A commercial loan workout is a negotiated agreement between a borrower and lender to restructure or resolve a distressed commercial real estate loan outside of foreclosure. With over $540 billion in commercial loans maturing in 2025 and an additional $480 billion in 2026, the need for workout strategies has never been more urgent. Rising interest rates, shifting property values, and evolving tenant demand have placed enormous pressure on borrowers who financed under very different market conditions.
Whether you are dealing with a maturing loan that cannot be refinanced, a property that has lost value, or cash flow that no longer covers debt service, understanding your workout options is critical to protecting your investment and your broader portfolio. This guide covers every major workout strategy, the negotiation process, and what lenders look for when deciding whether to work with you or pursue foreclosure. If you are already facing distress, contact our team for a confidential consultation on your options.
What Is a Commercial Loan Workout and When Is It Needed?
A commercial loan workout is any negotiated resolution to a loan in default or imminent default that avoids the time and expense of formal foreclosure proceedings. Workouts happen when both sides recognize that a cooperative resolution will produce a better financial outcome than litigation.
You may need a workout when your property's net operating income has declined below what is needed to cover debt service, when the loan is maturing and current market conditions prevent a straightforward refinance, or when the property has lost significant value and is now underwater. Common triggers include tenant vacancies, major lease expirations, rising operating costs, interest rate resets on floating rate loans, and broad market downturns that reduce property values below the outstanding loan balance.
The CMBS delinquency rate climbed to approximately 6.4% across all property types by late 2025, with the office sector leading at nearly 10%. This wave of distress has pushed the special servicing rate back above 9%, a level not seen since 2021. For borrowers caught in this cycle, a proactive approach to workout negotiations is almost always better than waiting for the lender to act.
What Are the Main Types of Commercial Loan Workout Options?
The main types are forbearance agreements, loan modifications, discounted payoffs, deed in lieu of foreclosure, and consensual receivership. Each option serves a different purpose depending on the severity of distress, the borrower's goals, and the lender's appetite for risk.
Forbearance Agreements temporarily pause or reduce loan payments for a set period, giving the borrower time to stabilize operations, lease vacant space, or arrange alternative financing such as a bridge loan. Forbearance typically lasts 3 to 12 months, and the borrower must meet specific milestones. The lender agrees not to exercise default remedies during this window, but the forbearance agreement typically acknowledges the existing default and preserves the lender's rights if milestones are missed.
Loan Modifications permanently change one or more loan terms. Common modifications include extending the maturity date, reducing the interest rate, converting from floating to fixed rate, re-amortizing the principal over a longer period, or in some cases reducing the principal balance itself. Modifications account for roughly 32% of all resolved workouts, making them the single most common long-term resolution.
Discounted Payoffs (DPOs) allow the borrower or a third party to pay off the loan at less than the full outstanding balance. Lenders agree to DPOs when they believe the discount offers a better recovery than the time and expense of foreclosure. DPO acceptance rates vary significantly by property type and market conditions.
Deed in Lieu of Foreclosure involves the borrower voluntarily transferring the property to the lender in exchange for release from the loan obligation. This avoids the cost and timeline of formal foreclosure while giving the lender immediate control of the asset.
Consensual Receivership places the property under court-appointed management while the workout is negotiated, protecting both parties' interests during the resolution process.
How Does the Commercial Loan Workout Process Actually Work?
The process begins with the borrower or lender initiating contact, followed by information exchange, proposal submission, negotiation, and final documentation. Most workouts take between 2 and 14 months depending on complexity and resolution type.
Step 1: Early Communication. Contact your lender or special servicer as soon as you recognize a problem. Lenders strongly prefer borrowers who come forward proactively rather than those who go silent or wait for a formal default notice. This single factor can dramatically influence the outcome.
Step 2: Assemble Your Workout Package. Prepare current financial statements for both the property and the borrower, a detailed explanation of what caused the distress, a realistic business plan for stabilization, current rent rolls and lease abstracts, a recent appraisal or broker opinion of value, and a specific proposal for how you want to resolve the situation.
Step 3: Submit Your Proposal. Present a well-structured workout proposal to the lender's asset management or special servicing team. Your proposal should demonstrate that you understand the problem, have a credible plan, and are willing to make concessions to reach an agreement.
Step 4: Negotiate Terms. Expect multiple rounds of negotiation. The lender will evaluate your proposal against foreclosure. Key negotiation points include forbearance period length, rate or term modifications, equity contributions, enhanced reserves, personal guarantees, and reporting requirements.
Step 5: Document and Execute. Once terms are agreed upon, attorneys for both sides will draft the workout agreement. This document replaces or supplements the original loan documents and typically includes pre-negotiated remedies if the borrower fails to perform under the new terms.
If you need help structuring a workout proposal, reach out to our commercial lending team for guidance.
What Do Lenders and Special Servicers Look for in Workout Negotiations?
Lenders primarily evaluate the property's current and projected cash flow, the borrower's willingness to cooperate and contribute additional resources, and whether the proposed resolution produces a better outcome than foreclosure. Understanding this framework gives you an advantage.
The most important factor is property cash flow. Lenders want to see a realistic path to stabilized net operating income that can support the restructured debt. Use our DSCR calculator to model different scenarios and present data-driven projections to your lender.
Borrower track record matters enormously. A history of successful projects, transparent communication, and financial stability makes lenders far more willing to cooperate. Conversely, borrowers who have been unresponsive or have misrepresented financials will face much tougher negotiations.
Market fundamentals influence the lender's view of recovery potential. A temporarily distressed property in a strong submarket with positive demand trends will receive more favorable treatment than a structurally obsolete asset in a declining market.
Collateral value relative to the outstanding loan balance determines how much leverage each side has in negotiations. If the property is worth significantly less than the loan balance, the lender has more incentive to negotiate a discount or modification.
What Concessions Will You Need to Make in a Workout Agreement?
Borrowers should expect to provide additional equity, enhanced personal guarantees, increased operating reserves, and greater transparency in exchange for workout relief. Lenders rarely grant workout terms without requiring meaningful concessions.
Additional equity contributions are required in approximately 68% of workout agreements. Lenders want to see that the borrower has "skin in the game" and is financially committed to recovery. Contributions typically range from 5% to 15% of the outstanding loan balance.
Personal guarantees are requested in about 55% of workouts, especially for loans that were originally non-recourse. This is often the most contentious negotiation point. In some cases, limited or "burn-off" guarantees that expire upon meeting performance milestones can be negotiated as a compromise.
Operating reserve requirements appear in roughly 72% of workout agreements. Lenders want assurance that funds are available for property improvements, lease-up costs, and debt service shortfalls during stabilization.
Interest rate adjustments occur in about 48% of workouts. Some modifications include rate reductions to improve cash flow, while others increase the rate to compensate the lender for added risk. The direction depends on specific circumstances.
For value-add projects executing a repositioning strategy, the concession package often focuses on renovation milestones tied to guarantee releases.
How Do CMBS and Special Serviced Loan Workouts Differ?
CMBS loan workouts are significantly more complex because the loan has been securitized, meaning multiple bondholders have competing interests, and a special servicer controls the process under strict pooling and servicing agreement (PSA) guidelines. This creates a very different dynamic than negotiating with a bank.
When a CMBS loan transfers to special servicing, the special servicer must maximize recovery for certificate holders. Special servicers also earn workout fees (typically 1% of outstanding balance) and liquidation fees, which critics argue can incentivize prolonging the process.
Key differences from bank workouts include:
- Longer timelines due to reporting requirements and bondholder approvals
- Less flexibility on principal reductions because of trust accounting and tax implications
- More standardized processes with detailed documentation requirements
- Appraisal requirements conducted by the servicer's chosen firm
- Advancing obligations that may keep the loan "current" to bondholders while in workout
The special servicing rate reached approximately 9.3% in 2025, reflecting the ongoing wave of loan maturities and distress concentrated heavily in office and retail properties.
What Is a Discounted Payoff and When Should You Pursue One?
A discounted payoff (DPO) is a lump-sum payment that satisfies the loan for less than the full outstanding balance. Pursue a DPO when the property has declined significantly in value, the lender faces a lengthy foreclosure process, and you or a third-party buyer can bring sufficient capital to make the deal attractive.
Recovery rates vary widely by property type. Industrial properties command the highest at approximately 88% of unpaid principal balance (UPB), while office properties see the lowest at roughly 62% due to structural headwinds from remote work trends. Multifamily recovers around 85% and retail approximately 71%.
Factors that increase your DPO leverage include property location in a judicial foreclosure state where foreclosure takes 12 to 24 months, environmental issues creating lender liability concerns, complex property structures like ground leases, borrower cooperation that eliminates costly litigation, and market timing around lender fiscal year-ends when institutions want to clear problem loans from their books.
If you are considering a DPO strategy, bridge loan financing can provide the capital needed. Learn more about how commercial bridge loans work in distressed situations.
How Does Deed in Lieu of Foreclosure Work for Commercial Properties?
A deed in lieu of foreclosure is a voluntary transfer of the property from borrower to lender in full satisfaction of the mortgage debt. It works best when the property is significantly underwater and both parties want a fast, clean resolution without the expense of litigation.
The process typically takes 2 to 4 months: the borrower proposes the deed in lieu, the lender orders an appraisal and title search, both parties negotiate terms including deficiency liability release, attorneys draft the agreement, and the borrower executes and delivers the deed.
Critical considerations: Ensure you receive a full release from personal liability and all guarantees. Understand tax implications, as forgiven debt may be treated as taxable income under IRS rules. Negotiate a cooperation period if you need time to relocate operations. Confirm the lender will not report a foreclosure to credit agencies, as a deed in lieu is typically reported differently. Review any cross-default provisions in other loan agreements that could be triggered by this action.
Deed in lieu accounted for approximately 12% of workout resolutions in 2024 and 2025.
What Role Does Property Type Play in Workout Outcomes?
Property type is one of the most significant factors influencing workout outcomes because it determines the lender's confidence in future cash flow recovery and the asset's marketability. Office properties face the toughest workout negotiations, while industrial and multifamily assets receive the most favorable treatment.
Office properties represented approximately 38% of all distressed commercial debt in 2025, driven by the shift toward remote and hybrid work. Retail accounted for about 22%, showing improvement from experiential and necessity-based tenant stability. Multifamily represented 18%, growing due to the 2021 to 2023 construction boom. Industrial had just 4%, reflecting continued strong demand from e-commerce and logistics.
Understanding where your property fits is essential for setting realistic expectations in workout negotiations. For down payment requirements and equity expectations in a refinance workout exit, review our detailed guide.
What Is the Maturity Wall and Why Does It Make Workouts More Common?
The maturity wall refers to the massive wave of commercial real estate loans reaching their maturity dates in a compressed timeframe, creating unprecedented refinancing pressure and driving a surge in workout activity.
Many of these loans were originated between 2020 and 2022 at historic low rates. Borrowers who locked in terms at 3% to 4.5% now face a refinancing environment 200 to 350 basis points higher. Even stable properties may not qualify because higher debt service pushes the DSCR below minimum thresholds.
The maturity wall means lenders are more open to modifications because foreclosing on everything is impractical, market-wide distress reduces individual stigma for borrowers seeking workouts, and competition for workout capital increases as opportunistic investors seek distressed opportunities.
If your loan is approaching maturity, explore refinance options early and develop a workout strategy as a backup plan. Proactive borrowers who start 6 to 12 months before maturity achieve significantly better outcomes.
What Legal Considerations Should You Know Before Entering a Workout?
The most important legal considerations are preserving your defenses, understanding recourse and guarantee implications, ensuring proper documentation of any forbearance or modification, and being aware of tax consequences from debt forgiveness. Every workout agreement should be reviewed by legal counsel.
Pre-negotiation agreements establish ground rules and prevent statements from being used in subsequent litigation. Always insist on one before sharing sensitive information or discussing concessions.
Recourse and guarantee analysis is critical. Many commercial loans have "bad boy" carve-outs that can trigger full recourse for actions like filing bankruptcy, committing fraud, or violating environmental laws. Your attorney should map these triggers before negotiations begin.
Tax implications of debt forgiveness can be substantial. The IRS generally treats forgiven debt as cancellation of debt income (CODI), though exceptions exist for insolvent borrowers and those who discharge debt through bankruptcy proceedings.
Bankruptcy as a strategic tool should be understood even if you do not intend to file. Chapter 11 can provide an automatic stay of foreclosure and the ability to cram down loan terms, which motivates lenders to negotiate outside of court.
How Can You Position Yourself for the Best Workout Outcome?
Start early, be transparent, bring a credible plan, hire experienced advisors, and demonstrate willingness to contribute additional resources. Borrowers who follow these principles consistently achieve better outcomes.
Act early before you actually default, as lenders view pre-default outreach as a sign of good faith. Be transparent with accurate financial information, since lenders will eventually discover the truth. Present a credible plan with realistic projections, clear timelines, and specific milestones. Hire the right team including a workout attorney and CPA who understands debt restructuring tax implications. Demonstrate commitment through willingness to contribute capital, accept reasonable guarantees, and actively manage the property through stabilization.
Contact Clear House Lending to discuss your situation confidentially. Our team has extensive experience helping borrowers navigate workout negotiations and find the best path forward.
Frequently Asked Questions About Commercial Loan Workouts?
How long does a typical commercial loan workout take? Forbearance agreements take 4 to 8 weeks. Loan modifications take 3 to 6 months. Discounted payoffs average 4 to 6 months. Deed in lieu transfers take 2 to 4 months. Full foreclosure can take 12 to 24 months depending on state law.
Will a loan workout affect my ability to get future commercial loans? Yes, but a completed modification or forbearance is viewed more favorably than foreclosure. Most lenders want 2 to 3 years of clean performance history after a workout. Bridge lenders and private capital sources may be more flexible sooner.
Can I negotiate a commercial loan workout without an attorney? It is strongly discouraged. Workout agreements contain complex legal provisions with lasting financial and legal consequences. The cost of an experienced workout attorney is a fraction of what you could lose.
What happens if the lender refuses to negotiate a workout? Options include bringing in a third-party buyer to assume or pay off the loan, filing for Chapter 11 bankruptcy protection to force a restructuring, marketing the property for sale, or defending foreclosure proceedings while seeking alternative solutions.
Is a discounted payoff taxable? Generally yes. The forgiven amount is treated as cancellation of debt income (CODI) by the IRS. However, the insolvency exclusion under IRC Section 108 may eliminate or reduce the tax impact if total liabilities exceed total assets at the time of discharge.
What is the difference between a workout and a loan modification? A workout is the broader term for any negotiated resolution of a distressed loan. A loan modification is one specific type of workout that permanently changes the loan terms such as rate, term, amortization, or principal balance.
Can a special servicer reject a workout proposal? Yes. Special servicers have significant discretion under PSAs but must act in the best interest of certificate holders, which generally means maximizing net present value recovery.
Should I hire a workout consultant or handle it directly? For loans under $2 million with straightforward issues, direct negotiation may be sufficient. For larger or CMBS situations, a consultant with special servicer relationships can significantly improve outcomes.
Sources and References?
- Trepp CMBS Research: Delinquency and Special Servicing Reports (2024-2025)
- Mortgage Bankers Association: Commercial and Multifamily Mortgage Maturity Volumes (2025)
- MSCI Real Assets: US Capital Trends and Distressed Property Reports (2025)
- Federal Reserve Financial Stability Report: Commercial Real Estate Risk Assessment (2024)
- American College of Mortgage Attorneys: Workout and Restructuring Best Practices (2024)
- CREF Council: Commercial Real Estate Finance Market Data (2025)
- Moody's Analytics: CRE Loan Performance and Default Studies (2024-2025)