Lockboxes - Tips from the Trenches

by Baker Donelson
Contact

Lockboxes and Cash Management Agreements1 are being required with increasing frequency in loan originations and workout deals. When carefully planned, lockbox implementation can be seamless. When enforced as an afterthought, problems ranging from delayed closings to unnecessarily divisive negotiations can ensue. Below are pointers to consider when a lockbox is introduced into a deal.

Start Early

As soon as the words "cash management" are uttered in a negotiation, start the process of opening the lockbox by contacting the bank that will provide the lockbox services. Do not wait to work through the waterfall or for all of the documents to be drafted. Although there is nothing inherently difficult about opening a lockbox, there is a good deal of paperwork for the (often reluctant) borrower to complete. Additionally, it takes time for the lockbox bank to work through its process of background checks, authorizations, and lockbox assignments.

So, start early and check on the progress of the bank and the borrower opening the lockbox often. The old "squeaky wheel gets the grease" adage is especially true here.

Know Your End Game

Lockboxes and Cash Management Agreements are essentially about imposing transparency, accountability, and control on the borrower's spending. But, the degree to which each of these is important with regard to the particular deal is a decisive factor in the negotiating stance. Deciding upon the desired effect of the lockbox in advance can shorten negotiation time. For example:

  • End Game: Transparency. If the lockbox is being implemented with a new borrower that has a strong credit history, the point of the lockbox may be primarily to monitor the cash flow. In this situation consider using a soft lockbox that allows the borrower direct access to the funds in the account. 
  • End Game: Accountability. If the lockbox is being implemented in conjunction with a distressed loan to a cooperative borrower, the point of the lockbox may be primarily to ensure that debt service and taxes are paid first. Knowing this up front may allow some leniency in the cash flow waterfall negotiations such that directly after debt service and taxes, a generously allocated operating expenses budget falls next in the priority line.

  • End Game: Control. If the lockbox is being implemented in conjunction with a distressed loan to an uncooperative borrower, the point of the lockbox will be to regulate every penny of cash flow being produced by the property. This may lead to heavy negotiation regarding a stringent budget for operating expenses, which might fall low in the priority line of the cash flow waterfall. However, leniency may be possible regarding the distribution of any excess cash flow to the borrower after all of the required payments, taxes, and reserve requirements are met.

Watch Out For Unintended Consequences

In all cases it pays to think about the real world effect of the lockbox. For example:

  • Will a strongly worded letter to the borrower's tenants instructing them to deposit their rents into the lockbox give the impression that the borrower is tanking and further cripple borrower's chances of success in a small town?
  • Will an extremely stringent line item in the cash flow waterfall for operating expenses stretch the borrower so thin that the maintenance of the property or quality of the staffing suffer and hurt the loan performance further?

  • Will implementing a soft lockbox with a cash trap trigger for events of default without defining a cash flow waterfall make the initial negotiation go smoothly, but set up for failure any negotiation after an event of default?

  • Will a complex cash flow waterfall that accounts for all spending complicate the cash management implementation for the servicer beyond what is reasonable?

The Takeaway

Planning is everything when it comes to a smooth lockbox implementation. From setting the logistical wheels in motion early to giving careful forethought to both the intention behind setting up the lockbox and its resulting consequences, a methodical approach is the key to seamlessly implementing a lockbox as a useful tool.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Baker Donelson | Attorney Advertising

Written by:

Baker Donelson
Contact
more
less

Baker Donelson on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Privacy Policy (Updated: October 8, 2015):
hide

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.

Security

JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.