What an interest reserve is
Many construction and land loans include an interest reserve — a sub-line of the loan set aside specifically to make monthly interest payments during the build, so you aren't paying out of pocket while the project generates no income.
How it's sized
Lenders typically size the reserve based on the projected draw schedule and loan term, estimating average outstanding balance over the construction period, then adding a cushion for delays.
What it doesn't cover
An interest reserve pays loan interest, not everything that costs money during construction.
- Property taxes and insurance during the build
- Loan extension fees if the reserve runs out before completion
- Operating deficits during lease-up, if the project is income-producing
Plan for the tail
The riskiest gap is often the period after construction completes but before stabilization or sale — build a dedicated carry reserve for this window rather than assuming immediate cash flow.