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How does the borrower choose a defeasance consultant? Knowing the right questions to ask provides a borrower with a framework for evaluation:

*'''What are the costs?'''
	 
There are two main cost components the borrower is responsible for when defeasing a loan. The first, and most significant, is the cost of the defeasance portfolio. 
When comparing estimates it is important to note that tThe market for [[US Treasuries]] is very liquid and very efficient, but the actual price of the collateral will vary until they are purchased in closing. Also, find out the method in which the securities will be purchased and whether there is any guarantee that there will be no hidden markup in the final cost.  

The second cost component is the third party fees incurred during the defeasance process. These fees include payments to the securities intermediary and certifying accountant as well as the fees generated by counsel to the Servicer and the successor borrower. Because defeasance has become a relatively standard process, these fees are generally non-negotiable but the consultant will be able to articulate the reason behind the numbers and explore whether they can get you any discountingdiscounting possibilities (say, due to a multi-loan defeasance) is possible.

*'''What is the residual value of the defeased loan?'''

An optimized portfolio of securities will match the original debt service schedule of the loan as closely as possible, but there will always be differences in the timing between cash receipts from the defeasance collateral (coupon payments or bond maturities) and cash payments (loan obligations). These mismatches accumulate interest at money market rates and are held in the successor borrower account. Generally, the most significant mismatch occurs between the maturity date of the loan and the Treasury that matures closest, but prior to, that date. Due to the regulations surrounding the defeasance process, this “residual value” cannot be considered at the time the portfolio is built to reduce the portfolio cost nor can it be accessed until the loan has matured. What happens to this residual value at maturity?

Once the loan has been defeased, the successor borrower assumes the obligations of making the monthly payments and the right to the residual value belongs solely to that entity. However, at the time of defeasance many consultants will enter into a '''sharing arrangement with the original borrower where the consultant will return a portion of the residual value to the borrower upon the loan’s maturity, or offer the present value of the residual value at defeasance closing. This arrangement will enable the borrower to recover some of the costs incurred at the time the loan was defeased.''' Make sure to ask your dDefeasance consultant about thes can detail tax orand accounting implications associated with sharing arrangements.

Another source of significant financial value centers on whether the defeased loan is prepaid. Many loans have a 3-6 month window allowing for the [[prepayment]] of the loan without incurring any penalty. However, regardless of whether a prepayment period exists, the defeasance collateral structure must be typically structured to make all the loan payments up to and including the payment due on the maturity date. If not explicitly prohibited, the successor borrower may have the right to prepay the loan and sell the existing (unused) securities on the open market. Any profit gained by selling the securities increases the residual value, and accordingly the amount shared back with the original borrower should a sharing agreement be in place.

Once the defeasance process is understood, several competing interests become apparent. The most efficient and therefore least expensive defeasance portfolio is in the best interest of the original borrower. In contrast, the successor borrower benefits from a less efficient portfolio which generates a greater amount of residual value. The defeasance consultant can have an impact on both the creation of the portfolio and benefit from the end result. Find out if the consultant is focusing on having the most efficient portfolio possible or focusing on the residual that may be received later. Knowing how the process works, the correct questions to ask, and the potential conflicts that may exist will allow the borrower to select a defeasance consultant that best suits their needs.

==References==
*{{1911}}

*[http://www.defeasancegroup.com Defeasance Group ]
*[http://www.astdefeasance.com AST Defeasance Services ]
*[http://www.defeasancemanagement.com Defeasance Management ]
*[http://www.defeasewithease.com Commercial Defeasance "Defease With Ease" ]
*[http://www.chathamdefeasance.com Chatham Financial ]

[[Category:Legal terms]]
[[Category:Property law]]

[[fr:Défaisance]]