The cap in the loan agreement is what the lender wanted. What the sweep collects depends on the building's cash and when the trigger springs.
A lease sweep traps all excess cash after debt service once a major tenant fails to renew by a set date, and holds it in a reserve capped at a sum per square foot of that tenant's space, to pay for re-leasing. How much it collects is the monthly excess cash times the months left before expiry. On an illustrative office loan with a 40,000 sq ft tenant, a $60 per sq ft cap of 2,400,000 needs 18 months to fill, so a sweep triggered 12 months out collects 1,600,000, two thirds of the cap and half the 3,210,000 of TI and commissions.
Worked in full in How to Read a Real Estate Loan Agreement by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
The lease sweep, sometimes called a tenant trap or major tenant trigger, is the provision in a CMBS or balance sheet loan that answers one question: if the largest tenant leaves, who pays to replace it? The cap printed in the loan agreement is the answer the lender wanted. What the sweep actually collects is set by arithmetic the agreement does not show: the cash the building throws off, and how early the trigger springs.
| Input | Value |
|---|---|
| Net rentable area | 100,000 sq ft |
| Major tenant, 40% of the building | 40,000 sq ft |
| Major tenant rent | $45.00 per sq ft, 1,800,000 |
| Net operating income | 6,000,000 |
| Annual debt service on a 60,000,000 loan | 4,200,000 |
| Ongoing reserves (tax, insurance, capex) | 200,000 |
| Lease sweep cap | $60 per sq ft |
| Trigger: no renewal notice by | 12 months before expiry |
DSCR is 1.43x and debt yield 10.0 per cent: a healthy loan, which is exactly when sponsors stop reading the cash management section. How the cash is ranked once a trap springs is set out in how the cash waterfall works in a commercial real estate loan.
Excess cash = NOI − debt service − required reserves
Sweep collected = MIN(cap, monthly excess cash × months from trigger to expiry)
Here 6,000,000 − 4,200,000 − 200,000 = 1,600,000 a year, or 133,333 a month. The cap is 60 × 40,000 = 2,400,000, which takes 2,400,000 ÷ 133,333 = 18.0 months to fill. In Excel: =MIN(B8*B3,(B5-B6-B7)/12*B9), with the tenant area in B3, NOI in B5, debt service in B6, reserves in B7, the cap per sq ft in B8 and the months in B9.
With the trigger at 12 months, the sweep runs for 12 months and collects 1,600,000, 66.7 per cent of the cap, leaving 800,000 of the lender's intended reserve unfunded on the day the tenant leaves.
When the tenant goes, so does 1,800,000 of rent. NOI falls to 4,200,000, DSCR to 1.00x and debt yield to 7.0 per cent. Excess cash after reserves becomes −200,000 a year: there is nothing left to sweep, and the sponsor must fund 16,667 a month just to keep the loan current. Whatever the reserve holds at expiry is all it will ever hold until the space is re-let.
| Item | Basis | Amount |
|---|---|---|
| Tenant improvements | $60 per sq ft | 2,400,000 |
| Leasing commissions | 4.5% of ten years' rent | 810,000 |
| Cash re-leasing cost | 3,210,000 | |
| Rent lost in downtime | 12 months | 1,800,000 |
| Rent-free period | 9 months | 1,350,000 |
| Total cost of the vacancy | 6,360,000 |
The 1,600,000 in the reserve covers 49.8 per cent of the TI and commissions, leaving a gap of 1,610,000 before any lost rent. The lease sweep is a contribution, not a solution, and the sponsor's equity cheque is still needed. The standing TI/LC reserve that runs alongside it is sized in how lenders size a TI/LC reserve.
| Trigger, months before expiry | Collected | Share of cap | Gap to TI and LC |
|---|---|---|---|
| 6 | 800,000 | 33% | 2,410,000 |
| 9 | 1,200,000 | 50% | 2,010,000 |
| 12 | 1,600,000 | 67% | 1,610,000 |
| 18 | 2,400,000 | 100% | 810,000 |
| 24 | 2,400,000 | 100% | 810,000 |
| Cap per sq ft | Cap | Months to fill | Collected |
|---|---|---|---|
| $30 | 1,200,000 | 9.0 | 1,200,000 |
| $45 | 1,800,000 | 13.5 | 1,600,000 |
| $60 | 2,400,000 | 18.0 | 1,600,000 |
| $75 | 3,000,000 | 22.5 | 1,600,000 |
From $45 per sq ft up, raising the cap collects nothing more: the binding constraint is time, not the cap. A lender that wants the full 2,400,000 must move the trigger to 18 months, or add an upfront deposit or a springing guarantee for the difference. A sponsor negotiating the clause should know that a higher cap with a late trigger concedes almost nothing, while an earlier trigger costs it real distributions: at 18 months, 2,400,000 of cash flow it would otherwise have taken home.
Reading the cap as the amount the lender will hold. Run the months: excess cash times the time between trigger and expiry. Here it is 1,600,000 against a 2,400,000 cap, and on a building with thinner coverage it is less. If excess cash were only 600,000 a year, a 12-month sweep would collect 600,000 and the cap would be decoration.
Compute the months to fill the cap, compare them with the time between trigger and expiry, and set the result against the TI and commissions the vacancy will need. How to Read a Real Estate Loan Agreement reads cash traps and cures clause by clause, and the free workbook and one-page model of your own loan lets you run the sweep on your own numbers.
Usually a major tenant failing to give renewal notice by a set date, often 12 to 18 months before expiry, giving notice to terminate, going dark or becoming insolvent. From then on all excess cash after debt service and reserves is trapped. In the illustrative case that is 133,333 a month until the cap of 2,400,000 is reached or the lease expires.
As a sum per square foot of the major tenant's space, sized to the tenant improvements and commissions needed to re-let it. At $60 per sq ft on 40,000 sq ft the cap is 2,400,000. Whether it fills depends on time: at 133,333 a month it needs 18.0 months, so a 12-month trigger leaves 800,000 unfunded.
It funds the tenant improvements and leasing commissions of the replacement leases, and any balance is released to the borrower once the cure conditions are met. Here the 1,600,000 collected covers 49.8 per cent of the 3,210,000 of TI and commissions, so the sponsor still funds 1,610,000 before any lost rent.
This article is one calculation from How to Read a Real Estate Loan Agreement. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
Get the book on Amazon →Free companion files
Also on Amazon UK · Amazon Germany · Amazon France · Amazon Canada
Reading guide: real estate investing, finance and fund management → · All 1501 articles →
If this book helped, or didn’t, a few lines on Amazon are worth more than they look: they are what the next reader goes on. Write a review. The workbook stays free either way.