Which component is commonly used to mitigate risk by setting aside funds to cover unexpected costs and vacancies in CRE assets?

• A. Insurance
• B. Hedging
• C. Reserve funds
• D. Tax planning

Answer: (C)

A reserve fund provides a liquidity cushion to handle uncertainty in cash flow. In CRE, vacancies and unexpected costs can abruptly reduce income or increase expenses. By setting aside funds specifically for these events, you create a safety net that keeps operations steady, protects debt service, and helps maintain stable NOI. This proactive funding is a standard risk-management practice because it directly addresses potential shortfalls without relying on piecing together funds after problems arise.

Insurance covers defined risks like property damage or liability, not the ongoing need to fill gaps from vacancies. Hedging deals with price or interest-rate risk, not the day-to-day cash-flow crunches caused by vacancies. Tax planning reduces liability, not reserves for unexpected costs.