A recent post of ours outlined the insistence on cash management accounts for nearly all CMBS conduit loans. In summary, cash management accounts are set up for each transaction as a bank account in the name of both the borrower and the lender, but it’s primarily under the borrower’s control. Depending on how the loan documents read, the lender can seize control of the property cash flow in the event of declining performance or default.
After reading many CMBS prospectuses, cash management can be broken down into three types of “lockboxes” and cash management accounts. It is important to understand these pieces to negotiate the least-burdensome structure for borrowers. Below is a matrix of possible lockbox/cash management structures:
Lockbox
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Cash Management
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None
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None
|
|
Soft
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Springing
|
|
Hard
|
Up Front Cash Management
|
Lockbox/Cash Management Options: |
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None | Prevalent in pre-2008 CMBS transactions, the loan documents provide for no lockbox or cash management, and the lender has no control of borrower cash flow. This option is generally only available for low leverage deals. |
Soft/Springing | All funds from the property are deposited into a lender-controlled bank account. As long as the property debt-service coverage ratio is above a pre-determined level (typically 1.10-1.20x), cash deposits pass immediately to the borrower’s operating account. This is the most desirable lockbox structure other than none. |
Hard/Up Front CM | All funds received by the borrower or property manager must be deposited into a lender-controlled bank account within one day of receipt. Deposited funds fill “buckets” in the following order: (1) monthly principal and interest, (2) real estate tax and insurance escrows, (3) replacement reserve escrows, (4) late fees and charges, and (5) operating expenses. One day before the loan payment date, funds in bucket (5) are released to the borrower, but only in accordance with an expense budget approved by the lender. |
As you can see, a hard lockbox with up-front cash management is extremely burdensome to the borrower and must be negotiated up front to obtain relief. This structure is most often prevalent on hotels and often, at a minimum, the operating expense portion of the “bucket” filling can be negotiated so the borrower receives all cash flow after buckets (1)-(4) are filled.