An Interest Carry Reserve Requirement is essentially a pre-funded pool of money taken from your loan proceeds to cover monthly interest payments during the construction or development phase. This is common in real estate and construction loans when the property isn’t generating income yet. Lenders require this to reduce the risk of missed interest payments while the project is still in progress.

For example, if you have a $1,000,000 construction loan for a warehouse expected to take 12 months with zero income during construction, the lender may require setting aside about $60,000 in an interest carry reserve. This reserve is part of your loan amount and is used to automatically pay your monthly interest until the project completes and starts generating revenue. Afterward, you take over payments from your operational income.

This requirement mitigates the borrower’s cash flow pressure early on and guarantees interest payments for the lender, balancing risks for both parties. It typically matches the construction or lease-up period and can range from several months to a couple of years depending on project size and complexity.

While it’s common in real estate development, construction-to-permanent loans, bridge loans, and value-add renovations, it’s important to distinguish the interest carry reserve from contingency funds, which cover unexpected project costs rather than loan interest.

Notably, the interest reserve is not an extra fee; it is capitalized into the loan amount. You do pay interest on the full loan amount, including the reserve, but do not need to provide separate cash upfront for those interest payments. Lenders rarely allow using these funds for anything other than interest, and any leftover reserve may be applied to the loan principal or returned after project completion.

To learn more about related financing terms, see our Construction Loan and Contingency Fund glossary pages.

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