Covenants on a commercial real estate loan

Investopedia describes a loan covenant as a condition the borrower agrees to. Wikipedia's loan-covenant article splits the promises into financial, affirmative, and negative. Financial covenants measure something on a schedule: debt service coverage, debt yield, a loan-to-value cap, or the guarantor's liquidity and net worth. Affirmative covenants are things you must do, such as pay taxes, keep insurance, and send reports. Negative covenants are things you must not do without consent, such as adding debt, selling the property, or changing the manager. A cure right is a window to fix a breach before it becomes a default the lender can act on. Some breaches have a cure period. Some, especially a missed payment or a forbidden transfer, may not.

The OCC's Commercial Real Estate Lending handbook and the Federal Reserve's SR 15-5 letter explain why banks monitor these promises. Examiners expect the bank to know whether income still covers the loan and whether concentrations are under control. That supervision is not a covenant in your life-company loan, and it is not legal advice. A number you heard called a good coverage ratio is explained, without a requirement from this office, on what is a good DSCR. How that ratio differs from debt yield is debt yield versus DSCR.

Cash management and the three lender styles

A cash-management or lockbox trigger sweeps rents to the lender, or to a controlled account, if coverage falls below a line or if a large tenant leaves. The trigger can be springing, meaning it sleeps until the test fails, or it can be in place from day one. Conduit loans use these tools often because a special servicer may later need the cash. Life-company loans may use a lighter set if leverage is low, and they may still sweep cash after a tenant failure. Bank loans often rely on the guaranty and on financial reporting more than on a lockbox, until the credit worries them. Those are tendencies. The documents win.

Reporting is its own covenant. Quarterly rent rolls, annual operating statements, and a guarantor financial statement are ordinary. A late package can be a default even when every tenant paid. Where these words first appear in a deal is the term sheet note. How lender types differ overall is lender types compared. Run a coverage test you invent in the DSCR calculator. Definitions are in the glossary.

Read the cure before you celebrate a loose quote

A loan with few covenants and no cure on the one covenant it has is not a loose loan. A loan with many covenants and a clear cure, a threshold, and a notice address can be easier to live with. Ask what is tested, how often, what notice you get, and whether cash management springs. Ask what a guarantor liquidity breach does if the property is fine. Then have counsel read the draft. We arrange the financing. We do not negotiate the covenant as your lawyer.

Capital Market Funds is not a Fannie Mae DUS lender. The office is 7373 E Doubletree Ranch Rd #255, Scottsdale, AZ 85258. The phone is (480) 495-8072. Capital Market Funds, LLC - CBK-2007014 - Commercial Mortgage Banker and NMLS 1445066. A term sheet summary of covenants is not the loan agreement.