FEATURE ARTICLE, OCTOBER 2005

DEFEASE WITH EASE
Commercial Defeasance's catchy slogan has caught on in the industry.
Karen Stone, CCIM

Come up with a good idea, design a foolproof system, hire good people, become experts in your niche, focus on serving your customers, perform well, and meet and exceed expectations. Sounds like a sure-fire way to build a successful business, and Commercial Defeasance, LLC has proved that it works. By following this business plan, this Charlotte, North Carolina-based company has risen to the top of its field.

Finlay

How does Commercial Defeasance handle this volume of transactions in a world where meeting absolute deadlines is a must? “Our primary key to success is that we have been extremely fortunate in hiring good people,” explains John Hosmer Jr., chief executive officer. “We now have a staff of 26, nine of whom were hired in the last 6 months.” Commercial Defeasance utilizes its talent to the max by operating a corporate culture that is casual and relaxed, and that supports interaction and teamwork. “We work in a bullpen where everyone is available to everyone and communication is open and coordination is easy,” says Hosmer. “We are able to interact constantly so that we can handle any issues as they arise.”

Defeasance, described most basically as a substitution of collateral that allows a borrower to access the equity in a commercial property, is a complex, time-consuming and often frustrating process. As many as two dozen professionals from all corners of the commercial real estate, finance, legal and securities fields may be involved in one transaction. Managing the process takes skill, knowledge, experience, and a tried and true system that can handle hundreds of details.

To manage the details, Commercial Defeasance has developed a proprietary software system that keeps track of all aspects of its business. “From managing our pipeline and our deal flow to keeping track of the details of each transaction, we rely heavily on technology,” says Finlay. “We built our software from scratch, so it fits our specific way of doing business. It allows us to do the volume we do, confident that we will provide the high-quality service our customers have come to expect.”

Hosmer

“Since we began Commercial Defeasance, the defeasance business has proved to be a legitimate one. Over 60 percent of our clients are repeat customers,” notes Finlay. For example, Connecticut-based real estate developer Starwood Ceruzzi, LLC uses Commercial Defeasance to defease its securitized mortgages. Most recently, in July 2005, Commercial Defeasance structured and closed a $38 million transaction that allowed Starwood to sell Gardiner Manor Mall to Western Bayshore Gardiner, LLC. The 220,738-square-foot, Class A retail property is located at Sunrise Highway and Manor Lane in Bayshore, New York.

Like Starwood, many of the company's clients are major and middle-market real estate investment and development companies. Because of their depth and breadth of experience, Commercial Defeasance also has done business with the country's largest real estate investment trust. It also structured and closed the first Canadian commercial mortgage backed securities (CMBS) defeasance.

Trends in the CMBS industry and the commercial real estate market point to continued growth opportunities for Commercial Defeasance. The pool of loans eligible for defeasance is growing. Since 1998, almost all fixed-rate conduit loans prohibit a simple cash repayment. Today, the requirement to defease is a standard clause in about 90 percent of CMBS loans. As of the end of 2004, a little less than 4 percent of eligible CMBS loans had been defeased. In 2005 alone, the more than $15.7 billion of U.S. CMBS loans originated in 1995, most of which did not require defeasance, will mature and be replaced by new 2005 U.S. CMBS originations that exceeded $76 billion in volume by the end of July.

Commercial Defeasance is grabbing a lion's share of the available business. The company has defeased more than three times the number of loans of all its competitors combined. “We stand apart from our competition because of our focus on customer service,” notes Finlay. “A dedicated deal manager and assistant deal manager are assigned to each transaction. In addition to overseeing the flow of transactions, they focus on responding directly and quickly to our clients' needs.”

Commercial Defeasance plans to remain focused on defeasance. “This is not a sideline for us...this is our only business,” notes Hosmer. “Because of this, we have been able to make significant contributions to the shape and texture of the defeasance process. We also have developed relationships with and closed numerous transactions with every major servicer.” The company's executives also spend time educating borrowers on the process of defeasance and its advantages.

As a one-stop shop that expertly handles the detailed and often cumbersome defeasance process, Commercial Defeasance has carved out a solid niche. “We handle the process from beginning to end — freeing up our clients to focus on the real estate transaction,” says Finlay. “Our clients know we are committed to closing their transactions on time, with no hidden securities mark-ups or surprises.”

Commercial Defeasance has taken a complex process and mastered it so that its clients can “defease with ease.” This started out as a catchy phrase used by the team at Commercial Defeasance, and it became the company's Web site address. It has caught on, and the number of borrowers that take advantage of Commercial Defeasance's expertise, responsiveness and personal attention continues to grow.

Karen Stone, CCIM, is president of Stone Consulting Group in Atlanta.

©2005 France Publications, Inc. Duplication or reproduction of this article not permitted without authorization from France Publications, Inc. For information on reprints of this article contact Barbara Sherer at (630) 554-6054.