Recording a Multifamily Loan Payment: Principal, Interest, Tax and Insurance Escrow and Reserve Deposits

What is in a multifamily loan payment?

4 parts in one draft: interest, principal, the tax and insurance escrow deposit, and the replacement reserve deposit. Birch Way's draft is $41,050: $24,300, $9,200, $6,500 and $1,050.

The bank shows one withdrawal. The lender statement shows what was in it. If the whole $41,050 is booked as one line called loan, the P&L shows a cost that is too high and the loan balance in the books never moves.

The Birch Way draft, 4 parts, invented data

The loan is the last monthly record in apartment building bookkeeping.

How do you record the interest and principal on a multifamily loan?

Record interest as a cost below net operating income. Record principal as a reduction of the loan balance. Birch Way: $24,300 of interest, and the loan balance falls by $9,200.

Net operating income is what is left of the rent after the running costs. Interest sits below it, so you can read how the building did before the loan. Principal never touches the P&L. It moves from the bank to the loan balance, and the balance owed goes down.

The loan payment at Birch Way, invented data

The split between interest and principal changes a little every month, so take both figures from the statement, never from last month. Where interest and principal sit on the report is shown in an apartment building profit and loss.

How do you record the tax and insurance escrow on a multifamily loan?

Record the escrow deposit as an asset, money the lender holds for the building. It is not an expense. The expense is the property tax and insurance themselves, recorded month by month.

At Birch Way the escrow deposit is $6,500 a month. That is the same as the month's property tax of $4,600 and insurance of $1,900 in the running costs. The deposit and the cost are 2 different records. The deposit builds an asset. The cost is recorded month by month in 5300 Property tax and 5310 Insurance.

The escrow deposit at Birch Way, invented data

Recording the tax and insurance cost month by month is in accruing property tax and insurance monthly.

How do you record the replacement reserve deposit on a multifamily loan?

Record it as an asset too: a replacement reserve balance held by the lender. It becomes a cost or a capital item only when the money is spent on the building.

Birch Way's reserve deposit is $1,050 a month, recorded in 1210 Replacement reserve, held by the lender. The lender-held balance was $25,200 at the start of the month and $26,250 after the deposit. This month the lender also paid Birch Way back $8,400 for a roof section done by Example Roofing, so the balance at month end is $17,850. Deposits, draws and the balance are in replacement reserves on a multifamily loan.

What happens in an apartment building's books when the lender pays the tax or insurance bill?

The escrow asset goes down by the amount paid, and the tax or insurance owed is cleared. Nothing leaves the building's bank account, and no new expense is recorded.

Birch Way records $4,600 of property tax every month, so by the time the half-year bill arrives, 6 months of it, $27,600, is already on the P&L and sitting as tax owed. The lender pays the bill out of escrow. The books clear the amount owed against the escrow asset.

The lender pays the tax bill, Birch Way, invented data

The operating account does not move, and 5300 Property tax does not move either. The cost was recorded a month at a time. The insurance bill works the same way when the lender pays it.

What is the yearly escrow analysis on a multifamily loan?

Once a year the lender compares the escrow balance with the bills ahead and resets the deposit. A shortage raises the deposit or is paid once. Either way it adds to the escrow asset.

Suppose the Birch Way analysis finds the escrow $1,200 short of next year's bills. The lender spreads it over 12 months. The escrow deposit goes from $6,500 to $6,600, which is $100 a month more. The extra $100 goes to 1200 Tax and insurance escrow, held by the lender like the rest of the deposit. It is not a cost.

If the lender asks for the shortage in one payment instead, the $1,200 goes to the same escrow asset in the month it is paid. A surplus works the other way: the lender sends it back or lowers the deposit, and the escrow asset goes down. Nothing in the analysis changes the property tax or insurance cost on the P&L.

How do you check an apartment building's books against the lender statement?

Compare 3 balances with the lender statement after every payment: the loan balance, the escrow balance and the reserve balance. Each must equal the books to the dollar.

1. 1Open the lender statement for the month. Find the 3 balances it reports after the payment: the loan balance, the escrow balance and the reserve balance.
2. 2Read the same 3 balances from the books: 2500 Loan balance, 1200 Tax and insurance escrow, held by the lender and 1210 Replacement reserve, held by the lender.
3. 3Compare each pair. A difference means a part of the draft went to the wrong account, or a bill the lender paid or a draw it sent has not been recorded yet. Fix it before the month closes.

The 3-balance tie-out, Birch Way, invented data

All 3 agree, so the month is tied out. When they do not, the usual cause is a part of the draft booked to the wrong account, or a lender payment recorded in a different month from the one the lender used.

How do you record the refinance of an apartment building's loan?

Clear the old loan, its escrow and its reserve from the books. Record the new loan at its full amount, and the new escrow and reserve deposits as assets. Cash to the owner is not income.

A refinance pays off one loan and opens another. The closing statement lists every piece. Here is where each line goes. Cash from the new loan is not income, so none of this touches the P&L except the interest and the loan costs.

How loan costs are treated for tax is a question for your CPA. A purchase closing statement is read the same way, in setting up the books when you buy an apartment building.

What does the lender measure from an apartment building's loan payment?

2 things: coverage, which is net operating income divided by the loan payment, and the reports the loan documents ask for after closing.

Coverage is the lender's word for how many times the building can pay its loan. At Birch Way, net operating income of $41,150 divided by the $33,500 loan payment is 1.23. Whether the escrow and reserve deposits count in that payment is set by your loan documents. Coverage is worked out in debt service coverage ratio for an apartment building.

The second thing is reporting. Most loan documents name the reports the lender wants after closing, and the 3 balances on this page are among the figures they check. What to send, and when, is in the lender reporting package.