Definition
A cash sweep is a loan provision requiring that excess property cash flow be redirected toward debt repayment or placed into lender-controlled reserve accounts, rather than distributed to the borrower.
Purpose
Cash sweep provisions protect lenders by accelerating principal reduction or building reserves when performance thresholds are triggered. They are common in commercial mortgage loans and CMBS structures.
When Is a Cash Sweep Triggered?
- Debt Service Coverage Ratio (DSCR) falls below a threshold
- Loan maturity is approaching
- Performance covenant breach
- Property underperformance or distress
Types of Cash Sweeps
- Hard Sweep: All excess cash flow is captured by the lender.
- Soft Sweep: Triggered only after performance declines below agreed metrics.
- Springing Sweep: Activates upon covenant breach.
Example
A property generates $100,000 in monthly net cash flow after operating expenses and debt service. The loan agreement requires that if DSCR falls below 1.20x, excess cash must be swept.
- Instead of distributing profits, the $100,000 may be applied to principal reduction or held in reserve until the trigger is cured.
Impact on Borrowers
- Limits cash distributions to equity investors
- Accelerates loan amortization
- Reduces financial flexibility
- Signals increased lender oversight
Investor Perspective
Equity investors should carefully review cash sweep triggers when underwriting leveraged acquisitions. A cash sweep can materially affect projected cash-on-cash returns and timing of distributions.
Common Pitfalls
- Overlooking DSCR covenant language
- Failing to model stress scenarios
- Assuming temporary sweeps will be short-lived
- Not negotiating cure provisions