Defeasance Decision Checklist
Loan defeasance is an option for many commercial real estate owners. The following checklist can help property owners when making a defeasance decision.
1. Determining eligibility.
- Do the loan documents require defeasance in order to obtain a release?
- Has the loan's lock-out period expired? Real Estate Mortgage Investment Conduit rules mandate a lock-out period of at least two years from the date the loan is securitized.
2. Performing due diligence.
- Is defeasance a cost-effective solution? Use an online calculator, such as the one found at www.defeasewithease.com, to help determine costs. To obtain an accurate assessment, the following information is required: the loan's original amount, the note date, the original term, the interest rate, the interest accrual method (30/360 or actual/360), the amortization term, and the loan servicer's name.
- If refinancing, it's important to determine how long the property will be held before it is sold. In addition, what terms currently are available for new loans?
- How much equity can be pulled out of the property? How badly is it needed?
3. Analyzing the data.
• Determine if a potential sale is economically beneficial based upon the demands of the particular situation and the opportunities to reallocate the net sale proceeds to earn a solid return. If refinancing, it's important to determine how long it will take to recoup the defeasance premium (the amount by which all of the defeasance costs exceed the loan's outstanding principal balance) in the form of lower monthly payments and increased proceeds on a new loan. If the answer is less than the number of years the property will be held prior to selling, the property can benefit from loan defeasance and refinancing.