Commercial Property Loan: Free Rent vs Cash DSCR

A signed commercial lease does not necessarily produce its stated monthly rent immediately. Free-rent periods, tenant improvements and delayed occupancy can create a gap between the rent roll and cash available for loan payments. Evaluate both the stabilized leasing case and the actual collection schedule.

The interagency commercial real estate workout statement published by the Federal Reserve emphasizes realistic cash-flow analysis and includes examples involving rental weakness. It is supervisory guidance, not an entitlement to a modification or a single DSCR formula for every property.

Turn lease terms into monthly receipts

For each tenant, record the lease commencement, rent commencement, free-rent interval, scheduled increases, reimbursements and security deposit separately. A deposit held under lease terms is not automatically unrestricted rental income. Ask the property accountant how deposits and concessions should be reported.

Distinguish contractual rent, actual collections and the income definition used in the loan documents. A lender may use a different underwriting treatment from your cash budget. Explain the reconciliation rather than replacing one figure with another and calling the result official coverage.

A hypothetical free-rent year

Assume a small property has $30,000 of scheduled monthly base rent when fully paying. A new tenant represents $10,000 of that total and receives three months without base rent during the first year. The other tenants pay throughout the year. Ignore reimbursements, bad debt, leasing costs and taxes beyond the operating expenses below.

The cash case uses $150,000 ÷ $144,000 = 1.0417 before rounding. That is a planning ratio, not a covenant certification, appraisal or forecast for a specific building. The inputs are invented and exclude capital expenditure, leasing commissions, reserve requirements and income tax.

Look inside the annual total

During each free-rent month, assumed receipts are $20,000 and operating expenses are $15,000. Only $5,000 remains before the $12,000 monthly debt payment, creating a $7,000 monthly gap. Across three months, the modeled cash reserve need is $21,000 before excluded costs.

Later months can produce surpluses without solving the early timing problem. A lender may require reserves or other controls under its own terms. Do not assume a favorable annual average allows the property to skip payments during a concession period.

Build a separate line for tenant improvements and leasing commissions. Those costs may precede rent commencement and can make the actual low point worse than the simple $21,000 gap. Include only confirmed financing or owner contributions as available sources.

Stress occupancy and collections separately

A signed tenant can occupy space yet pay late. A vacant suite can have no collectible rent at all. Model those cases independently instead of applying a single unexplained haircut to revenue. Track which assumptions are supported by signed leases and which rely on future leasing.

The business DSCR calculator can compare annual scenarios using the income and debt totals you select. Its output does not implement a commercial mortgage's reserve, concession or covenant adjustments. Preserve a bridge from the property records to every input.

Present the lender with a dated plan

If a concession will reduce near-term cash below scheduled payments, contact the lender before the gap. Provide the rent roll, lease amendments, monthly collection forecast, expenses, reserve balances and proposed sources. Any accommodation requires the applicable lender review and documented terms.

Do not characterize a temporary reserve draw as recurring operating income. Likewise, an owner contribution can fund a shortage without establishing that the property itself generates enough cash to service debt.

The commercial balloon-loan guide addresses maturity risk. Review that separately: reaching stabilized rent may improve monthly cash flow while leaving a substantial refinance obligation at the end of the loan.

Practical review: Commercial Property Loan: Free Rent vs Cash DSCR

For this commercial property question, begin with the record that proves the current loan free status. Write its date beside the rent cash amount and keep the document that explains the dscr commercial treatment. The purpose is to make the commercial-loan decision traceable: someone reviewing it later should be able to see which property figure was used, when the free event occurred, and why the rent action followed. If a phone conversation changes the cash plan, request written confirmation so the dscr timeline does not depend on memory.

A useful commercial property stress test is to move the expected loan date later while leaving the required free date unchanged. Then test a second version in which the rent amount is slightly higher than expected. These are not predictions. They show whether the cash plan still works when the dscr process takes longer or the commercial cash requirement changes. Keep essential cash outside the commercial transaction unless using that reserve is an intentional, documented part of the decision.

Suppose, only as a hypothetical commercial property timing example, that $1,600 remains available after the immediate loan step, a $950 free obligation comes due first, and a $700 rent credit is expected later. The later cash credit cannot pay the earlier dscr bill unless another source of commercial cash exists. Paying $950 from $1,600 leaves $650 before the expected credit. Replace these invented figures with the actual commercial records; the example demonstrates timing, not an appropriate reserve or recommended transaction.

For the commercial property comparison, also model the unchanged case. Ask what the loan balance, free payment, rent fee, or cash obligation would look like if no action occurred for one more cycle. Compare that result with the proposed dscr change using the same cutoff date. This prevents an old commercial balance from being compared with a newer commercial quote and helps isolate whether the apparent improvement comes from the transaction itself or merely from different dates.

Avoid double counting in the commercial property math. If loan proceeds directly pay a free balance, do not also record those proceeds as free rent cash. If a cash refund reduces an account, do not count the same dscr refund again unless it is actually returned for spending. If a commercial fee is financed, include it in the amount owed even when it does not leave the bank account immediately. These checks keep the commercial model consistent.

Before relying on the commercial property result, resolve who controls the loan step, what proves the free step is complete, whether changing the rent amount triggers another review, and when the cash posting becomes effective. Use Federal Reserve: interagency commercial real estate accommodation and workout statement for the source-specific rule discussed above and the site's business dscr calculator resource for the adjacent calculation where relevant. Neither source can replace the actual dscr agreement, commercial account history, or transaction record.

Finally, reconcile commercial property after completion. Compare the expected loan outcome with the next official free record; verify the rent amount, cash date, remaining dscr balance, and next commercial obligation. If something differs, describe the discrepancy with exact figures and dates. That final commercial reconciliation turns the guide from a planning exercise into a documented check of what actually happened.

Sources and scope

• Federal Reserve: interagency commercial real estate accommodation and workout statement

Source guidance checked 2026-11-03. The linked material has its own publication date and scope; a check date does not establish a current lender offer. Examples are hypothetical unless explicitly identified otherwise.

Continue with Business DSCR Calculator, Commercial Property Balloon vs Full Amortization or browse the loan education library.

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