Reviewed by Craig Hoebing, Capital Market Funds, LLC - CBK-2007014 - Commercial Mortgage Banker · Updated October 2026
A bridge loan on a building that is still leasing up may set aside money to pay interest until the rent can carry the payment. The OCC Comptroller's Handbook booklet Commercial Real Estate Lending, version 2.0, transmitted with OCC Bulletin 2022-7 and opened as the PDF on October 28, 2026, defines an interest reserve as a reserve account established by the lender and used by the borrower to cover loan interest during construction and lease-up. It says the reserve is typically funded as a budget line item in the construction loan, and that it may also be funded by the borrower into a separate escrow as a condition of the loan. It says an appropriate reserve provides enough to pay interest through anticipated completion and lease-up, sale, or occupancy. The booklet is written for national banks and federal savings associations, and it discusses acquisition, development, and construction as well as income-producing property. Construction-to-permanent financing is not a product described on this page. The sentences below are the lease-up and the examiner warnings. They are not a draw schedule for a ground-up building. This note is general information. It is not tax advice, legal advice, or an appraisal. A CPA, an attorney, or the other professional named in the note decides how the rule applies to a given property.
The handbook says the presence of an interest reserve may not accurately reflect a borrower's ability to pay, and that inappropriately administered reserves can mask a poorly performing project, increase the bank's loss exposure, and have been a major contributor to banks' losses in acquisition, development, and construction lending. Examiners are told to assess interest reserves thoroughly. During lease-up, the booklet says any cash flow from the project is ordinarily applied to pay interest before the reserve is drawn, and that once cash flow covers the interest, further draws on the reserve should stop so income is not diverted. If the reserve runs out before lease-up is achieved, because of delay or a change in the market, the bank generally requires the borrower or guarantor to add cash or replenish the reserve. The booklet calls a decision to increase the reserve by extending more debt, which it describes as repacking, a red flag that may mask a nonperforming loan.
What this office will not quote from the same pages
The handbook discusses loan-to-cost and loan-to-value in the same interest-reserve section. Those ratios are not repeated here. It also says using a reserve to pay interest on a loan that should already be producing cash flow, such as a stabilized property, is generally not appropriate, because that cash flow should carry the debt. A stabilized building does not need an interest reserve to look current. A lease-up does, until the rent arrives, and only if the reserve was sized for the time the lease-up was actually expected to take.
Arizona bridge, for a property that is not yet a permanent file, is Arizona bridge. Lease-up as its own purpose is Arizona lease-up. A cap on a floating rate, which is a different contract from a reserve that pays the interest, is interest rate caps. Who provides bridge capital is bridge lender types. Bridge money is sourced from private investors. Capital Market Funds does not fund the reserve from its own balance sheet.
Questions to ask before the reserve is the only plan
How many months did the budget assume. What rent has to be in place before draws on the reserve stop. Who adds cash if leasing slips. Whether the lender can advance more debt to refill the reserve, and what the handbook's red flag means for that request. Get those answers in the term sheet. A reserve that exists only to keep a report current is the situation the examiners were told to look for.
Capital Market Funds is not a Fannie Mae DUS lender and is not the bank the OCC examines. The office is 7373 E Doubletree Ranch Rd #255, Scottsdale, AZ 85258. The phone is (480) 495-8072. Capital Market Funds, LLC - CBK-2007014 - Commercial Mortgage Banker and NMLS 1445066.
Sources
Questions
- Is an interest reserve on this page a construction-to-permanent loan?
- No. The OCC definition mentions construction and lease-up because that is the booklet's subject. This note is the lease-up and bridge use. A construction-to-permanent structure is not offered here.
- What does the OCC say happens when an interest reserve is used to hide a weak project?
- The handbook says inappropriately administered reserves can mask a poorly performing project and raise the bank's loss. It calls adding new debt to refill a depleted reserve a red flag. That is an examiner warning, not a strategy.
- Should a stabilized commercial property carry an interest reserve so the payment looks current?
- The handbook says that use is generally not appropriate. Cash flow on a stabilized property should carry the debt. A reserve is for the period before that cash flow exists.
- Do you fund the interest reserve yourselves?
- No. The lender or the borrower funds it, as the handbook describes. Bridge capital we arrange comes from private investors. It is not this firm's cash.