How do I factor reserves into my NOI? It seems that the amounts can vary.

I'm looking for a reasonable amount an owner should expect to set aside. It seems like the NOI is more complete when reserves are factored in, and less respected when Reserves aren't included. Am I right?
In Selling Property - Asked by T. F. - Jun 15, 2011
Report Abuse
Answer this Question

Answer(s)

Rob B.
Chandler, AZ

T.F.....
You are correct. NOI is more complete when reserves for maintenance are factored in. It is almost assured that you will have to do so by the underwriter for a multifamily loan. I am seeing anything from $150 per unit annually to $350. Most often it seems to be $250 per unit.
For commercial properties, the reserves will have a great deal to do with the amount of maintenance that can be expected over a 10 year period. These costs normally require a reserve study. Roof and parking lot repairs or replacement are the larger items for commercial properties in this analysis. The dollars estimated over the period, divided by number of months prior to a call for the capital investment.

Items like tenant improvements and leasing commissions in commercial properties are factored in below the NOI line.
Onward and upward T.F..... Rob Baird

Jun 17, 2011
Report Abuse
Aurelio M.
Broker/Agent
Torrance, CA

Hello
Most NOI's will not factor in reserves because the age of the building and the current condition will vary these amounts drastically. As far as Commercial properties the amounts will vary depending on the type of leases that are in place. Most banks will work with actual expenses. As far as calculating a projected reserve I usually us $20 per unit per month but that is only when I'm buying something on my own. Most experienced buyers will use their own amounts based on personal experience. Old run down building = more reserve, Newer or newly remodeled building = Less

Jun 18, 2011
Report Abuse
Philicia L.
Broker/Agent
Brooklyn, NY

You are correct . Reserves for replacements are mandatory in the appraisal process. When the market was more stabilized some appraisers used a range between 2-5%. You have to separate you major capital improvement by short-lived and long-lived items. I would recommend a replacement cost software program Marshall & Swift is a good one.

Jun 20, 2011
Report Abuse
Jeremy C.
Broker/Agent
Reading, MA

Reserves calculations belong below the NOI line. In Massachusetts commercial real estate, many banks expect the NOI to be reduced by the reserves because it provides them with higher margin on the loan to value ratios. Reserves are not an expense, which is why they are treated as a below the line item.

Jul 10, 2011
Report Abuse

Welcome to Answers

LoopNet Answers is where the commercial real estate community shares what they know to help each other out. And it's all for free.

Ask a question to get advice from brokers, investors, professionals and local experts.

Answer questions to raise your visibility as a trusted advisor and build new relationships.

Ask a Question

Post Question