Expert: Terrence Cullen - 1/21/2009

Question
Hi,

I was wondering exactly what Interest Reserve is and how to build it up?  I have heard my supervisor talk about it on his construction loan he used to rehab an apartment complex.  Now, instead of paying the monthly loan payment from his rental income, he decided to pay it this month with his interest reserve.  Can you please explain this?

Thanks!
Michael

Answer
Usually in the apartment, lending business there is a replacement reserve fund of  100 to 500 per unit per month take care of one time repair or capital expenses. The money is kept in an escrow account and it is released by the lender upon receipt of an invoice.

 With construction and other loans the lender may request a reserve account for interest payments. Usually the account is paid in at the beginning of the loan and it is used after the completion to bridge the gap between completion and occupancy. Some lenders use it as a hedge in a turbulent economy or market or sponsor weakness. The times that the borrower can draw from it vary according to the loan docs.

Good Luck, TC