Defaulting on a CMBS loan: what happens, and in what order

A CMBS loan in payment default moves to a special servicer once a payment has gone 60 days unpaid, or at once if the balloon is missed without a signed refinancing commitment. Default interest and late charges accrue, an appraisal follows at 120 days, and the servicer weighs a workout against foreclosure on a present-value basis.

The rules below come from the pooling and servicing agreement (PSA) of BANK5 2025-5YR14, a conduit trust from April 2025 that this site uses as its reference deal. Your trust has its own agreement, close to this one but not identical, and your loan agreement sets your default rate, cure periods and guaranty. Nothing here is legal advice.

Two kinds of default

Monetary. A missed monthly payment, or a balloon not repaid at maturity. These are the defaults the PSA’s clock runs on.

Non-monetary. Breaking a covenant: letting required insurance lapse, transferring an interest in the borrower without consent, adding debt, missing financial reporting. The PSA treats one of these as a transfer event when it could materially impair the property as security and stays uncured past its cure period, or 60 days if the loan names none (PSA 1.01, “Servicing Transfer Event” (iv)). A cash management trigger in your loan agreement can also sweep the property’s cash before any payment is missed: see CMBS cash management.

What happens, day by day

When	What happens	Source
Due date	Payment due. Your loan documents set any grace period.	Loan documents
Day 30	The monthly SEC filing shows the loan 30 to 59 days delinquent.	Schedule AL payment status code
Day 60	Servicing Transfer Event: the loan moves to the special servicer, and its fee starts.	PSA 1.01, “Servicing Transfer Event” (ii)
Within 60 days of transfer	The special servicer delivers an asset status report: its recommendation and a present-value comparison of the options.	PSA 3.19(d)
Within 30 days of becoming a Defaulted Loan	An appraisal is ordered, the first step toward a possible note sale.	PSA 3.16(a)(i)
Day 120	Appraisal Reduction Event: the appraisal decides how far advances to bondholders are cut.	PSA 1.01, “Appraisal Reduction Event” (i)
Any time after default	Acceleration and other remedies, which the controlling bondholder can block while it holds control.	PSA 6.08(a), Major Decision (xviii)

A missed balloon runs on a different track with a 120-day window to close a refinance or sale. That is covered on missed maturity, and both tracks are on the servicer clock.

Default interest and late charges

Your loan agreement sets the default rate and the late charge. The PSA calls both “Penalty Charges”. What is collected first repays interest on the master servicer’s advances and the trust’s extra costs on your loan, including the special servicing fee, and only the remainder goes to the servicers as pay (PSA 3.11(d)).

Two things follow. A cure has to cover more than the missed payments: expect to be asked for default interest, late charges, advances with interest and the servicer’s costs. And those charges are negotiable: the PSA’s list of changes the controlling bondholder can block covers monetary terms “other than late fees and Default Interest” (PSA 6.08(a), Major Decision (ii)).

Non-recourse, until a carve-out is triggered

The BANK5 2025-5YR14 prospectus describes its loans as “generally non-recourse in nature”, with carve-outs for liabilities such as fraud and certain voluntary insolvency proceedings, often guaranteed by an affiliate of the borrower. A default by itself usually leaves the lender with the property. Certain acts during a default can turn that into personal liability under the guaranty, which is why every step below runs past a lawyer first. For how non-recourse debt is structured, see non-recourse CMBS loans.

What the special servicer is weighing

It must act for the bondholders as a whole and maximize recovery on a net present value basis (PSA 3.01(a)). It can agree to a modification of a defaulted loan if that is reasonably likely to recover at least as much, discounted at the mortgage rate, as liquidating the loan (PSA 3.18(b)). It must try to foreclose or otherwise take the property only when “no satisfactory arrangements (including by way of a discounted pay-off)” can be made (PSA 3.09(a)). The menu:

• a modification, maturity extension or A/B note split;
• a forbearance while you refinance or sell;
• a discounted payoff, usually funded by a new loan and new equity;
• a sale of the note to a third party;
• a deed in lieu, a receivership, or foreclosure.

What to prepare

1. Your loan agreement, guaranty, cash management agreement and any default notice, read with counsel.
2. A current rent roll, trailing twelve-month operating statement, this year’s budget and capital needs.
3. A short written explanation of what caused the default and what fixes it, with numbers. Rev. Proc. 2009-45 lets a servicer rely on credible written statements from the borrower.
4. A priced alternative: what a refinance would size to today, what new equity could add, or what a sale would net. That is the comparison the asset status report makes.

If the alternative is a takeout refinance, a recapitalization or a sale, Janover Capital can talk it through on the troubled loan desk. It is not your servicer or lender, and contacting it notifies no one.

When to call a lawyer

Before you miss a payment on purpose, and immediately if you receive a notice of default or acceleration, a foreclosure filing, a motion to appoint a receiver, or a demand under your guaranty, or if anyone is considering a bankruptcy filing. The master servicer reports forgiven debt to the IRS on Form 1099-C, and foreclosures and abandonments on Form 1099-A or 1099-C (PSA 3.09(f)); IRS Publication 4681 explains how canceled debt and foreclosures are treated. Ask a tax adviser before you sign a workout.

Sources: BANK5 2025-5YR14 PSA, dated as of April 1, 2025, sections 1.01, 3.01(a), 3.09, 3.11(d), 3.16(a), 3.18(b), 3.19(d) and 6.08(a); BANK5 2025-5YR14 prospectus, filed April 2, 2025, “Risk Factors” on non-recourse loans; Rev. Proc. 2009-45.