Replacement reserves cover which kind of expenditure?
Correct Answer
C) Periodic replacement of short-lived components like roofs and HVAC
Why this is correct: Replacement reserves are an annual allowance for periodic replacement of short-lived components like roofs, HVAC, and carpets, smoothing lumpy capital expenses over time. Why the other choices are wrong: The daily janitorial, landscaping and routine grounds-keeping work orders are operating expenses, not reserves. The owner's annual income-tax bill is a personal expense, not a property operating expense. Loan principal repaid each month is a financing cost, excluded from NOI. Exam tip: Reserves are for capital items; operating expenses are for routine maintenance.
Why This Is the Correct Answer
Why this is correct: Replacement reserves are an annual allowance for periodic replacement of short-lived components like roofs, HVAC, and carpets, smoothing lumpy capital expenses over time. Why the other choices are wrong: The daily janitorial, landscaping and routine grounds-keeping work orders are operating expenses, not reserves. The owner's annual income-tax bill is a personal expense, not a property operating expense. Loan principal repaid each month is a financing cost, excluded from NOI. Exam tip: Reserves are for capital items; operating expenses are for routine maintenance.
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Previous Question
An appraiser is analyzing the operating statement for a 15-year-old industrial warehouse. The owner has set aside $12,000 annually for the eventual replacement of the roof and repaving of the parking lot. For purposes of calculating stabilized net operating income, how should this $12,000 be treated?
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Which expense pattern in an owner's statement most deserves scrutiny?