Marks Paneth Real Estate Perspectives Summer 2019

Commercial real estate owners, borrowers and investors interested in refinancing their securitized loans

should consider all the costs associated with a defeasance transaction as well as any possible tax deductions.

securitized loans. CMBS loans are sold into securitiza- tion trusts that elect to be treated as a Real Estate Mortgage Investment Conduit (REMIC). The investors who invest in REMICs are enticed by the predictable payment stream offered by these investments. Due to the various restrictions imposed on REMICs by the tax code, prepayment of the underlying mortgages is generally not allowed, unless the collateral on those mortgages can be substituted with new collateral that guarantees the same payment stream to the investors as the old collateral.

substituted government securities must generate cash flows sufficient enough to cover the periodic payments required under the original loan. Costs to acquire the substituted collateral generally include transactional expenses, such as fees paid to attorneys, defeasance consultants and tax advisors, and may include a defeasance premium . A defeasance premium is a function of the spread between the interest rate on the conduit loan and the yield on the government securities on the date the securities are purchased. A defeasance premium occurs when the interest rate on the substituted securities is lower than the interest rate on the original conduit loan. Note: If the interest rate on the conduit loan is lower than the yield on the government securities, there is a defeasance discount. A defeasance premium can be deducted immediately by the borrower so long as the transaction satisfies the definition of a legal defeasance .

This substitution and release of the old collateral for new collateral is referred to as a defeasance .


In commercial real estate transactions, defeasance generally means that the original real estate securing a conduit loan is released as collateral and new collateral is substituted. (The new collateral is generally a portfolio of high-quality government securities, such as treasury notes, zero-coupon bonds, etc.) These

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Real Estate Perspectives

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