An interest reserve sets aside funds for debt carry; current-pay interest comes from operating cash or sponsor funds. Compare usable proceeds and runway.
By H Equities. Numerical examples and rate ranges are educational illustrations, not current financing quotes.
Reference: OCC Commercial Real Estate Lending handbook. Actual rights and obligations depend on the transaction documents.
Quick Comparison
Key attributes side by side.
| Attribute | Interest Reserve | Current-Pay Interest |
|---|---|---|
| Payment source | A designated reserve account | Current operations or sponsor contributions |
| Closing proceeds | May be reduced by the reserve holdback | No dedicated reserve unless separately required |
| Main risk | Reserve runs out before the exit | Current cash flow cannot support the payment |
In Depth
An interest reserve helps plan carry when a property is vacant, under construction or in lease-up. Determine whether the reserve is funded from the loan, sponsor cash or another source and how draws are approved.
A reserve changes the timing and source of payment. It does not eliminate interest expense, and a lender may require replenishment or other conditions as the balance falls.
In Depth
Current-pay interest requires cash at each payment date. In-place collections may support it, but operating deficits, tenant rollover and capital work can compete for the same cash.
Model seasonal collections and a delayed business plan. An annual NOI figure can conceal a cash shortfall in a particular month.
Key Differences
Payment source: A designated reserve account; compared with current operations or sponsor contributions.
Closing proceeds: May be reduced by the reserve holdback; compared with no dedicated reserve unless separately required.
Main risk: Reserve runs out before the exit; compared with current cash flow cannot support the payment.
Decision Guide
Practical scenarios to help you decide.
Going deeper
Lay out interest, taxes, insurance, operating deficits and capital work by month. Show when rent is expected to begin and how concessions affect collections. A single annual total cannot show the month when available cash first falls below the required payment.
Track gross loan commitment, funded principal, undrawn commitments and reserve cash independently. Determine whether interest accrues on the full commitment or only on funded amounts. Note whether reserve draws increase the debt balance or use cash already funded at closing.
Move lease-up or the sale date later and recalculate carry. Identify the party required to replenish the reserve, any minimum balance and the consequences of failing to fund. An uncommitted future refinance should not be treated as cash available to cover an immediate payment.
At a constant $10 million balance and 10% simple annual interest, twelve months of interest is $1 million. If that reserve is withheld from a $10 million gross loan, only $9 million remains before other deductions. Current-pay interest requires the same modeled $1 million over the year but from another cash source.
All figures in this example are illustrative. They are not a quote, investment return forecast or statement of H Equities terms.
Our Role
H Equities evaluates senior bridge loans, structured capital and equity opportunities. Share the property, existing capital, requested role and timing. Product availability, economics and approval depend on a transaction-specific review.
FAQ
Not by itself. It earmarks funds for interest and can reduce spendable proceeds. Compare actual funded balances, draw timing and accrual conventions to avoid double counting the reserve and the interest it pays.
Compare net proceeds, total costs, current cash obligations, control rights, downside exposure and the exit. Identify all required approvals and distinguish an indicative proposal from a binding funding commitment.
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