A discounted payoff (DPO) is a workout in which the lender accepts less than the full outstanding loan balance as full satisfaction of the debt. Common when the property's current value has fallen below the loan amount. The lender accepts the loss to avoid the time and cost of foreclosure and asset management.
When does the lender consider a DPO?
When foreclosure recovery (after foreclosure cost, broker fees, holding period, and operational drag) is projected to net less than the discounted cash payment. The math typically works when the property has lost meaningful value, the borrower has run out of equity, and outside capital is available to fund the discounted payoff.
Who funds the DPO?
Usually a new lender (often a debt fund), a recapitalizing equity partner, or both. The new capital pays off the existing loan at the discount and takes a fresh first lien on the property at the new lower basis. The original sponsor sometimes loses control of the equity in the process.
What are the tax consequences?
Cancellation-of-debt income. If $40M of debt is settled for $30M, the borrower may have $10M of taxable COD income unless an exception applies (insolvency, bankruptcy, qualified real property business indebtedness). Borrowers must work with tax counsel before signing a DPO term sheet.
Sources
- Quarterly Survey of Commercial/Multifamily Mortgage Bankers Originations · Mortgage Bankers Association · 2026-Q1
- Financial Stability Report · Board of Governors of the Federal Reserve System · 2025-11