10.30.15: Don’t Let This Trigger Hurt You

Most CMBS conduit loans have a protection for lenders in the event property cash flow decreases significantly during the loan term. The protection is in the form of a cash management account that is in the name of the lender and the borrower. When the property is performing in accordance with the underwritten debt-service coverage, property cash flow (rents) passes through the cash management account and is routed directly to the borrower’s operating account. Under normal circumstances, the borrower hardly knows that the cash management account exists because it is not used.

If the property cash flow falls below a certain debt-service coverage ratio (DSCR), typically in the 1.20x area for two consecutive quarters (using a trailing 12-month operating period to smooth out any seasonality), the loan servicer “triggers” cash management, which is miserable for borrowers. Cash flow that previously passed through the cash management account and routed directly to the borrower’s operating account no longer does so. Instead, the servicer keeps the cash and puts it in escrow in one of three “buckets.” The first is a principal and interest bucket in the amount of the next mortgage payment. The second is a tax and insurance bucket for those escrows. And the third is a reserve bucket for the monthly replacement reserve. Essentially, the servicer is now making the mortgage payment for the borrower. The servicer no longer relies on the borrower to make it.

“Borrowers can create a cash management trigger by mistake if they are not careful in submitting accurate property operating statements,” commented Michael D. Sneden, Executive Vice President at ValueXpress. “Borrowers must make sure that the operating statements submitted to the loan servicer do not contain non-property-related expenses and capital expenses. In addition, one-time expenses should be footnoted so the servicer can make proper adjustments to the cash flow before applying the debt-service coverage test.

“ValueXpress offers all of our clients who have closed CMBS conduit loans with us free, ongoing review of property cash flows and an internal DSCR calculation to ensure that they don’t accidently trigger cash management,” noted Jim Brett, head of underwriting at ValueXpress. “It’s just one of many ongoing services we provide our clients post-closing, at no charge.”

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This entry was posted in CMBS Conduit Loans, Commercial Lending, Commercial Real Estate Loans, Michael D. Sneden, News & Recent Closings, The Banker's Mortgage Conduit, Valuexpress and tagged , , , . Bookmark the permalink.

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