TI, leasing commissions, and replacement reserves

A commercial loan on a building with expiring leases is partly a loan against future leasing costs. Tenant improvements are the landlord's cost to build out a new tenant's space. Leasing commissions are what the landlord pays a broker to sign that tenant. Free rent is a third cost: months with no cash even though the lease has 'started.' Lenders who ignore those costs are lending against income that has not yet been reduced by the expense of keeping it. Capital Market Funds arranges the loan. The reserve amount is the lender's number, built from the rollover schedule you provide. This note does not publish a cost per square foot.

Upfront reserves are funded at closing, in cash or by a holdback from proceeds, sized to near-term expirations. Ongoing reserves are deposited each month so the bucket refills as later expirations approach. Some loans do both: a lump sum for the next two or three years of known expirations, and a monthly deposit for the rest of the term. The trigger to release money is usually a signed lease and invoices, not a verbal leasing update. A reserve is still the borrower's money, pledged. It is not extra proceeds and it is not the lender investing in the building.

The rollover schedule is the input

List every suite, the expiration, the square feet, whether an option exists, and whether the tenant is likely to renew on your facts, not on a hope. Mark vacant space as vacant. A lender will often assume vacant space and near-term expirations get re-leased at a cost, and will ask you for the cost assumption rather than inventing one in a blog post. Related-party tenants and month-to-month shops get less credit for renewal. Percentage-rent shops need a sales history before anyone treats the overage as available to pay a future commission. The rent-roll companion is rent rolls and T-12s.

Replacement reserves sit beside TI reserves and should not be blended with them. A roof, a parking lot, and an HVAC plant wear out whether or not a tenant turns. Lenders hold a monthly amount for that capital plan, sometimes released against inspections. Mixing the roof reserve into the leasing reserve makes both buckets lie. Grocery-anchored centers add a further wrinkle: shop rollover can spike if an anchor event triggers co-tenancy, which is co-tenancy, not a reason to publish a reserve formula.

What we will not print

No allowance per foot, no commission percentage held out as a rule, and no statement that every life company or conduit uses the same holdback. Life company and Arizona CMBS loans often include these reserves. The documents of the actual lender control. A bridge loan may escrow interest instead, which is a different reserve, described on the bridge pages rather than here.

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. A reserve worksheet sent here is a discussion draft. It does not bind the lender who will hold the cash.