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replacement reserve

   Also found in: Wikipedia 0.01 sec.
replacement reserve

An amount of money set aside because building components or equipment will wear out in a relatively short time and need to be replaced.Replacement reserves can be a mere accounting entry as a phantom expense item reducing net operating income each month, or it can be money actually deposited into an account and earmarked for replacements.If the money is set aside into a separate account,any contract for the purchase of that property or business should include a clause addressing who gets the money—the purchaser or seller.When purchasing a condo or co-op,or a home in a planned unit development,the buyer should make sure there are adequate cash replacement reserves for the future.If not, then repairs will not be made or they will be made only after assessments against all owners.



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Like most loans, FHA/HUD loans require tax and insurance escrows, but HUD loans also require a replacement reserve and repair escrow.
That makes them highly priced with a lower growth potential and caught in a position whereby they must find or buy replacement reserves as they mine and sell their gold.
Replacement reserves are already fully accounted for in the income streams used for both the overall capitalization rate and the discount rate.
 
 
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