(b) The minimum reserve for replacement of class 2 capital assets shall be determined as follows:

1. (1) During the original assumed useful lifetime of the buildings (the useful lifetime of the assets used for purposes of calculating depreciation or amortization), the minimum reserve shall equal any excess of the realized and unrealized capital gains on the capital (fixed) asset (including that due to replacement or repair) over the realized and unrealized capital losses relative to that asset less the cost of any replacement or repairs.

2. (2) At any other time the minimum reserve shall be equal to the greatest of:

   1. (i) the value of the reserve of the class 2 capital asset at the end of the original assumed useful lifetime;
   2. (ii) the highest previous value of the reserve for a class 2 capital asset which was outlived its original assumed useful lifetime, as determined in accordance with this paragraph; and
   3. (iii) any excess of the realized and unrealized capital gains on the capital (fixed) asset over the realized and unrealized capital losses relative to that asset, less the cost of any replacement or repairs made since the end of the original assumed useful lifetime.
3. (3) In addition, an operator may use a plan for the systematic funding of a reserve for replacement over and above the requirements of paragraphs (1) and (2) of this subdivision, subject to the approval of the superintendent.
4. (4) Notwithstanding the requirements of paragraphs (1) and (2) of this subdivision, the reserves held under those paragraphs along with any reserves held under paragraph (3) of this subdivision need not at any time exceed the current replacement cost.
5. (5) At the time of replacement of a capital (fixed) asset, the reserve for replacement may be reduced by the replaced capital (fixed) asset's portion of the reserve for replacement.

(d) For purposes of determining the depreciation or amortization on capital assets for use in the retrospective and prospective reserve calculations in section 350.3 of this Part, the following rules shall apply:

1. (1) Class 1 capital assets—no depreciation;
2. (2) Class 2 capital assets—depreciation over the useful lifetime, preferably 40 years at construction;
3. (3) Class 3 capital assets—depreciation over the useful lifetime of each asset or over the average useful lifetime of a grouping of assets;
4. (4) Class 4 capital assets—amortization over the lifetime of the associated class 2 assets. In the event of an accelerated reduction in the value of class 4 capital assets pursuant to section 350.5 of this Part, the annual amortization charge will remain unchanged, except for the final charge, and the period of time over which these assets will be amortized will be shortened in a manner consistent with the method of amortization used for class 4 assets; and
5. (5) Depreciation or amortization may be calculated using either the straight line method or the constant yield method or some intermediate method or any other method approved by the superintendent. The depreciation or amortization under the constant yield method is calculated as the change in value of an amortization schedule. Such schedule is calculated using an interest rate and a pattern of charges, approved by the superintendent. The amortization schedule at any time equals the present value of the remaining charges.

(i) The prospective reserve liability calculations shall be done on an aggregate basis which assumes:

1. (1) the residents at the date of valuation form a closed group; and
2. (2) unit costs for operating expenses and capital expenses are based on an ongoing concern maintaining a reasonable occupancy rate. When performing the reserve calculation on a closed group basis, the projection should be done until all current residents reach the last age of the assumed mortality table.