A successful defeasance requires the timely execution of a number of critical steps. Having an expert on your side is essential to ensure the defeasance is executed properly and fairly. Chatham’s defeasance consultants will help you navigate the process and will ensure you receive the best terms, market standards, and a fair cost. To help you understand borrower requirements and to illustrate how Chatham can assist with your defeasance, the following guide outlines the critical steps involved in a defeasance transaction:
Borrower should use the defeasance calculator to develop a baseline estimate for their defeasance but not stop there. It is critical to pull in an independent expert (Chatham Financial) early to discuss the defeasance in detail. This is also a chance to lay out a plan for timing, requirements of the Borrower and anticipated costs.
Loan Docs Review
Borrower sends their loan documents to Chatham for review. Chatham’s defeasance experts review the documents thoroughly to check for beneficial portfolio structures and prepayment options.
Following the loan document review, Chatham develops a comprehensive indicative cost estimate for the borrower, giving the borrower a realistic understanding of the expected costs.
Chatham will draft a defeasance notice for the borrower that is addressed to the Loan Servicer. Borrower must execute the notice and submit it to the Loan Servicer, as the loan servicer must be officially notified before the defeasance can begin.
Loan Servicer Responds
Loan Servicer will respond with deposit instructions and a requirements letter. Deposits vary depending on the size of the loan and the servicer. Both the requirements letter and the deposit must be returned before the defeasance can begin.
Upon receipt of the deposit and requirements letter, Loan Servicer engages counsel, allowing the defeasance to officially begin. Chatham will coordinate a kickoff call with Borrower and Loan Servicer to lay out groundwork for the transaction.
Defeasance Execution Underway
Defeasance execution typically takes about one month. A significant part of this time is spent reviewing and commenting on the core defeasance documents which govern the defeasance. It is important to allow an additional ten business days for loans with a balance >$35M as rating agencies may elect to review the process.
One or two days prior to the defeasance closing date, Chatham will lock in the replacement securities portfolio on behalf of the borrower. Proceeds will not change hands until the trade settles on the defeasance closing date. There is a strict deadline to settle the trade. Timing is critical and having an independent, experienced expert on the borrower’s side relieves them of these burdens and ensures successful execution.
Once the portfolio is paid and the wire received the defeasance will close as planned. If refinancing it is important that the defeasance consultant review the defeasance/prepayment provisions of the new loan to ensure that they are favorable to the borrower. This is often overlooked and can have large financial implications if the new loan is ever prepaid or defeased.