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Course Details

Course Information
  • smart_display Format

    On-Demand

  • signal_cellular_alt Difficulty Level

  • work Practice Area

    Real Property - Finance

Date & Time
  • event Date

    Tuesday, March 16, 2021

  • schedule Time

    1:00 p.m. ET./10:00 a.m. PT

  • timer Program Length

    90 minutes

Credit Information

  • This 90-minute webinar is eligible in most states for 1.5 CLE credits.

$347.00
CLE
ALL

This CLE course 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.

Faculty

Steven M. Herman
Senior Counsel
Cadwalader Wickersham & Taft LLP, London

Mr. Herman concentrates his practice in the areas of real estate finance, development, joint ventures, acquisitions, dispositions, commercial leasing, restructurings, workouts, and commercial mortgage securitizations. His work ranges from single- and multiple-asset negotiated and auction transactions to highly structured transactions that span all segments of the marketplace, including office, hotel, retail, multifamily, mixed-use healthcare, and industrial facilities. Mr. Herman's clients include investment banks, commercial banks, developers, investors, partners, lenders, owners, fund managers, borrowers, tenants, landlords, issuers and underwriters. He is also actively engaged in assisting his clients with the transition from LIBOR, including conducting contract remediation, implementing enterprise-wide changes to form documents, and providing strategic guidance throughout the transition.

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Andrea G. Weitzman
Attorney
Cadwalader Wickersham & Taft LLP, London

Ms. Weitzman is an associate in Cadwalader’s Finance Group. Her practice is concentrated in the area of commercial real estate finance.

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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.

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?