Seamlessly managing a complex process
At NorthMarq Capital, we take pride in being a partner for the life of your commercial real estate loan, including when you need a defeasance exit strategy. We offer a full range of defeasance services—working with a securities trader to assemble a portfolio, setting up custodial accounts, notifying the servicer and more—to ensure this complex financial and legal transaction closes seamlessly. As a trusted partner, we manage the entire process on your behalf so you can focus on your new loan or the sale of your property.
What is defeasance and how does it work?
Defeasance is a process by which a borrower can be released from current loan obligations in order to sell or refinance a property. Defeasance is required in lieu of a payoff for most securitized commercial loans. The borrower purchases a portfolio of U. S. Government or Agency Securities at closing. Those securities serve as replacement collateral to secure the loan, and the cash flow generated by those securities as they liquidate will make the loan payments for the remaining term of the loan. Once the purchase of the securities is complete, the lender releases the lien on the property.
How do I know if my loan requires defeasance?
Most securitized loans require defeasance in lieu of a yield maintenance prepayment premium. The language in the loan documents requiring defeasance can often be found in the Note, but sometimes the language can be found in the Security Instrument (Mortgage or Deed of Trust) or in a Loan Agreement.
Is there a fee for a defeasance cost estimate?
NorthMarq will provide defeasance cost estimates at no cost. We believe in providing cost estimates that are tailored to your loan, so it’s helpful if you can provide the loan documents that contain the defeasance language. The loan documents allow us to determine several factors that may impact the cost of the defeasance, including whether Agency Securities or U.S. Treasuries will be required, whether the loan can be defeased to the open date rather than the maturity date, as well as other variables.
If the loan documents are not available to review, NorthMarq can provide a general cost estimate.
What does NorthMarq do as the defeasance consultant?
As your defeasance consultant, NorthMarq will manage the entire defeasance process so that you can focus on the sale or refinance and have confidence that the defeasance will be ready to close at the same time. We will notify the Loan Servicer on your behalf and coordinate with the Servicer’s counsel throughout the process. In addition, we will work with a securities trader to assemble the most cost effective securities portfolio, set up the custodial account where the securities are held for the remaining term of the loan, order the Accountant Verification Report, as well as coordinate with the Successor Borrower and Title Company and any other parties that may be involved.
Our goal is to make the process as smooth as possible for the client and to make sure the closing time frame is met.
How do I get the defeasance process started?
Contact us a email@example.com for a cost estimate. To initiate the defeasance process, there are three initial tasks:
- Sign the NorthMarq defeasance services engagement letter;
- Sign the letter that will notify the Servicer of the defeasance (NorthMarq will draft the notice letter and deliver it to the Servicer on your behalf); and
- Wire the defeasance deposit that is required by the Servicer. The required Servicer deposits are typically between $25,000 and $40,000.
How long does the defeasance process take?
The defeasance process can take approximately 30 days; however, we have processed some defeasances in as little as a week. Some Servicers and their attorneys will charge an expedited fee if too short of a notice is provided prior to the closing date. We recommend providing at least three weeks notice in order to avoid any expedited fees and to provide a reasonable time frame for completing the process. If rating agency approval is required, 45 days is recommended.
The Servicer’s counsel will issue a checklist at the start of the process that will need to be complete prior to closing the defeasance. There are a handful of deliverables on the checklist that will be the responsibility of the client and/or their attorney. The speed of the process is most often determined by how quickly the client and/or their attorney can provide the required deliverables. The parts of the process that NorthMarq will handle on behalf of the borrower can be done quickly if called for by the closing time frame.
Is the defeasance deposit refundable?
The defeasance deposit is a requirement of the Loan Servicer and is refundable at their discretion. NorthMarq, as your consultant, has no say in whether or not the deposit will be refunded if the defeasance does not close. The borrower should be confident the sale or refinance will close before sending the deposit to the Servicer.
Can I defease to the date the loan can be prepaid at par (open date) rather than the maturity date?
More often than not, the language in the loan documents will require that the defeasance securities be purchased to the maturity date. Some Servicers interpret the defeasance language differently and may allow defeasing to the open date in certain cases. NorthMarq will review your loan documents and advise you if defeasing to the open date is an option for you.
Do I have to defease on a payment date?
This is typically required in the loan documents; however, the Loan Servicers will routinely waive this requirement.
What is the defeasance residual and can the residual be shared with the client?
The defeasance residual is cash that is left over in the custodial account as a result of the interest “float” earned or the Successor Borrower’s ability to prepay the loan.
The “float” is the result of interest earned on the cash in the custodial account. Throughout the term of the loan, there are times when the securities that are purchased mature before the monthly payments of the loan are due, so there is cash in the account during those times. During today’s low interest rate environment, the “float” earned on the cash in the custodial account is typically a very low amount.
In most cases, per the language in the loan documents, the Successor Borrower is not allowed to prepay the loan. In some cases, however, the Successor Borrower will be allowed to prepay the loan at the date the loan can be prepaid at par (open date). This is typically between six months and one month prior to maturity. When this is the case, the Successor Borrower will pay off the loan on the open date and then, once the payoff is complete, the remaining securities that were purchased to the maturity date will be sold off. The proceeds from the sale of the remaining securities may substantially exceed the amount of the payoff, resulting in a residual at the end of the loan term.
The Successor Borrower will share the residual value with the borrower when it’s estimated that there will be a substantial residual at the end of the loan term. NorthMarq will always be 100% transparent when it comes to residual sharing. Upon review of the client’s loan documents, we will let you know as soon as possible if residual sharing will be applicable to your defeasance.