Utilizing Defeasance

As property values have recovered and credit has become more available, utilizing defeasance to help refinance at a low rate has become an increasingly popular financial tool. If the loan has less than five years to maturity and the ability to refinance, the following factors should be considered:

1. Refinancing now and paying defeasance costs can be cheaper than waiting to maturity.

2. Defeasance costs are often tax deductible in the year of a defeasance.

3. Interest rate savings help offset the defeasance premium cost. This is a particularly effective strategy when you have lendable equity in the property— the cost can be built into the new loan amount. With rates so low, the resulting monthly payments can be lower than the current payments.

4. With economic and political uncertainty, we are in an attractive window of opportunity to lock in 10, 15 or 20 year rates at very low rates.

Defeasance is typically found in CMBS or conduit loans. It is a substitution of collateral where proceeds from a refinance or sale are typically used to purchase a portfolio of U.S. Government Securities during the defeasance closing process. The portfolio of securities is structured to be sufficient to make all of the remaining debt service payments required by the lender. Securities are pledged to the lender, who releases the real estate from the lien of the mortgage.

Barry Slatt Mortgage is particularly well versed in the defeasance process. Our lending sources and relationships with defeasance facilitators can make the process easier to understand and navigate.

 By Richard Davidson