When a CMBS trust sells your loan: how a note sale works

A CMBS trust can sell a defaulted loan to a new holder instead of foreclosing. In BANK5 2025-5YR14, the special servicer orders an appraisal within 30 days of the transfer, sets a fair value, and markets the note when no workout or discounted payoff will do better. Sales are for cash; the special servicer earns a 1% liquidation fee.

The rules here are from Section 3.16 of the pooling and servicing agreement (PSA) of BANK5 2025-5YR14, the reference deal on this site. Older deals use different sale procedures, and your trust’s agreement governs.

When a loan can be sold

A loan can be sold once it is a Defaulted Loan: specially serviced and at least 60 days late on a monthly payment, delinquent on its balloon (120 days if a signed refinancing commitment or sale contract was delivered), or accelerated by written notice (PSA 1.01, “Defaulted Loan”). Then:

1. Appraisal and fair value. Within 30 days after a Defaulted Loan becomes specially serviced, the special servicer orders an appraisal, and within 30 days of receiving it sets a fair value for the loan, which it can revise as circumstances change (PSA 3.16(a)(i)).
2. Decision to sell. It solicits offers when it decides that “no satisfactory arrangements (including by way of a discounted pay-off)” can be made and a sale is in the trust’s best economic interest, marketing the loan to maximize its value on a net present value basis (PSA 3.16(a)(iii)).
3. Notice. At least 10 days’ written notice to the trustee, master servicer, operating advisor and Directing Certificateholder before it sells (PSA 3.16(a)(iii)).
4. The bid. Cash only (PSA 3.16(c)). The special servicer accepts the highest offer it judges a fair price, considering any appraisal from the prior nine months, occupancy, physical condition and the local economy (PSA 3.16(a)(iv)).

Until a sale closes, the special servicer keeps pursuing other strategies, including a workout or foreclosure (PSA 3.16(a)(v)).

Who gets a say, and who can buy first

• The controlling bondholder. Selling a defaulted loan for less than its Purchase Price is a Major Decision the Directing Certificateholder can block while it holds control (PSA 6.08(a)(iii)). The special servicer may also reject the highest bid, after consulting it, if that serves bondholders better (PSA 3.16(a)(iv)(B)).
• Mezzanine lenders and other noteholders. Where the loan has a mezzanine loan or a companion note in another trust, their intercreditor agreement can give them a right to buy the loan and cure defaults first (PSA 3.16(a)(ii), 3.16(e)). If your property has mezzanine debt, that lender may be the first buyer.
• The Purchase Price. It is the yardstick: the principal balance, accrued interest at the note rate (not default interest), unreimbursed advances with interest, special servicing fees and other trust expenses on the loan (PSA 1.01, “Purchase Price”). A bid at or above it is not a Major Decision.

Can the borrower bid?

The PSA treats a borrower, a property manager, anyone owning 25% or more of either, and their affiliates as Interested Persons (PSA 1.01, “Interested Person”, “Borrower Party”). Their bids face extra tests:

• the trustee, not the special servicer, decides whether the bid is a fair price, unless the bid is at least the Purchase Price and the highest received;
• below the Purchase Price, an Interested Person’s bid is fair only if it is the highest and at least two other offers came from independent third parties;
• the trustee can hire an independent valuation expert at the bidder’s expense (PSA 3.16(a)(iv)).

On a loan split into pari passu notes held by several trusts, the whole loan is sold together and “the related Mortgagor and its agents and Affiliates shall not be permitted to submit an offer” (PSA 3.16(d)). Check which kind your loan is before you plan a bid through a partner. A discounted payoff is often the more direct route.

Why selling a loan is allowed

A REMIC pays a 100% tax on income from prohibited transactions, and selling a loan it holds is generally one. The statute excepts “a disposition incident to the foreclosure, default, or imminent default of the mortgage” (26 U.S.C. 860F(a)(2)(A)(ii)). That exception is why a note sale only happens to loans in or near default.

What it costs, and who bears it

The special servicer earns a 1% liquidation fee on the sale proceeds, net of liquidation costs, up to 3% if needed to reach $25,000 (PSA 1.01, “Liquidation Fee”). That fee and the discount come out of what bondholders receive. Your debt does not shrink because the trust sold it cheaply: the buyer holds the full claim under your loan documents, and any guaranty goes with the loan. The sale is on a “servicing released basis” (PSA 3.16(f)): the trust’s servicers drop out.

What changes for you

You deal with a new lender that owns the loan outright, typically a debt fund or distressed buyer that paid a discount. It is not bound by the trust’s REMIC limits, its servicing standard or a controlling bondholder, so it can agree to things the trust could not, or move faster to foreclose. Its view of the deal depends on what it paid. If you expect a sale, the time to make your own proposal, a payoff, a partner or a recapitalization, is before the bid date.

Janover Capital LLC can talk through refinancing and recapitalization options on the troubled loan desk. It is not your servicer or lender, and contacting it notifies no one. Find the special servicer running the sale on who is my special servicer.

When to call a lawyer

Before you or anyone related to you bids, before you talk to a buyer, and as soon as a new holder sends a notice. A lawyer should also confirm what your guaranty covers once the loan changes hands. This page is not legal advice.

Sources: BANK5 2025-5YR14 PSA, dated as of April 1, 2025, section 1.01 definitions, sections 3.16 and 6.08(a); 26 U.S.C. 860F(a).