Treasury Yields and Commercial Real Estate

11 Dec

Treasury Yields and Commercial Real Estate

Category: Commercial Real Estate, Credit Crisis

Square Feet Commercial Real Estate Blog details some of the difficulties that commercial real estate owners may have if they want to refinance or sell with US Treasuries at such low returns.

Treasury Yields Create Defeasance and Yield Maintenance Nightmare | Square Feet Commercial Real Estate Blog.

I first learned about defeasance in October of 2007. (Not something we use every day.)

The idea behind it is that a mortgage investor wants a guaranteed yield or return for a specified amount of time. If they are repaid early on the mortgage, the yield is affected. In order to maintain the yield a clause is written into the loan that the borrower has to buy a basket of “safe” securities to replace the payments that investor would have received over the life of the loan.

Defeasance was mostly used on CMBS loans. This calculations are so complex that defeasance companies have sprung up to help borrowers accomplish this feat.

With US Treasury yields at low levels, investors have to purchase massive amounts of Treasuries in order to generate a yield to replace their interest payments.

This additional cost limits the ability of an owner to refinance or sell their property.

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Posted Thursday, December 11th, 2008 at 2:31 pm
Filed Under Category: Commercial Real Estate, Credit Crisis
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345Response2008-12-11+21%3A31%3A45Peter+Maclennan to “Treasury Yields and Commercial Real Estate”

Regan
December 12th, 2008 at 8:26 am

Great post. I work in the defeasance/commercial real estate finance industry and frequently provide cost estimates for both defeasance and yield maintenance transactions to commercial property owners/buyers. Borrowers routinely contact us to find out how much their defeasance or yield maintenance will cost and unfortunately in the current treasury yield environment these figures often become deal breakers. However, there are still deals with the provisions being completed.

I did want to comment on your statement that “With US Treasury yields at low levels, investors have to purchase massive amounts of Treasuries in order to generate a yield to replace their interest payments.” This is not entirely true. The “amount” of treasuries purchased or “par amount” remains the same regardless of the yield environment. It is the price you pay for this amount that rises with falling yields. I would be more than happy to answer any further questions on this topic. Thanks again for the post!

Peter Pays Paul