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    Replacement Reserves

    Money set aside regularly to fund future capital repairs and replacements at a property.

    Replacement reserves are funds set aside on a regular schedule to pay for major capital items down the road, such as roofs, parking lots, HVAC systems, and appliances. Unlike routine repairs, these are large, periodic costs, and the reserve spreads them out so the money is there when the work is needed.

    Lenders often require reserves and collect them monthly alongside the mortgage payment. They size the amount per unit or per square foot, for example $250 to $300 per unit each year on multifamily. An engineering report at closing helps set the figure based on the property's condition and remaining useful life.

    Underwriters typically subtract replacement reserves when calculating NOI, even when the current owner does not fund them. That lowers the NOI used for sizing, which is why reserves affect both value and the loan amount a property can support.

    Formula
    Annual Reserve = Units x Per Unit Reserve (or Square Feet x Rate)
    Worked Example

    A 100 unit apartment property with a $250 per unit annual reserve funds $25,000 a year, or about $2,083 a month, into the reserve account for future capital work.

    Why It Matters

    Reserves protect the property and the loan, but they also reduce underwritten NOI, which trims value and proceeds. Budgeting for them up front keeps your DSCR and loan sizing realistic.

    Related Terms

    Net Operating Income (NOI)

    A property's income after operating expenses but before debt service, income taxes, and capital costs.

    Debt Service Coverage Ratio (DSCR)

    The ratio of a property's net operating income to its annual debt service, showing how comfortably income covers loan payments.

    Stabilized Property

    A property leased and operating at market occupancy with steady, reliable income.

    Capitalization Rate (Cap Rate)

    The ratio of net operating income to property value, used to gauge return and estimate what a property is worth.

    Related Programs & Tools

    Multifamily FinancingAgency LoansCommercial Mortgage

    Looking for another term? Browse the full commercial lending glossary.

    Frequently Asked Questions

    Many lenders require them, especially agency multifamily programs. They are collected monthly and held in an account the lender controls for approved capital work.

    Underwriters subtract them when calculating NOI, which lowers the income used for sizing. That can reduce both the appraised value and the loan amount.

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