Forbearance is a formal agreement between a borrower and lender in which the lender agrees to temporarily refrain from exercising its remedies — such as accelerating the loan, foreclosing, or charging default interest — despite the borrower being in technical default. In exchange, the borrower typically agrees to specific conditions: making partial payments, providing enhanced financial reporting, injecting additional equity, or meeting milestones toward a resolution (such as a refinance or property sale). Forbearance does not forgive the default or reduce the debt — it simply pauses the lender’s enforcement rights for a defined period while the borrower works to resolve the underlying issue. Forbearance agreements are distinct from loan modifications, which permanently change the loan terms.
How It Works in Practice
Forbearance has become a critical tool in CRE debt markets, particularly for borrowers facing maturity defaults, covenant breaches, or short-term cash flow disruptions. The process typically begins with the borrower proactively approaching the lender (or servicer, in CMBS) before the default event, presenting a clear plan for resolution. Lenders are generally more receptive to forbearance when the borrower is transparent, the property fundamentals are sound, and the resolution plan is credible. For CMBS loans, forbearance involves the special servicer rather than the original lender, and the process can be more formal and slower. Key provisions to negotiate in a forbearance agreement include the duration, the conditions that terminate the forbearance, whether default interest accrues, and whether the borrower acknowledges the default (which can affect future legal remedies). Understanding your forbearance options before you need them gives you negotiating leverage when it matters most.
Related Terms
Part of the LoanBoss CRE Debt Glossary. For hedging-specific terms, see Pensford’s resources.