About Our Defeasance Services

Waterstone has a stellar reputation in the defeasance industry due to our transparent approach, unmatched customer service and cost saving ideas for our clients.

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What is Defeasance?

In commercial real estate, defeasance is a process a borrower may need to go through when selling property or refinancing a loan encumbered by CMBS debt. Defeasance is a substitution of collateral activity where a portfolio of government securities are purchased from new loan proceeds, and the cash flow from these securities are used to satisfy the remaining debt service of the existing CMBS loan. The CMBS loan is subsequently assumed by a Successor Borrower, which is an entity created to hold the securities and make the future ongoing monthly loan payments.

The process can be complicated, and it is common for borrowers to engage a consultant on their behalf to help them navigate through the process since it involves structuring a portfolio of approved securities and coordinating the activities of multiple parties to meet closing schedules.

The professionals at Waterstone Defeasance will make sure that all of the details are covered for you, so the defeasance will go smoothly and closes on time.

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What are the Fees?

Fees will vary by servicer and by loan size, but typical third party fees range from $50,000 to $75,000. Fees are set by the various parties and tend to be non-negotiable since defeasance has become a standardized process. However, discounts may be given for multiple loans within the same securitization.

Below is an example of typical third party fees:

Servicer $10,000 – $25,000
Servicer’s Counsel $15,000 – $20,000
Accountant $3,500
Securities Custodian $5,000
Successor Borrower $5,000
Defeasance Consultant $10,000 – $15,000
Rating Agency $7,500
Total $50,000 – $75,000

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Who is Involved?

ORIGINAL BORROWER

This is the current noteholder of the loan.

BORROWER’S COUNSEL

The current Borrower is required to be represented by legal counsel as part of the defeasance transaction.

SERVICER

The Servicer may be different from the lender that originated the loan. The servicer is the group that currently receives the monthly loan payments, and represents the interests of the lender under the loan documents.

SERVICER’S COUNSEL

The Servicer will engage outside counsel to represent their interests as Lender. Servicer’s Counsel in large part controls the defeasance process on behalf of the Servicer.

VERIFICATION ACCOUNTANT

An independent accounting firm will review the adequacy of the defeasance securities portfolio to verify it will be sufficient to make the remaining loan payments.

SECURITIES CUSTODIAN

The pledged securities portfolio will be held by a major banking institution who is responsible for remitting the remaining loan payments to the Servicer until the loan matures.

RATING AGENCIES

The involvement of the Rating Agencies may not be required – it is usually based on the size of the loan being defeased or the percentage of collateral it represents in the securitization.

NEW LENDER

Proceeds from the new loan will be used to purchase the defeasance securities. The defeasance process is designed around the closing schedule of the new takeout loan.

TITLE COMPANY

The Title Company is the escrow agent typically engaged by the New Lender to close the new takeout loan. They play an important role during the defeasance closing process as they are the party responsible wiring the proceeds from the new loan to purchase the defeasance securities.

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Frequently Asked Questions

In commercial real estate, defeasance is a process a borrower may need to go through when selling property or refinancing a loan encumbered by CMBS debt. Defeasance is a substitution of collateral activity where a portfolio of government securities are purchased from new loan proceeds, and the cash flow from these securities are used to satisfy the remaining debt service of the existing CMBS loan. The CMBS loan is subsequently assumed by a Successor Borrower, which is an entity created to hold the securities and make the future ongoing monthly loan payments. The process can be complicated, and it is common for borrowers to engage a consultant on their behalf to help them navigate through the process since it involves structuring a portfolio of approved securities and coordinating the activities of multiple parties to meet closing schedules. The professionals at Waterstone Defeasance will make sure that all of the details are covered for you, so the defeasance will go smoothly and closes on time.

You can use our calculator for quick estimates, or you can contact us directly for a more accurate estimate of fees unique to your loan documents.

Currently, only a couple of Servicers permit borrowers to buy defeasance securities to the ‘open period start date’, which is typically 3 months prior to the maturity date of the loan. The majority of Servicers still require securities be purchased to the maturity date. However, if permitted, the cost of the defeasance portfolio will be cheaper since you are purchasing fewer securities. Please note that this right depends on the interpretation of the language in your loan documents.

Our defeasance experts will review your loan documents to determine if this may be an option for your particular transaction.

The defeasance process typically takes 3 to 4 weeks. However, if all the parties are motivated a defeasance can be closed within 10 days on an expedited basis (additional servicer fees may apply).
The short answer is No. The various deposits are typically non-refundable. However, depending upon how much work has been done you may be able to get a partial refund from servicer’s counsel as well as any deposits we collect as your consultant. The servicers, however, will not refund deposits.
Although most loan documents require the defeasance to close on a Payment Date, this requirement is typically waived by the servicers. The industry recognizes it is not practical for commercial real estate loan closings to occur only on Payment Dates.
In certain situations, revenue can be generated by the Successor Borrower after the loan has been defeased. If the Successor Borrower can prepay the loan at the open period start date (typically 3 months from the maturity date), the securities used to pay the last 3 months’ interest payments would be liquidated, which creates an excess “residual” amount. Waterstone has a program that shares this potential residual with our clients.

Please call us to learn more about this important opportunity.

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WHAT ARE THE NEXT STEPS?

Your next step is to give notice of your intent to defease the loan to the Servicer, as required in your loan documents. Loan documents typically require the borrower to give notice within 60 to 90 days of your projected closing date. The Servicer will then require various up-front deposits be paid. Once these have occurred, the Servicer will engage its outside counsel to commence the defeasance process with the various parties.

Waterstone Defeasance will coordinate this initial communication on your behalf, ensuring the process gets out of the gates smoothly. Contact us today to discuss your Next Steps in more detail.

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