In 2021, a private lender extended a three-year construction loan. The plan was to get taken out by a commercial lender at stabilization. In 2023, interest rates rose, which means cap rates shifted. And the commercial bank, the one the private lender relied on from the outset to refinance at 70% loan-to-value, was now only going to 65%.

At origination, the gap wasn’t unreasonable to underwrite. After all, rates were low, valuations were on the rise, and the assumption that a commercial lender would be there at stabilization was well-founded. Just two years later, that safe bet suddenly wasn’t valid anymore. The borrower simply didn’t have the reserves to cover a five-point LTV shift on the asset.

More consequences followed: Costs ran over, and rents came in below expectations. Both are common in this space. But now the borrower couldn’t pay off the note.

That scenario played out across the private lending market and continues today. The Mortgage Bankers Association estimated that $957 billion of commercial and multifamily mortgage balances matured in 2025. Another $875 billion will follow this year. As of this writing, data on how that 2025 cohort has resolved is still emerging, but the volume alone signals that private lenders will be navigating a high volume of distressed situations for the foreseeable future.

So, what is your best option if you find yourself in this position?

When you reach a dead end

Not every distressed loan reflects a bad borrower. Legitimate projects and capable operators have struggled in the current environment. Interest rates rose quickly, commercial banks dropped their LTVs, and borrowers were left to fill the gap with cash. Construction costs climbed while multifamily rents fell. A borrower navigating those conditions isn’t one worth writing off.

Private lenders typically have four paths forward: a workout, a deed in lieu of foreclosure, foreclosure, or receivership. Each is an important part of a lender’s tool kit, but the secret is knowing which one to deploy—and when.

Workout

A workout is the most borrower-friendly option, and the only one that offers the borrower a path to pay off the loan. There are many routes within this category, including adjusting interest, extending maturity, or offering a forbearance agreement. If the borrower is operating in good faith, has met other milestones, and the underlying asset can realistically support payoff under modified terms, a workout is often the fastest and most cost-effective resolution available. Under these conditions, both sides maintain a path to win.

The challenge is that a workout may not be able to fix basis point rate movement or other significant market change that causes a previously solid loan to no longer pencil. If the conditions that broke the deal are not ones the borrower can mitigate, extending the timeline is likely to simply extend the loss.

Deed in Lieu of Foreclosure

For loans where a workout will not resolve the underlying issue with the loan, a deed in lieu is often a lender favorite because it turns over the keys without upfront litigation costs. This option may be ideal for lenders operationally geared to complete additional due diligence and absorb real estate, financial, and legal responsibilities.

The top due diligence items to address with a deed in lieu of foreclosure are:

Junior liens or other encumbrances (disclosed or potentially undisclosed)

Potential environmental contamination, especially due to lax standards during default

Property maintenance and code violations

Impacts of merging the mortgage lien and ownership estate

Releases/covenants to prevent borrower counterclaims

Transfer and other taxes

Titling issues and title insurance transfers (or lack thereof)

Unwinding of the deed in lieu if the borrower files bankruptcy

A deed in lieu is not a decision to rush into, and it isn’t a quick fix. This structure can result in many surprises.

Foreclosure

Foreclosure is reliable and well-documented, and when it progresses in the lender’s favor, it ensures clear title to the property. For assets that don’t require active management to preserve value, or in cases where the borrower relationship has broken beyond repair, it may be the best option.

Downsides to this option generally involve higher costs due to legal fees, strict compliance with statutory prerequisites to reach optimal outcomes, and longer timelines, during which the borrower retains control of the asset and its associated value and revenue. In judicial foreclosure states, timelines average 12-18 months or longer, during which borrowers are, at minimum, often not in a financial position to care for the property.

Receivership

For private lenders holding construction loans, bridge loans, or interim financing on assets that have gone sideways through no fault of the borrower, a receivership is often most effective. Its current underutilized status is primarily a branding issue—lenders aren’t aware of where and how it fits in the playbook.

With a receivership, a court appoints a neutral third party to take control of the asset. The receiver’s job is to stabilize the operation, manage the moving parts, preserve value as a first principle, and, in most cases, prepare for sale.

The receiver will collect rents, manage leases, pay operating expenses, make necessary repairs, and preserve the property’s income. The receiver’s fiduciary obligation runs to the asset itself, not to the borrower or any single creditor.

The process itself is supervised, with the receiver answering to the court for their actions and the property’s finances. This structure can avoid many of the liabilities and risks associated with deeds in lieu and foreclosure while allowing the private lender to maintain the borrower relationship. It threads the needle between inaction and full adversarial proceedings. A receiver is neither the lender’s hammer nor the borrower’s advocate, which can do a lot to preserve cool heads when money is on the table.

There are also potential trade-offs. The receiver’s fees are paid from the property’s income or, in some jurisdictions, can become a lien on the asset. Additionally, timelines aren’t always clear from the outset—court appointments vary by state and docket.

For some lenders, ceding direct day-to-day control may also be an issue. Although lenders are typically not required to advance funds to the receiver to preserve, maintain, or complete the property, receivers can petition the court for receiver certificates. These debt instruments have priority over the lender’s mortgage.

As a rule, the receivership tool is most useful when all three of the following are true: the asset is income-producing but under stress, the borrower has lost the ability to manage the asset effectively, and you need the situation stabilized while working toward a longer-term resolution.

When Receivership Is Not Advised. Receivership isn’t a universal solution, and part of using it well is knowing when you’re better off without it.

In cases where the asset has little or no operating value to preserve, such as raw land, single-tenant property, or a property with expenses but no income, receivership is not likely to be cost-effective. Value lies in assets needing active management: If there’s nothing to stabilize, the receiver’s fee is just another cost.

Receivership is also a poor fit when the borrower relationship is functional and the fundamentals of the deal are salvageable. For a borrower who communicates, has a credible path to payoff, and is both working to meet milestones and maintain the property, a workout is likely the faster and less expensive resolution. And if you still pursue a receivership even given those variables, it’s not uncommon for a judge to deny the motion, which adds legal expenses and puts you back at square one.

Why Commercial Receiverships Are on the Rise. There’s a confluence of factors driving an increase in receivership activity right now. Institutional dynamics reflect rising vacancy, compressed values, and stalled rent growth, which are likely to have follow-on effects for the collateral backing private lending portfolios. The assets are often the same and face the same stressors. Institutional multifamily vacancy hit 6.8% in first quarter 2026, well above the 15-year average of roughly 5%, while values remain down 18% from their 2022 peak and rent growth has slowed to nearly zero.

Distressed assets don’t have to be the bogeyman, but they do require a skillset that many lenders haven’t had to adopt at scale since the Great Recession. Private lenders who optimize their playbook now will have the portfolios and the relationships to show for it on the other side of this cycle.