Defeasance consulting is a specialized service and relationship that lasts beyond the closing of the defeasance transaction. Choosing a defeasance consultant is an important step that is often overlooked or pushed off to a third-party broker or servicer whose interests may not be directly aligned with the Borrower. Not all consultants are created equal, so it is wise to take a little time to research your options.
Please note that a “closed” defeasance is not necessarily a successful transaction – inefficient portfolios and out-of-market securities pricing cost Borrowers tens of thousands of “hidden” dollars.
Choosing a consultant that is experienced in defeasance generally, as well as portfolio structuring and pricing specifically, can provide peace of mind that you are in good hands for a truly successful defeasance closing.
Even after 20 years of commercial loan defeasance practice, misinformation runs rampant through our industry every day; be wary of these 4 myths in defeasance or any facilitator that may tout any of the following:
i. We have the cheapest third party/transaction fees
ii. Securities costs should be the same from everyone
iii. We bid securities to get you the best price
iv. As your Lender/Servicer, we have synergies and efficiencies that a third party can’t provide.
1. We have the cheapest third party/transaction fees
Third party transaction costs represent the smallest cost component of the defeasance yet garner the most attention when selecting a defeasance consultant. On the other hand, the securities costs are the most expensive and volatile aspect of the defeasance process and the most overlooked.
Why is this the case?
Sales/marketing efforts by unnamed defeasance providers spread misinformation and half-truths to convince Borrowers that defeasance portfolios are a commodity and securities costs should be the same across the board. However, nothing is further from the truth. The newer generation of defeasance language allows for higher yielding agency securities and has, on average, longer terms to maturity (at the time of defeasance), making securities costs today much more sensitive to poor structuring and bad execution and unknowing borrowers are paying for it.
If you are being enticed by low third-party fees, buyer beware. Saving a couple thousand dollars in transaction fees could cost you many times more than your perceived savings with mismanaged defeasance securities practices.
2. Securities costs should be the same from everyone
Defeasance securities costs can be similar across providers for certain specific situations (generally when the loan has a very short term to maturity and/or is limited to defeasance collateral comprised of only US Treasury obligations). The last few years of rate volatility and increased defeasance activity revealed changing transaction metrics where loans were being defeased with much longer, 4–6 year, average terms to maturity compared to prior years. Current defeasance activity is comprised of a high concentration of Freddie Mac “K” Multifamily loans and newer vintage CMBS loans that have lower initial interest rates and include optionality to use higher yielding Agency securities on a broader scale. The combination of longer remaining terms and a smaller universe of less liquid Agency securities has exposed process inefficiencies in our industry - our sister company works with every defeasance provider and has given us a unique insight into the securities execution practices of our competition. The results have been eye opening, with cost differentials in the tens and even hundreds of thousands of dollars for each loan. Defease With Ease utilizes proprietary structuring processes and long-standing trading relationships to provide our clients with the best securities pricing in the industry.
If you think the defeasance securities market is the same across all providers, you are probably paying too much.
3. We bid securities to get you the best price
The two main defeasance portfolio execution options are competitive bids and negotiated trades.
Competitive bidding a defeasance portfolio’s structure and pricing is an archaic conceptual carry-over from the municipal bond defeasance market, created with the intent of providing municipalities with the best pricing. For anyone familiar with the municipal bond bid-rigging scandal you know this wasn’t necessarily the case. The process for competitive bidding entails the consultant sending the loan’s underlying amortization cashflows to multiple bond salesmen, usually 2-4 desks, approximately 30 minutes prior to a bid deadline. In turn, each desk will set up a portfolio based on securities they have on hand, or can locate at that moment, and subsequently submit their bid with their chosen fee embedded in the pricing. There is no time for creativity, planning or extra cost saving efforts because a mere 30 minute window is insufficient to effectively source, structure and price; moreover, securities must be available and guaranteed for delivery the following day.
Issues with competitive bids:
» Trading desk preparedness: lack of timing/focus to provide an effective bid » Some desks pass on bidding or may submit a high bid to see if anyone is willing to take it.
» Limited universe of eligible securities for your portfolio when a trader is only given 30 minutes to “submit their best offer”
» Extra layers of commissions and fees
» Traders are fully aware of the fallacies and drawbacks of competitive bids and the Borrower suffers – choosing the “best” of three poor bids is often the result.
It is understandable that Borrowers relate to the oft promoted concept where ‘seeking multiple bids’ would result in lower costs, but there continues to be MAJOR issues with the competitive bidding process and defeasance providers to this day will pitch this as an asset to their services.
Parties who tout the benefits of bidding create a significant disservice to the industry and have cost their unknowing clients millions of dollars in just the past few years.
4. As your Lender/Servicer, we have synergies and efficiencies that a third party can’t provide
In reality, there are no significant synergies or efficiencies created by using your Servicer as your Consultant. Having the Servicer act as your defeasance consultant is like being a defendant in a courtroom where the plaintiff, judge and jury are all the same party. Most CMBS Servicers do not have an affiliated or internal defeasance consulting arm, and for good reason. CMBS Servicers are financially obligated to represent the interests of the CMBS Trust and its investors first, so it is impossible for them to also put the Borrower’s interests first. We have helped Borrower clients navigate defeasance issues where their interests were directly adverse to the Servicer’s interests, with significant monetary value at stake.
Each Borrower has the right to engage and utilize an independent third-party advisor to represent its interests in the defeasance transaction, don’t give that right away.
Why Defease With Ease?
Since 2000, Defease With Ease has been working hard to earn the trust and respect of CMBS Borrowers and the entire CMBS defeasance industry. DWE pioneered the modern defeasance consulting industry, creating an organized and economical process for Borrowers to exit a CMBS loan prior to maturity. Since then we’ve closed over 10,000 defeasance transactions, structured & purchased over $100 billion in defeasance securities, and worked with thousands of borrowers, attorneys & brokers, but don’t settle for our word. We would be happy to introduce you to some of our past clients to get their feedback. We pride ourselves in providing 100% transparency throughout the transaction and will always aggressively advocate for the best interests of our clients. We guarantee the timing and execution of our services in writing and provide a level of customer service that is unmatched in the industry.
As your consultant, every step of our process is structured with your interests in mind. From providing the preliminary cost analysis, to starting the defeasance process with your Servicer, through the successful closing of your transaction, our goal is to work on your behalf to minimize your out-of-pocket costs and efficiently meet all the requirements in your loan documents for your closing timeline. We do not pay referral fees to third parties; we earn our business by providing real value to each and every client.
Third party fees are important, but they are a small portion of the overall defeasance costs. Defease With Ease offers a fair and competitive flat fee for our comprehensive defeasance consulting services. Our proprietary ‘negotiated trade’ process ensures the lowest defeasance portfolio cost for every Borrower. We take great pride in our services and continue to invest in new technology and relationships to deliver our clients the best possible economics for their defeasance. Our proprietary pricing models, subscriptions to live trading data feeds and direct trader relationships are just a few ways we set ourselves apart from the competition.