Lender RET Escrow - Closing Cost?

For those of you who actually handle the modeling at your firms, how do you guys treat the lender-required RET escrows in your models? Do you have it listed in your capitalization the same way you would legal, 3rd parties, origination fees, etc?

Because the lender always wants to “stay ahead” via the monthly escrows, do you show the escrow amount “coming back” to you at the end of the loan?

I realize this is a very specific question, but I traditionally have not carried this anywhere in my capitalizations (if there was a deal where we capitalized carry costs, I would make the argument it is in there). For cash flowing deals, I’ve always viewed the RET Escrow as a pre-pay of an operating expense that the tenant will ultimately pay for under a NNN lease deal. 
 

Basically, am I wrong to not carry RET Escrow as a line item in my closing costs? How do you guys treat this in your models? Seems that I rarely see this in people’s model when I get sent them, but I do wonder if this therefore understates equity needs.

Thanks!

 
Most Helpful

Yes, lender required escrows are budgeted in our capital stack.  Yes, we assume they come back to us when we sell the property. 

Never thought of it as a prepayment of opex since we still have to reserve for it each month (I think?).  Worst comes to worst I'd rather have my equity be higher than what I truly need vice versa.  I think of it as "contingency to my contingency".  Furthermore, cutting it out of models would have a minor impact on returns so why not just keep it in?

 

Thanks. Helpful comment and discussion. As a follow up, how do you treat insurance? I seem to see 99% of people model this in their cash flows when they produce an Argus/model, but we have been pre-paying our insurance at closing recently. I can’t think of a time where someone has sent me a model with Y1 insurance capitalized and no insurance expense shown in their Y1 cash flow. 

 

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