What is a Cash Sweep?

Cash Sweep

A cash sweep is when money is automatically moved into a bank account based on a certain threshold. The money is then put into a higher interest-earning account such as a high interest saving account, money market mutual funds, or short-term certificates or can be used to payoff debt.

Sweep of Uninvested Cash

When does a cash sweep occur? A cash sweep can be required by a loan agreement or be self-imposed. Some loan agreements have a fixed amount swept each month, while some sweep and transfer all proceeds until the investment is sold. Some loan agreements also have requirements to start sweeping the levered cash flows if a certain DSCR, debt yield percentage, occupancy requirement, or combinations of any three isn’t met each month. This is done to make sure there is enough cash to repay the loan at maturity and gives lenders control over your cash. The cash swept can then be released when the threshold that did not pass or some higher threshold is then met. This requirement also can sometimes be met faster by making a payment to paydown the debt balance outstanding. It is therefore important to make sure the tests are not failed because it can take a long time to get the money back from the lender and can reduce your potential distributions.

What is Cash and Sweep Vehicle — The Good & Bad

One of the benefits of an optional cash sweep is that it is an automated process and moves cash that otherwise would just sitting be in the operating account. This money is automatically transferred into the high-interest account at the end of each day and is automatically transferred back into the operating account if the operating account goes below a certain minimum balance set or when needed to make operational payments. The money in the cash sweep account is still accessible when needed. One of the drawbacks is that banks sometimes charge a fee for sweep accounts, so it is important to make sure that the fees don’t outweigh they money saved using the sweep.

Cash and Sweep Vehicle

Cash sweeps can be a valuable tool while you are holding onto an investment and are not quite ready to make a distribution yet if the cash sweep is used wisely. It can also keep you accountable for making sure extra cash for an investment is being used to the best of its ability, whether that be making early debt repayments or simply holding onto the cash for future operating payments and earning a high rate of interest.

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About the Author

Brittany Martin is TSM’s Vice President who has developed real estate financial models for an extensive range of property types. She specializes in hotel and storage models. Please reach out to her if you have any questions on Cash Sweeps or if she can help you with your modeling needs.