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.

John Hosmer

John Hosmer is chief operating officer of Commercial Defeasance, LLC, in Charlotte , N.C. Contact him at (800) 624-4779 or visit www.defeasewithease.com.


The People in Your Neighborhood

Spring 2020

The growth of community banks has lagged since the Great Recession. What impact do local lenders have on commercial real estate?

Read More

Leverage Can Boost Equity Yield

Winter 2020

In this cash flow modeling example, learn how yields can be greatly improved by knowing when to incorporate leverage via a loan.

Read More

Loan Relief and Commercial Real Estate’s Response to the COVID-19 Pandemic

Winter 2020

What can lenders do to survive the next two, six, or 12 months? CCIM Institute spoke with two executives from national lending firms to understand how landlords — and to a lesser degree, tenants — can best prepare for possibly negotiating rent or mortgage relief.

Read More

Slow Fuse


Many sports analogies are being thrown out to describe how close the U.S. commercial real estate market is to its cyclical peak. Regardless of whether fans are keeping score based on quarters, innings, or overtime, time is still left on the clock.

Read More