Tenant default concentration and liquidity runway

Tenant concentration becomes a financing problem through lost collections, continuing costs and the time required to restore income. A large tenant’s percentage of rent is a useful starting point, but the cash runway depends on how much spending can actually stop, what reserves are usable and which obligations arrive before a replacement tenant pays.

The 2023 interagency CRE workout statement evaluates repayment using current cash flow and support resources. The scenario below is hypothetical and does not predict a tenant’s default, establish collection remedies or assume a security deposit can be used without satisfying the lease and applicable requirements.

Translate lost rent into a monthly deficit

Assume monthly collections of $100,000, operating expenses of $40,000, debt service of $35,000 and required reserve deposits of $5,000. The property normally produces $20,000 of cash after those obligations. One tenant contributes $45,000 of monthly collections.

If that tenant stops paying, collections fall to $55,000. Assume only $3,000 of monthly operating costs can immediately be avoided; expenses remain $37,000. Cash after debt and reserves becomes $55,000 − $37,000 − $35,000 − $5,000 = −$22,000 monthly.

The tenant represents 45% of collections, but the cash result is not simply a 45% decline in the prior $20,000 surplus. Fixed obligations create a switch from positive $20,000 to negative $22,000, a $42,000 monthly deterioration. The $3,000 avoided cost is explicitly modeled rather than applying the tenant’s rent share to all expenses.

Calculate runway with actual cash uses

Suppose unrestricted opening cash is $180,000. At a constant $22,000 monthly deficit, arithmetic runway to zero is 8.18 months. If the owner needs a $40,000 minimum operating buffer, usable cash is $140,000 and runway to that buffer is 6.36 months.

Now add a hypothetical $60,000 legal, leasing and preparatory-work payment due in month 2. The remaining cash available for monthly deficits is $120,000, so runway to zero falls to 5.45 months. With the $40,000 buffer preserved, only $80,000 remains for deficits, or 3.64 months. These division results are approximations; a monthly schedule must place the month 2 payment on its actual date.

The operating buffer is breached during month 4; cash becomes insufficient during month 6. A response plan should be triggered before those dates.

Keep collection recoveries conditional

Assume the tenant has a $90,000 deposit. Do not automatically add it to opening unrestricted cash. Confirm where it is held, its restrictions, permitted application, claims against it and timing. If an accepted $60,000 amount becomes available in month 4, enter that receipt then and retain the unresolved remainder separately.

A guaranty, letter of credit or insurance claim is also a distinct recovery path. Record the beneficiary, conditions, deadlines, counterparty and evidence. A potential claim is not cash merely because its face amount is large enough to cover the modeled deficit.

The defaulted rent may remain an accounting receivable while cash collections are zero. For runway, use the cash timing. For lender reporting and covenant calculations, use the definition in the documents and explain the difference rather than silently switching bases.

Separate covenant pressure from cash exhaustion

Before default, annualized operating cash flow is $720,000 and annual debt service $420,000, giving 1.714x coverage under this simplified definition. After default and the $3,000 cost saving, annualized operating cash flow is $216,000 and coverage 0.514x. Required reserve deposits are separate in both cases.

A covenant may be tested on trailing periods, use different adjustments or trigger remedies before unrestricted cash reaches zero. Obtain the actual testing and notice provisions. The runway schedule does not grant permission to wait until the bank balance is exhausted before reporting a required event.

Test the replacement path as a series of milestones

List possession, work authorization, construction completion, lease execution, tenant opening and rent commencement separately. A signed replacement lease can still require months of cash support. Include concessions and landlord work without treating the replacement tenant’s full annual rent as immediately available.

Assign each milestone a date, evidence owner and funding source. Update the runway when a milestone slips or a cost changes. The decision-ready output combines concentration, monthly deficit, usable cash, covenant timing and the earliest credible replacement collections. That shows how long the property can fund the disruption and when an additional financing or equity response must be secured.