I'm working through a model and have to make an assumption for an appropriate amount of debt service reserves for a fully leased class A office building in a major market. Does anyone have insight on what a good assumption would be?
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A few questions to first consider:
Given those two variables, lenders would expect a borrower to begin to sweep cash a certain number of months in advance to have appropriate reserves to tenant any space that was recently vacated.
Other than that, if you're asking from a cash management perspective, "what is the appropriate amount of debt service reserves for a fully-leased building?" I would answer 1-2 months maximum.
Just calculate your interest reserve as a function of not having the operating cash flow to pay off interest each month entirely. We typically will offset using NOI before stabilization to reduce the amount we have to capitalize. All lenders view this differently—I.e. how to you guarantee you hit the NOI projections you think you will, and finish the capitalize portion of the project within budget vs leasing up slower, running out of money and having a capital call down the road...
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