Engage a Consultant The first step is to discuss your transaction with a defeasance consultant. Using only the defeasance language in your loan agreement and a most recent servicer statement, your consultant should be able to provide you with a relatively accurate cost estimate and a summary of any potential issues. You have various options for consultants and ultimately should choose the one with whom you are most comfortable will work diligently and in your best interest to close an efficient defeasance.

Review Existing Loan Documents The loan documents and servicer policies govern the structure of the defeasance and certain provisions may significantly impact the cost or ability to defease. It is important at the outset of the process that your defeasance consultant fully reviews the documents and works with the servicer to understand their policies. The main things to consider include the following:

• Is a defeasance allowed?
• Who may appoint the successor borrower?
• Are there any restrictions on usage of a securities broker?
• What is acceptable substitute collateral?
• Is prepayment allowed upon defeasance?
• How is the open period considered in a defeasance?

TriMont Defeasance Consulting will work with you to interpret your documents and work with your servicer to understand their application of the documents in order to structure the most cost effective solution available.

Determine the Cost Correctly estimating the defeasance cost is critical to making an informed decision about the overall sale or refinance. The cost of the defeasance includes (i) the securities purchase and (ii) upfront transaction costs.

In the current low interest rate environment, the greatest expense to the borrower will likely be the premium on the securities purchase. This cost fluctuates with the market but is correlated to the spread between the fixed rate of the existing loan and the current yield on government securities. It is worthwhile to note that unless specifically requested, the defeasance securities will not be locked in and the cost will continue to fluctuate with the market until closing.

Upfront transaction costs are used to compensate the various parties involved in closing a defeasance and typically range from $45,000 - $85,000. The majority of the transaction costs are fixed and do not vary with your choice of consultant, however, TriMont will always strive to minimize your transactions expense.

Consider Ways to Mitigate the Cost There is generally not a lot of room for negotiation in the transaction or securities cost, but the borrower may have other alternatives to reduce, recover or hedge some of the expense.

Defeasance Portfolio Lock As discussed above, the borrower remains exposed to market fluctuations on the securities price up to closing unless otherwise negotiated. TriMont will facilitate a lock on the securities pricing at little to no cost should that be a desirable feature for the borrower.

Monetization of Residual Sharing There is potential for significant value to accrue in the successor borrower entity. Such value may arise from float income earned for the periods of time where the security collateral has matured but the debt service payment is not yet due. It may also arise if the successor borrower is able to prepay the defeased loan at the open period when the defeasance collateral was purchased through final maturity.

Where the loan documents and servicers policies allow the defeasance consultant to establish and administer the successor borrower entity, there is often an opportunity for the borrower to recover a portion of the defeasance cost through a sharing of such residual.

Generally these amounts are not available until maturity of the defeased loan, but the benefit is still available. TriMont offers sharing as a matter of policy whenever it is available and in certain instances, TriMont may buyout your portion of the residual benefit on a present value basis to immediately offset a portion of the defeasance expense. Borrowers often find this very attractive as the successor borrower residuals are not available until the end of the defeasance period, generally several years from today, and may carry adverse tax consequences.

Negotiate Defeasance Provisions in New Documents The time to think about defeasance costs is when negotiating new loan documents. Once a loan is closed, the defeasance provisions are largely non-negotiable. Work with your defeasance consultant to make sure you understand what provisions may have an impact on your future ability or cost to defease. Ultimately, retaining as much control and flexibility in the process such as the right to appoint the successor borrower while removing ambiguity around such things as prepayment and qualifying government securities will result in the most economical defeasance; however, these provisions of course need to be weighed against any incremental costs that may arise in the new loan.