Commercial Investment Real Estate

JAN-FEB 2015

Commercial Investment Real Estate is the magazine of the CCIM Institute, the leading provider of commercial real estate education. CIRE covers market trends, current developments, and business strategies within the commercial real estate field.

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14 January | February | 2015 Commercial Investment Real Estate FINAN CIN G FO CUS Zoonar RF/Thinkstock w With the real estate market on a signifi cant upswing and lenders across the U.S. loosening their purse strings, defeasance activity has picked up substantially over the past two years. According to industry reports, more than $13.2 billion of commercial mortgage backed securities loans were defeased in 2013, representing a 123 percent increase from the previous year. With Treasury yields keeping defeasance costs relatively high, defeasance activity has been driven primarily by borrowers look- ing to capitalize on the current low interest rate environment and the improved lending arena in general, both for purchases and ref - nances. A major impetus behind defeasance is an increase in property value. T e defea- sance process allows borrowers to extract equity out of their properties and lock in new, long-term f nancing. With property values rising and sales activity increasing, the result is that more loans are becoming attractive to defease. Considering the high volume of loans nearing maturity over the next few years, the already booming defeasance industry is expected to be exceedingly active, with Trepp projecting a signif cant increase in 2014 defeasance volume over 2013. The majority of loans defeased in 2013 were retail, office, and multifamily properties, accounting for 82 percent of total activity. Similarly, for the f rst half of 2014, retail and multifamily properties led the way as the most commonly defeased loans by asset type, followed by of ce, hospitality, and self-storage properties, according to AST Defeasance consultants. Moreover, the short- term trends of the last few years are changing with 2013 data from Moody's showing that borrowers are defeasing loans with longer remaining terms than in 2012. Defeasance Explained Despite the rebound in defeasance trans- actions over the past two years, defeasance remains an unfamiliar topic to many pro- fessionals in the commercial real estate and f nance arenas. Most of en used in commer- cial real estate as the prepayment penalty on conduit/CMBS loans, defeasance is the process of releasing a commercial property from the lien of the mortgage and replacing it with a portfolio of U.S. government secu- rities. Once a loan is defeased, the securities portfolio ef ectively replaces the borrower's payment stream and makes the remaining mortgage payments on the loan, allowing the borrower to either ref nance or sell the property free and clear. T e process of defeasance is highly coordi- nated and involves an array of professionals, including accountants, attorneys, brokers, consultants, rating agency personnel, and trustees. Defeasance consulting f rms have become a standard component to defeasance transactions, retained by borrowers to help maneuver the process and minimize costs. While the defeasance process itself is rela- tively standard, each loan contains unique attributes that consultants maximize to the benef t of their clients. In addition to ensuring the process runs smoothly, the defeasance consultant is also responsible for structuring the defeasance portfolio. T is portfolio of optimized securities, typi- cally U.S. Treasurys or Agency securities, will match the debt service payments of the Defeasing CMBS Loans Low interest rates fuel loan prepayments. by Eitan Weinstock

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