How do your operating &amp; property reserves change with portfolio size?
In practice, how do your operating &amp; property reserves change with portfolio size? Would you expect to hold a different percentage or time period of OPEX reserves as AUM grows from $10M to $20M, $50-100-500 etc?

Similarly, do you always manage property reserves at the property level, at a fixed percentage of internal reserve study, or at a certain point do you lower your portfolio-wide percentage of replacement reserves?

To date I've grown organically through distressed industrial, but as those projects have dried up I am for the first time acquiring a stabilized property at a lower (7.5) cap rate. As portfolio grows and matures I expect I'll do less pure distressed and more stabilized. Numbers are tighter, debt is higher, etc etc. So I am taking the opportunity to be a little more disciplined &amp; professional across the board.

FWIW I'm all multi-tenant industrial, \~400k sq ft \~25 tenants. Portfolio will be at 65 LTV, DSCR 1.8, WALT 36 months after latest acquisition and refi.

Is it reasonable to keep operating reserves at 3 months, assuming WALT stays 24-36+ months? Then grow it toward 6 months if I drop below 24mo?

To date, I haven't kept a set property reserve. Honestly I've just had an eye on having enough liquidity to replace my largest roof (\~85k sq ft) should that come up, although it is 7 y.o. and I don't expect it. But again trying to be more disciplined and start contributing reserves monthly to a separate account.

Last question - as property reserves grow, do you double count those as operating reserves, or is that frowned upon? ie worst case you lose the tenants and the building needs a refresh to lease up?

TIA for any thoughts.
[{"id": "httbx0y", "text": "I think it probably depends on property type, age, and current condition. You could go the route of getting a property condition report that might make you more comfortable with your #s going forward.", "replies": [], "depth": 1}, {"id": "htvvq4k", "text": "As fund size increases portfolio level reserves drop as a % of gross monthly revenue. At a certain point you don\u2019t need to have a ton of cash in reserve for unexpected stuff, $10mm (or whatever is fine). The portfolio manager and fund controller decide on what that reserve level is, and a lot goes into it - what is anticipated capex, is there a fund line of credit left and how much capacity is available, etc. as a fund heads towards liquidation though in my experience the reserve level grows a little bit as you\u2019re down to a few assets - you won\u2019t have a line of credit, and can\u2019t recall money from investors, so if you need cash for an emergency it has to be generated from operations. \n\nI don\u2019t have our controllers manage to property level reserves anywhere except in JVs, everything gets swept up to the fund where it\u2019s commingled and if an asset needs cash they can take it from the pot. \n\nWith respect to reserve level, we manage to much less than 3 months of opex for a fund - that\u2019s a ton of cash that\u2019s a drag on IRR - remember that money costs you 8% (or whatever your pref hurdle is). Typically looking at more like 1 month of opex for a sufficiently diversified portfolio that has some seasoning. That said you really shouldn\u2019t set a reserve or take a distribution until you\u2019re like 4-6 months into ownership of an asset to figure out the unknowns generally to make sure their are no capex surprises that will blow you out. \n\nAnyways long winded and kind of all over the place but hope that helps.\n\nETA - where youre doing industrial your property level debt should have good news money built in to cover the re-tenant costs. Realistically given how frothy debt funds are right now just ask for 100% future funding the cost won\u2019t be that much different than if you ask for 65% future funding. Also if you have known roof replacement / other capex just ask for it from the lender, their money will always be cheaper than equity (just don\u2019t get over your skis and have a super tight actual DSx)", "replies": [{"id": "htxuf3h", "text": "Thanks for the thoughts. I agree 3mo opex is a drag, however I'm fighting the conflicting concern that as that number gets larger, it is harder to obtain from outside the portfolio in event of emergency. COVID opened my eyes to some of these systemic shocks possible that I wasn't previously considering. I'll chew on that further. \n\nCould you throw out a range of common portfolio level reserves as a % of revenue? I realize you took some time to explain why it is complex and variable - I just don't have anything to measure against. Or if you know of available benchmark data, that'd be interesting. Thanks again.", "replies": [{"id": "htyeig3", "text": "I wouldn\u2019t worry too much about an exogenous event like Covid - if something happens like that again imagine the lenders and government would figure it out. You\u2019re also in industrial so I can\u2019t picture a scenario in which everyone skips the rent for a few months but who knows, I never thought we\u2019d be where we are today. \n\nI wish I could give you a rule of thumb - our fund controller looks at the next 6 month CF projections from the asset management models to determine what we need for capex / projected major opex (ie taxes and insurance) / IM fees / other fund expenses which sets a buffer level above the base reserve. We\u2019re running a reserve at like 15% of annual NOI (which is probably like 10% of annual revenue back of envelope?) and manage to that as a base to cover anything major that pops up. If you can\u2019t call Capital and are stuck to running it from operating CF would honestly just figure out what you feel comfortable with as a base level of reserve and run it from there. Honestly it\u2019s a risk tolerance thing. I won\u2019t tell you that 3 months of OpEx sounds rich - it\u2019s your portfolio and like, don\u2019t take advice from randos on the internet and all that - but it feels pretty rich to me especially with a diversified portfolio. You should always have excess cash coming in from other assets every month to cover the one that goes weird (assuming that you aren\u2019t leveraged to the hilt or have a super thing DSx across the whole portfolio.). Anyways good luck!", "replies": [], "depth": 3}], "depth": 2}], "depth": 1}]