PARTIES AND TERMS
DEFEASANCE PARTIES
- Accountant:
- An Independent Public Accountant that provides a Verification Report
certifying the sufficiency of the Defeasance Collateral. The accountant must be approved by
the Rating Agencies and the Servicer.
- Borrower (Original Borrower):
- The individual or entity responsible for paying back
the CMBS loan on a commercial property.
- Custodian (Securities Intermediary):
- The financial institution, typically a bank
or trust company, that holds the securities portfolio in a trust account
on behalf of the Successor Borrower, and disburses the monthly loan payments to the Servicer
from the proceeds of the portfolio.
- Defeasance Consultant:
- The independent financial entity that represents the borrower
in the defeasance transaction and coordinates the entire defeasance process.
- Escrow/Title Company:
- The entity that provides the title services,
manages the escrow account during the defeasance closing process,
and records the release of the mortgage at the close of the defeasance.
- New Lender:
- The lender, also known as the refinance lender, that provides
a new loan for the Borrower to replace the defeased loan. The proceeds from
the refinance are used to pay for the defeasance.
- Rating Agencies:
- The agencies that examine the CMBS pools (REMICS) and assign
credit ratings based on the quality of the underlying collateral (commercial properties) that secures
the pools. In addition, they review any defeasances of large loans to ensure there will not be
any negative impact on the pool. The four Rating Agencies are Dominion Bond Rating Service (DBRS),
Fitch Ratings, Moody's Investors Service, and Standard & Poor's (S&P).
- Servicer (Master Servicer):
- The bank or financial entity that services the loans in a
CMBS pool on behalf of the Certificateholders and collects monthly payments from borrowers. The Servicer
is the administrator or "gatekeeper" of the defeasance process. With the help of their counsel they
make sure all the provisions of the loan documents are satisfied and they enable the release
of the borrower's mortgage and the transfer of its obligations to a Successor Borrower.
- Servicer's Counsel:
- The attorney/law firm that represents the Servicer in the defeasance
and works with the Borrower and the Borrower's counsel to complete the legal
requirements of the transaction.
- Special Servicer:
- The bank or financial entity that manages defaulted loans for the Servicer.
For certain loans a Special Servicer Review is required to ensure that the borrower has not defaulted
and that the defeasance will not negatively affect the CMBS pool.
- Successor Borrower (SB):
- A bankruptcy-remote special purpose entity formed, typically by the
defeasance consultant, to take over all of the Borrower's loan obligations. Once the defeasance closes,
the SB assumes the responsibility of the trust account that holds the Defeasance Collateral and retains
the rights to any residual value created in the account.
- Agencies (Agency Securities):
- Securities issued by government-sponsored agencies, such as Fannie Mae, Freddie Mac, and the Federal Home Loan Bank.
If permitted in the loan documents, Agencies can be used for Defeasance Collateral. They are higher yielding, thus cheaper, than Treasuries and
significantly reduce the securities cost of a defeasance.
- Certificateholders:
- The owners of the certificates (bonds) of a CMBS pool.
- Commercial Mortgage-Backed Securities (CMBS):
- Securities backed by a pool of commercial loans that have been packaged into a REMIC trust.
All of the principal and interest payments from the CMBS loans are passed through the trust to the Certificateholders.
CMBS loans pooled into a REMIC are also known as "Conduit" loans or "Securitized" loans.
- Conduit:
- See Commercial Mortgage-Backed Securities (CMBS).
- Defeasance Collateral:
- A portfolio of securities purchased to generate sufficient cash flows to replace the remaining payments
of a defeased loan. Permitted securities include Treasuries and Agencies, though loan documents typically allow only for Treasuries.
Defeasance Collateral is also referred to as "Securities Portfolio" or "Defeasance Portfolio".
- Defeasance Deposit:
- An upfront deposit the Borrower submits to the Servicer to begin the defeasance process.
- Defeasance Documents:
- Five core legal documents are required in a defeasance: the Defeasance Account Agreement;
Defeasance Assignment, Assumption, and Release Agreement; Certificate of Borrower; Defeasance Pledge and Security Agreement;
and the Modification Waiver and Consent Agreement.
- Float Value:
- Accrued interest created by the mismatch of the monthly payment date on a loan and the maturity date of the
securities in the defeasance portfolio. The Float Value is part of the Residual Value created in the Successor Borrower trust account.
- Lockout Period:
- The time period, after a loan is originated, during which the loan cannot be defeased or prepaid.
The lockout period typically lasts two years after the Startup Date.
- New York (NY) Style Defeasance:
- A way of structuring a defeasance transaction to reduce mortgage recording taxes.
NY Style Defeasance is only used in a few states that require a mortgage recording tax, such as New York, Florida, and Maryland.
- Prepayment Value:
- Value created by paying off a defeased loan at its prepayment date. Depending on the loan documents, there may be a short period of
time (one to six months) at the end of a loan's term where the loan can be prepaid without a penalty. The exercise of this prepayment right on a
defeased loan can create value by avoiding the final few interest payments. The prepayment value, when available,
is part of the Residual Value created in the Successor Borrower trust account.
- Real Estate Mortgage Investment Conduit (REMIC):
- A REMIC is a bankruptcy-remote legal entity formed to hold a pool of
CMBS loans and facilitate the pass-through flow of funds between Borrowers and Certificateholders. REMICs are conduit trusts structured to
avoid taxation and regulatory restrictions.
- Residual Value:
- Total accumulation of float and prepayment value available in the Successor Borrower
trust account at the maturity of the loan.
- Securities Portfolio:
- See Defeasance Collateral.
- Securitization (Securitized):
- See Commercial Mortgage-Backed Securities (CMBS).
- Startup Date:
- The date that a CMBS loan is placed into securitization. The Startup Date occurs no more than three months
after the loan origination date.
- Tranche:
- A class of certificates (in a CMBS pool) distinguished from other classes by its credit rating and rate of return (coupon rate).
A CMBS pool is structured so each tranche offers varying degrees of risk/reward to investors. Higher rated (senior) tranches are safer investments
than lower rated (subordinate) tranches as they are paid down before subordinate tranches. However, subordinate tranches offer a higher rate of return
than senior tranches.
- Verification Report:
- A report provided by the accountant to verify the Securities Portfolio
is sufficient to cover the remaining payments of the loan. The report includes an in-depth analysis of the loan's amortization
schedule and the cash receipts from the Securities Portfolio. The Verification Report is also known as an "Accountant's Report"
or "Defeasance Report."
- Yield Maintenance:
- A prepayment penalty wherein the Borrower pays the Servicer a cash premium to
terminate its loan prior to maturity. The Yield Maintenance premium is calculated to ensure CMBS Certificateholders maintain the same yield
on their certificates as if the Borrower continued to make all scheduled loan payments until maturity. Since defeasance has become prevalent,
Yield Maintenance is no longer an option on most CMBS loans.
