I'm trying to understand a real estate calculation. I need to find the IRR for an investment where I have reserves to cover tenant improvements that are put into the deal when it's purchased. The reserves will be used in year 2. I am reserving $250,000 that will be used.

In year 2 do I add the reserves that are being spent into the IRR calculations? Is it a positive cash flow for year 2?



I would include the reserves as costs in Year 1. While the money isn't really being spent in Year 1, the funds are being "tied-up" by the investment and aren't available for use elsewhere.

If you are opposed to doing this, an alternative would be to include an "opportunity" cost for year 1, then the remainder of the cost in year 2.

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