Expertise in Defeasance and Prepayment
Defeasance and Yield Maintenance are two alternatives that real estate borrowers may consider for paying off existing debt. Yield Maintenance is an actual prepayment of a loan. It is most common in agency loans and those originated by balance sheet lenders. Defeasance is the substitution of collateral and assignment of debt and is mostly seen in securitized, CMBS debt. As a real estate investor considering prepayment terms or defeasance – whether it’s to restructure a loan and exit from current debt – questions of cost versus flexibility and overall benefits versus penalty are common.
The Defeasance Team at Chatham Financial has paved the way for transparent defeasance services since 2000. With more than 1,000 defeasances totaling more than $28 billion on behalf of clients, Chatham has navigated a wide range of defeasances, from $2 million individual property loans to as large as a $1.2 billion loan for a marquee property in a large portfolio.
Structuring collateral: Chatham structures the defeasance collateral using the most efficient portfolio of securities available.
Purchasing collateral: Chatham holds a competitive auction or structures negotiation for the purchase of the defeasance collateral, ensuring that clients receive the most competitive portfolio pricing available. Chatham receives no brokerage fee or commission on the purchase of the securities.
Successor Borrower: Chatham establishes the Successor Borrower entity, taking assignment of the defeasance collateral and assuming the remaining financial obligations of the loan. This includes shortfall liability, an important consideration, if a borrower wishes to consider the defeasance an “extinguishment of debt.”
Residual value: Chatham returns a portion of the residual value from the Successor Borrower account either at the close of the defeasance or at maturity. Chatham was the first in the industry to disclose and share the residual value. To date, Chatham has returned over $50 million to its clients. Your defeasance could have tens or hundreds of thousands of dollars of residual value, and Chatham will work with you to meet your constraints while returning value to you.
Hedging risk: As a part of our Real Estate financial risk management practice, the Chatham defeasance team is supported by experts in real estate capital markets. From real estate investment banking to interest rate hedging and debt valuation and debt management, Chatham helps clients understand their yield maintenance and defeasance scenarios. We also develop and implement strategies that protect the cost of defeasance collateral.
Throughout the industry, Chatham is known for its expertise in handling defeasance transactions of all sizes, from the largest, most complex multi note transactions to small balance, single asset loans. Brokers, legal counsel and servicers commonly refer clients to Chatham as a trusted source for the highest quality service with low cost execution.