Upfront deposit, monthly collection, cap and major-tenant sweep are four numbers in the loan agreement. They only work if they are sized together against the rent roll.
Size a TI/LC reserve from the leases that expire during the loan: the expected cost of renewing or re-letting each one, set against when the reserve collects cash. On an illustrative 200,000 sq ft office where 130,000 sq ft expires over a five-year loan, the expected tenant improvement and leasing commission bill is $4,420,000, or $4.42 per sq ft a year. Collected at $1.50 per sq ft, the reserve needs a $2,920,000 deposit at closing to stay solvent; even at the full $4.42 rate it runs $204,000 short in year 4, when the largest tenant expires.
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 →
Loan agreements on multi-let offices, retail and industrial usually contain a rollover reserve, often called the TI/LC reserve: an upfront deposit, a monthly collection from the cash management account, sometimes a cap on the balance, and a springing sweep tied to a major tenant. Each of those four terms is a number, and they only work if they are sized together against the rent roll.
| Input | Value |
|---|---|
| Net rentable area | 200,000 sq ft |
| Probability a tenant renews | 65% |
| Cost of a renewal (TI and commission) | $20.00 per sq ft |
| Cost of a new letting (TI and commission) | $60.00 per sq ft |
| Expected cost per sq ft expiring | $34.00 |
| Timing | Costs paid at the end of the expiry year, collections monthly |
Expected cost per sq ft = p × renewal cost + (1 − p) × new-letting cost
65% × $20.00 + 35% × $60.00 = $13.00 + $21.00 = $34.00. In Excel: =B2*B3+(1-B2)*B4
| Loan year | Area expiring, sq ft | Share of NRA | Expected cost, $ |
|---|---|---|---|
| 1 | 15,000 | 7.5% | 510,000 |
| 2 | 25,000 | 12.5% | 850,000 |
| 3 | 10,000 | 5.0% | 340,000 |
| 4 | 60,000 | 30.0% | 2,040,000 |
| 5 | 20,000 | 10.0% | 680,000 |
| Total | 130,000 | 65% | 4,420,000 |
Spread evenly, $4,420,000 over five years is $884,000 a year, $4.42 per sq ft of the whole building. That is the collection rate that funds the expected cost by maturity. The schedule is not even, though: almost half the cost falls in year 4.
The reserve must hold enough at every expiry, not only at maturity. The upfront deposit is the largest cumulative shortfall of collections against costs.
| Year | Cost, $ | Cumulative cost, $ | Cumulative collected, $ | Surplus or shortfall, $ |
|---|---|---|---|---|
| 1 | 510,000 | 510,000 | 884,000 | 374,000 |
| 2 | 850,000 | 1,360,000 | 1,768,000 | 408,000 |
| 3 | 340,000 | 1,700,000 | 2,652,000 | 952,000 |
| 4 | 2,040,000 | 3,740,000 | 3,536,000 | −204,000 |
| 5 | 680,000 | 4,420,000 | 4,420,000 | 0 |
Upfront deposit = MAX(0, MAX over t of (cumulative costt − cumulative collectionst))
With cumulative costs in C2:C6 and cumulative collections in D2:D6: =MAX(0,MAX(C2:C6-D2:D6)), entered as an array formula in older Excel.
Lower collection rates push the shortfall up and later:
| Collection, $ per sq ft a year | Collected a year, $ | Upfront deposit, $ | Total funded, $ |
|---|---|---|---|
| 1.00 | 200,000 | 3,420,000 | 4,420,000 |
| 1.50 | 300,000 | 2,920,000 | 4,420,000 |
| 2.50 | 500,000 | 1,920,000 | 4,420,000 |
| 4.42 | 884,000 | 204,000 | 4,624,000 |
At $1.50 the binding point is maturity, where the reserve has collected $1,500,000 against $4,420,000; at the full rate it is year 4. The total funded is the same $4,420,000 in the first three rows; what changes is who puts the cash up and when, the sponsor at closing or the property over the loan. At the full rate a further $204,000 is needed only because the year-4 expiry arrives before the collections catch up, and it comes back at maturity.
A cap that stops collections once the balance reaches a set figure is common, and it is often set without looking at the schedule. With a $1,000,000 cap at the full rate, the reserve collects $884,000 in year 1, then only $626,000 in year 2 and $850,000 in year 3 because the balance keeps hitting the cap. It reaches the year-4 expiry holding $1,000,000 against a $2,040,000 bill: a $1,040,000 shortfall. A cap must be at least the peak need, or it should spring off ahead of a large expiry.
The expected cost also hides the case the lender worries about. If the 60,000 sq ft tenant leaves, the year-4 cost is $3,600,000, not $2,040,000: $1,560,000 more, which is 37.4 months of collections at $2.50. That is why agreements add a major-tenant sweep, trapping all excess cash from a set date before that lease expires unless the tenant has renewed.
Setting the collection rate as a round number per square foot, then checking it only against the total. A rate that funds the total by maturity can still leave the reserve empty at the one expiry that matters. Model the reserve year by year against the rent roll, and size the deposit, the cap and the sweep from the same table.
Renewal probabilities and leasing costs are illustrative; real underwriting uses lease-by-lease terms and market evidence. Not advice on any loan.
The reserve schedule sits with the cash management agreement among the free working documents for this book. How reserves flow through the account each month is worked in how the cash waterfall works in a CRE loan, and the leasing costs themselves in how to calculate leasing commissions.
Multiply the area expiring each year by the expected cost per sq ft, which weights the renewal and new-letting costs by the renewal probability: 65 per cent of $20.00 plus 35 per cent of $60.00 is $34.00. Across 130,000 sq ft expiring over five years that is $4,420,000, or $4.42 per sq ft a year on a 200,000 sq ft building.
The largest cumulative shortfall of collections against costs. Collecting $1.50 per sq ft a year, $300,000, against $4,420,000 of expected costs needs a $2,920,000 deposit; at the full $4.42 rate the deposit is $204,000, because the year-4 expiry arrives before collections catch up.
A ceiling on the reserve balance above which monthly collections stop. Set below the peak need it fails: a $1,000,000 cap on this rent roll leaves the reserve holding $1,000,000 against a $2,040,000 year-4 bill, a $1,040,000 shortfall even at full-rate collections.
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.
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