Every defeasance has two cost components: (1) transaction costs, and (2) the cost of the securities that comprise the substitute collateral. The transaction costs consist of the fees of the various parties involved, which generally range from $45,000 to $65,000, in the aggregate (excluding borrower’s counsel’s fee), if the borrower takes advantage of our network of experienced third party service providers. The transaction costs vary depending upon the size of the loan, the complexity of the transaction (i.e. a partial defeasance or a New York-style defeasance), and the fees charged by the servicer of the loan and their legal counsel.

However, the single biggest cost component is the securities purchase. Borrowers should be aware that some securities brokers include significant fees for themselves in the price of the securities without separately disclosing those fees. Securities purchases that are conducted as a so called competitive bid process are particularly susceptible to this type of fee gouging, because brokers (including large, well-respected institutional brokers) traditionally make money by including as much mark up in the securities cost as they can get away with. That’s why Commercial Defeasance pioneered a less expensive, more transparent approach to the securities purchase – a nominal, fixed broker fee that is disclosed up-front in writing.

Why does Commercial Defeasance prefer to use a broker-dealer that charges a nominal, fixed fee

Our defeasance volume is so much greater than any other facilitator (even large, well-known institutions) that broker-dealers are willing to work for our customers for a fixed fee of $1,500 — $5,000 (depending on loan size) over the broker’s cost to obtain the securities directly from the market makers. Some of the same broker-dealers from whom others get their “competitive bids” actually have politely declined to work on our defeasances, because they could not or would not limit their fee to the fixed fees we require for the amount of work required to deliver a defeasance portfolio.

While the name competitive bid process may sound appealing, the reality is that broker-dealers would much prefer to handle a few hundred million dollar trades for large fees from their other customers than perform the 10 – 40 relatively small trades required for a defeasance for one small fee. If they’re going to do all the extra work required by a defeasance portfolio, they want to get paid big fees for it. As a result, a competitive bid process for a defeasance portfolio can yield bids from brokers that are not interested in buying a defeasance portfolio, unless it commands a hefty premium. In the end, the competitive bids can include undisclosed mark ups of $20,000, $25,000 and $35,000 on a $3 million defeasance, so the lowest bid is padded with a $20,000 broker fee.

Contrast the “competitive bid” with the fixed $2,500 fee that would have been charged for the same transaction by a broker-dealer working for a nominal, fixed fee. Even if the competitive bid process happens to yield a reasonable fee once in a while, it will rarely, if ever, result in a broker fee that is less than our negotiated, fixed fee, so why even take a chance? That’s why Commercial Defeasance believes a low, fixed, pre-negotiated broker fee obtains the best result for the customer.

You could, but we don’t recommend it. If the broker fails to deliver just one security in the portfolio, the defeasance cannot close, which means the sale or refinance closing has to be rescheduled. In addition to cost considerations, it’s important to use a broker with significant defeasance experience. The real estate closing is just too important to take a chance on a broker who is not used to the rigors of a defeasance closing.