Understanding Yield Maintenance Both yield maintenance and defeasance allow borrowers to unencumber the underlying real estate asset. However, from a legal and economic perspective, the two processes are fundamentally different. Yield maintenance is the actual prepayment of the loan. Defeasance on the other hand entails a substitution of collateral and assumption of the loan by the Successor Borrower. Download This Bulletin

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Real Estate Case Study: Debt Ratio Our Client: A public real estate company specializing in asset management in the hospitality sector. Situation: Our client had paid down a significant portion of their floating rate line of credit, leaving them with a fixed/floating rate debt ratio higher than they desired. With hotel assets essentially re-pricing daily, the client wanted to increase their floating rate exposure on the liabilities side to better match the characteristics of their assets. Summary: We discussed entering into a receive-fixed swap to rebalance their fixed-floating mix. A secondary benefit of this strategy was that it allowed them to reduce their current interest expense due to the steepness of the yield curve; the receive fixed swap synthetically transformed a higher fixed rate obligation into a lower floating rate obligation, based on an historically low current LIBOR setting. Because…

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Real Estate Case Study: Mezzanine Debt Our Client: A nationwide owner of hotels. Situation: Our client’s hotel portfolio was leveraged with a number of long-term low fixed interest rate loans. Since the origination of the original first mortgage debt, increases in operational efficiency for the portfolio resulted in improved portfolio cash flow. Our client’s desire was to use the increased cash flow as a borrowing base to create additional liquidity for new capital investments in the portfolio. The prepayment penalties associated with refinancing the first mortgages along with the faltering CMBS market made a conventional refinancing cost prohibitive, and market turmoil made traditional, low-leverage, mezzanine debt unavailable. The client engaged Chatham to find a capital partner. Summary: As is typical with our engagements, Chatham’s role started with the strategic planning of the transaction and continued until the deal closed. We…

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  by  nandadevieast  The 1970s was a decade when scientific knowledge really began to coalesce around the prediction of earthquakes. Predictions of major earthquakes in China, Russia and Los Angeles lent credibility to the burgeoning field and led to a ramping up of interest in the subject. But in the years that followed, increased scrutiny was paid to the data behind these predictions, and it was ultimately determined that in no case had the science behind the forecast been substantiated. In China, the same methodology used to predict a major quake in 1975 had completely missed an even larger quake the following year, which killed hundreds of thousands of people. The Russian report was deemed inconsistent and unsubstantiated and ultimately thrown out. Finally, the Los Angeles quake that scientists predicted with such certainty never materialized. In fact, in the years since, the…

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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…

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Compliance without compromising hedging OTC derivatives continue to evolve in this era of financial regulatory reform. Dodd-Frank and EMIR regulation are now actively enforced. These new standards have increased complexity and rigor for real estate companies. They must manage derivative-related documentation, policies and resolutions, as well as risk management operations. While the changes in effect today present one set of challenges, continued adjustments in the rules further complicate the compliance process. This demands a watchful eye and sharp navigation skills. How Chatham’s regulatory compliance services provide optimized compliance Derivatives regulation understanding meets markets expertise: Chatham guides you through compliance with derivatives regulations with a powerful combination of proven regulatory expertise, practical derivatives experience, and technology solutions you can apply to your business. Our dedicated team of regulatory experts has been actively engaged in the global policy debate on derivatives regulatory…

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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…

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Investment Banking Strategies for the Real Estate Industry The pursuit of the deal, whether acquiring an existing property or pursuing ground up construction, is what moves commercial real estate investors. And regardless of the property, be it Core or Value Add, or the property type, from Hospitality and Multifamily to Office, Industrial. and Retail, every real estate deal comes with the complexities and complications of financing. Chatham’s investment banking strategy team offers a different kind of service to real estate investors seeking strategic capital solutions. Chatham brings a network of relationships and unique ways of meeting real estate investing needs. At the same time, we provide services with an unbiased view. Additionally, Chatham investment banking services tend to be for multifaceted, sophisticated deals, making our team sought after for investment projects that require unique structuring or innovative thinking to get…

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Chatham’s expert advisory services and proprietary software solutions for real estate debt and derivatives not only serve global real estate investors, but also our clients’ key partners, including lenders, brokers, agency originators, auditors, loan servicers, and legal counsel. Chatham collaborates among all partners to ensure details are in order for a smooth closing. This involves considerations on hedging, defeasance execution, best treatment for hedge accounting, specifics on derivatives regulatory compliance, and negotiation of ISDA and related documentation. Our independent, unbiased perspective, market-proven models and methodologies, and proprietary SaaS platform make Chatham Financial the authority in debt and derivatives practices serving real estate clients and their business partners.

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