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Frequently Asked Question about Defeasance
Why do I need a defeasance consultant and why should I choose DefeaseIt?
The need for a defeasance consultant is principally to coordinate the purchase of the portfolio of securities as required by your loan documents. DefeaseIt not only facilitates the purchasing of the most cost efficient pool of securities, we manage the defeasance transaction from start to finish. Unlike many competitors, our business is focused solely on defeasance. Our familiarity with the defeasance and closing process allows us to ensure you transaction closes on time and with cost effectively. DefeaseIt uses proprietary software that finds the most efficient collection of securities to replace the loan and balloon payments. The relationships we have developed with other participants in the transaction allow us to negotiate the most competitive transaction fees in the industry.

Why do I have to defease my loan and how is this different from yield maintenance?
Since 1998 most lenders of CMBS loans have required the borrowers that want to sell their property or refinance their loan to defease the loan in the place of yield maintenance. Yield maintenance is a prepayment of the loan with cash and although a yield maintenance calculation should equal a perfectly efficient defesance calculation and doesn't include the transaction costs of a defeasance, it is not always less expensive. A yield maintenance penalty is always at least 1% of the loan balance. Thus, as treasury yields get close to the original coupon rate of the loan defeasance can be less expensive than yield maintenance an in certain circumstances even allow for securities costs less than the loan balance.

When does defeasing a property make economic sense?
While each borrowers situation is unique there are at least four factors that can help determine whether defeasance of a loan is a good decison. First is how much equity a borrow has in their property. Second is the amount of money they can get on a new loan. Third is the interest rate on the new loan. Finally, is a borrower's need to fun any other project.

How long does is take to defease my loan?
Loan provisions generally require that you give your servicer 30 to 60 days written notice prior to the date of your intent to defease. While some loans have been known to be defeased within a week or two our more typical planning is usually 30-45 days. DefeaseIt has partners in the transaction including accountants and securities dealers are capable of moving extremely quickly to facilitate your transaction. However, we do rely on other outside parties including the servicer an sometimes rating agencies which may require additional time.

How much does it cost to get a defeasance bid?
DefeaseIt offers written estimates for any defeasance free of charge. We are happy to assist you in determining the viability of defeasing your loan and see this estimate as a valuable opportunity to provide you with any helpful information about the defeasance process. We also offer phone estimates, you can also provide us information for bid by email or fax as well as using our accurate defeasance calculator on the first page of our website.

How is the cost of a defeasance transaction calculated?
The costs of a defeasance consists of both the cost of the securities and the various third-party fees associated with the documentation and processing of the transaction. The cost of the securities is a function of the spread between the interest rate of the loan and the yield of the securities. If the loan coupon is higher than the yield of the government securities or agencies then there is a defeasance premium. If the loan coupon is higher than the yield of the government securities or agencies then there is a defeasance discount.

What types of securities are used in a defeasance transaction?
Acceptable securities typically include noncallable U.S. Treasury obligations but in some cases also allow for noncallable obligations of agencies such as Fannie Mae and Freddie Mac.

Why does the defeasance require a three day closing?
The three day closing coincides with the property sale closing and is used to facilitate the purchase and then movement of the collateralizing securities to the successor borrower. Three days is not mandatory but does give sufficient time for the movement and confirmation of funds thus providing the greatest chance for a simple and successful transaction.

Why shouldn't I get a broker myself to buy the securities?
Not all securities are eligible to serve as collateral to defease your loan. Additionally, the typical loan document has language that is not familiar to most brokers and their inexperience in dealing with these type of transactions would be problematic. Additionally, DefeaseIt uses proprietary software that optimizes the matching of your monthly debt service payments and the balloon. This would be a complicated and timely process for others yet this process give DefeaseIt the opportunity to create savings for you by obtaining the best pricing by dealing directly with the market-makers in the bond industry.
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