In one sentence
A loan requirement that the borrower submit, and sometimes obtain lender approval of, the property's operating and capital budget each year.
The longer version
On many commercial loans the lender has a say in the property's annual budget, particularly capital spending. Approval rights protect the collateral from underinvestment or cash stripping.
Budget submissions and approvals are annual servicing events with documentation, and a common source of back-and-forth that benefits from a tracked, dated process.
Common questions
- What is annual budget approval in a commercial loan?
- A requirement that the borrower submit the property's operating and capital budget each year, and in some loans obtain the lender's approval before it takes effect.
- When does a lender approve the budget?
- Often only during a cash management period or in loans where the lender funds operating expenses from controlled accounts, because then the budget controls cash.
- What happens if the budget is not approved?
- Loan documents usually let the borrower operate under the prior year's budget, adjusted for non-discretionary items such as taxes and insurance, until approval.
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