Debt Covenant Monitor

Do NOT trigger for: new loan origination underwriting (use deal-underwriting-assistant), general interest rate discussion, REIT-level leverage analysis (use reit-profile-builder), or loan comparison shopping.

Input Schema

Loan Terms (required)

Covenants (required)

Financials (required)

Appraisal (preferred)

Upcoming Events (optional, high-value)

Process

Step 1: DSCR Calculation

1. Determine the trailing period per loan docs (trailing_3m, trailing_6m, trailing_12m).
2. Sum NOI for the specified trailing period.
3. Annualize per the loan's method:
   • annualized: multiply by (12 / months_in_period). E.g., 3-month NOI x 4.
   • actual_period: no annualization (compare to same-period debt service).
   • rolling_12m: actual 12-month sum.
4. DSCR = annualized_noi / annual_debt_service.
5. If floating rate: use current rate for debt service (not origination rate).
6. Compare to minimum DSCR covenant threshold.

Step 2: LTV Calculation

1. Current loan balance from input or amortization schedule.
2. Current value estimate:
   • Primary: NOI-implied value = trailing_12m_noi / cap_rate_at_appraisal.
   • Secondary: last appraised value (flag if > 12 months old).
3. LTV = loan_balance / current_value * 100.
4. Compare to maximum LTV covenant threshold.
5. If appraisal-based and NOI-implied values diverge materially, report both and flag the discrepancy.

Step 3: Occupancy Calculation

1. Physical occupancy: occupied_sf / total_sf * 100.
2. Economic occupancy: actual_collected_rent / total_potential_rent * 100.
3. Use whichever the loan docs specify (most use physical; some use economic).
4. Compare to minimum occupancy covenant threshold.

Step 4: Other Covenant Metrics

• Debt Yield: noi / loan_balance * 100. Compare to minimum.
• Interest Coverage: noi / annual_interest_expense. Compare to minimum.
• Net Worth: borrower net worth vs. minimum requirement.
• Minimum NOI: absolute NOI floor vs. threshold.

Step 5: Cushion and Trend Analysis

For each covenant metric:

1. Calculate cushion: percentage above/below threshold before breach.
2. Calculate trend: compare current to prior 3 periods. Classify as improving, stable, declining.
3. Calculate break-even: what NOI decline ($ and %) triggers a breach.
4. Assign watch status:
   • SAFE: cushion > 15%
   • WATCH: cushion 5-15%
   • WARNING: cushion < 5%
   • BREACH: threshold crossed

Step 6: Forward Projection

If upcoming_events provided:

1. For each event, project its impact on trailing NOI.
2. Recalculate all covenant metrics under the projected scenario.
3. Identify which events (individually or combined) cause a breach.
4. Calculate the timeline: when does the breach occur (which month)?
5. Generate sensitivity matrix: metrics under base, single event, multiple events, stress case.

Step 7: Cash Trap Analysis

If the loan has a cash trap provision:

1. Calculate proximity to cash trap trigger.
2. If triggered: calculate the cash sweep amount (excess cash flow above debt service).
3. Project duration of cash trap based on trending NOI.

Step 8: Compliance Certificate Draft

Generate the lender-facing compliance certificate:

• Reporting period.
• Each covenant: definition, calculation detail, result, threshold, status.
• Officer certification language.
• Supporting schedules (NOI detail, occupancy, rent roll summary).

Output Format

1. Covenant Compliance Dashboard

Status color coding: SAFE / WATCH / WARNING / BREACH.

2. Break-Even Analysis

Per covenant: how much NOI can decline before breach ($ and %). Expressed as equivalent tenant departure.

3. Forward Projection Table (if events provided)

4. Sensitivity Matrix

NOI decline in 5% increments (0%, -5%, -10%, -15%, -20%). Show which covenants breach at each level.

5. Compliance Certificate Draft

Formal lender-facing document with calculation detail and supporting schedules.

6. Remediation Guidance (if watch/warning/breach)

Per covenant: specific actions to cure or prevent breach. Cash contribution required, timeline, negotiation options.

Red Flags and Failure Modes

1. Loan-specific definitions: "NOI" per loan docs often differs from GAAP NOI. Some exclude management fees, some include reserves, some use "Net Cash Flow." Always use the loan doc definition.
2. Floating rate debt service: If SOFR-based, debt service changes with the index. Use the current rate, not the origination rate.
3. Stale appraisals: LTV using a 2-3 year old appraisal may mask deterioration. Calculate both appraisal-based and NOI-implied values.
4. Cash trap vs. hard default: Being in a cash trap severely constrains the asset manager even though it is not technically a default. Model as a separate trigger.
5. Compounding events: A single tenant departure may not breach, but combined with a rate reset and capex, it can. Test combined scenarios.

Chain Notes