A commercial loan covenant is a promise in the loan agreement that stays in force after closing, and the ones sponsors feel most are the financial tests: minimum debt service coverage ratio (DSCR), minimum debt yield, and occupancy or major-tenant tests. In many loans, failing one of those tests starts a cash sweep, where the lender takes control of the property's excess cash until the ratio recovers; the events of default are listed separately. Knowing the trigger levels, the test period and the cure before you sign tells you how much room the property has before distributions stop.
Underwriting tests versus ongoing covenants
At origination, lenders size the loan with LTV, DSCR and debt yield and lend the lowest result. We covered that process in Debt Yield vs. DSCR vs. LTV. Covenants are different. They are the levels the property must keep meeting for the life of the loan, and they are usually set below the underwritten figures to leave a cushion.
Two CMBS conduit term sheets dated September 2025 show the spread. The BMO 2025-C13 term sheet reports a weighted average underwritten net cash flow DSCR of 1.85x and a weighted average underwritten NOI debt yield of 12.4% for the pool. The BANK5 2025-5YR17 term sheet reports 1.87x and 13.0%. The ongoing triggers on individual loans in those pools sit well below those averages, as the examples below show.
The common covenant and trigger types
| Covenant or trigger | What it measures | Typical consequence when tripped |
|---|---|---|
| Minimum DSCR | NOI or net cash flow divided by debt service, usually on a trailing basis | Cash sweep period; in some bank loans, an event of default |
| Minimum debt yield | NOI divided by the outstanding loan balance | Cash sweep or cash trap period |
| Major tenant or rollover | A lease expiration, termination, bankruptcy or "go dark" by a large tenant | Sweep of excess cash into a leasing reserve |
| Occupancy or leasing | Percentage of space leased, overall or for a named tenant's space | Cash sweep period |
| Event of default or borrower bankruptcy | Any default under the loan documents | Lender-controlled cash management for the rest of the default |
DSCR tests react to interest rates and amortization, so on a floating-rate loan a rate increase alone can push coverage toward the trigger. Debt yield tests ignore the rate entirely and respond only to NOI relative to the loan balance.
Lockbox and cash management: two separate questions
Term sheets usually show a pair of labels, such as "Hard / Springing." The first word describes the lockbox, meaning where rents are paid. The second describes cash management, meaning who controls the money once it arrives.
- Hard lockbox: tenants pay rent directly into a deposit account the borrower cannot direct.
- Soft lockbox: rents are collected by the borrower or property manager and then deposited into the lockbox account.
- Springing lockbox: no lockbox is in place at closing, but one must be set up if a trigger occurs.
- Springing cash management: money in the lockbox flows back to the borrower each period until a trigger occurs. After that, the lender's waterfall pays taxes, insurance, debt service and required reserves, and the excess is swept.
The BMO 2025-C13 term sheet's loan pool summary shows hard lockboxes on 50.8% of the pool by balance, springing lockboxes on 42.8%, soft lockboxes on 2.4% and no lockbox on 4.0%.
How triggers are written in practice
Two loans in those September 2025 pools show the standard pattern. We describe them by loan terms only, without property names.
A lab and office portfolio loan (BMO 2025-C13). The loan has a hard lockbox and springing cash management. A cash sweep period begins on the earliest of an event of default, a borrower bankruptcy, a mezzanine loan default, DSCR on the whole loan falling below 1.30x for two consecutive calendar quarters, or the date 18 months before a major tenant's lease expires unless that tenant renews. The DSCR trigger ends when DSCR is at least 1.30x on the first day of each of two consecutive calendar quarters. The borrower can also cure by partial defeasance (or, late in the term, a prepayment), by posting cash or a letter of credit as cure collateral, or by providing a guaranty. During a lease-related sweep, excess cash is reserved and can be released for leasing costs.
The term sheet shows an underwritten whole loan DSCR of 1.66x against that 1.30x trigger, so, if the trigger is measured on the same basis and debt service as the underwritten figure, net cash flow could fall about 21.7% before the sweep starts (1 − 1.30 ÷ 1.66 = 21.7%).
A lab and office loan with a single major tenant (BANK5 2025-5YR17). Also hard lockbox with springing cash management. A trigger period starts on an event of default, the loan's debt yield falling below 7.50% for two consecutive calendar quarters, or a tenant credit event, which includes the major tenant's space being less than 80% leased. The debt yield trigger is cured by two consecutive quarters at or above 7.50%, by a prepayment sized to restore the threshold, or by posting cash or a letter of credit. During a trigger period, excess cash goes to an account held as additional collateral, and those funds are returned once all trigger periods end.
Three features repeat across both loans: the test runs over two consecutive quarters, the cure mirrors the trigger, and the borrower can buy its way out with a paydown or collateral.
Worked example: a $10 million loan that trips a DSCR sweep
The figures below are illustrative, not a quote or a market term. Assume:
- Loan amount: $10,000,000, 6.50% fixed, 30-year amortization
- Monthly payment: $63,206.80; annual debt service: $758,481.63
- Underwritten NOI at closing: $1,050,000
- Cash sweep trigger: DSCR below 1.20x for two consecutive calendar quarters
- Required replacement reserve: $30,000 per year (deposited before any excess cash is released)
At closing: DSCR = $1,050,000 ÷ $758,481.63 = 1.38x. Debt yield = $1,050,000 ÷ $10,000,000 = 10.5%.
In year three, a tenant vacates and trailing NOI falls to $880,000 for two straight quarters.
| Test at month 36 | Calculation | Result |
|---|---|---|
| DSCR | $880,000 ÷ $758,481.63 | 1.16x (below the 1.20x trigger) |
| Debt yield on the original balance | $880,000 ÷ $10,000,000 | 8.80% |
| Debt yield on the amortized balance | $880,000 ÷ $9,641,724.19 | 9.13% |
The DSCR test trips. If this loan had a 9.0% debt yield trigger instead, measured on the outstanding balance, the same drop in NOI would not have started a sweep. Which test the documents use, and whether the debt yield is measured on the original or current balance, changes the outcome.
What gets swept. Annual excess cash after debt service and the reserve is $880,000 − $758,481.63 − $30,000 = $91,518.37, or about $7,626.53 a month. Over six months of sweep, $45,759.19 is held by the lender instead of being distributed. Whether that cash is released at the cure, applied to the loan or held for leasing depends on the documents.
Curing with NOI. To clear 1.20x the property needs $758,481.63 × 1.20 = $910,177.95 of NOI, an increase of $30,177.95 over the current $880,000, held for two consecutive quarters.
Curing with a paydown. If the documents recalculate debt service on the reduced balance over the remaining 324 months, debt service can be no more than $880,000 ÷ 1.20 = $733,333.33 a year ($61,111.11 a month). The balance that supports that payment is $9,322,042.19, so the paydown is $9,641,724.19 − $9,322,042.19 = $319,682.00 of principal, plus any yield maintenance, defeasance cost or prepayment premium the documents require. If the documents keep the monthly payment fixed after a partial prepayment, a paydown does not change DSCR at all, and the cure has to come from NOI, collateral or a guaranty. Check this provision before closing.
What the regulators expect from bank lenders
Bank lenders that hold loans on their balance sheet can modify a loan when a covenant breaks, and federal bank regulators have published guidance on how they expect that to be done. The 2023 interagency Policy Statement on Prudent Commercial Real Estate Loan Accommodations and Workouts, adopted by the Federal Reserve with the FDIC, NCUA and OCC and transmitted by SR 23-5 on June 30, 2023, lists covenants among the elements of a prudent workout plan, alongside loan structure and requirements for curtailment or re-margining. It also asks lenders to analyze the borrower's global debt service coverage. Its office example starts with a loan underwritten at a 1.30x DSC ratio and walks through scenarios where coverage falls to 1.12x.
The statement also warns that being current on payments can be misleading. It describes a construction loan whose interest reserve keeps it contractually current while the project stalls and principal repayment is in doubt. Under this guidance, examiners expect bank lenders to evaluate a borrower's cash flow and repayment capacity as well as payment status.
Questions to settle before you sign
- What is the trigger level, and on what NOI? Trailing three, six or twelve months; actual or underwritten; NOI or net cash flow after reserves.
- How many test periods? One quarter or two consecutive quarters makes a large difference for seasonal assets.
- Is it a sweep or a default? Read the covenant and the events of default together.
- What cures are allowed? NOI recovery, paydown, partial defeasance, cash or letter of credit collateral, guaranty.
- How is DSCR recalculated after a paydown? Re-amortized payment, fixed payment or a stated hypothetical constant.
- Where does swept cash go, and when does it come back? Additional collateral, leasing reserve or loan paydown.
- Are there tenant-specific sweeps? Lease expirations, terminations and dark-space provisions can start a sweep with no change in NOI.
Run your own numbers with the DSCR calculator and debt yield calculator at the term sheet's trigger levels as well as the underwritten levels. Our piece on negotiating commercial loan terms covers how to build cushions into those levels.
Bottom line
Covenants decide what happens to your cash flow after closing. A DSCR or debt yield trigger set at two consecutive quarters, with springing cash management, can stop distributions without any missed payment. Confirm how each cure is calculated and which events sweep cash and which ones default the loan. If you are comparing term sheets for a bridge loan or a refinance, model each covenant package against the same downside case before you commit.