Basics Of Reserves

Reserves are amounts deposited with a lender as security for an obligation expected to occur at a future date, and can serve various functions. The following is an overview of typical reserves in a real estate finance transaction.

Required Repairs

Lenders typically commission property condition reports in connection with a financing which detail immediate repairs anticipated to be required in the short-term for a property. The time frame ranges from work needed immediately to work which should be accomplished over the next 6-12 months. Work beyond that time frame would typically be characterized as a capital expenditure project, which would be addressed in another potential reserve. The anticipated cost of required repairs would be held back from the loan proceeds at closing and funded into a reserve account for such work. Such funds are then released either as progress payments to fund such work or in a lump sum as such work is completed.