What are "Holdbacks" as they relate to commercial property loans or commercial real estate bridge loans?
A holdback is a clause in the commercial property loan that seeks to put aside a certain portion of the loan until an objective has been accomplished. Holdbacks account for any issue that has not been resolved before closing the contract and can be solved soon after. The holdback is held in the lender’s escrow account.
For example, a commercial construction loan holdback will state that the lender holds funds for specific parts of the project held in escrow till they are completed. As each part of the project is done, the funds will be released from the escrow account.
A holdback may also be used to cater for TI/LC, OpEx, and interest reserve. It is a
protection for both the lender and the buyer. It ensures that there is funding for the
borrower for capital outlays and protects the lender from incomplete/inadequate
work that doesn’t raise property value.