Defeasance in Real Estate Finance: Process and Timing, Prepayment and Lockout Provisions

CMBS and SPE Concerns, Structuring Around Mortgage Taxes, Economics of Prepayment vs. Defeasance

Note: CPE credit is not offered on this program

A live 90-minute premium CLE video webinar with interactive Q&A


Tuesday, March 16, 2021 (in 7 days)

1:00pm-2:30pm EDT, 10:00am-11:30am PDT

or call 1-800-926-7926

This CLE webinar will examine the mechanics of defeasance in CMBS and other yield protected commercial real estate loans. The panel will discuss restrictions inherent in yield maintenance and lockout provisions, the timing complexities and documentation of defeasance transactions, CMBS servicing issues, and additional steps required to avoid mortgage taxes in states like New York and Florida.

Description

Defeasance allows a borrower to prepay its existing loan after a specified lock-out period by substituting for the real estate collateral a basket of U.S. government-backed securities that generate cash flow sufficient to pay the ongoing debt service and the principal amount due at maturity. Defeasance thus results in yield protection for CMBS and other lenders that have been promised continued payments throughout the loan term.

The decision to refinance may be governed by the cost of defeasing the existing loan. Counsel must weigh the economic costs and benefits of defeasing a higher interest rate loan with lower yielding securities. Documentation is significant and typically includes the formation of a new SPE and transfer of the mortgage. Additional issues must be considered in states with significant mortgage taxes. If allowed, simple prepayment (with a prepayment penalty) might be the better option.

When involved in a refinance or sale that will require a defeasance to close, counsel must consider the transaction process and timing. All parties must agree to the closing timeline because once the borrower "pushes the defeasance button," the borrower must purchase securities and close the defeasance and the new loan within the allotted window or incur high breakage costs. In the CMBS context, servicer and rating agency approval must be obtained before closing.

Listen as our authoritative panel discusses the legal and economic complexities of defeasance.

READ MORE

Outline

  1. Defeasance and yield protection
  2. Economics of defeasance: weighing costs and benefits of refinancing
  3. Defeasance, prepayment, and lockout provisions
  4. Documentation of the transaction
  5. Parties to defeasance
  6. Process and timing issues
  7. Mortgage tax considerations

Benefits

The panel will review these and other key issues:

  • What is the rationale for requiring defeasance in CMBS and other commercial real estate loans?
  • How should borrowers calculate the cost of defeasance? Why does defeasance make more economic sense later in the loan term?
  • Are there times when a cash prepayment is an option? When is prepayment preferable to defeasance?
  • How should the transaction be structured in a heavy mortgage tax state?

Faculty

Herman, Steven
Steven M. Herman

Partner
Cadwalader Wickersham & Taft

Mr. Herman concentrates his practice in the areas of real estate finance, development, joint ventures, acquisitions,...  |  Read More

Weitzman, Andrea
Andrea G. Weitzman

Attorney
Cadwalader Wickersham & Taft

Ms. Weitzman is an associate in Cadwalader’s Finance Group. Her practice is concentrated in the area of...  |  Read More

Live Webinar

Buy Live Webinar

Live Webinar

$347

Buy Live Webinar & Recording
A savings of $250

Live Webinar & Download

$444

Live Webinar & DVD

$444 + $24.45 S&H

Other Formats
— Anytime, Anywhere

Strafford will process CLE credit for one person on each recording. All formats include program handouts. To find out which recorded format will provide the best CLE option, select your state:

CLE On-Demand Video

48 hours after event

$347

Download

48 hours after event

$347

DVD

10 business days after event

$347 + $24.45 S&H