has 8 blank years in it because you got no dividends. Doesn’t matter. Investment “out” in year 1 and total sales (minus taxes) in year 10.

Voila! You have two different IRR’s to compare - Fubarbook stock vs Mobile Home Park - and you know what investment to buy. In reality you don’t because of course you can’t predict if Fubarbook will even exist in a decade or if it will be Twerker Inc. that is the dominant social media platform.

IRR and MIRR are more useful tools to compare two parks for example - you still have to do guesswork on your yearly cash flows but it’s closer.

AS YOU CAN SEE - THE LEECH FIELD RESERVES “DISAPPEAR” ON DAY ZERO IN THIS ANALYSIS (INVESTMENTS AND RESERVES AND ANY ONGOING CAPITAL CONTRIBUTIONS ARE GIVEN A NEGATIVE SIGN - CASH FLOW AND SALES PROCEEDS ARE A POSITIVE SIGN). The capital reserve for your leech field will pull down your IRR in the calculations because the sums of the positive cash flows through time will be a smaller overall return on investment - so THIS is where you factor it iun to compare this park vs another park that has city utilities. In year 10 when you sell the park if your sewer didn’t go bad you give yourself back the reserves as a positive cash flow number in the spreadsheet. If leech field went tits up sometime in that decade you do not ever see the $200K again. It’s your thought experiment - build two IRR’s and see how much that reserve affects it.

Plenty of tutorials online about this calculation - there’s a standard Excel fomula for it that works in Google Docs spreadsheet as well. You must input an “r” - your “required rate of return” - and again that is something YOU invent. It’s personal - how much return do YOU require to make this investment - factoring in loss of liquidity during the holding period, risk of loss, etc. That “r” is effectively your “opportunity cost of capital” that I mentioned way at the beginning.