Avoided Cash Management

On a large, single tenant CMBS loan that was well performing, the single tenant approached the borrower to proactively extend his lease another 10 years after the remaining 2 years left on the lease.  In exchange for that, the tenant requested a month free rent every year.  Even with the month free rent, the annual projected debt service was above 1.7.  While finalizing the lease with the tenant, the borrower requested our assistance getting the lease approved.  As part of this process, we reviewed the cash management provisions to ensure there would not be any negative effect with this new lease.

What we discovered is that the financials for the quarter where the tenant got a free month of rent resulted in a DSCR of 1.23 which is below the cash management trigger of 1.25.  This means the loan would go into cash management with a cash sweep every year.  The cure to get out of cash management was TWO quarters of DSCR above 1.25; meaning the loan would be in cash management at least 2 quarters every year.

The borrower ultimately agreed upon other concessions to provide the tenant rather than a month of free rent every year to avoid the cash management trigger all together.