A balance sheet loan is a commercial mortgage that a bank, credit union or life company holds on its own books rather than selling or securitizing, which gives the lender discretion to negotiate bespoke terms and to hold the borrower to covenants tested on the lender’s own definitions, often at both the property and the guarantor level. Relationship lenders are flexible when things go wrong and demanding about reporting when things go right. The owner’s job is to know, before every test date, exactly what the lender will calculate. This guide covers the covenants that come with bank debt, how they are defined, and how to track them across a portfolio with several banks.
Why bank covenants are the hardest to automate
Agency and CMBS documents follow forms. Bank documents follow the credit committee. Two loans from the same bank can define NOI differently. Across a portfolio with six banks, there are six definitions of revenue, six treatments of management fees and reserves, and six debt service conventions. As loanboss.com says of balance sheet loans, some of your most important relationships have some pretty unique terms.
The covenants
DSCR and debt yield with adjustments
The financial covenants are ratios, but the inputs are defined line by line. Common adjustments: exclude tenants with notice to vacate within a window, include executed leases commencing within a window, exclude free rent, apply a vacancy factor at the greater of actual or a floor, set management fees at the greater of actual or a percentage of revenue, deduct a capital reserve per unit or per square foot, and compute debt service at the greater of actual, a hypothetical amortization at a stressed rate, or the fixed rate in place. Tests run on current, T-3 or T-12 NOI, sometimes all three. See DSCR and debt yield tests with lender-specific adjustments and T-3 vs T-12 NOI.
LTV
Tested on the lender’s appraisal, sometimes with a right to reappraise at the borrower’s cost if the lender believes value has fallen. Track the appraisal date, the value, the covenant and the reappraisal rights. See loan-to-value.
Guarantor covenants
Minimum net worth and liquidity for the guarantor, tested annually on personal or entity financial statements. These are portfolio-level obligations: one guarantor may stand behind loans at five banks, each with its own threshold and reporting deadline.
Prepayment
Banks use the widest range of prepayment structures: lockout, flat percentage, step-down, spread maintenance, yield maintenance, make-whole and swap breakage where the loan is swapped. Step-down dates and the cost on any date belong in the tracking. See real-time prepayment calculations.
Hedge requirements
Floating-rate bank loans often require a cap or a swap with the same bank. Swap breakage becomes part of the prepayment cost, and settlement calculations need reconciling each period. See hedge requirements.
Recourse and burndown
Full or partial recourse that reduces on DSCR, LTV or leasing milestones. See recourse and guaranty burndown.
Deposit and reporting covenants
Operating account requirements, minimum deposits, and reporting deadlines for property financials, rent rolls, guarantor statements and compliance certificates. Late delivery is a technical default.
A worked example: three banks, three definitions
An owner holds bank loans on three retail centers with three regional banks. Each loan agreement defines DSCR.
Bank A. NOI on trailing twelve months, excluding tenants in default or with notice to vacate, vacancy at the greater of actual or 7%, management fees at the greater of actual or 4%, capital reserve at $0.20 per square foot. Debt service is actual. Threshold 1.30x, tested annually.
Bank B. NOI on trailing six months annualized, including executed leases commencing within 90 days, vacancy at actual, management fees at actual, capital reserve at $0.15 per square foot. Debt service is the greater of actual and a 25-year amortization at the note rate. Threshold 1.25x, tested semi-annually.
Bank C. NOI on trailing twelve months, excluding non-recurring income and percentage rent, vacancy floor 5%, management fees at 3% regardless of actual, no reserve. Debt service is a 30-year amortization at the greater of the note rate and the 10-year Treasury plus 300. Threshold 1.20x, tested annually. Guarantor net worth $25 million and liquidity $2.5 million, tested annually on a personal financial statement due within 120 days of year end.
On the same properties’ books, an internal spreadsheet with one DSCR formula shows 1.45x, 1.41x and 1.38x. On each bank’s definition: 1.34x, 1.27x and 1.16x. Bank C’s loan is in breach and the owner does not know it. The guarantor’s liquidity is $2.7 million, with a $400,000 capital call due next month for a fund commitment.
Illustrative example:
| Bank | NOI basis | Debt service | Threshold and frequency | Internal spreadsheet DSCR | Lender-definition DSCR |
|---|---|---|---|---|---|
| Bank A | T-12, excluding tenants in default or with notice to vacate, 7% vacancy floor, 4% management fee floor, $0.20 per square foot reserve | Actual | 1.30x, annual | 1.45x | 1.34x |
| Bank B | T-6 annualized, including executed leases commencing within 90 days, actual vacancy and fees, $0.15 per square foot reserve | Greater of actual and a 25-year amortization at the note rate | 1.25x, semi-annual | 1.41x | 1.27x |
| Bank C | T-12, excluding non-recurring income and percentage rent, 5% vacancy floor, 3% management fee, no reserve | 30-year amortization at the greater of the note rate and the 10-year Treasury plus 300 | 1.20x, annual | 1.38x | 1.16x, in breach |
The banks are not being difficult. They wrote what they wanted, and the owner agreed. The tracking has to match the agreement.
Common mistakes on bank loans
- One DSCR formula for every lender. The breach hides in the definition.
- Tracking the guarantor covenant per loan. It is a portfolio obligation; the most restrictive bank sets the floor.
- Assuming the bank tests annually so monthly does not matter. The trend is the warning; the test date is the consequence.
- Missing a reporting deadline because the property performs. Technical defaults do not care about NOI.
- Not calendaring the swap’s breakage on a swapped loan. It is part of the prepayment cost, and it can be a receipt or a payment.
Tracking across several banks
- Abstract each loan’s definitions as well as its thresholds. The threshold is one number; the definition is twenty fields.
- Connect the financials so the adjustments apply to live rent rolls and operating statements.
- Test monthly, even if the lender tests annually. The trajectory is the early warning.
- Track guarantor covenants at the portfolio level, with the most restrictive threshold across all banks as the operating floor.
- Calendar every deadline: test dates, reporting deadlines, appraisal rights, step-downs. See loan critical date tracking.
How this looks in LoanBoss
DSCR and debt yield testing requirements are fully automated and customizable to each distinct requirement: every index, payment convention and business day adjustment; every amortization type including mortgage style, straight line, step-up, step-down, fixed payment, interest-only periods and fully custom schedules; custom draws, paydowns and accounting overrides. Every prepayment structure is modeled, with alerts before step-downs and exact prepayment cost for any date. Hedges are valued with real-time rates and settlement calculations reconcile to the bank’s. Recourse and burndown are tracked. Escrows and reserves are tracked. One click produces DSCR and debt yield for every lender adjustment across the portfolio.
Frequently Asked Questions
Our bank’s compliance spreadsheet differs from ours. Whose is right?
The loan agreement’s. Reconcile both to the document. Most differences are in tenant inclusion rules and the debt service convention.
Do banks really call technical defaults for late reporting?
Rarely, but they reserve the right, and a technical default in one loan can cross-default others. Deliver on time.
How should we handle a covenant we expect to breach?
Tell the bank before the test date with a plan. Relationship lenders respond to early notice; they respond badly to surprises.
Can guarantor covenants be tracked in the same platform?
Yes. LoanBoss tracks guarantor obligations across loans so the most restrictive requirement is visible.
How often should we test a bank covenant?
Monthly, even if the lender tests annually. The trend is the warning and the test date is the consequence, so a monthly test on the lender’s definition shows the trajectory before the bank sees the result.
Related reading
- Covenant compliance software compared
- Managing agency loans
- Tracking CMBS loans as a borrower
- DSCR vs. debt yield
- Covenant in the glossary
Bank covenants are written one loan at a time. LoanBoss abstracts every definition so the test the platform runs is the test the bank runs.
Sources
- Federal Reserve, Senior Loan Officer Opinion Survey on CRE lending standards (2026)
- OCC, Commercial Real Estate Lending handbook
- Public bank loan documentation and covenant compliance certificate forms
- LoanBoss balance sheet loan documentation and sample DSCR test, loanboss.com