How long is the process?
Defeasance transactions typically occur in parallel with a property sale or refinancing, so the defeasance process timing is usually determined by the underlying the transaction. A 30-day period is comfortable for a defeasance, but defeasances can be closed more quickly if needed. Please note that the closing itself takes three days due to the securities purchase. (Read more in the Defeasance FAQ – What happens during the three-day close?)
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How does the defeasance process integrate with my sale?
Defeasance is often used to facilitate a sale on better terms than could otherwise be obtained by the seller if they sold the property with assumption of the loan. Specifically, defeasing the loan lets the borrower sell the property unencumbered by shifting the lien off the original property collateral. The new buyer can obtain their own financing, at a better rate, or with less equity, or with a longer term or fewer escrows. The defeasance closing is completed simultaneously with the sale closing so that financing for the new purchase closes seamlessly.
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How does the defeasance process integrate with my refinancing?
Defeasance is often used to facilitate refinancing since it represents the only way to prepay the original financing for nearly all conduit loans issued since 1998. Specifically, defeasing the loan lets the borrower obtain new financing in first lien position by shifting the old lien off the original property collateral. The defeasance closing is completed simultaneously with the refinance closing.
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What can lengthen the timeline?
There are three events most commonly responsible for lengthening the overall defeasance timeline. First, rating agency review can add several weeks to the process. Second, difficulty obtaining the borrower’s organizational documents (including good standing etc.) from the state of formation can also lengthen the timeline.
Third, and with the largest impact, is a situation when the borrower’s loan is in technical default. In most loan documents, this means the defeasance (or any assumption) cannot proceed until the default is cured. The Master Servicer and/or Special Servicer will not permit the defeasance to proceed if an event of default has occurred (even a technical, non-monetary default), unless the default is cured and the borrower pays applicable fees, including default interest from the date of the default and additional servicer review, and assumption or approval fees, such as fees for expedited review, assumption or approval.
Any event of default, even one that may seem inconsequential, will result in delays and additional servicer fees and servicer legal expenses.
Some common events of default discovered during Servicer’s counsel due diligence (i.e., review of current title policy, Borrower organizational documents, good standing certificates, conversations with Borrower, Borrower’s counsel, and Borrower’s accountant, etc.) are:
- outstanding judgments against the borrower and/or property;
- transfers of the property, or an interest therein (including by deed or ground lease), without having first obtained Servicer’s consent;
- transfers of direct or indirect ownership interests in the Borrower (including to a spouse or other family member, if the original loan documents do not permit such transfers) without having first obtained the Servicer’s consent;
- the existence of secondary financing (including mezzanine financing and unsecured debt, if the original loan documents do not permit such financing) without having first obtained the Servicer’s consent; and
- failure to maintain the Borrower in good standing (i.e., administrative dissolution by the Secretary of State for failure to file annual reports, tax returns, etc.)
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When can I defease?
The defeasance typically occurs in parallel with a purchase/sale or refinance transaction. There are typically two restrictions in your original documents that govern the timing of the defeasance. First, REMIC compliance requires the defeasance to occur at least two years after the CMBS securities are issued. This is termed the “REMIC lockout” period and importantly is not two years after loan origination, but two years after the securitization trust issues its securities to investors. Some loans specify a longer lockout period after which a defeasance can proceed. The second defeasance timing restriction relates to giving notice to the loan servicer. Most loan documents require the original borrower to notify the servicer 30-90 days before the anticipated defeasance closing date. This last requirement can be waived with servicer’s consent. (Read more about Waiver and Consent Agreement)
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What is the role of the Successor Borrower?
After purchase, the securities portfolio is transferred to a special purpose, bankruptcy remote entity called the Successor Borrower, which assumes the obligations of the original loan and makes the remaining loan payments until loan maturity. The Successor Borrower assumes nearly all the rights and obligations for the loan from the original borrower, and owns and administers the defeasance collateral that secures the loan. An affiliate of the defeasance advisor typically forms the Successor Borrower and maintains it throughout the remaining life of the loan. These administrative tasks include annual registration, tax filings, and other required maintenance.
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What is the Defeasance Refund™ payment?
The nature of defeasance requirements and the securities portfolio often creates residual value within the Successor Borrower at loan maturity. The residual value is created through two sources. The first source is float income that accrues due to timing mismatches between the securities portfolio income and the regular loan payments. The second source of residual value comes from the borrower’s option to make penalty-free prepayments near the loan maturity date. Capital Defeasance Group is committed to the transparency of this residual value, including sharing this value with the borrower through a Defeasance RefundTM payment when appropriate. (Read more on the Defeasance RefundTM)
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What happens during the three-day closing?
It typically takes three days to close a defeasance for reasons relating to the purchase of the defeasance collateral securities. The three-day closing brings together all the work that has been done since notification of the servicer, resulting in the release of the lien in exchange for the Successor Borrower assuming the original loan obligations, collateralized by a new portfolio of government securities.
DAY ONE: PURCHASE DAY
After receiving confirmation that all defeasance and borrower due diligence documents have been received in good order, the defeasance advisor finalizes the securities portfolio and obtains approval from the accountant. The securities are purchased with settlement planned for Day Three. Servicer’s counsel sends all original release documents to the title company.
DAY TWO: SAFETY DAY
Servicer’s counsel distributes final closing instructions and confirmations are sent from the title company and securities broker. Any outstanding issues are resolved by end of day in order to proceed with closing on Day Three.
DAY THREE: CLOSING DAY
Securities Intermediary confirms receipt of the securities, signaling that the closing may begin. Servicer’s counsel instructs the title company to finalize the closing including recording all executed documents and disbursing remaining funds from escrow.
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Can I use my own accountant in my defeasance?
Your own accountant is well positioned to provide accounting and tax advice regarding your defeasance, but servicers typically require that the verification report for the securities portfolio be issued by a nationally recognized accounting firm with experience in defeasance matters. These firms usually charge a standard flat fee of $3,500 to $4,000 for the verification report.
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Can I use my own attorney in my defeasance?
Capital Defeasance Group and its employees are not practicing attorneys. The borrower should engage its own attorney to provide legal counsel to them and advise them in connection with the defeasance. It is often best to use the attorney involved in the original closing because of his or her familiarity with the property and original documentation. You generally will need counsel to prepare and review many of the documents for the defeasance transaction. Borrower’s counsel must review all defeasance documents, render a due authorization/enforceability opinion, prepare release documents, and provide the borrowers’ organizational documents. Capital Defeasance Group will share our defeasance experience with your attorney to ensure he or she has all the information needed to fulfill the defeasance requirements.
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