What is a replacement reserve?

[Gabe Goudreau]

Hello everyone, 

I am analyzing multifamily deals using a modified spreadsheet I found online, and the spreadsheet has a reserve account that is taken directly out of of the NOI called "Replacement Reserve". It is taken directly out from the projected NOI, and replacement reserve account + debt service is what's subtracted from the NOI to find net cash flow. What is the function of this replacement reserve account? Thanks.

[Taylor L.]

It's money you set aside to replace items that have shorter lives than the property itself. It's pretty much a guarantee that you're going to need to replace things like HVAC systems eventually, it's best to have money in the bank to fund those fixes!