Appraisal reduction calculator
When a CMBS loan is 120 days delinquent, or 90 days past a missed maturity, the special servicer orders a new appraisal. If 90% of the new value, plus reserves, less everything owed on top of principal, falls short of the balance, the shortfall is the Appraisal Reduction Amount. It cuts the interest the servicer advances to bondholders, and it can move control of the workout to a more senior class.
Worked example
A $30,000,000 loan appraises at $28,000,000. Ninety percent of that is $25,200,000; add $600,000 of reserves and subtract $1,400,000 of unpaid interest, advances and other amounts due, and the value side is $24,400,000. The balance exceeds it by $5,600,000, the Appraisal Reduction Amount. Interest advances on the loan drop to 81.3% of what is scheduled.
Why an owner should care
The reduction is written against the subordinate bonds for control purposes. In BANK5 2025-5YR14, the Directing Certificateholder controls major decisions only while its class, after appraisal reductions, is at least 25% of its original balance. A large enough reduction ends the junior bondholder's right to block decisions; it and the operating advisor are then consulted rather than asked to consent. The value the appraiser puts on the building is also the starting point for any discounted payoff or note sale conversation.
Appraisal came in low?
The gap between that number and your balance is the gap a recapitalization has to fill. The desk can look at it.