A discounted payoff is executable only when net cash and effective approvals meet the settlement deadline. Separate a new loan commitment from its initial funding, remove unavailable equity, and account for the post-closing work behind any holdback.
Hypothetical negotiated payoff proposal. A borrower owes $5 million of principal and asks the existing lender to accept $4.2 million in full settlement by September 30. Assume a proposed settlement also requires $100,000 of transaction costs outside the new-loan fees. The requested discount has not yet been accepted, and no enforcement deadline is assumed changed by the discussion.
A replacement lender has issued a conditional $3.5 million commitment. Of that amount, $300,000 is a repair holdback unavailable at payoff closing. New-loan fees are 2% of the entire $3.5 million commitment, deducted at initial funding. The borrower reports $900,000 of equity, consisting of $600,000 cash and $300,000 of securities not yet sold or settled.
The initial presentation adds $3.5 million and $900,000 to show $4.4 million of sources against $4.3 million of uses. That apparent $100,000 cushion disappears when the sources are tested for amount, conditions and date.
Calculate initial available loan proceeds
Initial funded principal is $3.5 million less the $300,000 future holdback, or $3.2 million. The 2% fee on commitment is $70,000. Net new-loan cash available to the settlement is therefore $3.13 million.
The unused holdback is not funded principal at closing under this case’s terms, and it is not available to pay the old lender. Actual financing can structure withheld amounts differently; the commitment, note, disbursement agreement and closing statement must agree on the treatment.
| September 30 funding bridge | Amount |
|---|---|
| Proposed discounted payoff | $4,200,000 |
| Other transaction costs | $100,000 |
| Total closing uses | $4,300,000 |
| New loan, initial cash after fee | −$3,130,000 |
| Required closing equity | $1,170,000 |
Even if all $900,000 of reported equity becomes cash in time, the borrower remains $270,000 short. If only the $600,000 cash is accessible by the deadline, the immediate gap is $570,000. These are distinct timing cases, not an error to smooth over with a total-asset figure.
Do not turn conditional documents into funded sources
The calculation above assumes the replacement loan’s conditions can be satisfied and its net proceeds can fund on September 30. Until that is established, $3.13 million is a conditional modeled source, not verified closing cash.
The lender’s conditions might include acceptable title, reports, insurance, entity documents, required equity and an effective payoff settlement. Record each dependency and who can clear it. If one condition depends on another party’s approval, identify that approval rather than labeling the whole file “committed.”
Likewise, an outside investor’s unsigned indication for $500,000 does not close the $570,000 immediate gap. Even if it were funded, it would still leave $70,000 unless the securities proceeds also arrived. Its investment or loan terms could require additional consents and alter future obligations.
The interagency workout statement, Section IV, emphasizes the accessibility and continuity of repayment sources. It provides a useful review framework, but it does not compel the current lender to grant a discount or extend the deadline.
Follow the repair holdback beyond the settlement
Assume the repair scope costs $400,000 and the replacement loan can eventually fund $300,000 of eligible work. The remaining $100,000 is a permanent additional capital requirement. It is separate from the $1.17 million of closing equity.
If the loan pays its $300,000 share directly as approved work is completed, the timing may differ from a reimbursement arrangement. If the borrower must first pay the entire $400,000 and receives $300,000 only afterward, peak cumulative cash supplied rises to $1.57 million before reimbursement: $1.17 million at closing plus $400,000 for repairs.
After reimbursement, net cumulative contribution becomes $1.27 million. The $300,000 difference is temporary funding, not an additional permanent project cost. The disbursement provisions must establish which timing actually applies. A holdback cannot fund the old payoff and also remain available for repairs.
Assemble the evidence that makes the proposal reviewable
The borrower should present a date-specific settlement ledger, proof of the required equity, a cleared or credibly clearable replacement financing file, the repair budget and draw mechanics, and a realistic funding calendar. Any contribution from a third party needs an effective agreement and evidence that the money can arrive when required.
The old lender’s written settlement must identify the amount, deadline, payment mechanics, obligations being satisfied and necessary releases. Counsel should review the actual legal effect, including any remaining guarantees or liabilities. Potential tax consequences and other noncash effects are outside this numerical example and require separate evaluation.
The headline $800,000 principal discount is not a realized gain or a funded closing. Under the fully converted equity case, the borrower needs another $270,000 at settlement and at least $100,000 of permanent repair capital afterward, with potentially greater temporary liquidity. The proposal becomes executable only when those amounts, the approvals and the dates fit together.
Sources and evidence
- Interagency policy statement on prudent CRE loan accommodations and workoutsIV. Long-Term Loan Workout Arrangements · Checked 2026-10-21 · June 2023 policy statement. Does not entitle a borrower to an accommodation or impose the hypothetical terms.
Source dates and applicability matter. Report an error or a changed source.