A discounted payoff is a negotiated settlement where the lender accepts less than the full loan balance in cash to release the lien. Used when the property value is materially below the loan balance and the lender prefers a quick cash exit over foreclosure or extended workout.
When does a DPO get done?
When the borrower (or a buyer) can deliver cash today, the lender's loss expectation in foreclosure exceeds the gap between the cash offer and the loan balance, and the timeline to a foreclosure sale is uncertain or long. The lender takes the certainty of cash now over the uncertainty of foreclosure later.
Most common in CMBS where the special servicer's bondholder duties favor cash exits, and in bank workout groups where the loan is materially impaired and the bank wants the asset off the balance sheet.
Worked example
$25M loan balance on an office building with a $17M broker BOV. Borrower offers $18M cash for full release of lien (DPO at 72% of balance). Lender's foreclosure-and-sale expectation: $15M net of carrying costs, legal fees, and time. DPO accepted.
DPOs typically clear the senior loan but leave any junior debt or trade payables unresolved. Buyer or borrower must coordinate the full capital stack settlement before signing.
Sources
- Commercial/Multifamily Mortgage Maturities Outlook · Mortgage Bankers Association · 2026-02
- Financial Stability Report · Board of Governors of the Federal Reserve System · 2025-11
- Semiannual Risk Perspective · Office of the Comptroller of the Currency · 2025-12