When developing proformas, it is common to add Reserves to the model. Reserves may represent a...

 

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When developing proformas, it is common to add Reserves to the model. Reserves may represent a property owner's estimate of annual capital needs, or it may be the owner's view of the amount they need to save over time to effectively reserve for future capital improvements. This is similar to a sinking fund. It's also possible that the Reserves are lender-required, and must be paid to the lender monthly, along with the mortgage payment. These lender-required Reserves may be general in nature, or for specifically identified future capital. The question analysts and financial modelers have to decide on is where to show these Reserves on the proforma. Should they be shown above NOI, or below NOI in your model? What are the ramifications of each approach? Which do you believe is most appropriate? When developing proformas, it is common to add Reserves to the model. Reserves may represent a property owner's estimate of annual capital needs, or it may be the owner's view of the amount they need to save over time to effectively reserve for future capital improvements. This is similar to a sinking fund. It's also possible that the Reserves are lender-required, and must be paid to the lender monthly, along with the mortgage payment. These lender-required Reserves may be general in nature, or for specifically identified future capital. The question analysts and financial modelers have to decide on is where to show these Reserves on the proforma. Should they be shown above NOI, or below NOI in your model? What are the ramifications of each approach? Which do you believe is most appropriate?

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The decision of whether to show reserves above or below Net Operating Income NOI in a proforma depends on the conceptual framework and purpose of the ... View the full answer