CMBS Loan Defeasance Transactions: Borrower and Lender Strategies, Process, Timing, Benefits and Risks

Description

Most CMBS borrowers wanting to prepay their loan must go through a process known as defeasance, which involves replacing the collateral and interest income that the lender will lose as a result of prepayment with alternative securities, often U.S. Treasury bonds. This process protects the economic expectations of the CMBS investors while allowing the borrower the flexibility to sell and/or refinance its property free of the mortgage loan.

Defeasance can be a cost-effective way to prepay a loan depending on the market environment. It can be beneficial when interest rates are rising because the treasury bonds used as replacement collateral for the loan become less expensive to purchase, leading to substantial savings. When interest rates are falling, the cost to an investor may not be much worse than what they would be required to cover through loan yield maintenance.

The loan defeasance transaction is a specialized and potentially time intensive process with benefits and risks for both lenders and borrowers. Loan servicer's counsel will typically prepare a set of defeasance documents that are dictated by the substantive terms of the existing loan documents and will generally include details about the securities the lender will accept, the appointment of a successor borrower, and the commencement of the defeasance process.

Listen as our authoritative panel of commercial real estate finance attorneys guides you through a CMBS loan defeasance transaction and provides best practices for counsel representing borrowers and lenders in these transactions.