Replacement Reserves

Replacement reserves (reserves for replacement, or "capital reserves") are an annual set-aside for future capital expenditures — roof replacement, HVAC, parking-lot resurfacing, unit turnovers, and other big-ticket items that wear out over time. They are distinct from operating reserves, which are a working-capital buffer for short-term cash shortfalls.

How it's used: institutions and lenders deduct reserves (commonly stated as $/unit/year, $/SF/year, or a percent of gross rent) to arrive at a post-reserves, "true" NOI — the income that's actually sustainable once you fund the capital the building will inevitably need.

Why it matters: a broker pro-forma almost always omits replacement reserves, which overstates the NOI, the cap rate, and ultimately the price. The gap between a pre-reserves "broker" NOI and a post-reserves "true" NOI is one of the most common ways deals get dressed up — and it's exactly why a true cap rate sits below the headline. Funding reserves isn't optional; the capital gets spent whether or not the seller modeled it.

Formula: Replacement reserves = $/unit/year × units (or $/SF × area, or % of GPR)

UpsideIQ deducts replacement reserves to compute a true NOI on every deal — see the reserves & overstated returns teardown.