What a CMBS servicer can change, and who has to agree

The tax rule

Under 26 CFR 1.860G-2(b), a "significant modification" is any change that would count as an exchange of debt instruments for income tax purposes. A loan significantly modified after it enters a REMIC is treated as newly issued, and the deemed sale of the old one is a prohibited transaction. These changes are not significant modifications, whatever their size:

• changes occasioned by default or a reasonably foreseeable default;
• an assumption of the loan, or a waiver of a due-on-sale or due-on-encumbrance clause;
• a change in collateral, guarantees or credit support, or a switch between recourse and non-recourse, if the loan stays principally secured by real property.

"Principally secured" means the real property is worth at least 80% of the loan's adjusted issue price after the change, based on a current appraisal, an updated original appraisal, the price in a sale where the buyer assumes the loan, or another commercially reasonable valuation.

You do not have to be in default to start talking

Rev. Proc. 2009-45, IRB 2009-40 says discussions about a possible modification "may occur at any time and need not begin only after the loan is in default." A servicer can modify a performing loan if it reasonably believes, after a diligent contemporaneous determination, that there is a significant risk of default at maturity or earlier, and that the change substantially reduces that risk. There is no outer limit on how far ahead the foreseen default can be: the IRS accepts more than a year out. The determination can rely on credible written factual statements from the borrower, so a clear written case from you is part of the file.

Who has to agree

In BANK5 2025-5YR14, the special servicer cannot take a major decision if the Directing Certificateholder, the representative of the most junior bondholders in control, objects in writing within ten business days of its recommendation; silence counts as approval. Major decisions include foreclosure, any change to a monetary term or a material non-monetary term, discounted payoffs, maturity extensions, waivers of due-on-sale clauses, assumptions that release a borrower or guarantor, and collateral releases. Once that class is reduced below 25% of its original balance, it is consulted instead.

The special servicer must act for the trust and its bondholders as a collective whole, aiming to maximize recovery on a net present value basis, and without regard to its own fees. That standard is the frame for any proposal you make: show that your plan returns more, in present value, than the alternatives.

Sources: 26 CFR 1.860G-2(b)(b)(1)-(7) (eCFR, current text); Rev. Proc. 2009-45, IRB 2009-40, sections 3.11, 5.03, 5.04; T.D. 9463 (Sept. 16, 2009), IRB 2009-40; Pooling and Servicing Agreement, dated as of April 1, 2025 (BANK5 2025-5YR14), sections 3.01(a) and 6.08(a) and the definitions of "Major Decision" and "Control Termination Event".