Structures and Execution
With so many clients transfixed on finding the least expensive third-party transaction costs, the single biggest cost component is the defeasance securities cost. While there’s a limited universe of securities eligible for each defeasance, many think defeasance securities portfolios across multiple providers would be the same. That’s not necessarily the case.
The two most important factors for defeasance portfolios are structuring and execution. Great execution means little if you purchase an inefficient structure, while poor execution can also ruin a perfectly efficient portfolio. Many trading desks that structure their own portfolio could have inventory they may want to unload, which may be good for their positions, but would be inefficient for the defeasance and subsequently increase the defeasance costs.
Likewise, an efficient defeasance structure could be submitted to various trading desks for multiple bids, but you could be choosing the best of three bad bids with layers of sales commissions buried in the trades. Defeasance consultants should have extensive experience with portfolio structuring and deep relationships with trustworthy trading desks.
There also are a couple of variations on the standard defeasance that borrowers should understand: the New York-style defeasance and the partial defeasance.
New York-Style Defeasance
The real estate mortgage investment conduit trust (the lender) will assign the existing note and mortgage to the new lender to accommodate the borrower's (or buyer's) desire to reduce mortgage recording taxes on the new loan financing. While the servicer or their counsel may charge an additional fee to accommodate a New York-style defeasance, the savings often is worth the extra effort.
New York is the only state with a concrete ruling from the taxing authority that this structure will not require payment of mortgage tax on the existing debt. As such, nearly all defeasances of New York properties are structured New York-style. Florida is the state where the next highest frequency of New York-style defeasances when the borrower can save on both the documentary stamp and intangible tax. Other high-tax jurisdictions include Kansas, Virginia, Tennessee, Washington D.C. and some counties in Maryland (i.e., Prince George), where recording an indemnity deed of trust is troublesome. It’s important borrowers examine the economics of saving on the tax.
Some cross-collateralized loans and single loans secured by multiple properties include an option to defease a portion of the loan related to individual properties. If so, some servicers or their counsel may charge an additional fee for the additional documentation required for a partial defeasance.
Choosing a Defeasance Partner
The defeasance process has a lot of moving parts, and the real estate closing cannot happen without it. Most borrowers engage a defeasance facilitator, like commercial defeasance, to manage the transaction. Doing so saves the borrower time, money and aggravation, and provides peace of mind that the defeasance transaction will not delay the real estate transaction.
For example, while a borrower could use his own broker to structure and purchase the defeasance collateral, his lack of familiarity with the defeasance process, its timing and delivery requirements can delay closing, and the cost to purchase the collateral can be tens of thousands of dollars higher due to structuring inefficiencies and inflated securities prices. If the broker fails to deliver just one security in a portfolio of 50 securities, the defeasance cannot close, which means the sale or refinance closing has to be rescheduled.