Loan Defeasance and Loan Assumption
Defeasance
When a property is encumbered by a mortgage loan which cannot be paid off early, typically a “conduit loan”, it must be “defeased” in order for a buyer or existing owner to place new more favorable debt financing on the property. Defeasance involves a substitution of collateral for a loan, whereby the mortgaged property is replaced with government securities. The cash flow from these government securities must be sufficient to cover the debt service requirements for the remaining term of the loan. Unlike a payoff, the loan is not paid off, but the mortgaged property is released.
We have acted as borrower’s counsel in many defeasance transactions and provided legal opinions to most nationally prominent lenders; we’ll be there by your side from the “kick off call” through the “3 day closing”. Obtaining the appropriate release of future liability and considering the tax ramifications are crucial issues. We work in sync on these complex transactions with defeasance consultants such as Commercial Defeasance, LLC (www.defeasewithease.com) who has selected Scott Silver as a preferred attorney.
Loan Assumption
Many times a property is being sold and better financing isn’t available or defeasance would be cost prohibitive. Assuming a favorable existing loan is sometimes the best option. However, assuming a “conduit” loan which has been securitized is anything but simple. A Master Servicer and Special Servicer will need to review and approve of submissions by seller and buyer to satisfy a long checklist of documents, both business and legal, on the property and the existing and proposed borrower(s) and guarantor(s). And many documents and a few legal opinions will need to be drafted and approved by the servicers for closing. In today’s economic environment, servicers will be looking for opportunities to tighten up their underwriting and condition their approvals on lender favorable loan modifications. All of this delay and complexity can lead to huge delays and cancelled escrows. We make order from chaos and stay on top of the process to help minimize the risk.
