What the reserve covers
On an interest-only loan the monthly interest is fixed by the balance and rate. Whatever the property cannot pay from operations has to come from a reserve or from the sponsor. A $10,000,000 loan at an illustrative 10% for 18 months accrues $1,500,000 of interest; if the property contributes $40,000 a month ($720,000 over the term), the reserve has to cover the remaining $780,000.
Lenders typically fund the reserve from loan proceeds at closing and release it monthly, which means the reserve is itself borrowed money that accrues interest and counts toward LTC.
Sizing it realistically
The NOI figure should be the average over the term, not the stabilized number. On a lease-up or renovation, income starts low and grows, so a month-by-month schedule gives a more accurate reserve than a single average, and the calculator's average input should be set conservatively.
Floating-rate loans add rate risk to the reserve: a higher index raises monthly interest with no change in NOI. Many lenders size the reserve at a stressed rate or require a rate cap so the reserve cannot be exhausted by rate movement alone.
When the reserve runs out
If leasing or construction runs long, the reserve is exhausted before the exit and the sponsor has to fund carry from its own liquidity, negotiate an extension with a replenished reserve, or bring in rescue capital. Building a contingency into the reserve at closing is cheaper than any of those.
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