What are capital reserves?

• A. Funds set aside from operating cash flow for future capital improvements
• B. Funds set aside for debt service
• C. Funds used for distributions to investors
• D. Emergency cash reserves only

Answer: (A)

Capital reserves are funds set aside from operating cash flow to cover future capital improvements or major replacements for a property. They’re built up over time so when big expenses—like a roof, an elevator, or HVAC system replacement—become due, there’s money available without needing to finance the work all at once. This helps preserve asset value and keep property performance stable over the long term.

They’re not the payments you make on debt service, which is financing the property’s loans, nor the regular distributions you might pay to investors. They’re also not limited to emergency cash—though an emergency reserve can exist separately, capital reserves specifically fund planned, larger-capital projects that aren’t part of routine operating expenses.