Commercial Loan Settlement Statements, Escrow Accounting, and Proration Mechanics
Unlike residential HUD-1 or Closing Disclosures, commercial real estate settlement statements are customized balance sheets managed by title escrow officers. They govern the precise sources and uses of capital, closing day prorations, lender holdback escrows, third-party invoices, and wire disbursements required to complete commercial financing.
* Proration methodologies, closing conventions, and escrow reserves vary by jurisdiction and purchase agreement terms.
Structure of a Commercial Sources and Uses Statement
The foundation of every commercial loan closing is the Sources and Uses schedule. It accounts for every dollar entering and exiting the title escrow ledger:
Capital Sources
Gross Senior Mortgage Loan Proceeds funded by the lender wire.
Subordinate Debt or Mezzanine Financing proceeds (if applicable).
Borrower Cash Equity Contribution wired to escrow prior to funding.
Seller Financing Credit or purchase price credits.
Capital Uses
Purchase price payoff to seller or payoff of maturing senior mortgages.
Third-party diligence fees (appraisal, Phase I ESA, ALTA survey, PCA report).
Title and settlement costs (title insurance premiums, recording fees, escrow fees).
Upfront lender reserves (debt service reserves, tax/insurance impounds, replacement escrows).
Commercial Closing Proration Mechanics
In acquisition financing, closing settlement statements balance the financial handover of ongoing operations on the exact date of closing:
Tenant Rent and Arrears Proration
Rents collected by the seller for the month of closing are prorated based on calendar days, with the seller retaining funds through the day prior to closing. Delinquent rents are generally not prorated at closing; post-closing collections apply first to current rent before paying historical seller arrears.
Tenant Security Deposits and Prepaid Rent
All tenant security deposits held on the rent roll must be credited 100% to the buyer on the settlement statement. The lender underwriter verifies that the total credit matches the certified rent roll to ensure the new borrower holds required tenant escrow liabilities.
Common Area Maintenance (CAM) True-Ups
Triple-net operating expense reimbursements are reconciled. If the seller under-collected CAM relative to actual expenses incurred year-to-date, the seller receives a credit; if the seller over-collected, the buyer receives a credit.
Frequently Answered Questions
Common Questions About Commercial Loan Settlement Statements, Escrow Accounting, and Proration Mechanics
Direct, transparent answers regarding underwriting standards, documentation, and process.
Closing Mechanics
How do rent prorations work on a commercial closing statement?
Direct Answer
Rent collected by the seller for the closing month is divided by the number of days in the month, with the buyer receiving a credit for the number of days from the closing date through the end of the month.
Tenant security deposits and prepaid rents are also credited 100% to the buyer on the settlement statement to ensure ongoing lease compliance.
Escrow Reserves
What initial escrows do commercial lenders require on a settlement statement?
Direct Answer
Lenders typically require upfront escrows for 2 to 6 months of real estate taxes, 12 months of property insurance premiums, 125% of immediate repair holdbacks, and any required interest reserves.
These reserves are deducted directly from gross loan proceeds on the settlement statement to fund lender-controlled escrow accounts.
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