The fee schedule decides what the special servicer earns on each resolution. Discounted, the two paths pay almost the same, and the break-even sits at a recovery of 73 per cent.
A CMBS special servicer is typically paid three ways: a special servicing fee of about 0.25 per cent a year on the balance while it holds the loan, then either a workout fee of around 1 per cent of everything collected on a loan it modifies and returns to performing, or a liquidation fee of around 1 per cent of the proceeds when it sells. On an illustrative $60.0M defaulted loan, modification pays $0.833M and liquidation at $42.0M pays $0.67M. Discounted at 8 per cent they are worth $0.619M and $0.604M: almost the same.
Worked in full in CMBS and CRE CLOs by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
A fictional conduit loan transfers to special servicing after a payment default. The rates below are illustrative; each pooling and servicing agreement sets its own, often with minimum monthly amounts, caps, and offsets for fees earned elsewhere on the loan.
| Input | Value |
|---|---|
| Loan balance | $60.0M |
| Coupon | 5.0% |
| Special servicing fee, a year, on the balance | 0.25% |
| Workout fee, on collections after correction | 1.0% |
| Liquidation fee, on net liquidation proceeds | 1.0% |
| Discount rate for the comparison | 8.0% |
Path 1: the servicer modifies the loan after 9 months, extending it 4 years at the same coupon; the borrower pays and then repays in full. Path 2: the servicer forecloses and sells after 20 months for $42.0M, 70 per cent of the balance.
Special servicing fee = balance × 0.25% × time in special servicing
$60.0M × 0.25% = $0.15M a year, $0.0125M a month
Modify after 9 months: $0.1125M. Liquidate after 20 months (1.67 years): $0.25M
The fee runs as long as the loan stays in special servicing, so it is the one part of the schedule that pays for time. On its own it is small; it matters because it comes on top of the resolution fee and is paid out of the trust's collections.
Workout fee = 1% × collections after correction = 1% × (4 × $3.0M interest + $60.0M principal) = 1% × $72.0M = $0.72M, paid as collected
Liquidation fee = 1% × $42.0M = $0.42M, paid at the sale
Excel, workout leg: =SUMPRODUCT(Collections*Fee/(1+r)^Times)
| Fee | Modify | Liquidate |
|---|---|---|
| Special servicing fee | 0.1125 | 0.25 |
| Workout fee | 0.72 | |
| Liquidation fee | 0.42 | |
| Total, undiscounted | 0.833 | 0.67 |
| Present value at 8% | 0.619 | 0.604 |
Undiscounted, the modification pays $0.163M more. But most of the workout fee is 1 per cent of a balloon repayment almost five years away, while the liquidation fee is cash within two years. In present value the gap is $0.015M, a ratio of 1.03. On these terms the fee schedule is close to neutral between the two outcomes, and the break-even is precise: liquidation proceeds of $43.8M, 73 per cent of the balance, would make the two paths worth exactly the same to the servicer.
| Scenario | PV of fees |
|---|---|
| Liquidation at $36.0M | 0.551 |
| Liquidation at $42.0M | 0.604 |
| Liquidation at $48.0M | 0.657 |
| Liquidation at $54.0M | 0.709 |
| Modification, 2-year extension | 0.645 |
| Modification, 4-year extension | 0.619 |
| Modification, 6-year extension | 0.597 |
| Modification, re-default after 2 years, liquidated at $40.0M | 0.576 |
Two features stand out. A longer extension pays more fees in total, $0.892M at six years, but less in present value, because the 1 per cent on the balloon recedes. And the re-default path, often cited as the servicer's best outcome because it earns a second round of special servicing and a liquidation fee, is here worth less than either base path: the first $0.1125M of special servicing, $0.06M of workout fees, $0.15M of fees for a second year in special servicing and $0.40M of liquidation fee, $0.723M in all but only $0.576M today, with the sale 3.75 years away.
For the trust, the same choice is worth far more. Net of fees, the modification's cash flows are worth $50.50M today at 8 per cent and the liquidation $36.57M, a gap of about $13.9M, before any allowance for the risk that the modified loan defaults again. The servicer's fee difference is 0.1 per cent of that. Fees run at 1.23 per cent of the trust's recovery on the modification and 1.65 per cent on the liquidation. The agreements typically require the special servicer to choose the resolution that maximises recovery to certificate holders as a collective whole on a net present value basis, and the fee schedule, on numbers like these, barely tilts that choice. Where conflicts arise in practice they come more from who controls the special servicer, discussed in how an appraisal reduction moves control, than from the percentages.
Comparing fees undiscounted and concluding that servicers are paid to extend. The second is to forget that every fee is a cost to the bonds: the special servicing and liquidation fees come off the top of the proceeds, which is why they appear in the bridge from appraisal to realised loss in why realised severity exceeds appraisal severity, and the junior classes bear them first.
The book's liquidations, with every fee and advance traced to the trust's cash reconciliation, are in the free workbook for this case.
A fee the special servicer earns on a loan it has modified and returned to performing status, usually a percentage of every payment of interest and principal collected afterwards. At an illustrative 1 per cent on a $60.0M loan paying 5.0 per cent for four years and then repaying, collections of $72.0M produce a workout fee of $0.72M, paid out over the life of the loan.
A fee the special servicer earns when it resolves a defaulted loan by selling the loan or the property, usually a percentage of net liquidation proceeds. At an illustrative 1 per cent of $42.0M of proceeds it is $0.42M, paid at the sale, on top of the special servicing fee accrued while the loan was in special servicing.
Undiscounted, modifying usually pays more because collections on a corrected loan exceed sale proceeds: $0.833M against $0.67M in the illustrative case. But the workout fee arrives over years and the liquidation fee at once, so in present value at 8 per cent the two are $0.619M and $0.604M, a difference of $0.015M on a $60.0M loan.
This article is one calculation from CMBS and CRE CLOs. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
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