Preparing for CMBS workout and negotiating effectively.
CMBS workouts are high-stakes battles against unfavorable odds. Diligent preparation and strategic planning can secure concessions and save assets. Below are actionable, experience-based best practices—from pre-default planning to special servicer engagement and negotiation tactics.
by: Shlomo Chopp, Managing Partner
Properly facing a CMBS loan workout should feel like a critical, high-stakes project. You’re facing a rigorous counterparty under unforgiving rules and documents. But borrowers who prepare diligently and strategize can secure concessions to save their projects. This represents actionable best practices for borrowers, from before loan default looms, through the process of engaging with the special servicer. These are drawn from hard-won experiences and advisory insights that separate successful workouts from debacles.
1. Plan Early and Treat a POTENTIAL Workout Like a Mission-Critical Project
When chaos hits – it’s too late to start scrambling for answers. Long before your loan matures or hits a covenant trigger, you should be planning for various scenarios. Borrowers often fall into the trap of denial fueled by optimism, assuming “We’ll refinance or sell by then, no need to worry.” But market conditions (like today’s rising rates and tighter credit) can derail those hopes last-minute. This is what early planning means:
Know Your Loan Documents Cold: On the day that you close the loan, you (or someone on your team) should deeply understand every relevant section of your loan agreement, guarantees, and leases. What are your notification requirements? Do you have any extension options? What triggers default or recourse? What rights does the lender have on cash, reserves, approving leases, etc.? Being surprised by a clause (e.g. being unprepared that the lender can sweep your excess cash and resist it) undermines your credibility and disregarding loan terms puts you in harm’s way. Retain the right loan document lawyer to help you draft the best documents and advise you on what the final document actually requires of you.
Monitor Triggers and Timeline: If your loan has financial triggers (DSCR, occupancy), stay vigilant in monitoring these indicators. If you're approaching a potential breach of your DSCR trigger within the next two quarters, you could be facing a cash flow crunch. Likewise, if maturity is 12 months out and the refinancing picture looks bleak now, start investigating methods to potentially deal with a maturity default. This lead time is your window to assemble your team and plan (discussed more below).
Scenario Plan Like the Pentagon: Develop multiple scenarios—optimistic, moderate, and pessimistic—for both your asset's performance and broader market conditions. What if interest rates are 50 bps higher at your maturity? What if occupancy drops 5%? Identify what can occur for your debt service coverage to drop below 1.0x (negative cash flow), and game out whether at that point, you will be forced to subsidize the property with cash or default. Know those breaking points ahead of time. Most real estate borrowers aren’t as prepared as they think. Borrowers are by their nature optimistic and often dismiss downside scenarios, overestimate their inherent leverage and fail to prepare for negotiations. A workout can take two years, but decision time can come very quickly.
2. Pre-Default Positioning: Strengthen Your Hand Before You’re in Default
Once you miss a payment or violate a covenant, you lose certain freedoms of action – and you signal distress. Leverage shifts heavily to the lender after default, so in the period before a default, take steps to position yourself:
Optimize Property Operations and Appearance: It might go without saying, but a borrower attempting a workout must convince the lender that they are the best party to maximize the asset’s value. If the lender perceives that you’re not effectively managing the property, they may bypass negotiations and opt for foreclosure, entrusting the property to another party. So, prove them wrong. Maximize occupancy rates and maintain the property to the highest standard. Even with limited cash flow, avoid deferring essential maintenance, as it will likely be noted during the lender’s assessment. Show that you’re actively marketing vacancies, addressing any health/safety issues, and keeping tenants satisfied. Document these efforts (leasing reports, maintenance logs). If you can demonstrate, “We’ve done everything right managing this asset despite the market downturn,” you gain credibility. Conversely, if the servicer finds out you allowed the property to deteriorate or mismanaged it, you lose credibility in negotiations. Don’t give them a reason to say that you’re a bad borrower. Have them consider you part of the solution – not the problem.
Clean Up Any Technical Defaults or Open Issues: Perhaps you haven’t defaulted on payments yet, but maybe you breached a covenant or defaulted in a non-monetary manner (like timely financial reporting). Cure those if possible. If you have outstanding deferred maintenance that the loan agreement requires you to address (common in loans with holdback reserves), get it done or draw the reserve to do it before things escalate as the lender’s requirement to release funds will cease post-default. The goal is to not hand the special servicer an easy list of your shortcomings. It also avoids giving them cause to claim a recourse trigger (like failure to maintain the property could be a non-recourse carveout). Many borrowers neglect critical notices, fail to seek required consents, and end up triggering unnecessary defaults – or worse, personal recourse – at times, even without realizing it. Don’t be that person – be meticulous in loan compliance.
Consider Preemptive Engagement – Carefully: This is tricky. Servicers are generally unable to modify before a default due to REMIC rules. But you can talk to your master servicer or a special servicer if default is foreseeable (PSAs allow transfer for “imminent default”). Some borrowers choose to request transfer to special servicing in advance when a maturity default is certain, to start the process. This can be a double-edged sword: it signals you have an issue and starts incurring special servicing fees (which you ultimately pay). However, it might get the ball rolling on a resolution sooner. If you go that route, be prepared to sign a pre-negotiation agreement immediately (the servicer will demand it) and to submit a well-crafted proposal package (business plan, financials, etc.). One should engage professional advisors before taking this step, as they can communicate with the servicer more deftly (and sometimes informally feel out receptiveness).
3. Build Your “Workout Team” and Intel Network
A CMBS borrower should not go it alone. Assemble your team early:
Legal Counsel (Experienced in CMBS): Retain a legal expert with specific experience in CMBS loan workouts to navigate complex servicer and intercreditor matters. They are essential for navigating PSA nuances, negotiating, and protecting you from missteps. As noted earlier, top law firms often represent servicers, so find one that is not conflicted out – easier said than done. Your regular real estate attorney might say “I can handle it,” but if they’ve never dealt with a CMBS special servicer, tell them no thank you.
Financial/Restructuring Advisor: Consider hiring a restructuring advisory firm (like CASE) that focuses on CMBS debt. They can help craft a business plan, value analysis, and negotiation strategy. If they can’t articulate a strategy, then they should be ignored.
Hope, or a golf buddy, well, isn’t a strategy. Importantly, have insight into how different servicers behave. An advisor can also help diffuse animosity before it occurs, an issue that presents itself far to often in these negotiations. Lenders do take proposals more seriously when vetted by industry experts because it signals the borrower is organized and realistic. There’s a cost, but often a worthwhile investment given what’s at stake. Having specialists who know the lenders documents, real estate, and finance on your side “will make all the difference” in leveling the playing field.
Brokerage/Leasing Input: Even if you’re not otherwise planning to sell, involve a brokerage team and solicit Opinions of Value (BOV) and perhaps list the property quietly for backup offers. Also, top brokers can give insight on market rent, occupancy, and maybe identify interested buyers should an investor be needed. In many workouts, showing the servicer that “I’ve marketed the asset for sales and here’s the best offer” can justify your proposal terms. Just be cautious: openly listing a property that is underwater can be tricky (brokers may be hesitant, knowing it can’t trade free-and-clear without a deal with the lender).
Your Internal Team: Make sure your asset management, property management, and accounting folks are in the loop. You’ll need to produce a lot of information for the servicer (financials, budgets, leases, etc.) quickly. Having your books in order and prompt reporting will build credibility. Plus, if a receiver ever looms, you want no loose ends that undermine your credibility.
While building the team, also start gathering intel on the other side: Who is the special servicer on your deal? Who likely owns the controlling class? (Sometimes you can find this in bondholder reports or servicer commentary – e.g., if a particular fund is known to be the B-piece buyer). Research recent news: are there stories of that servicer granting extensions or doing loan sales? Knowing their playbook helps you tailor your approach.
4. Develop a Realistic Business Plan and Proforma Model for the Asset
Before you propose anything to the lender, underwrite your asset as if you were the lender. Also view this as if you are investing in the asset anew. Develop a comprehensive proforma that forecasts the property's cash flow over a realistic timeframe (e.g., 5-10 years). This model becomes the foundation and baseline for your workout ask. You will overlay you proposal and lenders counters on this to determine whether a workout is acceptable. Key elements:
Conservative Assumptions: Don’t assume sky-high rent growth or optimistic lease-up if market conditions don’t support it. The servicer will heavily scrutinize your numbers or commission their own appraisal. It’s better to slightly underplay and then demonstrate why even under this conservative case, a mod makes sense. For instance, if occupancy is 80% now, maybe assume only 85% in 2 years, not 95%. If current market rent is $20/SF, maybe use $21 next year, not $25. The plan should reflect the true competitive position of the property in the market – what an unbiased third party would project, not the rose-colored view of the owner. Because, if you show yourself to be a dreamer, the lender will want your deal to reflect it. Great potential doesn’t add leverage for the borrower, it just asks why the borrower didn’t deliver up to now.
CapEx and Tenant Improvements: Be honest about what investment the property needs. If part of your request is that the lender allow use of reserves or fund leasing costs (they may not fund new money, but perhaps allow trapped funds to be used), outline those costs clearly. E.g., “Property will require $2M in TI over next 3 years to lease remaining vacancies; without this, occupancy will stagnate.” Even if you don’t mention it, the servicer will arrive at their own determination anyways – and if you have no plan for it, they’ll doubt your credibility.
“Lender’s Perspective” Analysis: The servicer is thinking, what’s the net present value of this loan under various strategies? It’s useful to do your own calculation of the NPV of their recovery via different paths: (a) foreclosure and sale now, (b) foreclosure and sale in X months, (c) modify and extend with you contributing Y, etc. Special servicers actually have to justify modifications by showing they expect a better NPV outcome than its other options. If you can pre-empt this concern by showing “If we work it out, the trust will likely recover 90 cents on the dollar versus 70 cents via foreclosure fire sale”, you speak their language. Use reasonable discount rates (they might discount cash flows at a rate equal to the loan rate or market rate). Presenting an NPV comparison in your proposal can be powerful – it shows you understand their decision criteria.
Multiple Scenarios: Perhaps have a base case and downside case to demonstrate you’ve pressure-tested the plan. Also identify when the trust gets paid: e.g., in a modification, are you proposing they get paid off at a refinanced balloon in 3 years? Show what metrics the property will have then (DSCR, LTV) to indicate refinancing is plausible. Servicers hate open-ended extensions; they want to see an exit. If your plan provides one (like a sale or refi at a point when value has recovered), back it up with data.
One particularly insightful tactic is to provide your analysis to the appraiser or servicer as part of the process. While they won’t blindly accept your numbers, you can influence their view by highlighting things they might miss. For example, if you believe the market rent the appraiser will use is too high (thus overstating income and value), point out evidence of recent leases at lower rates. Or if the appraiser might understate capex needs, give them the engineer’s report showing the roof must be replaced. Essentially, don’t let the lender’s valuation be done in a vacuum. Provide your “value proof” and rationale to shape the narrative.
DID YOU KNOW:
CMBS means Commercial Mortgage backed Securities. These are bonds issued to investors by the trust, which is a REMIC, a Real Estate Mortgage Investment Conduit, first introduced in the Tax Reform Act of 1986.
Bondholders are granted the beneficial interest of loan cash flows, but generally have no direct relationship to the mortgage loans. Bonds are tiered by risk appetite, each with yields on their notional balances, paid monthly from loan interest collected by the trust.
The Master Servicer oversees loan administration and borrower interactions for performing loans, while the Special Servicer manages troubled or defaulted loans. A subordinate Controlling Class of bonds have consent rights over any modifications or workouts (among other rights). All roles and authorities are governed by the Pooling and Servicing Agreement (PSA), and summarized in a Prospectus.
Both the REMIC regulations and the nature of bonds, limit servicers' flexibility when compared to conventional lenders. This includes a restriction on advancing new debt proceeds after the securitization is established - which takes certain modification structures off the table.
5. Leverage Every Negotiation Chip: What Can You Offer (or Withhold)?
Workouts ultimately come down to trading value and mitigating risk. As the borrower, your leverage is your ability to deliver something the lender needs or wants that they can’t get by just taking the property. It may not seem like you have much leverage if you’re defaulting – the lender has the mortgage and the law on their side. But you often have these chips:
Time and Cost Savings: Foreclosure, particularly in judicial states, is often a prolonged and expensive process. By offering a more cooperative solution, such as a deed-in-lieu or consent to judgment, you can save the trust significant time and legal fees. In return, you’d ask for something – typically a release of personal guarantees (no post-foreclosure liability). This is a common trade: the borrower says, “I’ll cooperate and hand over the property smoothly (or help transition operations), but I want a full release of the debt and no foreclosure on my record.” Often special servicers are amenable to this, after they’ve tried other routes, because a cooperative turnover is valuable.
Operational Expertise / Continuity: Ask: Would a receiver or a new owner do a better job turning this around than me? If you truly believe the answer is no, make that case. Perhaps you as sponsor have local connections or a unique concept (e.g., repositioning plan) that an out-of-town buyer wouldn’t. Emphasize your track record or past success with similar assets.
If you show yourself to be competent, they may prefer to keep you in place as part of the solution– provided you contribute new equity or agree to terms ensuring you’re committed. Essentially, you offer your continued stewardship as value: “Work with me and I’ll maximize value for both of us; kick me out and the trust might end up with a worse outcome.” Be ready to back this with evidence.
Additional Equity or Collateral: If you have access to fresh capital (from yourself or new partners), you can offer it as part of the solution. Lenders typically require borrowers to re-commit by putting new skin in the game. For example, you might say, “I’ll contribute $X in new equity, which will fund leasing and pay down the loan, if you (lender) agree to extend the term and reduce the interest rate.” This sharing of pain (you put in cash, they give a concession) often is required to get to yes. Be careful with offering new capital, confirm that you’re getting something valuable in return (like a principal reduction or a long extension). Don’t throw good money after bad without solidifying the deal.
Third-Party Purchase Offers: As mentioned, having an outside investor willing to buy the property at some price can be leverage. If you bring the trust a bona fide purchase offer that’s higher than what they’d net in foreclosure, they might consider a note sale or a consented sale. This is essentially delivering the solution to them. It requires lining up investors quietly (which is why engaging a brokerage or tapping your network early can help). If the servicer sees “Offer on table: $40M cash now vs. uncertain foreclosure recovery $35M a year from now,” that can break a stalemate. They may prefer to just take the $40M (possibly via you doing a discounted payoff with that investor’s money, or the investor buying the note). Just ensure any offer is real – nothing undermines credibility like presenting a phantom buyer who later vanishes.
In all of this, know the lender’s alternatives thoroughly. Ask yourself: If I were the special servicer, what would I do if I (the borrower) walked away today? What is the property likely to sell for in foreclosure? How long will that take? What are the carry costs (taxes, insurance, legal fees) in the interim? The more precisely you can estimate these, the more convincingly you can argue that your proposal gives a better (or at least equal) outcome. Do you truly have leverage? Yes. Figure out what the trust needs from you – hint, it’s not the property. It could be as simple as cooperation and time savings, or as involved as new capital and expertise.
6. Negotiation Strategy: Be Ready for Rejection and Play the Long Game
Special servicers are known to be tough skilled negotiators. They may initially reject even reasonable proposals to test your resolve and see if you improve terms. Borrowers who get intimidated or angry at the first “no” often end up with worse outcomes. Approach negotiations with the understanding that this could be an extended process, potentially spanning 9-12 months of discussions and revisions (or sometimes longer). Some tips for the negotiation phase:
Control the Narrative: In all communications and proposal materials, maintain a professional, fact-based tone. Use the data you’ve compiled to drive the conversation. Frame requests as mutually beneficial moves to maximize value. Whenever possible, reference the benefit to the trust vs. the alternatives. Avoid emotional pleas or irrelevant info (the servicer can’t concern themselves with the equity you’ll lose or how unfair the pandemic was – their focus must beprimarily on the trust’s recovery metrics and data-driven rationale).
Keep Your Powder Dry (Don’t Overcommit Too Soon): In initial proposals, don’t give your absolute best offer unless you already know the servicer’s bottom line. It’s often wise to start by initially presenting a buffer in your request to facilitate compromise. For example, if you could live with a 1% rate cut, you might ask for 2%. Or if you’re willing to contribute $1M new equity, you might initially offer $500k and see if they push for more. There is a balance – you must stay credible (don’t ask for something absurd like a 50% principal write-down unless you have bona fide justification). But savvy borrowers leave room to concede. Servicers almost expect this dance.
Be Very Mindful of Legal Documents: Once negotiations start, the servicer will send a pre-negotiation agreement (PNA) which basically states that the party’s agree that discussions are not binding, you won’t claim lender made any oral deals, etc.. Have your attorney review it – these are usually standard, but ensure you’re not waiving rights. Later, if a modification deal is reached in concept, it will go through Credit/Committee approval on their side, then they’ll produce modification documents. These will be lengthy. Check everything: sometimes they demand a waiver of claims or new covenants. Ensure any guaranty modifications (like releasing guarantor upon successful completion of the mod) are explicitly written. Also verify how trapped funds are handled, how fees are paid (usually you pay their legal fees and servicer fee as condition).
Patience vs. Proactiveness: It’s a fine line. You want to drive the process, but not appear desperate. If you’ve sent a proposal and the servicer goes quiet for a few weeks (common, servicer response times may vary given portfolio volumes”), follow up periodically with polite requests for update, but don’t bombard them daily. Conversely, if market conditions change (say interest rates drop or a big lease gets signed at your property), update the servicer with the new information and perhaps adjust your ask accordingly. This shows you’re engaged. Also, be prepared for servicer changes: It’s possible mid-workout the directing holder could replace the servicer (for example, if things drag or if control shifts as discussed). If a new asset manager comes in, you may have to re-educate them on the situation. Keep a well-documented file so you can quickly bring a newcomer up to speed with facts rather than starting from scratch on terms.
Document Everything: Keep a log of every communication. Follow up important phone discussions with a confirmation email highlighting your understanding.
Finally, maintain professionalism and some degree of cooperation, even if it’s contentious. Borrowers sometimes get adversarial to the point of hostility – that rarely helps. Better to be firm but cordial, making the servicer’s job easier in ways that don’t hurt you.
For example, promptly provide any reasonable documents they request (they will ask for updated financials, rent rolls, etc., repeatedly). By doing so, you gain moral high ground and build the case that you are acting in good faith. The lender’s lawyers might then view you as a responsible party, which can influence how they negotiate terms or enforcement. In conclusion, executing a successful CMBS loan workout is challenging but achievable. By understanding the unique CMBS landscape a borrower can avoid pitfalls and focus on strategies that align with the lender’s incentives. Preparation is paramount: know your opposition, know your property, plan your strategy well in advance. Then, with a combination of solid data, savvy negotiation, and yes, sometimes sheer persistence, you can steer the outcome. Whether the goal is to restructure and hold onto a valued asset or to gracefully exit with minimal damage, the guidance above serves as a roadmap for borrowers to not only survive the CMBS workout gauntlet, but to come out the other side with their interests protected.