LOS ANGELES-The process of defeasance, which deals with prepayment penalties on bank loans, had waned considerably during the recent economic downturn. In 2007, the number of defeasances in the US hit its peak at 3,000 only to crash to 100 in 2008. The number has been increasing by about 100 defeasances per year since then, with a total of 400 in 2011 and an expectation of as many as 800 this year, according to Yehuda Neuberger, CEO of AST Defeasance, a locally based defeasance consulting firm.
“There has been an easing in the defeasance market, not because treasury rates have gotten better, but lending has opened up, refi has become a little more viable and sale prices a little better for sellers, Neuberger tells GlobeSt.com. “Defeasance is slowly picking back up. This has got to mean that properties are performing a little better.”
There are tricks to defeasance that can cost unsavvy borrowers considerably if they don’t know the market. For example, when borrowers defease a loan, they are essentially paying back the principal only. In order to make up for the unpaid interest the lender had been anticipating at the time of the loan, borrowers are asked to purchase US treasury bonds and pay the lender the monthly interest on the bonds. However, treasury prices have risen so high over the past several weeks that purchasing has become more prohibitive for borrowers who wish to defease.
Clearly, navigating the defeasance waters can be tricky, but defeasance companies—essentially consultants with experience in getting the highest yield for the lowest fee—can save borrowers up to tens of thousands of dollars and possibly create residual value—where a certain percentage of interest paid on the loan is returned to the defeasance company, which acts as the successor borrower—as part of the transaction. GlobeSt.com previously reported on the trend of defeasance firms sharing residual value with their borrower clients in order to stay competitive.
AST is currently competing with other companies for borrowers’ business by offering clients this residual value at the date of closing rather than having to wait several months for it. “Slowly, over time, more and more borrowers have been becoming more educated on defeasance,” says Neuberger. “Borrowers want to start a bidding war and see who will get them the highest percentage of residual value, but that’s only created on a fraction of defeased loans.”
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Carrie Rossenfeld
Carrie Rossenfeld is a reporter for the San Diego and Orange County markets on GlobeSt.com and a contributor to Real Estate Forum. She was a trade-magazine and newsletter editor in New York City before moving to Southern California to become a freelance writer and editor for magazines, books and websites. Rossenfeld has written extensively on topics including commercial real estate, running a medical practice, intellectual-property licensing and giftware. She has edited books about profiting from real estate and has ghostwritten a book about starting a home-based business.
