Wealth Opportunities in Commercial Real Estate: Management, Financing, and Marketing of Investment Properties

Taxes and Insurance Impounds

As an example, it is standard practice for lenders to create an impound account for real estate taxes and insurance. To illustrate, if annual real estate taxes for the project equal 1.22 percent of its value, then using the above illustration, 1.22 percent of $10,200,000 equals $124,440. Therefore, on a monthly basis, in addition to the scheduled principle and interest payments, the lender would require the borrower to fund to the lender $10,370 per month to build-up a sufficient amount of cash so that the real estate tax bill can be paid in full when due. In California, real estate taxes are paid on a semiannual basis. The first installment is due November 1 and is considered delinquent December 10 of the year in which the taxes are incurred, and the second installment is due February 1 of the next calendar year and is considered delinquent the following April 10.

A similar analysis would be undertaken for insurance premiums. Real estate taxes and insurance are operating expenses that should be accounted for in the expense line items above net operating income—that is, within the $450,000 budgeted operating expenses shown in the examples. Consequently, since these expenses are already accounted for in the operating expenses, you would not want to double-count them. Therefore the cash flow should not be further reduced by the amounts deposited into the tax and insurance impound accounts. However, as mentioned next, there are certain reserves that may ...