defeases

A defeasance is a legal concept in real estate and finance that essentially means to cancel out or nullify a previous obligation. This is typically achieved by the creation of a separate trust or escrow account that holds sufficient funds or securities to satisfy the original debt. When a defeasance occurs, the original debt is effectively extinguished, and the borrower is released from their liability. The security interest held by the lender over the property is also released.

The most common scenario for defeasance involves commercial real estate. A borrower may wish to remove a mortgage from a property, perhaps to sell it or to refinance the debt with a new lender. If the original mortgage loan is still outstanding, the borrower can defease the loan. This involves establishing a defeasance escrow with a third-party escrow agent. The escrow agent then purchases a portfolio of U.S. Treasury securities that will generate enough cash flow to cover all future principal and interest payments on the original mortgage. Once the escrow is fully funded and structured correctly, the lender agrees to release their lien on the property.

Defeasance is a complex legal and financial transaction. It requires careful planning and execution to ensure that the original debt is legally satisfied and the collateral is released as intended. The specific terms and requirements for a defeasance can vary depending on the loan agreement and state laws.