CMBS (commercial mortgage-backed securities) workouts unfold inside a specific envelope — the pooling and servicing agreement (PSA), the special servicer's mandate, REMIC tax rules, and B-piece investor economics. Once a loan is in or near default, the special servicer chooses among five primary paths.
The five paths
- Discounted payoff (DPO). The borrower pays the loan off below face — meaningful below outstanding principal — typically in lieu of foreclosure, when the borrower has fresh capital and the lender's foreclosure-recovery math favors taking the discount now.
- Note sale. A third party buys the loan from the trust, often at a discount, and takes over the workout. Useful when the trust wants the position off its books.
- Modification & extension. The special servicer agrees to change terms (rate, maturity, amortization) so the loan can perform again — when the asset is fundamentally sound but mistimed.
- Deed-in-lieu. The borrower surrenders the property to the lender, avoiding a full foreclosure timeline.
- Receivership → foreclosure → REO. The lender takes control and ultimately disposes of the asset. The longest, most adversarial path.
Why the path matters. Each path has a different IRR profile, timeline, and capital-stack outcome. Modeling all five in parallel against real market comps is where the analytical work pays off — and where a borrower or a capital partner decides which path to push for.
Where this fits
This resource supports the broader distressed-property practice. For office-specific distress, see the loss-mitigation and short-sale resources; for the analytical workflow on a specific asset, start a conversation from the home page. This is general educational information, not legal or financial advice — CMBS workouts are legally significant; engage qualified counsel.
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