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
A retail property has the following annual figures: Potential Gross Income: $350,000; Vacancy and Collection Loss: 4%; Miscellaneous Income: $5,000; Operating Expenses: $102,000; and a Replacement Reserve of $15,000. What is the property's Net Operating Income (NOI)?
Next Question
A mixed-use property has a retail component with potential gross income of $120,000 and an office component with potential gross income of $80,000. Market analysis indicates the retail sector has a 10% vacancy rate, while the office sector has a 15% vacancy rate. There is no other income. What is the property's overall effective gross income?