Reserves for 200 Unit Chicago High Rise

[Ed W.]

I'm being asked to invest in a 50 year old, 200 unit Chicago high rise building.  I'm very experienced with rentals in general and rental complexes with many units and have a good understanding of investment numbers in general but I have zero experience with high rise, elevator buildings.  All of my involvement has been with low-rise flats and townhouses.

The building (from what I can initially tell) has been well maintained.  There are 10 units per floor with 12,000 sf of living space per floor plus hallways, chutes, etc.  The lobby, offices, and some maintenance areas are on the ground level and there are 3 underground levels of parking, maintenance areas, and mechanicals.  The building also has a large generator and outdoor pool.

I'm generally comfortable with the numbers but I'm next to clueless about what would be considered adequate reserves for capital expenditures.

If someone has some insights, I'd love to hear them.  Thanks for your assistance.

[Account Closed]

As a Fannie Mae and FHA Multifamily underwriter, your replacement reserve should be based on the overall economic remaining life of the building. In other words, if the property has a remaining life of say 40 years, in theory you would replace most of the replaceable building components over that time frame. Using this formula and your 200 unit project, it would be safe to assume that at least 40% or more of the building components would be replaced. So---40%/40 years equal 1.0% annually of the new replacement cost. New replacement building cost is probably well north of $300/sqft. or $3.0/sqft. At a minimum your replacement cost would be around $3600 per unit.

Obviously, this would be cost prohibitive for most investments and so generally you see budgets that show capital accounts with large infusions staged over extended times. Additionally, most investment are not intended to be held that long and each subsequent owner recapitalize the asset/property extending the economic life of the building.

Quick word on replacement reserve -  replacement reserve is for major systems, not normal wear and tear maintenance. Replacement reserve typically breakdown into three groups, mechanical (electrical, plumbing, hvac), structural (stairs, elevators, roofs, windows), foundation ( parking, grounds, sewers).

Unit replacements such as carpets, counters, appliances, paint etc..while capital expenditures, are separate from the calculations above. 

All said - Most lenders prefer replacement reserve greater than $500 and usually rely on an physical needs assessment to determine cost over a 5,10, or 15 year period. FHA and loans over 20 years usually require substantially more.