Introduction to Defeasance

What is Defeasance

Defeasance is a financial strategy used by commercial real estate investors to replace the property tied to a mortgage with other types of collateral, typically a bundle of high-quality securities. This switch is particularly useful when an investor wants to sell or refinance their property but is hindered by the terms of their original loan, which may include severe penalties for early repayment. Defeasance allows property owners to be free of their mortgage by ensuring that the lender continues to receive payments as if the original loan were still in place, just from a different source.

This process isn’t simple and involves several key steps. It begins with consulting a defeasance expert who can help navigate the complexities of this strategy. This expert will help structure the process so you satisfy all the requirements of your loan agreement, ensure all legal bases are covered, that all the right people are involved and will make certain the right securities are selected to replace the property as collateral. These securities will generate exactly enough income to cover the mortgage payments for the duration of the original loan.

However, defeasance can be costly. The expenses are influenced by current interest rates and the price of securities. In environments where interest rates are low, the securities needed to cover the mortgage payments can be quite expensive. Despite this, under certain interest rate conditions, like those prevalent today, defeasance can actually be less expensive than paying off your remaining loan obligations. This situation is known as having a “negative defeasance penalty.”

Understanding and implementing defeasance can provide significant strategic advantages, enhancing your ability to manage and profit from your property investments. Whether it’s timing a sale to maximize returns or refinancing to better terms, defeasance offers a pathway to greater financial flexibility and opportunity.

If you’re considering this strategy, it’s important to get expert advice. Steve Morus, our Director of Defeasance Services at Derivative Logic, Inc., is a leading defeasance consultant. He’s particularly skilled at making the defeasance process stress and worry-free for property owners like you. With his expertise, you can quickly find out if you might have the opportunity to benefit from a negative defeasance penalty right now. You can contact Steve Morus directly at 415 510-2100 or email him at smorus@derivativelogic.com.

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