Tangible net worth covenant
A tangible net worth covenant requires a borrower under a credit facility to keep its net worth, excluding intangible assets such as goodwill, above a set minimum. Breaching it can let the provider cut or cancel the line.
How a tangible net worth covenant works
Tangible net worth is equity minus intangible assets (goodwill, capitalized software, some deferred costs, and often loans to owners or affiliates). Facility agreements set a minimum, sometimes alongside a maximum ratio of liabilities to net worth and a minimum of unrestricted cash, and test it each quarter from the lender’s financial statements.
Federal Reserve researchers describe warehouse covenants that require minimum net worth, unrestricted cash and liability-to-net-worth ratios, and sometimes profitability. They note that in normal times providers often waive or renegotiate a breach, but under stress a provider’s incentive is to pull the line and sell the collateral.
Why it matters to a private lender
Net worth minimums grow with line size, so the covenant can cap how big a line you qualify for. Distributions to owners, a loss quarter or a write-down on a defaulted loan can push you below the minimum when you least expect it. Track the covenant monthly, not only at quarter-end.
Example
Hypothetical. A line requires tangible net worth of at least $5,000,000. A lender reports $6,000,000 of equity, but $700,000 is a loan to an affiliate and $400,000 is goodwill, so tangible net worth is $4,900,000 and the covenant is breached.
See what capital partners review instead in the lender due diligence checklist.
Where Lender Capital fits
Lender Capital places first-lien, business-purpose real estate loans with capital partners. You apply once, then submit each loan with the full file. We send it only to capital partners whose criteria it fits, one partner funds the whole loan at closing and it is assigned to them. You keep your points (less the placement fee), earn the spread above the partner’s rate and service the loan. You pay a placement fee only when a loan funds.
Lender Capital is a business-to-business platform. This page is general information, not legal, tax or securities advice. Terms of warehouse lines and other funding sources vary by provider; confirm them with each provider and your counsel.