Is A Sinking Fund the Same as a Reserve Fund?
Is A Sinking Fund the Same as a Reserve Fund?
Let’s say you have the sinking and reserve funds. You’ll buy a coffee machine from the sinking funds and pay emergency bills from reserve funds.
Let’s break down both terms.
Sinking Fund
A sinking fund is a specific pool of money set aside for planned expenses, such as building a parking lot for your office. The fund ensures that enough money is set aside for major repairs or improvements that may only be needed once or twice during a building’s lifetime.
This includes large-scale expenses such as roof replacements, boilers, or elevator repairs. Contributions to a sinking fund are typically collected over time from tenants through regular payments or as specified in lease agreements.
By gradually accumulating funds, landlords can cover these significant costs without borrowing or diverting funds from other operational expenses.
Reserve Funds
On the other hand, a reserve fund is meant to cover recurring maintenance and management costs that arise periodically rather than annually.
For example, external repainting or facade maintenance might only be required every four or five years. To prevent tenants from facing a large, unexpected bill, the estimated cost is collected in smaller amounts over several years.
The primary role of a reserve fund is to maintain financial stability and ensure ongoing property upkeep. It also serves as a safety net for unexpected expenses that might arise.
However, reserve funds should not be used to cover day-to-day service charge expenses or compensate for underbudgeting. If routine expenses exceed projections, landlords typically have the right to issue a balancing charge to tenants rather than depleting reserve funds set aside for larger projects.
To comply with legal requirements, all money collected through service charges must be held in trust for the benefit of leaseholders throughout the property’s lifespan.
