Defeasance Transactions

Author:Mr Robert Antenore
Profession:McMillan Binch Mendelsohn LLP

As the commercial mortgage-backed securities ("CMBS") market in Canada has matured, it has experienced a growth in the use of defeasance as a strategy for borrowers whose mortgage loans have been securitized as part of a CMBS transaction. In an environment where property values continue to rise and Canadian interest rates are favourable, borrowers seek to capture the equity that is tied up in their real estate assets with refinance or sale transactions and the result has been a dramatic upswing in defeasance activity.

McMillan Binch Mendelsohn LLP is the recognized market leader in the development and structuring of defeasance transactions in Canada. We work closely with servicers, sub-servicers, lenders, rating agencies and title insurance companies to ensure the successful completion of each defeasance transaction. No other Canadian law firm can match our level of expertise, service or commitment.

Our CMBS Services Group has completed more defeasance transactions than any other law firm in Canada. We are market pioneers for:

The largest defeasance in Canada

The first single asset pool defeasance transaction

The first multi-loan, multi-pool defeasance

Partial defeasance transactions

Complex, multi-step escrow closings

Our CMBS Services Group is also a proud member of the CMSA Taskforce, a group of recognized industry experts whose mandate is to develop the Canadian defeasance market and promote practices conducive to the efficient conduct of defeasance transactions. Our model documents have been adopted as the standard for a Canadian defeasance transaction.

What is Defeasance?

In its simplest form, defeasance is the process whereby a borrower replaces real property security with personal property security. The mortgage is discharged from the property and the borrower is free to sell or re-finance the property as it wishes. All obligations under the mortgage loan, other than those related to the use, operation or ownership of the property, remain in place, such as the obligation to continue to make payments under the mortgage loan. In exchange for a release of its mortgage, the mortgagee receives a pledge of a portfolio of bonds from the borrower. The bonds are generally high quality, triple A rated, sovereign risk (such as direct, non-callable, Government of Canada bonds) and are purchased such that the proceeds from the cash flow of the bonds replaces the expected income stream under the mortgage. Each future payment under the mortgage...

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