Defeasance FAQ's

Defeasance is the exchange of one form of collateral for another. This specialized financial transaction is especially prevalent in the commercial real estate industry where commercial mortgage backed Securities (CMBS), otherwise known as conduits, have grown increasingly popular. A defeasance allows the original collateral (commercial property) to be released from the mortgage and replaced with a portfolio of Securities (defeasance collateral), with these Securities producing enough cash to make monthly debt services payments.

On most loans there is a lockout period of 2-3 years from the date the loan closes but these provisions can vary from loan to loan. The provisions for the lockout period can be found in your loan documents, and please feel free to contact us if you have any questions on this matter.

A quick and easy way to get an estimate of how much a defeasance will cost is to plug in your information to our calculator. But often times our analysts are able to make special arrangements for individual loans (depending on your loan terms and Servicer). So for the most accurate estimate, please contact our offices.

There are many different parties involved during the legal-heavy defeasance process. AST will handle all the interactions between the parties, which include the servicer, broker, accountant, successor borrower, rating agencies, special servicer, escrow agent, and all parties’ respective attorneys.

Unlike some of its competitors, AST does not use a preferred broker dealer and instead shops your defeasance around Wall Street to obtain the best price for Securities. This allows AST to offer the lowest defeasance cost in the industry and avoid potential conflicts of interest.

A typical defeasance process will take about 30 days, although AST is often able to tailor the closing to the client’s needs and can expedite and complete the process in less than a week if circumstances require.

It is recommended that you use your own attorney to represent you in all legal transactions that take place during the defeasance process.

It is recommended that you use your own accountant to advise you on the benefits of defeasance specific to your situation.

There are two types of ‘residual’ values potentially created in defeasance accounts.

  • Most often, the value created is called ‘float’, the interest created by cash sitting in the account for the short amount of time until it is applied towards the loan payment. Although the portfolio of Securities purchased in the defeasance is structured to be as efficient as possible, often there are just not enough Securities that mature on the same day as the scheduled loan payments.
  • The second type of ‘residual’ value is created by the par repayment provision that is a part of some loan documents, allowing the loan to be prepaid several months early.  This allows several months of interest payments to be saved, either at the time of defeasance or final loan maturity. Depending on the size of your loan and interest rate, this value may be the difference between a defeasance being affordable or not.

AST revolutionized the defeasance industry by pioneering the sharing of residual with the borrower in 2006 when none of its competitors offered borrowers a split of this value. Often times this reduction in borrower’s defeasance cost is what makes the transaction affordable. For a complete breakdown of the residual available to you, please contact our office.

Defeasance Consulting Fee - AST's role is to quarterback the process, serve as an intermediary between all parties and arrange for all third parties such as accountants, securities intermediaries and broker-dealers. Prior to kicking off the process, we provide estimates, discuss timing considerations, risks, and other quality insights to ensure the process commences at the appropriate time to meet your timeline. Throughout the process we work to ensure the borrower's best interests are put first so that the borrower can focus on other aspects of their closing. Unlike other advisors, we are an independent third party with no potential conflicts of interest; meaning our only interest in the transaction is ensuring it's smooth, efficient, and transparent for the borrower.

Successor Borrower/Legal - A bankruptcy-remote special purpose entity that becomes the legal holder of the securities portfolio. The right to establish and own the SB is outlined in the loan agreement, but most commonly it's at the lender's discretion. Once the defeasance closes, the SB assumes the responsibility of the trust account that holds the Defeasance Collateral and retains the rights to any residual value created in the account.

Securities Structuring Fee - Charged by the party with rights to purchase securities. Determined in the loan documents, this fee may not apply based on language in the Loan Agreement. We include it in our estimates to provide customers with a worst-case-scenario.

Accounting Opinion - All loan documents require that an Independent Public Accountant provides a Verification Report certifying the sufficiency of the Defeasance Collateral. There are two firms that offer these services and we are normally able to save ~$1k on this fee by using the lower cost option.

Servicer Processing Fee - The master servicer on your loan is the administrator or "gatekeeper" of the defeasance process. With the help of their counsel they make sure all the provisions of the loan documents are satisfied and they enable the release of the borrower's mortgage and the transfer of its obligations to a Successor Borrower.

Servicer Legal - The outside attorney that represents the Servicer in the defeasance and works with the Borrower and the Borrower's counsel to complete the legal requirements of the transaction. They will distribute a checklist of deliverable items that must be provided by the borrower and defeasance consultant. Servicer's counsel's fees typically range from $12k-$25k.

Custodian Fee - After the defeasance closes, a custodian, typically a bank or trust company, will hold the securities portfolio in a trust account on behalf of the Successor Borrower, disbursing the monthly loan payments to the Servicer from the proceeds of the portfolio.