Replacement Reserves

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Replacement Reserves

Replacement Reserves are monthly deposits that a lender may require a borrower to a reserve in an account, along with principal and interest payments for future capital improvements of major building systems; i.e., HVAC, parking lot, carpets, roof, etc.

It is not required to keep a property in service like routine maintenance and repair, utilities, property taxes, insurance, or management fees. Therefore replacement reserves are not a typical operating expense.

Rather, it’s an allocation of funds for the future major expenses eventually required to replace components that would lengthen a property’s life, make it more useful, or increase its value.

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