Property Management
What is 'replacement reserve' in Delaware commercial property budgeting?
AA legal fund required by Delaware law to replace tenants who vacate
BA budget line item setting aside funds annually for eventual replacement of major capital items (roof, HVAC, parking lot, elevators) — representing an amortized capital reserve rather than a current operating expense✓ Correct
CInsurance reserves for property casualty losses
DA fund reserved for replacing the property management company
Explanation
Replacement reserves (capital reserves) are annual contributions to a fund for future replacement of major building components with limited useful lives. Example: if a roof has 10 years of life and costs $100,000 to replace, the annual reserve might be $10,000. Lenders and sophisticated investors require adequate replacement reserves in pro forma analyses to accurately project long-term NOI.
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