Interest Reserves

Interest Reserves: In real estate, an interest reserve is an account that is set aside from the loan proceeds to cover the interest payments on a loan during the construction or rehabilitation phase of a project.

The primary purpose of an interest reserve is to provide the borrower some financial flexibility during the construction period when the property is not generating any revenue. The borrower is not required to make interest payments out-of-pocket during this phase as they would be covered from the interest reserves.

Interest reserves are often used in construction loans or other types of commercial real estate loans where there is a period of time in which the property is not producing income. The size of the reserve is typically determined by the lender and may be based on the estimated length of the construction period and the projected interest rate.

Once the property is complete and begins to generate revenue, the borrower then starts to make regular interest and principal payments on the loan, and the interest reserve is no longer used.