What Does Defeasance Mean


What is defeasance of a loan?

Defeasance, as its name suggests, is a method for reducing the fees required when a borrower decides to prepay a fixed-rate commercial real estate loan. Instead of paying cash to the lender, the defeasance option allows the borrower to exchange another cash-flowing asset for the original collateral on the loan. via

How does a defeasance work?

The defeasance process is a means by which borrowers can get out of a mortgage by substituting a portfolio of U.S. Treasury-backed securities for collateral. These securities must be of sufficient value to generate enough cash flow to cover the remaining principal and interest owed on the loan. via

What happens when a bond is defeased?

A defeased security is a bond which, after its issuance, has its outstanding debt collateralized by cash equivalents or risk-free securities. The funds used as collateral are sufficient to meet all payments of principal and interest on the outstanding bonds as they become due. via

Is defeasance a prepayment penalty?

In some cases, the borrower will be required to pay the entire remaining interest on the note at the time that the debt is repaid. However, in many instances, the terms of the loan will call for a defeasance, which is effectively a prepayment penalty, but that can offer some flexibility to the borrower. via

How long does it take to defease a loan?

How long does it take to defease a loan? A typical defeasance process will take about 30 days, although AST is often able to tailor the closing to the client's needs and can expedite and complete the process in less than a week if circumstances require. via

Are defeasance costs deductible?

A defeasance premium paid under a legal defeasance is deductible as a payment of interest in the year incurred. via

What is the cost of defeasance?

Defeasance Costs means expenses incurred in the defeasance or prepayment of secured indebtedness including, but not limited to: prepaid interest, yield maintenance or other prepayment premiums, legal, accounting and consulting fees directly attributable to the defeasance of debt; the write‑off of deferred financing via

How do you stop defeasance?

Defeasance may even be avoided altogether by electing a yield maintenance prepayment penalty or even considering a floating-rate loan, for which Chatham offers strategies to manage interest rate risk. via

What does call Defeased mean?

Defeasance is a provision in a contract that voids a bond or loan on a balance sheet when the borrower sets aside cash or bonds sufficient enough to service the debt. via

What is the prepayment clause?

A prepayment penalty clause states that a penalty will be assessed if the borrower significantly pays down or pays off the mortgage, usually within the first five years of the loan. Prepayment penalties serve as protection for lenders against losing interest income. via

What is yield maintenance?

Yield maintenance is a sort of prepayment penalty that allows investors to attain the same yield as if the borrower made all scheduled interest payments up until the maturity date. via

What is a prepayment penalty clause?

A prepayment penalty is a fee that some lenders charge if you pay off all or part of your mortgage early. If you have a prepayment penalty, you would have agreed to this when you closed on your home. In some cases, a prepayment penalty could apply if you pay off a large amount of your mortgage all at once. via

Is a prepayment penalty tax deductible?

Mortgage prepayment penalty. If you pay off your home mortgage early, you may have to pay a penalty. You can deduct that penalty as home mortgage interest provided the penalty isn't for a specific service performed or cost incurred in connection with your mortgage loan. via

Is a loan prepayment penalty tax deductible?

Prepayment penalties are tax deductible in the State of California and at the federal level, meaning that the penalty could be reduced by half for borrowers in the top tax brackets. via

Which legal instrument evidences the debt?

Evidence of debt means a writing that evidences a promise to pay or a right to the payment of a monetary obligation, such as a promissory note, bond, negotiable instrument, a loan, credit, or similar agreement, or a monetary judgment entered by a court of competent jurisdiction. via

What is a defeasance date?

Defeasance Date means the date on which all Bonds shall have been paid and discharged, or shall be deemed paid and discharged, and the Indenture shall have been defeased in accordance with its terms. via

What is an acceleration clause in a loan?

An accelerated clause is a term in a loan agreement that requires the borrower to pay off the loan immediately under certain conditions. via

Can you prepay a CMBS loan?

Many borrowers believe CMBS loans can never be prepaid and must always be defeased. The reality is that prepayment can be negotiated at the time the CMBS loan is originally made, but the borrower can expect to pay for this flexibility in the form of a higher interest rate on the loan. via

What is lock clause?

A lock-in clause in a loan agreement stating that the borrower cannot repay a loan prior to a specified date. via

What is a Trepp report?

The Trepp/CREFC CMBS Collateral Performance Database

Accessible directly through the CRE Finance Council website, the Trepp/CREFC database tracks the historical performance of collateral that underlies the majority of the actively traded CMBS transactions. via

Is Defease a word?

verb (used with object), de·feased, de·feas·ing. to defeat or annul (a contract, deed, etc.). via

What is acceleration in real estate?

An acceleration clause is a condition inside a contract that allows a lender to “accelerate” the repayment of your loan if certain conditions aren't met. The acceleration clause will outline the different situations a lender can demand loan repayment and how much repayment is required. via

What is a reconveyance?

A deed of reconveyance is a legal document that indicates the transfer of a property's title from lender to borrower. The deed of reconveyance is typically issued after the borrower has paid off their mortgage in full. With your mortgage or deed of trust paid off, you cannot be foreclosed on by a financial institution. via

What is substance defeasance?

In-substance defeasance occurs when a firm irrevocably deposits cash or other assets Into a trust for the sole purpose of making principal and interest payments on debt as the payments become due. via

What is an extraordinary call?

An extraordinary redemption means the issuer can redeem the bond at par before the bond matures. Extraordinary redemption, also called extraordinary call, is most commonly exercised when bond proceeds are not spent according to schedule or a catastrophe affects the financed project. via

What is a refunding call?

Refunding occurs when an entity that has issued callable bonds calls those debt securities from the debt holders with the express purpose of reissuing new debt at a lower coupon rate. In essence, the issue of new, lower-interest debt allows the company to prematurely refund the older, higher-interest debt. via

What hypothecation means?

Hypothecation basically means offering an asset as collateral security to the lender. It is usually done in a case of movable assets, for creating the charge against collateral for the loan given. Under hypothecation, the possession of the security remains with the borrower itself. via

How do I avoid a prepayment penalty?

The easiest way to avoid them is to take out a loan or mortgage without prepayment penalties. If that is not possible, you still have options. If you already have a personal loan that has a prepayment penalty, and you want to pay your loan off early, talk to your lender. via

Why paying off mortgage early is bad?

You'll also pay your loan off 74 months earlier than you would if you only paid your premium each month. Paying down your mortgage early reduces the amount that you'll pay over time, but finance experts don't agree that you should always focus on paying your loan off as soon as possible. via

Why is it smart to pay debts off early?

Paying off the full amount of your debt saves you money. Increase cash flow: In many cases, when you pay off debt early, you free up more cash on a monthly basis. This is because your monthly payments will disappear or shrink (although that's not necessarily the case if you make a lump sum payment on your mortgage). via

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