Real Estate Case Study: Defeasance

Our Client:

A public real estate company that owns and manages over 600 retail operating and development properties worldwide.

Situation:

Our client engaged Chatham to assist as they used proceeds from a new securitized loan to partially defease existing secured debt. The securitization was designed to include a triple-A rated tranche which qualified as “eligible collateral” under the Term Asset-Backed Securities Loan Facility, or TALF, provided by the Federal Reserve.  The defeasance was predicated on the funding of the new loan which in turn, was predicated on the securitization being deemed eligible for TALF funds by the Federal Reserve, a deadline that could happen in as few as five business days. (To add to the complexity, the defeasance required review from three rating agencies.) Finally, the original loan contained language that was unclear with respect to the right to prepay the defeased note, a right which could have significant value for the original borrower based on Chatham’s residual sharing agreement for defeased loans.

Summary:

To facilitate the five day closing requirement, Chatham relied on its relationships throughout the CMBS industry, requesting that the loan servicer, rating agencies, certifying accountant, and all other third parties involved with the defeasance transaction expedite their review and documentation from the standard thirty day process down to five. As each entity assembled the required information, Chatham worked with the servicer’s counsel to ensure language was added to the defeased note that would preserve the right to prepay following the defeasance. Two days later the documentation was finalized and we were in a position to move forward with closing. At this point the client received notice that the Federal Reserve would not be in a position to make a decision on TALF eligibility for an additional 30 days.

Outcome:

Our client successfully closed the defeasance transaction and the Federal Reserve recognized the new debt as eligible for TALF funding. As a result of negotiating the prepayment language Chatham was able to pay the client over $260,000 at closing as its share of the anticipated successor borrower residual value.

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