It’s become fairly common that loans originated for the CMBS market contain some form of in-place or springing lockbox mechanism. The requirement for cash management/lockboxes is being driven by a combination of rating agencies, CMBS bond investors and servicers, all of whom enjoy the added security cash management provides.
As lockboxes become more common, it’s important to understand the different forms of lockboxes, the associated costs and the issues they can create for real estate owners.
A national bank provides the majority of lockbox/cash management services, so we’ve included their estimated pricing in our descriptions. However, new providers are entering the marketplace, which we hope will provide downward pressure on pricing. All of the options below require that setup fees be paid to the lockbox bank by the Borrower. Currently, approximately $2,500 is being charged for initial setup costs.
There are three main types of lockboxes: Soft, Hard and Springing. Learn more about each option below.
Soft Lockbox: The Borrower has some control over the property cash flow.
How it works: Soft lockboxes primarily work one of two ways: (A) All rents from the property are deposited into a Lender-controlled account (aka lockbox account) and are subsequently swept to the borrower; or (B) Rents are deposited in the controlled account, are swept to the Cash Management account and remain there until an amount equal to the debt service payment is secured. Once that occurs the excess funds are swept to the borrower and the debt service payment is wired to the Lender on the payment date.
Costs: Monthly account costs run from $300-$700 for option A and $450-$1,000+ for option B. Costs fluctuate based on the number of tenants and the method of payment (ACH/wire/check).
You should also know: For option B, the borrower must maintain a $5,000 balance in the Cash Management account.
Hard Lockbox: The Borrower does not have control of cash flow.
How it works: All rents flow through the Lender-controlled account and are subsequently swept to the Cash Management account. Tenant(s) are instructed to make rental payments directly to the Lender-controlled account, or in the case of apartments/hotels, rents must be deposited in the controlled account upon receipt by the property manager. On the payment date, funds from the Cash Management account are wired to the Lender to make the debt service payment and reimburse borrower for monthly operating expenses. Any excess cash flow from the property is commonly trapped in a cash-collateral, TI/LC or replacement reserve escrow.
Costs: Account costs run from $550-$1,000+ on a monthly basis depending on the number of tenants and the method of payment (ACH/wire/check).
You should also know: The borrower must maintain a $5,000 balance in the Cash Management account at all times.
Springing Lockbox: The Borrower, Lender and lockbox bank execute Cash Management/lockbox agreements at closing.
How it works: A Lender-controlled account is not opened, but the framework is put in place for an account to be established quickly if a trigger event occurs. The trigger events are most commonly tied to debt-service ratios, debt-yield, large lease expirations or a default.
Costs: There are no ongoing costs unless the accounts are opened upon a trigger event.
Timing Is Everything
One issue worth noting is that both Hard and Soft lockboxes can create cash flow issues due to the timing of rental receipts and the mortgage payment due date. It can take the lockbox bank one to three days after receipt of rental payments to make the funds available. Additionally, the wire from the lockbox bank to the Lender/Servicer must be set up one day in advance, which effectively eliminates a day from the timeline. Essentially, this means that if a loan has a payment date of the fifth day of the month, rental payments likely need to be received by the first or the second day of the month in order to be used for that month’s payment. We commonly see money getting “trapped” in these accounts until the following month because the funds did not clear in time.
To compound that issue, some conduit Lenders have language stating that if the payment date does not fall on a business day, the payment is due on the preceding business day. Timing issues can be mitigated to some extent if the payment date falls later in the month or if the loan documents allow a longer grace period. With that said, it is important to understand the timing of payments for your property so that accommodating terms can be negotiated in the loan documents.