Earnout Reserve Clause
(Loan Agreement)

Summary

This earnout reserve clause is for use in a loan agreement where a portion of the loan proceeds are held in a reserve account and disbursed once conditions measuring the real property's economic performance are satisfied. This clause includes practical guidance, drafting notes, and an optional clause. Earnout reserve funds are held in a lender-controlled account. The borrower and the property must satisfy a number of conditions before an agreed-upon deadline in order for the reserve funds to be disbursed to the borrower. If the disbursement conditions are not satisfied as and when required under the loan agreement, then the lender is not obligated to advance the reserve funds to the borrower and may instead apply the reserve funds to pay down the outstanding principal balance of the loan. The disbursement conditions in this clause consist primarily of financial covenants used to assess the property's economic performance. It may be necessary to add further conditions depending upon the context of the loan and the anticipated use of the reserve funds. For example, if reserve funds will be used to pay for construction costs, the lender should require, among other things, paid invoices for work performed at the property, lien waivers from all contractors and vendors, date down title endorsements, and a certificate of occupancy or completion. If reserve funds will be used for leasing costs or tenant improvements, the lender should require delivery of executed leases, estoppel certificates, subordination, non-disturbance, and attornment agreements, and broker's lien waivers. This clause may be used by either party and contains drafting notes and an optional clause that should be consulted when negotiating. The capitalized terms and section references used in this clause should be conformed to the relevant loan agreement. For more information on the use of reserve funds for construction, leasing, and tenant improvement costs, see Loan Agreement (Acquisition Financing), Construction Loan Agreement, and Mechanic's Lien Resource Kit.