Prepayment of CMBS conduit loans, primarily through defeasance, hit $20.9 billion in 2014, driven largely by refinancing that allowed borrowers to pocket cash well in excess of the defeasance cost.
The majority of CMBS conduit loans are prepayable with a penalty after an initial lock-out period, typically 24 months. Thereafter, the loan can be prepaid under defeasance or yield maintenance, depending on how the loan documents were negotiated. Defeasance is a fairly complicated procedure, but a number of firms provide all the services to defease a loan to have the property released from an existing CMBS conduit loan to be sold or refinanced. A good resource for understanding and calculating defeasance penalties is defeasewithease.com.
“I have been telling my colleagues not to automatically assume that a client will not refinance their property because of the high cost of prepayment,” commented Michael D. Sneden, Executive Vice President of ValueXpress. “With the increase in cash flow and value for commercial real estate, owners with substantial equity in their properties who need cash for other purposes may consider refinancing with a large cash out well in excess of the prepayment penalty to get their hands on the cash for other purposes.”
“I recently refinanced a client of mine that I provided a $14-million CMBS conduit loan for eight years ago,” commented Gary Unkel, Senior Loan Originator at ValueXpress. “With 20 months still remaining until the loan was open to prepayment without penalty, I assumed that my borrower would wait until then. But I received a call from the fellow indicating that his partner wanted to be bought out, hence a need to complete the transaction now, as the equity in the property even after the defeasance penalty provided 100% of the cash to buy out the partner.”