Most CMBS conduit loans feature defeasance as the method for loan prepayment before maturity. In layman’s terms, the lender releases the mortgage lien in exchange for securities, usually treasury bonds, that produce enough cash flow to make the remaining loan payments as they come due. If the total cost of the bonds and transaction costs is more than the mortgage balance, the difference is the prepayment premium or “penalty,” in simple terms.
This sounds complicated, which is why several well-qualified firms handle the defeasance process on behalf of borrowers. ValueXpress clients have engaged AST Defeasance (astdefeasance.com), DefeaseWithEase (defeasewithease.com) and Chatham Financial (chathamfinancial.com) with excellent results. ValueXpress will guide its clients through the defeasance process at no cost to the borrower.
Many borrowers want to estimate the potential prepayment “premium” (or “penalty,” in simple terms) when contemplating a CMBS conduit loan or when considering a prepayment during the loan term. The estimate requires a defeasance calculator because the amount of the prepayment premium is highly dependent on two variables: the remaining time to loan maturity and interest rates at the time of prepayment. In general, the closer to maturity and the higher interest rate is at prepayment, the lower the relative prepayment premium. Luckily, all the defeasance firms have defeasance calculators on their websites. I like the calculator at DefeaseWithEase because it features a sensitivity calculator that calculates the prepayment premium at various interest rates.