Developer Joe developed an office building and got a new CMBS loan in late 2016 to pay off his construction loan.  At the time of origination of the loan, the property was 80% occupied and 2 tenants were set to take occupancy a month after origination, so the property was effectively 100% occupied. All good so far.

The new CMBS documents required Joe to send his operating statement to his servicer every quarter.  He proudly sent the good results of his property the at the end of the first quarter 2017. Sounds good still, right?

His springing cash management feature was all of a sudden sprung, meaning the servicer took control of his cash and all net cash flow would now be applied to a reserve account. What? His property is 100% occupied. How could that be right?

The problem is that the CMBS loan documents directed the servicer to use the GREATER OF actual vacancy, vacancy at origination, or market vacancy in determining the debt service coverage ratio.  Since the reported vacancy at origination was 20%, the servicer used 20% and the DSCR triggered cash management. So, Joe effectively lost the ability to have any distributions for the next 9 years of his loan regardless of how well the property performed.

How does Joe get out of cash management? He can’t because the DSCR will always be less than the required threshold!

This is not a made-up story! It is, unfortunately, real!!! Be sure your loan documents don’t contain similar language when signing new CMBS loan documents. It’s called cash TRAP for a reason!

So Don’t Get Caught In A Cash Trap, because it’s a trap!