Cash Management 101
With all of the turmoil Borrowers are experiencing, I thought it would be helpful to share some information on Cash Management. I suspect many readers may be requesting forbearance and Lenders will typically use the situation to improve their terms in exchange for relief. Cash Management is one topic that has some nuances, so I thought I'd share:

&amp;#x200B;

**Why Lenders Seek Cash Management:**

· To ensure proper use of revenue before distributions to equity.

· To build an escrow to address a specifically identified risk and/or mitigate refinance risk

**Terminology:**

· Lockbox Account – The account into which revenues are deposited. Funds can come directly from Payors (might require direction letters) or from owner/manager who collects from tenants then deposits into the account. Sweeps/disbursements typically occur daily.

· Cash Management Account – The account that holds the accumulated funds, usually to apply to waterfall. Sweeps/disbursements typically occur monthly, but can also be mid-month.

· Reserve Account – Segregated account to hold reserves for specific purpose – insurance payments, tax payments, capital reserves, excess cash reserves, etc.

· Waterfall – similar to an equity waterfall – determines priority of payments. Usually Debt Service, RE taxes and Property Insurance are first, then reserves, then approved operating expenses.

**Types of CM:**

· Level 1 - No cash management.

· Level 2 - Springing Cash Management – turns “on” after a specific event aka a “trigger event”

· Level 3 - Soft Cash Management – active at closing, revenues paid to Borrower/manager, who then deposits into lockbox account. Sums in Lockbox are remitted back to Borrower until occurrence of trigger event, at which time they are swept to Cash Management Account.

· Level 4 - Hard Cash Management – Same as Level 3, but revenues are deposited directly into lockbox by payors. Two variations: (i) hard with no “cash sweep” and (ii) hard with “cash sweep”

· Level 5 - Cash Sweep – Sums in lockbox account are swept to Cash Management Account for application of waterfall. Two variations: (i) with “cash trap” and (ii) with no “cash trap”

· Level 6 - Cash Trap – after application of waterfall, excess cash is trapped into a Reserve Account.

**What does a Trigger Do?**

· Begins Cash Management (springing to soft/hard)

· Switches from Soft to Hard Cash Management

· Switches from (x) no cash sweep or excess cash trap to (y) cash sweep or excess cash trap

· Can also turn “off” or exit cash management when certain events occur. e.g. In at a DY of 6.5%, out at a DY of 6.75% for three (3) consecutive months.

**What are the common triggers?**

· DSCR/DY

· Event of Default

· Major Tenant Events – default, go dark, notice of termination, bankruptcy, failure to renew lease, credit rating downgrade.

· Hotels – franchise agreement related events.
[{"id": "fm9v3au", "text": "As someone who is in both borrower and lender shoes currently, I want to +1 this post. All the terminology and definitions align with what I know. Every commercial borrower MUST know this. Stay safe everyone!", "replies": [{"id": "fm9zvig", "text": "And it's all completely negotiable.  I've had lenders pop some shit like this at close, and had borrowers tell them to GFY.", "replies": [], "depth": 2}, {"id": "fmbqstl", "text": "How does your perspective as a lender affect your ability to get deals done on the other side? I find it really tough to win deals - too conservative I guess, but it's almost like you have to plug your nose and jump in even though you know the u/w is bullshit to get to the pole position. Think we needed a good recession to knock shit back down to reason.", "replies": [{"id": "fmbuab9", "text": "I wasn't super clear in my reply to you. I'm a \"lender\" because we buy performing and nonperforming loans. I don't originate (although would love to). We typically resolve them fairly quickly (work on a payoff with borrower, or foreclose), but at any given moment, we're going to have some notes on the books. \n\nThat being said, I have effectively stopped all traditional acquisitions work. I won't look at any equity being marketed, just as buyers we've had on assets we were marketing have faded. I can't get anything financed today, so why look at buying? CMBS is frozen, bridge lenders have pulled back on risk, and agency lenders are claiming to be lending on an asset class that, as of 4/1/20, is suffering massive delinquency.\n\nSo the lender angle has effectively killed my desire to look at traditional equity for the time being. Strictly CRE debt for now, though I recognize that most can't just pivot like that.", "replies": [{"id": "fmcksj1", "text": "Interesting. Is this on your own or do you work for an org? Ive always thought about secondary notes. Been originating since 2014... I\u2019ve done about $4B in transactions", "replies": [{"id": "fmcnxuj", "text": "PM'ed you.", "replies": [], "depth": 5}], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "fma12bk", "text": "Remember those loan docs you didn\u2019t negotiate well enough when you just wanted to get the deal done. Whelp, here we go ....", "replies": [], "depth": 1}, {"id": "fmboj1a", "text": "This is a great post. Thanks for sharing!", "replies": [{"id": "fmbp47z", "text": "It's easy to get frustrated constantly arguing with people on reddit, so I figured I'd try a different approach and try to be helpful to those who want it.", "replies": [], "depth": 2}], "depth": 1}, {"id": "fme19q3", "text": "I'm a lender in the bridge space. We use cash management often and this is a fantastic breakdown.", "replies": [{"id": "fmfjaun", "text": "Yes we got into the bridge game 5 years ago and started implementing across our entire book. How are you guys doing in all of this? Our PM is scrambling for liquidity right now so I\u2019m a little worried will be sidelined with that product for a while.", "replies": [{"id": "fmg0rkp", "text": "We are busy as hell. We\u2019re in the 2-15MMM space and some of our competitors have gone by the wayside. I\u2019ll send you a PM.", "replies": [], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "fpa438s", "text": "I used to be in the lender space and now analyze new issue and do ongoing surveillance for previously issued CMBS loans. With respect to cash management, the lender also wants to minimize the risk that borrowers will exhibit bad behavior and funnel money elsewhere that should go to the respective property...there are generally SPE (\"single purpose entity\") requirements in their loan documents that require the borrower to utilize the funds specifically for the subject property, but it is also very costly and a lot of times fruitless to attempt to sue borrowers if they do violate their SPE covenants. Whether lockbox and/or cash management is springing or in-place can have a huge impact when loans become troubled or if there is a situation where a large or sole tenant has a lease expiration and cash is to be swept a few months before - depending on notice and/or amount of TI/LC funds required.\n\nSeparately, like a poster indicated, everything is negotiable, but you also have to consider which party has more leverage....right now lenders would have more leverage and if a sponsor wanted to get a loan now they'd likely have to capitulate and accept the terms the lender is willing to offer...relationships are also a big part of lending, so one cannot discount that fact either. There are springing, hard (\"in-place\"), soft etc. lockbox and/or cash management provisions which also are differentiated by property type...these play into the everything is negotiable note.\n\nCMBS has effectively been frozen from a new issue standpoint, but there is a new deal coming to market imminently. We shall see what happens in the months ahead in this space.\n\nI love commercial real estate.", "replies": [], "depth": 1}]