Paying off a CMBS loan at a discount: how a DPO gets approved

A discounted payoff (DPO) retires a CMBS loan for less than the balance. The special servicer accepts one only if it is likely to recover at least as much, in present value, as the alternatives. In BANK5 2025-5YR14 the controlling bondholder can block it within 10 business days, and the special servicer earns a 1% liquidation fee on the payoff.

These terms come from the pooling and servicing agreement (PSA) of BANK5 2025-5YR14, this site’s reference deal. Your trust’s agreement governs, and nothing here is legal or tax advice.

How the special servicer decides

The special servicer must service the loan for the bondholders “as a collective whole” and aim for the best recovery on a net present value basis (PSA 3.01(a)). Its job, before it forecloses, is to look for “satisfactory arrangements (including by way of a discounted pay-off)” (PSA 3.09(a)). In practice it builds a table like this one, and so should you:

Path	What the trust collects	What it costs the trust, and when
Your DPO	Your offer, in cash, now	Little delay; the liquidation fee
Modification	Payments over the extended term, and the balloon	Risk the loan defaults again; the workout fee
Note sale	The best cash bid for the loan	Marketing time; a discount buyers demand
Foreclosure or deed, then resale	Sale price of the property, later	Legal costs, carrying costs, advances with interest, time, the liquidation fee

The asset status report the special servicer must deliver within 60 days of transfer has to include exactly this kind of present-value comparison, with its assumptions (PSA 3.19(d)). A DPO offer that clearly beats the foreclosure column, after time and costs, is hard to refuse. One that only matches today’s appraised value may not be enough, because the appraisal is the starting point of every column.

Who signs off

Accepting a discounted payoff is a Major Decision: the PSA lists it as a change to a material term “including, without limitation, the timing of payments and acceptance of discounted payoffs” (PSA 6.08(a)(ii)). The special servicer sends its recommendation to the Directing Certificateholder, the representative of the most junior bondholders in control, which has 10 business days to object in writing; silence counts as approval. Once appraisal reductions push that class below 25% of its original balance, a Control Termination Event occurs and the Directing Certificateholder is consulted instead of asked (PSA 1.01, “Control Termination Event”). See appraisal reductions for how that happens.

The controlling class holds the bonds that take the first loss. A DPO turns its expected loss into a realized one now, so it may prefer to wait for values to recover. That is a reason to show, with numbers, why waiting costs more.

What it costs

The special servicer earns a liquidation fee of 1% of a “full, partial or discounted payoff”, net of the related liquidation costs, raised up to 3% if needed to reach $25,000 (PSA 1.01, “Liquidation Fee”, “Liquidation Fee Rate”). The fee is reduced by modification fees paid on the loan in the prior 12 months. The special servicing fee, 0.25% a year with a $3,500 monthly minimum, runs until the payoff closes. Run the numbers with the special servicing fee calculator.

One exception matters: if the loan went to special servicing only because the balloon or a payment was missed, and it is refinanced or repaid in full within 120 days of maturity, there is no liquidation fee at all. A DPO is not a payment in full, so the exception does not apply to it. See missed maturity.

Funding a DPO

The trust is selling a release of the debt for cash, so the offer has to come with real money: typically a new first mortgage sized to today’s income, new equity, or both. Servicers commonly want proof of funds, a short closing timeline and a deposit before they take an offer to the controlling bondholder. If the gap between the new loan and the payoff is too large for you to fill alone, the options are a partner, preferred equity or mezzanine capital.

Janover Capital LLC can talk through the takeout and the gap on the troubled loan desk; for a straight refinance quote, get a CMBS quote. It is not your servicer or lender, and contacting it notifies no one.

Terms to negotiate, with your lawyer

• Releases. A release of the borrower and the guarantor from the loan, the guaranty and any environmental indemnity, as far as the trust will give one.
• Reserves and cash. What happens to escrows, reserves and cash held in the lockbox: credited to the payoff or returned.
• Timing and default interest. A closing date the takeout lender can meet, and what happens to default interest if it slips.
• Taxes. The forgiven amount can be taxable. The master servicer reports forgiveness of debt on Form 1099-C (PSA 3.09(f)); IRS Publication 4681 explains canceled debt and the exclusions. Get tax advice before signing.

A DPO versus buying the note

Some owners try to have an affiliate buy the loan instead. In this agreement a borrower, its manager, anyone owning 25% or more of it and their affiliates are “Interested Persons”. The trustee decides whether their offer is a fair price, and below the full purchase price it only qualifies if it is the highest bid and at least two independent offers were received (PSA 3.16(a)(iv)). How note sales work: CMBS note sale.

Sources: BANK5 2025-5YR14 PSA, dated as of April 1, 2025, sections 1.01, 3.01(a), 3.09(a) and (f), 3.16(a), 3.19(d), 6.08(a); IRS Publication 4681.