In a defeasance context , the property owner is referred to as the “ original borrower ,” to differentiate from the unaffiliated “ successor borrower ” who will assume obligations under the existing loan documents from the defeasance closing onward .
The original borrower is typically forbidden from paying off the mortgage debt for a period of two years following securitization . Once this lockout period ends , the original borrower can trigger defeasance by notifying the servicer of its intent to defease and paying a nonrefundable deposit . The original borrower then needs to retain counsel to represent it and select a defeasance consultant .
The servicer ’ s counsel will draft a set of defeasance documents that are standard from deal to deal , but are negotiable in certain key areas . The release that protects the original borrower after the defeasance closes is of particular importance , to be discussed more in a bit . The defeasance documents will also be reviewed by counsel for the successor borrower .
Unlike most modern real estate closings , which are planned for a single day , defeasance closings are typically spread over two days . Once the defeasance documents are
In the right context , defeasing securitized debt can be an intelligent , financially advantageous exercise for a property owner .
finalized and the original borrower is ready to close the refinance or sale of the property ( as applicable ), the original borrower will give its authorization for the replacement collateral securities to be “ circled ” ( that is , identified and committed to be purchased ) on Day 1 of the closing . On Day 2 ( the following business day ), the original borrower is obligated to purchase the circled securities and close the defeasance transaction . Critically , the lien encumbering the real estate collateral will be released on Day 2 , enabling the defeasance closing to be synchronized with the closing of the corresponding refinance or sale of the property . This procedure requires significant coordination among all involved parties and their counsel .
SWEET RELEASE After the original borrower refinances or sells their property , the successor borrower assumes obligations with respect to the underlying loan , and the indebtedness due to the lender lives on . This maintains the payment obligations under the existing note , which is of great importance to the certificate holders . To insulate against loan defaults occurring after defeasance , the original borrower negotiates for a release from future claims , liabilities , and obligations related to the underlying loan . This release is embedded within the defeasance documents .
To the uninitiated , defeasance may seem overwhelming and expensive . However , in the right context , defeasing securitized debt can be an intelligent , financially advantageous exercise for a property owner looking to take advantage of attractive refinancing terms or a high purchase offer . In the end , despite it being a daunting topic to the unfamiliar , defeasance isn ’ t so daunting once you understand the underlying procedures .
Andrew Maguire , Esq . Shareholder with McCausland
Keen + Buckman , a law firm specializing in real estate transactions
Contact him at amaguire @ mkbattorneys . com .
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CIREMAGAZINE . COM COMMERCIAL INVESTMENT REAL ESTATE MAGAZINE 15