Glossary
CMBS (Commercial Mortgage-Backed Securities)
A type of investment product where commercial real estate loans are pooled together into a trust and then sold to investors as bonds. These loans almost always require defeasance rather than simple prepayment to protect the integrity of the bond investors’ income stream.
Defeasance
The process of releasing a property from its mortgage lien by replacing the real estate collateral with a new portfolio of government securities structured to cover all future loan payments.
Lock-out Period
A period, typically two years after a loan is securitized, during which the loan cannot be prepaid or defeased. This is a requirement under REMIC rules to maintain the tax status of the CMBS trust.
Master Servicer
The entity responsible for the day-to-day administration of the loans within a CMBS trust, including collecting payments and processing standard defeasance transactions.
New York-style Defeasance
A specific defeasance structure used in states with high mortgage recording taxes (like New York), instead of satisfying the old mortgage, it is assigned to the new lender during a refinance, which can significantly reduce the tax liability.
REMIC (Real Estate Mortgage Investment Conduit)
The legal trust structure that holds CMBS loans and allows them to be sold as securities while maintaining a favorable tax status. Since REMIC rules are the primary reason defeasance is required instead of prepayment.
Special Servicer
An entity that takes over management of a loan if it goes into default or requires special handling (e.g., waivers for technical issues). Their consent may be required for a defeasance under certain circumstances.
Successor Borrower
A special-purpose entity (SPE), typically an LLC, created solely to assume the loan obligation and hold the securities portfolio after the original borrower has completed the defeasance and been released from liability.
Yield Maintenance
A prepayment penalty, structured as a lump-sum cash payment, designed to ensure the lender receives the full interest income they would have earned had the loan remained outstanding through its scheduled maturity. The amount is typically calculated as the present value of the interest the lender is losing, discounted against comparable Treasury yields.
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