Commercial Defeasance

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Defease With Ease

As the CMBS market continues to rebound, defeasance is also making a comeback. Put simply, defeasance is a substitution of collateral. There are many reasons to defease a commercial mortgage, chief among them is the desire to refinance the existing debt in order to find more advantageous financing in the markets. Another key reason is the need to sell a property and the new borrower either cannot or does not want to assume the loan. In both cases (and any other), it is critical that the loan continue to "perform" within the securitized pool, and thus the borrower needs to keep making its monthly debt service. By substituting collateral, the CMBS loan continues to be paid, while the property owner also achieves their financing goals.

Since 1998, nearly every fixed-rate commercial real estate loan originated has required the borrower to defease the loan in order to sell or refinance. Defeasance has become so prevalent in securitized real estate loans that life insurance companies, HUD and others seeking to preserve the ability to securitize their loans have incorporated defeasance into their form loan documents, as well.

Industry Specialists: Commercial Defeasance, LLC

Founded in 2000, Commercial Defeasance, LLC has defeased loans on all property types. According to Jon Davis, the firm's Customer Service Team Director, "We have experience in all product types; from small, single loan defeasances to large, complex portfolio defeasances."

They have worked with every major CMBS servicer in the United States and Canada and are one of the premiere service providers. "Our professionals guide borrowers through the defeasance process by actively managing it from start to finish, which allows borrowers, and their attorneys and brokers, to focus on the related real estate transaction with confidence the defeasance will close on time," Davis said.

With so many clients transfixed on finding the least expensive third party transaction costs, the single biggest cost component is the defeasance securities cost. A unique characteristic for Commercial Defeasance, LLC is that they will confirm in writing that there will be no undisclosed mark up in the final securities price.

"We are the only defeasance company to make such a statement in writing," boasts Davis. Their company can confirm their pricing because (i) they are not owned by any bank, servicer or broker, (ii) their structuring of the securities portfolio is always unbiased and fully optimized, and (iii) they utilize technology and know-how to independently monitor the broker's pricing.

"We are proud to be leaders and have more defeasances than anyone else in the industry with numerous transactions with every master servicer," said Davis.

Commercial Defeasance is also a pioneer, with the first online defeasance calculator, first Canadian CMBS defeasance and the first CMBS defeasance to use a synthetic security.

"We were also among the first to offer customers PV payments and completed the first New York-style defeasance in Florida," said Davis.

Defeasance Process

Typically, a defeasance is coordinated to close contemporaneously with a sale or refinance. The borrower uses proceeds from the sale or refinance to purchase a portfolio of U.S. government securities that is sufficient to make all of the remaining loan payments. The securities are pledged to the lender, and the lender releases the real estate from the lien of the mortgage. The promissory note, which remains outstanding after the defeasance, and the portfolio of securities are assigned by the borrower to an unaffiliated successor borrower that makes the ongoing debt service payments.

Defeasing a loan involves a host of professionals, from attorneys and accountants to servicers, trustees and rating agencies. Defeasance is not a simple prepayment. While Commercial Defeasance has completed defeasances in as little as a week, the entire defeasance process typically takes 30 days, on average, of which 2 to 3 days are allocated to the closing.

Partnering with Commercial Defeasance

The defeasance process has many moving parts, and the real estate closing cannot happen without it. It is important to consult with only the most experienced and knowledgeable defeasance facilitators who understand the details of each and every transaction. Doing so saves the borrower time, money and aggravation and provides peace of mind that the defeasance transaction will not delay the real estate transaction. An experienced facilitator can explain the process, structure an efficient securities portfolio, proactively manage the completion of the various checklist items to meet the borrower's closing schedule, and offer options for sharing in residual value (like PV payments). For more specialized types of defeasance transactions, like partial, multi-loan or New York-Style defeasances, it is even more important to engage an experienced facilitator whose familiarity with lender requirements for such transactions will keep the defeasance on track. Knowledge, responsiveness and pro-active transaction management save valuable time and money, so the borrower, broker and borrower's counsel can focus on the sale or refinancing with complete confidence that the defeasance will close on schedule.

"Choose us because no other company possesses our depth of knowledge, breadth of experience and industry relationships. We understand that most defeasances are driven by a sale or refinance with its own deadlines and urgency. No matter who services your loan, we actively drive the defeasance process to ensure that the defeasance is ready to close when your sale or refinance is ready to close," explained Davis.

To learn more about Commercial Defeasance, visit their website at www.defeasewithease.com.

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