Many CMBS conduit loans have a clause whereby in the event a “Significant Tenant,” often defined as a tenant that occupies more than 25% of the space at the property, vacates the property or ceases to operate, all the cash flow after expenses and debt service is held in an escrow account and the owner receives no cash flow from the property. The cash flow escrow is available to pay for the reconfiguration of the space and pay leasing commissions as needed to secure a replacement tenant. Once a replacement tenant is operating in the space, the escrow stops and any balance in the escrow account is returned to the owner.
This situation can get tricky when tenants cease to operate well before the expiration of the lease, but they continue to pay rent. This is often referred to as a tenant space that “goes dark.” When a tenant goes dark well in advance of lease expiration but continues to pay rent, the owner may not have the right or ability to secure a replacement tenant, and therefore, all the cash flow after expenses and debt service could be escrowed for an extended period of time, affording the owner no cash flow from the property. The escrow could build up to a level well in excess of that required to secure a replacement tenant.
The solution is to always negotiate a cap on the escrow amount for situations in which a tenant goes dark or vacates. Once the cap is reached, the escrow stops and subsequent cash flow is directed back to the owner. Caps are typically based on the costs to refit the space in the local market and local leasing commission rates.