$29M Defeasance Closes in Five Days

BEVERLY HILLS, CA-A quick close on a $29.3 million defeasance here was a crucial element in the refinancing of a 99,904-sf office building, according to Commercial Defeasance LLC and George Smith Partners, who arranged the defeasance and the financing, respectively. Defeasance deals usually take 30 to 45 days to close, but this quick close—five days including rating agency review—was necessary to enable the building owner to refinance, according to Adam Coleman, deal manager based at the Commercial Defeasance headquarters in Charlotte, NC. “This transaction was a clear example of how the current economic turmoil can impact the timing of a defeasance transaction,” Coleman says. According to the Commercial Defeasance deal manager, Everyone working on the transaction “knew that if we weren’t able to get everything closed in less than a week, the refinance might fall through.”

The Beverly Hills owner of the office building refinanced property with Washington Mutual Bank. The owners were represented by Parklane Investments and George Smith Partners. Farzin Emrani, a vice president with George Smith Partners, says that the defeasance “played a pivotal role in helping us close a large loan in a very short time frame.”

Defeasance is a substitution of collateral in which a portfolio of government securities replaces the real estate as the collateral for a commercial loan. Redemption of principal and interest from the securities pays all remaining debt service, so the promissory note technically remains in place but is repaid from the proceeds of the securities purchased. The securities are typically purchased with a portion of the proceeds of a sale or refinance, so the defeasance transaction is usually coordinated with a related real estate transaction. Most fixed-rate conduit/CMBS loans originated since 1998 have defeasance provisions written into the loan documents.