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Accountant's Fee -
As a condition precedent to defeasing a CMBS loan, the borrower will be
required to deliver to the servicer an agreed upon procedure letter from an
independent public accountant acceptable to the servicer. The agreed upon procedures letter is addressed to the borrower, trustee, servicer, rating agencies and successor borrower and confirms that the cash receipts from the government securities serving as the pledged collateral will be sufficient to make all remaining monthly payments due under the note. It is commonly referred to as an “Accountant’s Report.”
Amortization - Amortization is the repayment of a debt by the borrower in a series of installments comprised of principal and interest over a period of time. A fully amortizing loan is a loan for which the loan term matches the term of the amortization schedule such that the loan balance is paid to zero at maturity by making equal monthly payments over the term. With the exception of loans secured by credit tenant leases, most CMBS loans are not fully amortizing. Rather, they have a five, seven or ten year term and require the borrower to make monthly payments based upon a twenty-five or thirty year amortization schedule. This results in lower monthly payments than a fully amortizing loan but also requires a balloon payment at maturity in order to repay the loan in full.
Ask/Bid - - The ask price is lowest price at which a seller is willing to sell a security at a given time. The bid price is the highest price at which a buyer is willing to buy a security at a given time.
Basis
Points (bps) - There are one hundred basis points in one percentage point. The term “basis points” is used in financial circles to describe percentages that include hundredths of one percent, usually in connection with a spread over an index to set an interest rate or to describe servicer fees.
CMBS CMBS is an abbreviation for “Commercial Mortgage-Backed Securities.” Loans for which the lender’s exit strategy is securitization by transfer of a pool of loans to a REMIC trust are referred to interchangeably as “CMBS loans” and “conduit loans.”
Conduit Loan - A conduit loan is the same as a CMBS loan. The word “conduit” in this context refers to the pass-through tax status of the REMIC trust to which the lender intends to transfer the loan in a securitization.
Coupon/Interest – The coupon rate or interest rate is the stated annualized percentage rate of interest paid by a borrower to a lender in exchange for the use of the lender's money for a period of time.
Custodian - In the defeasance context, the custodian or “securities intermediary” is an agent of the lender, usually a bank, that holds the government securities serving as the defeasance collateral and owned by the successor borrower, collects interest and principal payments on the government securities and sends the payments on the defeased loan directly to the loan servicer all pursuant to the defeasance account agreement.
Defeasance - Defeasance is a substitution of collateral. A portfolio of qualified U.S. government securities 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 thirty days to complete.
Defeasance Account Agreement - The defeasance account agreement is a standard document in CMBS defeasances that sets forth the terms pursuant to which the custodian/securities intermediary will hold the pledged collateral and apply the proceeds thereof to the payment of the debt as and when payments are due.
Defeasance Assignment, Assumption and Release Agreement - The defeasance assignment, assumption and release agreement is a standard document in most CMBS defeasance transactions. It sets forth the terms of (i) the assignment of the note, pledge agreement, and account agreement from the original borrower to the successor borrower, (ii) the assignment of the government securities serving as the pledged collateral from the original borrower to the successor borrower, and (iii) the release of the original borrower from the original loan documents.
Defeasance Borrower’s Certificate - The defeasance borrower’s certificate is a standard document in CMBS defeasances. As it is a condition to the borrower’s right to defease that the borrower’s loan not be in default, the defeasance borrower’s certificate is basically a litany of representations and warranties that confirm that the borrower has not committed certain acts or omissions that would result in a default under the loan documents.
Defeasance Note - Defeasance notes are used for CMBS defeasances in two primary situations. The first is when the real estate securing the loan is located in the State of New York and the borrower requests that the lender structure the transaction as a “New York-style defeasance” in order to avoid paying mortgage recording taxes on its new loan to the extent of the current outstanding principal balance of the existing loan on the date of the defeasance. The second situation in which a defeasance note is used is when the borrower elects to do a partial defeasance pursuant to the defeasance provisions in the loan documents in order to obtain the release of just a portion of the real estate encumbered by the loan.
Defeasance Pledge Agreement The defeasance pledge agreement is a standard document in CMBS defeasances. It creates the pledge of the government securities by the original borrower to the REMIC trust.
Defeasance Waiver and Consent - The defeasance waiver and consent is a standard document in CMBS defeasances. As the defeasance process has evolved, some non-economic procedural requirements that were built into the defeasance language in the original loan documents have become inapplicable. For example, notwithstanding language to the contrary, most defeasances do not occur on a payment date and most servicers do not require more than 30 days prior notice of intent to defease. Such requirements are routinely waived by servicers in the defeasance waiver and consent.
Free
Delivery - Free delivery in the context of the purchase of the portfolio of securities that serve as the pledged collateral for a defeasance means that the purchase price of the portfolio of securities is paid to the securities broker-dealer before the broker-dealer releases the securities per the purchaser's instructions.
Loan
Term -The loan term is the amount of time set by the lender for a buyer to repay the loan in full. Most CMBS loans have 5-year, 7-year or 10-year terms.
New York Perfection Opinion – CMBS defeasance transactions are governed by New York law, so a New York perfection opinion issued by a law firm (often the loan servicer’s counsel) is required by the loan servicer. The NY perfection opinion letter confirms that the REMIC trust has a perfected security interest (by possession and control under Article 8 of the UCC) in the government securities that serve as the pledged collateral.
New York Style Defeasance - A New York style defeasance can be arranged for borrowers defeasing loans secured by property located in the State of New York. It is an accommodation by the servicer of a borrower request to structure the transaction in such a way as to allow the borrower to avoid paying mortgage recording taxes unnecessarily. In simplified terms, (i) the REMIC trust assigns the existing loan to the borrower’s refinance lender, (ii) a portion of the refinance proceeds is used to purchase the government securities that will serve as the defeasance collateral, (iii) the refinance lender and the borrower enter into the defeasance pledge agreement and defeasance account agreement, (iv) the borrower signs three new notes in favor of the refinance lender (one, the defeasance note, in the amount of the current outstanding principal balance of the existing loan, another, the “gap note,” in an amount equal to the difference between (a) what the
refinance lender is willing to lend to the borrower on the new loan, and (b) the amount of the defeasance note, and the third, the consolidated note, combines the original note and the gap note into one amended and restated note), (v) the defeasance note, pledge agreement and account agreement are assigned by the refinance lender to the REMIC trust, (vi) the borrower pays mortgage recording taxes on the amount of the gap note only when the “gap mortgage” is recorded, and (vii) the borrower pays no mortgage recording tax on the consolidated mortgage securing the consolidated note, because it has already paid mortgage recording taxes on the original note (when the original mortgage was recorded) and on the gap note (when the gap mortgage was recorded in connection with the defeasance closing). For more information see the article Defeasance: Now a Viable Option In New York State by Joshua Stein, a copy of which may be found under the Working Papers/Articles section of this website under the Resources tab. As an industry service, Commercial Defeasance has also been working on the expansion of the New York style defeasance concept to the State of Florida.
No-downgrade Letter - A no-downgrade letter refers to a letter from a rating agency confirming that the defeasance, as set forth in the documents that the rating agency reviewed, will not result in a downgrade of the certificates evidencing the bonds issued by the REMIC trust that holds the loan.
Pooling and Servicing Agreement - – A pooling and servicing agreement is a lengthy written agreement among a lender depositing loans to a REMIC trust, the REMIC trust and the loan servicer. The “PSA” sets forth the obligations of the parties with respect to the securitized loans and usually includes some guidance with respect to the defeasance of such loans.
Rating
Agency - – Rating agencies are private companies that rate the creditworthiness of bonds. The three best known rating agencies are Moody's Investors Services, Standard and Poor's and Fitch ICBA. Typically, at least two of the three major statistical rating agencies rate the bonds issued to investors by a REMIC trust. Because defeasances can create issues that could cause the REMIC trust to lose its tax status as a REMIC, the rating agencies review the defeasance documents for certain large loans that meet the criteria established by the rating agencies for rating agency review. The fee charged by a rating agency for their review of a defeased loan is typically paid by the borrower pursuant to language in the borrower’s original loan documents.
REMIC Opinion CMBS defeasance transactions must be completed in compliance with REMIC regulations, so a REMIC opinion issued by a law firm (often the loan servicer’s counsel) is required by the loan servicer. The REMIC opinion letter confirms that the defeasance, as structured and documented, will not cause the REMIC trust to lose its status as a REMIC.
REMIC Trust - REMIC is an abbreviation for “Real Estate Mortgage Investment Conduit.” A REMIC trust is the entity to which a lender transfers its loans when it securitizes them. There are a number of complex regulations in the U.S. tax code that govern the creation and maintenance of a REMIC trust. REMIC Trusts issue bonds to institutional investors that are backed by commercial mortgages or other assets.
Securities
Securities is a general term that includes all instruments representing evidence of ownership of debt issued by a corporation or governmental agency or department. Securities that may be used to defease a CMBS loan are typically limited to direct obligations of, or obligations backed by the full faith and credit of, the United States government, which are not subject to early redemption.
Securitization - Securitization refers to the process by which a lender transfers loans to a REMIC trust. In simplified terms, when a lender securitizes a pool of loans the lender is paid for the transfer of the loans out of the proceeds of bonds issued by the REMIC trust to which the loans are transferred, and the lender is able to remove the loans from its books.
Servicer – The servicer is typically a large institution that interacts directly with the borrower pursuant to a pooling and servicing agreement to collect monthly mortgage payments, hold the borrowers' escrowed funds, request financial statements, renew UCC financing statements, respond to borrower requests and the like.
Successor Borrower - The successor borrower is a special purpose, bankruptcy remote entity that assumes the defeased loan, takes an assignment of the government securities that serve as the pledged collateral and is responsible for maintaining its existence for the remaining term of the loan.
Yield
- The rate of return on an investment over a given
time, expressed as an annual percentage rate. Yield
is affected by the price paid for the investment as
well as the timing of principal repayments.
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