Interest Reserve
An interest reserve is a portion of a loan’s proceeds that the lender sets aside at closing to cover the borrower’s interest payments during a construction or transition period, before the asset produces income. It draws down as interest accrues, and a reserve that runs dry before the project stabilizes is a common source of trouble in construction and bridge lending.
How it works
When a loan funds an asset that does not yet generate cash, the lender funds an interest reserve and draws against it each period to pay interest. The reserve declines as interest accrues and, on a floating-rate loan, as the rate moves.
Where it is used
Interest reserves are common in construction loans, bridge and transitional real estate loans, and value-add deals, sized to cover projected interest through the period before the asset can service its own debt.
Why lenders monitor reserve burn
The risk is the reserve depleting before the asset stabilizes. Delays and rate increases burn it faster than projected. Zolvo monitors reserve burn, draws, maturities, and covenants in real time through portfolio monitoring, see bridge lending.