CMBS loans are often sold to bond holders in the secondary market. As a result, they need to have predictable cash flow. In order to ensure that they do, loans are typically locked from any form of prepayment plan for most of the loan’s maturity life. Usually, this means about ten years. This prevents the loan from being paid off before it matures fully
But what happens when you want to sell your property? Those who decide to sell their property before their CMBS loan fully matures can do one of two things: assume the loan or defease it. Which one is the most appropriate choice?
The answer is it all depends.
Assumption vs. Defeasance
Commercial loan assumptions allow you to sell the property while the new borrower maintains the same terms and conditions already preexisting on the loan. This is a viable option if the loan has favorable terms and there is someone ready to take over the loan. Assumptions are the best course of action when the interest rate of the loan is greater than the interest rate of the bonds purchased.
When assumption is not a feasible option, defeasance is the best course of action. Here are some facts about defeasing your CMBS loan:
In a commercial loan defeasance, a loan cannot be paid off, so a collateral in the form of government securities – bonds, for example are used to substitute the property.
The bonds purchased must be enough to cover all payments made to the
CMBS bond holders for the life of the loan.
Commercial loan defeasance is the best option when you’re selling or refinancing your property AND when the interest rate of the loan is less than the interest rate of the bonds.
Defeasing your loan as an option
Defeasing your CMBS loan doesn’t have to be a complicated process. Like assumptions, it is vitally important to have all documents requested by the special servicer, follow all procedures to the letter and be prepared. Nevertheless, deciding whether to assume or defease can be a difficult decision to make if you are not familiar with the process.
You don’t have to face it alone. To get a free defeasance quote, visithttp://1stservicesolutions.com/ and click on the defeasance tab or like our Facebook page.