Overview

Lender-imposed escrows are contractual accounts the lender controls to make sure property-related expenses are paid on time. Unlike residential mortgage escrows governed by RESPA, commercial escrows are negotiated in the loan documents and can cover a wider set of items—taxes, hazard and liability insurance, major repairs, tenant-improvement reserves, environmental remediation, or capital expenditure funds.

Why lenders require escrows

  • Protect collateral: Ensures taxes and insurance are paid so liens or uninsured loss don’t erode the lender’s security interest.
  • Reduce default risk: Regular funding reduces the chance a borrower misses a large, lumpy payment.
  • Covenant compliance: Lenders include escrows to satisfy financial covenants or debt-service tests in the loan agreement.

Typical uses

  • Property taxes and assessments
  • Hazard, liability, and flood insurance premiums
  • Replacement reserves or capital expenditure (CapEx) funds
  • Common-area maintenance (CAM) or tenant recovery accounts
  • Environmental remediation or escrow holdbacks after a sale

How escrow funding usually works (simple example)

  1. Lender estimates annual obligations: e.g., property tax $12,000 and insurance $6,000 (total $18,000).
  2. Monthly escrow deposit = $18,000 ÷ 12 = $1,500 added to the monthly loan payment.
  3. Lender pays bills as they come due; the loan servicer provides periodic escrow analyses and statements.

Real-world notes from practice

In my practice advising commercial borrowers, lenders most commonly insist on escrows for newer loans on older or multi-tenant properties, assets with volatile taxes or insurance, or deals with tight debt-service coverage ratios. Escrows stabilize cash flow for those parties but can strain working capital if not forecasted.

Negotiation and borrower strategies

  • Ask for a detailed escrow schedule in term sheets and the loan agreement.
  • Negotiate the scope: limit escrow to taxes and insurance rather than broad reserves when possible.
  • Seek an initial deposit cap or tiered funding to avoid large up-front cash calls.
  • Build escrow deposits into pro forma budgets and covenant stress tests.

Common mistakes and misconceptions

  • Thinking escrows are only for the lender’s benefit: They also protect borrowers by avoiding large lump-sum outlays that can disrupt operations.
  • Underestimating cash-flow impact: Escrow deposits increase monthly obligations and may affect DSCR and covenant compliance.
  • Assuming residential rules apply: RESPA protections generally don’t cover commercial loans—commercial escrow terms are contractually set. See the Consumer Financial Protection Bureau for RESPA scope (Consumer Financial Protection Bureau).

FAQs (brief)

  • Can a borrower access escrow funds? No—funds are held for designated bills and are disbursed by the lender or servicer when due.
  • What if the escrow balance is short? Expect a shortfall clause: you’ll be required to cure the shortage via a one-time payment or increased monthly deposits. See our guide on Escrow Shortfall Clauses.
  • Are escrows refundable at payoff? Typically any surplus is returned or credited at loan payoff per the loan agreement.

Related reading

Sources and disclaimer

Authoritative sources: Consumer Financial Protection Bureau (for RESPA scope and mortgage escrow rules) and IRS (general tax guidance). This article is educational and not legal or tax advice. For decisions tied to specific transactions, consult your lender, attorney or tax advisor.