A holdback is a clause in a 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 but can be solved soon after. The holdback is held in the lender’s escrow account.

For example, a commercial construction loan holdback might state that the lender holds funds for specific parts of the project held in escrow until they are completed. As each part of the project is done, the funds are released from the escrow account.

A holdback may also be used to cater for TI/LC, OpEx, and interest reserve as 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.

The greatest benefit of a holdback in a commercial property loan is that it provides protection for both the lender and the borrower. 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. Additionally, it can be used to cater for TI/LC, OpEx, and interest reserve.

Sources:

• www.commercialrealestate.loans/commercial-real-estate-glossary/commercial-property-loan-holdback
• www.multifamily.loans/apartment-finance-blog/the-benefits-and-risks-of-interest-only-loans-in-commercial-real-estate

The risks associated with a holdback in a commercial property loan include the possibility of the borrower's monthly payments increasing significantly at the end of the interest-only period when they are required to start paying both principal and interest. Additionally, if the property's value decreases, the borrower could find themselves underwater on their loan - owing more than the property is worth.

Before taking out a loan with a holdback clause, it is important to speak with a qualified commercial real estate broker to discuss all of the risks and benefits associated with this type of financing.

A holdback is a clause in a 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 but can be solved soon after. The holdback is held in the lender’s escrow account.

For example, a commercial construction loan holdback might state that the lender holds funds for specific parts of the project held in escrow until they are completed. As each part of the project is done, the funds are released from the escrow account.

A holdback may also be used to cater for TI/LC, OpEx, and interest reserve as 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.

A lockout period is a specified length of time during which a borrower is not allowed to refinance or prepay their mortgage. Typically, during this time, the borrower must make all payments on time and cannot default on the loan. If the borrower does default, the lender can foreclose on the property.

Commercial mortgage loans typically have a lockout period of five years or more. Lockouts protect the lender from having to worry about the borrower refinancing the loan and taking advantage of lower interest rates. It also allows the lender to recoup some of their losses if the property value decreases.

In summary, a holdback affects the terms of a commercial property loan by protecting the lender from incomplete/inadequate work that doesn’t raise property value, and by providing a lockout period during which the borrower is not allowed to refinance or prepay their mortgage.

The most common types of holdbacks in commercial property loans are for specific parts of the project held in escrow until they are completed, tenant improvements/leasing commission (TI/LC), operational expenditures (OpEx), and interest reserve.

For example, a commercial construction loan holdback might state that the lender holds funds for specific parts of the project held in escrow until they are completed. As each part of the project is done, the funds are released from the escrow account.

A holdback may also be used to cater for TI/LC, OpEx, and interest reserve as 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.

Source: www.commercialrealestate.loans/commercial-real-estate-glossary/commercial-property-loan-holdback