Escrow
Funds held by a third party—often the lender—to pay future obligations such as property taxes and insurance, or held as additional collateral.
Definition
An escrow account holds money set aside for specific obligations. In commercial mortgage lending, lenders commonly require monthly escrow deposits for property taxes and insurance so those bills are paid when due; borrowers call this escrowing taxes and insurance. Lenders may also escrow or reserve funds for tenant improvements, leasing commissions, deferred maintenance, or replacement reserves. Separately, closing escrow is the third-party account used to hold earnest money and closing funds until conditions are met. For leveraged small bay owners, tax and insurance escrows raise the monthly payment above principal and interest alone even though those amounts are not debt service for DSCR purposes.
Example
Annual property taxes are $24,000 and insurance is $12,000. The lender escrows $3,000/month ($36,000/year) with the mortgage payment so both bills can be paid from the escrow account when due.
See Also
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