# Construction interest reserve

Canonical: https://chicagocommercialfunding.com/tools/construction-interest-reserve/

Model equal monthly draws, equity-first funding and separately funded interest.

## Model inputs and hypothetical defaults

- Project costs excluding interest and fees ($): 3000000
- Construction period (months): 18
- Annual interest rate (%): 10
- Sponsor project equity funded first ($): 900000
- Separately funded fees ($): 50000

## How the model works

Monthly cost is budget ÷ months. Equity funds project costs first. Monthly interest uses average beginning and ending debt balances.

## Worked illustration

For $1.2 million of costs over 12 months with no equity and 12% interest, average-balance interest totals $72,000. Equity-first funding lowers the reserve.

## Read the draw convention before using the reserve

This screening model spreads project spending equally over the entered months, applies sponsor project equity first, and charges interest on the average beginning and ending monthly debt balance. Interest and fees are funded separately; they do not increase principal and earn further interest inside the model. The result is appropriate to that stated convention, rather than every construction facility.

Real projects rarely spend at a constant pace. Acquisition costs can occur on day one, long-lead deposits early, and retainage late. Lenders may require pro rata equity, fund reimbursements after inspection, impose limits or exclude costs. An actual monthly cost and funding schedule should replace the linear screen before committing capital.

## Separate reserve adequacy from total project funding

Project equity entered here funds costs excluding interest and fees. It cannot exceed that project budget. The reported additional interest and fees need an identified source as well. Calling a reserve part of the loan does not establish that the commitment is large enough to fund it, or that proceeds are available before an invoice is due. Reconcile the complete facility and sponsor cash in sources and uses.

Extend the construction period and raise the rate to test delay. A longer period can increase interest even without a cost overrun. Then add a spending overrun to the project budget and examine whether more equity or commitment is available. Include lease-up carry, operating deficits and permanent-loan conversion conditions outside this construction-only calculation. A project may finish physically while still lacking the income or approvals needed to repay or convert the loan.

## Limitations

Linear spending and no interest-on-interest. Construction spending is rarely linear; use an actual monthly draw schedule before committing capital.

The canonical HTML page provides the interactive calculator. Inputs stay in the browser; hypothetical defaults are not current financing terms. Distinguish operating income, debt service, capital expenditures and investor distributions.

## Research and related reading

- [Source material](https://www.occ.treas.gov/publications-and-resources/publications/comptrollers-handbook/files/commercial-real-estate-lending/index-commercial-real-estate-lending.html)
- [Follow construction debt through conversion](https://chicagocommercialfunding.com/guides/commercial-construction-debt-from-closing-to-conversion/)
- [Understand funded interest and holdbacks](https://chicagocommercialfunding.com/guides/interest-reserves-lender-holdbacks-and-funded-loan-balances/)