Glossary

Defeasance Parties

Accountant
One of three national CPA firms that is approved by the ratings agencies to provide a verification report stating that the Defeasance collateral is sufficient.

Borrower (original borrower)
The party responsible for the original loan before and up to the defeasance.

Custodian (Securities Intermediary)
The financial institution that agrees to create an account to hold the securities and deliver monthly loan payments to the servicer from the collateral.

Escrow/ Title Company
The entity that provides title services and manages the escrow during the defeasance closing process. They are also responsible for recording the release of the mortgage at the closing of the defeasance.

Defeasance Consultant
The central party that represents the borrower and coordinates all processes of the defeasance.

New lender
The financial institution that provides the new loan to refinance the property, which is generally partially used to finance the defeasance transaction and consequent payoff of the original loan.

Rating Agencies
The agencies that rate the credit worthiness of CMBS loans and approve financial entities to act as defeasance consultants, such as Moody’s, S&P and Fitch.

Servicer
The bank that oversees all of the loans in a CMBS pool and makes sure that all provisions of the mortgages are satisfied. Their responsibilities include approving the defeasance process and confirming receipt of the monthly mortgage payments.

Special Servicer
The financial entity that sometimes handles defaulted loans for the servicer.

Successor Borrower
A special purpose entity formed to take over responsibility for the original borrower’s loan obligations. When the defeasance closes the Successor Borrower assumes responsibility for the trust account and is entitled to any residual value created in the account.

Defeasance Terms

Commercial Mortgage Backed Securities (CMBS)
Securities backed by a pool of commercial loans that are then termed a REMIC trust. The monthly principal and interest payments from the loans pass through the trust to the certificate holders and these holders assume all lender rights and responsibilities. These CMBS loans are also sometimes known as “securitized” or “conduit” loans.

Conduit
CMBS loans pooled into a CMBS/REMIC Trust

Defeasance Collateral
A portfolio of securities used to replace the property as collateral for the loan. The cash flow from these securities will then be used to make the loan payments. U.S. Treasury securities are used as collateral in most cases but when the loan documents permit, higher yielding U.S. agencies securities are used.

Float
The interest that is accrued in the defeasance account from the timing lag of the securities interest payments and the loan payments.

Lockout Period
The amount of time, usually two years, that the loan provisions specify the loan cannot be prepaid or defeased.

Open Window
Loan provision that allows the loan to be prepaid at par several months before loan maturity, allowing for the saving of several months of interest payments.

Real Estate Mortgage Investment Conduit (REMIC)
A legal entity formed to hold CMBS loans and facilitate the transfer of funds from the borrower through the trust to the certificate holders.

Residual Value
The value created by float and the open window in the successor borrower’s trust at the maturity of the loan.

Tranche
A portion of a CMBS loan that is separated from other tranches by its credit rating and rate of return. Different tranches have different risk/reward profiles.

Yield Maintenance
A prepayment penalty that is applied to a loan as an alternative to defeasance. This penalty allows the lender to obtain the same amount of interest he would have otherwise if the loan had not been prepaid. Yield Maintenance penalties differ from defeasance penalties only in that they require substantially lower third party fees than a defeasance.

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