What is Defeasance?

Defeasance enables a borrower to refinance or sell their property. Provisions in many Loan Agreements restrict borrowers from paying off their loan early to release them from their mortgage obligations. Defeasance substitutes a skillfully constructed basket of low-risk securities to replace the borrower’s property as collateral for a mortgage.

Why Can’t Borrowers Pay Off Their Mortgages?

Securitization is the process in which commercial real estate lenders transform loans into investment grade securities. Securitization is an important source of funding for lenders that enables them to make new loans.  Paying off commercial mortgages pooled into a security before they reach maturity can compromise the economics of these complex investments. Lenders insist on prepayment restrictions in their loan agreements so their assets are eligible for securitization. Borrowers receive favorable rates to motivate them to accept prepayment restrictions.

Defeasance Empowers the Borrower

Because of securitization, mortgages need to live on to maturity. Borrowers need to be free of their mortgages to refinance or sell their properties.  The fundamental problem is that a borrower remains tied to a loan because their property serves as loan collateral. Defeasance arranges for the borrower to pay for and substitute lower risk collateral for the property. This collateral is a carefully constructed portfolio of US Treasury and sometimes Agency securities. The portfolio produces the cash flow needed to make the remaining loan payments. During the defeasance we transfer the portfolio of collateral and responsibility for the loan to a new legal entity called a Substitute Borrower. Once all required legal opinions, accounting reports and other safeguards for the other stakeholders are complete the defeasance process releases the property from its collateral obligations and the former borrower is free to refinance or sell their property.

Call Derivative Logic Early

We will guide you every step of the way and make sure:

  • We identify all the factors that can impact your defeasance date.
  • We select appropriate third-party vendors to implement your defeasance.
  • We insure your peace of mind throughout the entire process.

Call us today at (415) 510-2100

Let’s talk about how Derivative Logic’s expertise helps you meet your goals.

Next Steps

We are skilled at accurately estimating the cost of a defeasance. The critical information we need you to share is:

  • the legal name of your property, and
  • a handful of details from your loan agreement, and
  • when you’ll  close your defeasance (to match your best guess as to when you will close your refinanced loan or property sale).

With these facts we can recreate your loan amortization schedule and calculate the cost low risk securities based on current market prices. We also estimate the fees you must pay specific professionals who handle the exacting legal and financial details necessary to close your defeasance on time.

Simply fill out the form above to begin, or call us today at (415) (510-2100.

No matter the transaction or issue, DL has been very responsive, knowledgeable and results oriented in servicing our account. Overall, I would say that…DL creates simplicity and savings.

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Derivative Logic is…always reachable, which is great…and a quick responder,…providing valuable hedging ideas and analytical support.

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