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Defeasance is a substitution of collateral. A portfolio
of qualified U.S. Government Obligations is structured such
that it will produce sufficient cash flow to make all remaining
payments due under the note as and when the same come due.
The securities are pledged to the lender in exchange for the lender’s
release of the real estate from the lien of the mortgage. Conduit loan
defeasances involve a number of parties, require a number of deliverables,
and generally take about thirty days to complete.
Most loans originated after 1998 have defeasance, but you
should check your loan documents to confirm that they contain
defeasance provisions. The defeasance provisions will dictate
when you may defease your loan. REMIC regulations prohibit
defeasance during the first two years from the date the loan
is securitized. However, most defeasance provisions on existing
loans prohibit defeasance for the lesser of (a) three years from
the date the loan closed or (b) two years from the date the loan
was securitized. The “lock-out period” does vary from loan to loan,
so it is important to review your loan documents to determine the
lock-out period that applies to your specific loan.
Commercial Defeasance does not charge any fee for a defeasance estimate. We view it as an
opportunity to educate people about the defeasance process and earn their business. We can provide
estimates over the phone, you can fax us the applicable sections of your loan documents or you can
use our website calculator. We provide written estimates in as little as five minutes and will take
all the time you need in order to answer your defeasance questions.
If you engage Commercial Defeasance to handle your defeasance,
we will create and optimize a securities list that complies with
the requirements in your loan documents. The defeasance provisions
in most loan documents require that the securities be direct obligations
of the United States that are not subject to early redemption and that
they mature as close as possible to the date on which the proceeds will
be needed for a payment under the note. A typical defeasance transaction
involves the purchase of a portfolio of anywhere from five to fifty securities
(depending upon the remaining term of the loan) that are a mix of T-Bills,
T-Notes and STRIPS.
Depending on the size of the loan and the complexity
of the transaction, there could be as many as 25 different
parties involved, including accountants, loan servicer, securities
broker-dealer, securities intermediary, successor borrower, escrow
agent, purchaser’s lender and purchaser, a refinance lender, rating
agencies, and all of their respective attorneys.
A typical defeasance managed by a competent defeasance
consultant will cost in the range of $50,000-$60,000, however there
are a number of factors that may affect the overall cost. The fixed
costs consist of the standard, pre-established fees of the rating
agencies, servicers, securities intermediary and defeasance consultant.
However, the standard fees of some servicers and their counsel are
significantly higher than that of other servicers. The other costs
are contingent on the level of experience, integrity and involvement
of attorneys, accountants, escrow agent and securities broker. The
single biggest opportunity for increased cost is in the securities
purchase where, left unchecked, the securities broker can include
significant fees in the purchase price of the securities. Generally,
it is less expensive and more efficient to take advantage of the network
of service providers that an experienced defeasance consultant like
Commercial Defeasance brings to the table than it is to try to find
third party service providers on your own.
Whereas others dabble in defeasance, Commercial Defeasance specializes in
it. Defeasance is the sole focus of our business. Our experience and
expertise allows us to anticipate issues and address them before they arise.
We have worked hard to streamline the entire defeasance process by developing
an established network of dedicated professionals who are committed to
quality, timely and cost effective service. Also, we are not owned by your
loan servicer, so we have to work hard to earn your business every day.
The defeasance provisions in the loan documents will typically require
that you give your loan servicer 30 to 60 days prior written notice of your
intent to defease. Some servicers are willing to expedite the process but
may charge an additional fee.
You will need to engage your own attorney to review documents, render
a due authorization/enforceability opinion, prepare release documents and
provide borrower organizational documents. We suggest using the attorney
who was involved in the original closing, provided that their level of service
was satisfactory. We can also put you in touch with attorneys all over the
country with whom we have worked, who are experienced in the defeasance process,
and charge reasonable fees.
You are encouraged to use your own accountant for your own accounting and
tax advice regarding the defeasance, but the servicers usually require that the
defeasance math verification report for each transaction be issued by a "big 6"
accounting firm. Even if the servicer allows you to use your own accountant for
the report, it can be done cheaper, more reliably and more efficiently by an accounting
firm that is already experienced in giving such reports in a format that has been
approved by the servicers and rating agencies on other transactions. Commercial
Defeasance can put you in touch with accounting firms that have done hundreds
of these reports and are willing to provide them for a reasonable, flat fee in
a format already approved by servicers and rating agencies.
Yield maintenance is a prepayment of the loan with cash. The yield maintenance
penalty is calculated by the lender which can take several weeks from the date it
is requested. Yield maintenance language also varies greatly from loan to loan and
is subject to a number of different interpretations. Even if you believe the servicer
interpreted your yield maintenance language in the way that is least favorable to the
borrower, the servicer’s calculation of the amount you owe typically may not be challenged
absent “manifest error.” While yield maintenance does not have transaction costs per se,
the yield maintenance penalty is always at least 1% of the loan balance.
Nearly all conduit loans originated since 1998 require borrowers to defease their loan
if they want to sell or refinance. Whether or not defeasance makes sense depends upon a
borrower’s individual situation, but factors motivating most borrowers include (1) the amount
of equity they have in their property, (2) the amount of proceeds they can get on their new loan,
(3) the interest rate on their new loan, and (4) their need to fund another project.
Only certain types of securities are eligible to serve as the defeasance collateral. Most
brokers are not familiar with defeasance requirements and will likely not have the experience to
be able to decipher the applicable language in the original loan documents. Additionally, the
process of optimizing the securities to match the monthly debt service payments on the loan
as required by the loan documents is a complicated and timely process. Commercial Defeasance
has the knowledge and experience to optimize the list of securities and uses experienced brokers
who will work to obtain the best pricing. Furthermore, while many brokers include a hidden mark-up
in the securities cost or buy from sources that have marked-up the securities cost themselves, we
independently monitor the broker to ensure that the securities are purchased directly from the
market-makers with no fees or mark-ups other than a nominal warehousing fee for holding the
securities during the closing process.
Unlike some servicers (including their wholly-owned subsidiaries) and broker-dealers dabbling
in defeasance, defeasance is our sole focus. Because their business is handed to them, they typically
sit back and wait for the transaction to happen and then step in to buy the securities. They often
charge a mark-up on the securities, in addition to their fee for “managing” the transaction, that
is never disclosed as a separate line item. We actively manage each defeasance transaction from
start to finish to close it on time, because we have to earn your business. Moreover, because we have
closed more defeasances than anyone else in the country, we anticipate and avoid issues before they a
rise. The competition can copy our marketing materials and proclaim themselves defeasance experts
before their first transaction closes, but they cannot simply copy our knowledge and experience.
Knowledge and experience have to be earned and Commercial Defeasance has both.
Contact us and you will
see how we got the slogan: "Defease With Ease"
®.
What is Defeasance | How to Save Money in a Defeasance | FAQs
Defeasance vs. Yield Maintenance | Defeasance Costs | Glossary | Working Papers & Articles
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