Choose a funding response before the scheduled closing.
When refinance proceeds are below the payoff, the closing team needs an approved funding response before documents and wires are treated as final. Quantify the gap using net proceeds and the actual payoff, then identify which party can authorize each alternative. A smaller loan indication is a fact to resolve, not a reason to hide uses or assume the existing lender will accept less.
The 2023 interagency CRE workout statement provides a supervisory framework for prudent accommodations and workouts. It does not create a right to a discount, extension or modification. All alternatives and amounts below are hypothetical and require the relevant parties’ agreement.
Calculate the executable gap
Assume the existing payoff is $5.2 million. The new lender offers $5 million gross, with $100,000 of fees and closing costs and $150,000 of required reserves. Net proceeds available for payoff are $4.75 million, so the borrower must supply $450,000.
The borrower has $300,000 of verified unrestricted cash available for closing, leaving $150,000 unresolved. Comparing the $5 million commitment only with $5.2 million payoff would show a $200,000 gap and understate the full funding need by $250,000.
| Component | Amount |
|---|---|
| Existing payoff | $5,200,000 |
| New gross loan | $5,000,000 |
| New costs and reserves | −$250,000 |
| Net payoff proceeds | $4,750,000 |
| Total borrower cash needed | $450,000 |
| Verified available cash | $300,000 |
| Remaining unresolved amount | $150,000 |
Confirm whether any expected reserve refund or prior deposit is actually available at closing. A later refund cannot reduce today’s required contribution without an accepted settlement mechanism.
Assign authority to each possible response
| Response to investigate | Required decision/evidence | Main cash consequence |
|---|---|---|
| Additional owner equity | Contributor commitment, authority and funds | Covers the remaining gap without increasing this loan |
| Revised new-loan terms | New lender approval and updated conditions | May change proceeds, costs or risk |
| Agreed existing-lender modification | Existing lender and required parties’ approval | Changes timing or obligation only as documented |
| Permitted subordinate financing | Both lenders’ consent and coordinated documents | Adds debt and payment obligations |
| Sale or other exit | Executable transaction and net proceeds | Requires its own timeline and funding test |
A proposed solution should remain conditional until its evidence exists. The advisor cannot approve a lender’s concession, an investor’s contribution or a legal priority arrangement.
Test equity and debt responses on the same basis
If an investor contributes the missing $150,000, total borrower cash becomes $450,000 and the stated sources and uses balance. The investor’s ownership, return or repayment rights may still require lender and entity approval. Do not treat new equity as free money without documenting the agreed terms.
If a separate lender proposes a $150,000 subordinate loan with a $10,000 fee withheld, only $140,000 reaches closing, leaving $10,000 still unfunded. If its annual debt service is $18,000, add that obligation to the combined repayment analysis. A nominal loan amount equal to the gap is insufficient when its own deductions reduce usable cash.
The new senior lender may prohibit or condition additional debt. Obtain the actual decision before presenting the subordinate source as part of a funded plan.
Reconcile an extension rather than assuming it solves proceeds
Suppose the existing lender proposes a valid six-month extension requiring a $100,000 paydown and $50,000 fee now. The borrower can fund $150,000 from its $300,000 cash, leaving $150,000. Principal falls from $5.2 million to $5.1 million, assuming the original payoff is entirely principal for this separate simplified extension comparison.
If later net refinance proceeds remain $4.75 million, the later gap is $350,000. With only $150,000 cash remaining, another $200,000 is needed, before added interest or other changes. The extension buys time but consumes cash and does not by itself eliminate the gap.
In a real file, separate principal from accrued interest and fees in the payoff before modeling a paydown. Do not apply a principal reduction to a total payoff figure without that reconciliation.
Decide before the closing becomes unstable
Set a deadline for confirming the gap response before final documents, rate-lock expiration, payoff validity or maturity make alternatives harder. Record the amount, source, acceptance owner, required evidence and completion date. “Sponsor will cover” is incomplete without funds and authorization.
If no accepted response is available, the closing cannot be represented as fully funded. Work with the appropriate parties on the actual available path and preserve a clear record of unresolved conditions. Do not move a required reserve off the statement merely to make the sources equal uses.
The final decision package should show one reconciled gap and a specific, approved source or agreement addressing it. That permits a controlled execution decision while keeping proposed accommodations, new capital and actual closing funds clearly distinguished.
Sources and evidence
- Federal Reserve — Prudent CRE Loan Accommodations and WorkoutsSection IV Long-Term Loan Workout Arrangements; A Supervisory Assessment of Repayment Ability of Commercial Borrowers; B Supervisory Assessment of Guarantees and Sponsorships · Checked 2026-10-21 · Supervisory analysis of accommodations and workouts; examples and supervisory classifications are not borrower rights or guaranteed loan outcomes.
Source dates and applicability matter. Report an error or a changed source.