Navigating Commercial Mortgage Defeasance: A Step-by-Step Guide

Apr 20, 2024

Commercial mortgage defeasance can be a complex process, but with the right knowledge and guidance, it can be navigated successfully. Whether you are a property owner looking to sell your property or a lender dealing with a borrower's request for defeasance, understanding the steps involved is crucial. In this step-by-step guide, we will walk you through the process of commercial mortgage defeasance to help you better comprehend the intricacies involved.

What is Commercial Mortgage Defeasance?

Commercial mortgage defeasance is a process in which a borrower substitutes collateral for a mortgage loan with government securities. This allows the borrower to release the property from the mortgage while still meeting the lender's debt service requirements. Defeasance is often used when a property owner wants to sell a property before the loan matures or when refinancing the property.

Step 1: Determine Eligibility

Before initiating the defeasance process, it is essential to determine if your loan is eligible for defeasance. Typically, loans with prepayment penalties or yield maintenance provisions are eligible for defeasance. Consult your loan documents or speak with your lender to confirm eligibility.

commercial mortgage

Step 2: Hire a Defeasance Consultant

Defeasance can be a complex process that requires specialized knowledge and expertise. Hiring a defeasance consultant can help streamline the process and ensure that all legal and financial requirements are met. The consultant will assist in structuring the defeasance transaction and coordinating with all parties involved.

Step 3: Purchase Government Securities

Once eligibility is confirmed and a consultant is hired, the next step is to purchase government securities that will be used to replace the collateral. These securities will need to generate cash flow that matches the mortgage payments to ensure the lender's debt service requirements are met.

Step 4: Create Defeasance Documents

Defeasance requires the creation of legal documents that outline the terms of the transaction and the substitution of collateral. These documents will need to be reviewed and approved by all parties involved, including the borrower, lender, and legal counsel.

defeasance process

Step 5: Close the Defeasance Transaction

Once all documents are in order and the government securities are purchased, the defeasance transaction can be closed. This involves the transfer of the securities to the lender and the release of the property from the mortgage. The borrower is then free to sell or refinance the property.

Step 6: Monitor Cash Flow

After the defeasance transaction is closed, it is crucial to monitor the cash flow generated by the government securities to ensure that the debt service requirements are being met. Any discrepancies should be addressed promptly to avoid default.

Step 7: Notify All Parties

Once the defeasance process is complete, it is essential to notify all parties involved, including the borrower, lender, and any other relevant stakeholders. Clear communication is key to ensuring a smooth transition and avoiding any misunderstandings.

Step 8: Document Completion

Finally, make sure to document the completion of the defeasance process for your records. Keep copies of all relevant documents and correspondence in a secure location for future reference.

By following these steps and seeking the guidance of experienced professionals, navigating commercial mortgage defeasance can be a manageable process. If you are considering defeasance for your commercial property, be sure to consult with experts in the field to ensure a successful outcome.