Partial Release

Definition

A Partial Release is a provision in a mortgage agreement that allows the borrower to release or discharge a portion of the mortgaged property from the lien or claim of the mortgage. The released portion is no longer considered as collateral for the loan, which can allow for greater flexibility in managing property holdings, especially in situations involving large parcels of land. Usually, partial release clauses are negotiated with lenders and are common in commercial real estate transactions or development projects where multiple property sales may take place over time.

Examples

Development Projects: A developer might secure a loan against a large plot of land intending to build several houses. As individual houses are built and sold, a partial release clause in the mortgage allows the developer to release each sold house from the mortgage, thus clearing the title for the buyer while still securing the remaining properties under the same mortgage.
Agricultural Land: A farm owner with a large amount of agricultural land might use a partial release provision to free up smaller sections of land to sell or lease while the rest remains as collateral for a mortgage.
Commercial Property: An investor who owns a shopping center might sell sections to different buyers. A partial release clause in the mortgage allows each section or property type (e.g., standalone grocery store) to be released from the mortgage when sold.

Frequently Asked Questions (FAQs)

What is the benefit of a partial release clause?

Answer: It offers flexibility for property owners, particularly those with large parcels, enabling portions of the property to be sold or developed without needing to refinance or fully pay off a mortgage. This is beneficial for cash flow and long-term project management.

How is the value of the released property determined?

Answer: The value is usually assessed based on current market conditions and the terms agreed upon in the mortgage documents. Final approval and valuation are subject to the lender’s discretion.

Do all mortgages come with a partial release clause?

Answer: No, not all mortgages include this provision. A partial release clause must be negotiated and explicitly included in the mortgage agreement. It’s more common in commercial loans rather than standard residential loans.

Who typically uses partial release clauses?

Answer: They are commonly used by real estate developers, large property investors, and owners of significant landholdings who plan on making sales or improvements over time.

What are the risks involved with a partial release?

Answer: The main risk is that the lender loses part of the collateral securing the loan, which may affect the loan’s security from their perspective. For the borrower, negotiating a partial release clause can sometimes result in higher interest rates or more stringent terms on the remainder of the loan.

Mortgage [Definition]

A mortgage is a loan secured by the collateral of a specified real estate property that the borrower is obliged to pay back with a predetermined set of payments.

Collateral [Definition]

Collateral refers to an asset that a lender accepts as security for extending a loan. Collateral minimizes the risk for the lender by compensating the lender in case the borrower defaults.

Lien [Definition]

A lien is a legal right or interest that a lender has in the borrower’s property, granted until the debt obligation is satisfied.

Real Estate Development [Definition]

Real Estate Development is a business process encompassing activities that range from the renovation and release of existing buildings to the purchase of raw land and the sale of developed land or parcels to others.

Online Resources

References

Fabozzi, Frank J., Modigliani, Franco. Mortgage and Mortgage-Backed Securities Markets.
Glickman, Howard. Mortgage Debt: Characteristics, Cost, and Consequences.

Suggested Books for Further Studies

Glick, Leslie. Basics of Real Estate Development
Brueggeman, William B., Fisher, Jeffrey D. Real Estate Finance and Investments
Cummings, Jan, Cummings, James. Real Estate Development: Principles and Process

Real Estate Basics: Partial Release Fundamentals Quiz

### What does a partial release clause in a mortgage permit? - [ ] A reduction in the interest rate. - [ ] Full payment of the entire loan before maturity. - [ ] Financing of additional properties. - [x] Release of part of the mortgaged property from collateral obligations. > **Explanation:** A partial release clause permits the release of a part of the mortgaged property from collateral obligations while keeping the remaining property still under the mortgage. ### In what type of real estate transactions are partial release clauses more common? - [x] Commercial loans - [ ] Personal loans - [ ] Credit cards - [ ] Auto loans > **Explanation:** Partial release clauses are more common in commercial loans, especially those involving large parcels of land or development projects. ### What happens to the title of the property once it is released from the mortgage? - [ ] It remains under lien. - [ ] It requires revaluation. - [ ] It is still collateral. - [x] It is cleared for sale. > **Explanation:** Once a property is released from the mortgage via a partial release, its title is cleared for sale. ### Who should you negotiate a partial release clause with? - [ ] Your real estate agent - [x] Your lender - [ ] Your neighbor - [ ] Your employer > **Explanation:** A partial release clause must be negotiated with your lender and explicitly included in the mortgage agreement. ### Which of the following scenarios could benefit from a partial release? - [x] Selling individual lots from a large property development - [ ] Mortgage refinancing - [ ] Leasing an apartment - [ ] Switching property managers > **Explanation:** Selling individual lots from a large property development is a typical scenario that could benefit from a partial release. ### Is a partial release automatically included in all mortgage agreements? - [ ] Yes - [x] No - [ ] Sometimes - [ ] Only in certain states > **Explanation:** A partial release is not automatically included in all mortgage agreements; it must be negotiated with the lender. ### What is the effect of a partial release on the remaining property under mortgage? - [ ] It dissolves the mortgage. - [ ] It increases the mortgage interest rate. - [x] It keeps the remaining property as collateral. - [ ] It mandates a new mortgage. > **Explanation:** The remaining property still serves as collateral under the mortgage after a partial release. ### If a farmer plans to sell parts of their land, what clause might be useful in their mortgage? - [x] Partial Release Clause - [ ] Prepayment Penalty Clause - [ ] Adjustable Rate Clause - [ ] Down Payment Clause > **Explanation:** A partial release clause would be useful for a farmer planning to sell parts of their land. ### What could be a downside for lenders when agreeing to a partial release clause? - [ ] Increased security - [ ] Faster loan repayment - [x] Loss of some collateral - [ ] Higher interest earnings > **Explanation:** The primary downside for lenders in agreeing to a partial release clause is the loss of some collateral securing the loan. ### Can a residential homeowner with a typical mortgage benefit from a partial release clause? - [ ] Always, in any case - [x] Not typically, as these clauses are unusual in standard residential loans - [ ] Only if the property value decreases - [ ] Only if permitted by state law > **Explanation:** A partial release clause is not typically found in standard residential loans as they are more common in commercial real estate transactions.