A large commercial property owner got a new CMBS loan to pay off his construction loan. At the closing of the loan, the property was 70% physically occupied with 2 more tenants taking occupancy shortly after closing.  After these additional tenants took occupancy, the property had a DSCR greater than 1.7. The borrower had a springing lockbox, which took effect if/when the property DSCR dropped below 1.2. The borrower submitted his first quarterly financial reports and was shocked to hear from his servicer that their calculation of his DSCR was 1.15 and that he would now need to be cash managed.  The definition of Underwritten Net Cash Flow in this borrower’s loan agreement contained a vacancy adjustment based on the lower of: (a) market, (b) underwritten (70% occupied), or (c) actual. See the problem?

The worst part about this is that there would never be a way for this borrower to get out of cash management, because the underwritten occupancy was 70%, which meant the DSCR would be below 1.2 in almost all cases.

Be sure to read every word of your loan documents when it comes to springing cash management!