Reserve Provisions in Real Estate Loans: Funding and Disbursement Terms for Taxes, Insurance, Repairs, and More

Reserve provisions are of particular interest to the borrower because of their impact on loan proceeds disbursed at closing and the borrower's autonomy in managing its cash flow throughout the loan term. Reserves for taxes and insurance, capital expenditures/replacement, tenant improvements, and lease commissions, FF&E (required for hotels), or excess cash are usually cast as monthly deposits. Immediate repair, environmental, and earnout reserves are usually one-time deposits that are required at closing in response to issues uncovered by the lender in its property inspection or environmental report.

Borrowers want to minimize all of these reserves and often contest the way in which they are calculated, the timing of deposits, who shall be entitled to interest on the reserve accounts, and the conditions under which funds are released. Counsel should understand how these reserves are underwritten by lenders and the options that may be available to reduce the amounts required to be deposited into reserves (or the amount at which they should be capped) and streamline the conditions for release of funds to the borrower.

Listen as our expert panel discusses the types of reserves and how those reserves might be funded and disbursed under the loan documents. The panel will also discuss the different types of earnout reserves and seasonality reserves (for hotels), and how letters of credit might be used in lieu of cash.