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.