Reserve Requirements
Funds that a lender requires a borrower to set aside in escrow accounts for specific future expenses. Common reserves include tax and insurance escrows (monthly deposits for annual obligations), replacement reserves (capital expenditure funding, typically $250-$500 per unit for multifamily), tenant improvement and leasing commission reserves, and interest reserves (pre-funded interest payments during construction or lease-up). Reserve requirements reduce distributable cash flow but protect the lender's collateral by ensuring property maintenance and expense coverage.
Related Terms
Construction Loan
Short-term financing used to fund the development of new commercial real estate projects. Construction loans are disbursed in draws as work is completed, with interest accruing only on funds advanced. They typically feature floating rates, 18-36 month terms, and require personal guarantees. Upon completion, the loan is paid off through permanent financing or sale.
Underwriting
The process by which a lender evaluates the risk and determines the terms of a proposed commercial real estate loan. Underwriting involves analyzing the property's income and expenses, market conditions, borrower financial strength, and collateral value. Lenders stress-test assumptions including vacancy, rental growth, and interest rate scenarios. The underwritten NOI, which may differ significantly from the borrower's pro forma, determines the maximum loan amount through LTV, DSCR, and debt yield constraints.
DSCR (Debt Service Coverage Ratio)
A measure of a property's ability to cover its debt obligations, calculated by dividing Net Operating Income (NOI) by annual debt service. Lenders typically require a minimum DSCR of 1.20x to 1.35x, meaning the property generates 20-35% more income than needed to pay the mortgage. Higher DSCRs indicate lower risk and may qualify for better loan terms.
Have Questions About CRE Financing?
Our experienced team can help you navigate the complexities of commercial real estate capital markets.
Contact Us