So, this is what I am working on today....................Defeasance or Yield Maintenance.
Defeasance is the process of changing the collateral of a loan from real estate to bonds backed by the government of the United States. In the process, the loan is assumed by a new entity (Successor Borrower). Defeasance is better for the lender than yeield maintenance in that it addresses the issue of duration.
Yield Maintenance is a calculation that protects the lender against a Delcine in interest rates. In the event of a decline in rates, the borrower would likely want to prepay the existing loan in order to refinance at a lower rate.
Defeasance does not change anything about the cash inflow to the lender's account. Defeasance is more expensive for the borrower as well. Nothing is free in Real Estate and Cheap is a realitive term.
I am supposed to write up some information on both of these terms. Mainly explaining Defeasance - so far I have 3 pages of information. It's a lot to take in.
Also - I am reviewing Cap Rates - the equation: = Pro Forma NOI/Actual Purchase Price
= $1,820,000/$30,000,000 = 6.07% Cap Rate
A lower cap rate is good because that means the risk is not that high - the higher the cap rate, the greater the risk. Look at the Bonds Chart below - ohhhh.......charts..........It's small isn't it? It gets bigger if you click on it.
3 comments:
Hey Jen. Nice blog on defeasance. I am actually a defasance consultant with the industry leader, Commercial Defeasance - "Defease with Ease" in Charlotte, NC. Great day here!! 70 degrees and sunny and the ACC basketball tourney just got underway uptown a short time ago. All the best, -scott
Holy crap where do you get this stuff? I didnot understand a word of what that said, and not because it was poorly written, BUT IT WAS WAY OVER MY HEAD~! How on earth do you keep this stuff straight? Give me my dewey decimal system, please??.....
You gave an explanation that is clear and concise, although, it is still technical after all. But basically, it depends on how you will look at it. From an economic standpoint, both of these will allow borrowers to achieve the same objective of obstructing the underlying real estate asset. But from the legal perspective, YM is the actual prepayment of the loan, and defeasance is the substitution of collateral. Nevertheless, the inclusion of a favorable defeasance and/or yield maintenance provisions will help borrowers in making the most cost-effective choice. :)
[Kandice Stowe]
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