What is Defeasance?
Nearly every fixed-rate commercial real estate loan originated since 1998 requires 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.
Put simply, defeasance is a substitution of collateral. 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 a successor borrower that makes ongoing debt service payments.
The defeasance process involves a host of professionals, from attorneys and accountants to servicers, trustees and rating agencies. Defeasance is not a simple prepayment. The entire defeasance process typically takes 30 days, on average, of which 2 to 3 days are allocated to the closing process.
There also are a couple of variations on the standard defeasance: the New York-style defeasance and the partial defeasance.
New York-style Defeasance:
Commercial Defeasance has facilitated numerous New York-style defeasances over the years. If the property is located in New York, Florida and a few other states, it is now common for the REMIC trust (the lender) to assign the existing note and mortgage to the new lender to accommodate the borrower's (or the buyer's) desire to reduce mortgage recording taxes on the new loan financing. While the servicer and/or their counsel may charge an additional fee to accommodate a New York-style defeasance, the savings often is worth the extra effort. Link here to a recent article on New York-style defeasance.
Partial Defeasance:
Commercial Defeasance has facilitated numerous partial defeasances over the years. Some cross-collateralized loans and single loans secured by multiple properties give the borrower the option to defease a portion of the loan related to individual properties. If so, some servicers and/or their counsel may charge an additional fee for the additional documentation required for a partial defeasance.
Contact us today... to Defease With Ease ®.