Knowledge Base

Reserves for Replacement

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Roofs wear out. So do HVAC units, ovens and refrigerators. Parking lots need to be resurfaced every few years as well. Buildings need to be maintained, just like cars.

Every time a landlord receives a dollar in rent, he can’t consider 100 cents of that dollar a return on his investment. Some of that dollar has to be ploughed back into the building to keep it going.

Almost every Pro Forma Operating Statement, therefore, will include a line item called “Reserve for Replacements”. This is different and separate from “Repairs and Maintenance”.

Multi-Family:

Traditionally replacement reserves are not included when preparing a Pro Forma operating on a multifamily property. They are considered included in the line item for repairs, typically 6% - 10% of effective gross income.

Conduit lenders, however, normally require a replacement reserve of $250 to $300 per unit per year.

Retail:

Traditional: 3 to 5% of effective gross income

Conduits: $0.20 per square foot per year

Office:

Traditional: 3 to 5% of effective gross income

Conduits: $0.20 per square foot per year

Industrial:

Traditional: 2 to 4% of effective gross income

Conduits: $0.15 per square foot per year

Self Storage:

Traditional: 2 to 4% of effective gross income

Conduits: $0.15 per square foot per year

Mobile Home Park:

Traditional: 3 to 5% of effective gross income

Conduits: $250 per pad per year

Healthcare:

Traditional: 3 to 5% of effective gross income

Conduits: $250 - $300 per bed per year

Hotel/Motel:

Traditional: 5% of effective gross income (includes FF&E’s)

Conduits: 5% of effective gross (includes FF&E’s)

 

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