In a commercial loan defeasance, a borrower substitutes qualified government securities as collateral for the loan in order to obtain a release of the property that originally secured the loan. Under existing industry practice, it was considered necessary for the substitute government securities to provide a stream of payments that would fund the debt service due on the related loan within four months of receipt. The PLR, which Wachovia received on behalf of a client, provides an affirmative acknowledgement that applicable tax rules would not be violated by utilizing securities maturing within 12 months, rather than the original four months, of the security’s associated payment date under the defeased loan.
“Although we have been providing defeasance facilitation services to borrowers for a short time, we quickly realized that there were conventions unrecognized by the market in the execution of a defeasance transaction that artificially created a less efficient securities purchase,” stated Alan Kronovet, a managing director in Wachovia’s Real Estate Services group.
The ruling by the IRS represents a significant development in the commercial loan defeasance industry. “This will create efficiencies for both the borrower and market participants,” added Dave Sisom, a vice president in Wachovia’s Real Estate Services Group.
“The 120 day rule limits the number of possible security combinations available to borrowers,” said T.J. Maher, a managing director in the Municipal Products Group. “Relaxing this constraint to 365 days allows for a greater number of solutions, thus increasing the likelihood of capturing the cheapest possible portfolio available in the market.”
The private letter ruling has not yet been published by the IRS, and may only be relied upon by the taxpayer who requested it. Nonetheless, it is expected to provide some guidance to servicers and practitioners regarding the IRS’ perspective on this important aspect of the defeasance process.
Wachovia is a leader in commercial loan defeasance advisory and is the number one Master and Primary Servicer of loans backing Commercial Mortgage Backed Securities (CMBS) with a total servicing portfolio of over $270 billion as of June 30, 20061.
About Wachovia’s Corporate and Investment Banking Group
Wachovia’s Corporate and Investment Banking group offers a full suite of products and services to public and private companies, institutional investors, financial institutions and the financial sponsor community. Investment banking and the global markets businesses (fixed income and equities) operate under the Wachovia Securities brand and have become a global force in the capital markets arena by providing comprehensive advisory, capital raising, structuring and execution services. Wachovia’s Corporate and Investment Bank also includes the 3rd largest Treasury Services business in the U.S., as well as leading asset-based lending and global correspondent banking services. The firm is built on a cohesive culture that encourages creative ideas, capital solutions, and experienced advice to all clients.
Wachovia Securities is the trade name for the corporate, investment banking and capital markets businesses of Wachovia Corporation and its subsidiaries, including Wachovia Capital Markets, LLC (WCM), member NYSE, NASD, SIPC and Wachovia Securities International Limited, which is authorized and regulated by The Financial Services Authority in the United Kingdom. Wachovia Securities is also the trade name for the retail brokerage businesses of WCM’s affiliates, Wachovia Securities, LLC, member NYSE, SIPC, Wachovia Securities Financial Networks, LLC, member NASD, SIPC, Wexford Clearing, LLC, and First Clearing, LLC.
About Wachovia
Wachovia Corporation (NYSE:WB) is one of the nation's largest diversified financial services companies, providing 13.4 million household and business relationships with a broad range of banking, asset management, wealth management and corporate and investment banking products and services. Wachovia has retail and commercial banking operations in 16 states with 3,109 offices from Connecticut to Florida and west to Texas and California. Two core businesses operate under the Wachovia Securities brand name: retail brokerage in 49 states and in Latin America, and corporate and investment banking in selected industries nationwide. Globally, Wachovia serves clients through more than 40 international offices. Online banking is available at wachovia.com; online brokerage products and services at wachoviasec.com, and investment products and services at evergreeninvestments.com. Wachovia had assets of $553.6 billion, market capitalization of $86.0 billion and stockholders' equity of $48.9 billion at June 30, 2006.
1 Source: MBA Mid-Year Survey of Large CMBS Servicers (as of June 30, 2006)
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