Calculator
Defeasance
Estimate the cost to release a fixed-rate commercial mortgage by substituting a portfolio of U.S. Treasury securities that replicate the loan's remaining cash flows.
How defeasance works
When a CMBS or life company loan is defeased, the borrower purchases Treasury securities whose coupon and principal cash flows exactly mirror the remaining loan payments. The lender accepts those securities in place of the property as collateral. The cost is driven by the spread between your loan rate and current Treasury yields: if Treasuries yield less than your loan rate, the securities cost more than the outstanding balance — you pay a premium. If Treasuries yield more, you may see a discount.
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Frequently Asked Questions
What is defeasance in commercial real estate?
Defeasance is the process of replacing real estate collateral for a CMBS loan with a portfolio of U.S. Treasury securities that generate cash flows matching all remaining loan payments. This releases the property lien, allowing a sale to proceed. The borrower purchases the Treasury securities through a defeasance consultant, often at a significant premium when current Treasury rates are below the loan rate.
When is defeasance required on a commercial property sale in Washington State?
Defeasance is required when the commercial property is secured by a CMBS (Commercial Mortgage-Backed Securities) loan that prohibits prepayment and requires defeasance as the exit mechanism. Common in retail, industrial, and office loans originated by conduit lenders. The loan documents will specify whether defeasance or yield maintenance applies.
How much does defeasance cost?
Defeasance cost depends on the remaining loan balance, the remaining term, the original loan rate, and current Treasury yields. When current Treasuries are well below the loan rate, the defeasance premium can be substantial — sometimes millions of dollars on a large commercial loan. Use this calculator to estimate the cost before approaching your servicer.
What is the difference between defeasance and yield maintenance?
Both are prepayment penalties on CMBS loans. Yield maintenance compensates the lender for lost interest by paying the difference between the loan rate and the current Treasury rate over the remaining term. Defeasance substitutes actual Treasury securities for the collateral. Yield maintenance is a cash payment; defeasance is a security substitution. The loan documents will specify which applies.
This is a simplified estimate using a single discount rate for all cash flows. Actual defeasance cost is calculated by matching each cash flow to the exact Treasury strip yield for that date. Engage a licensed defeasance consultant for a precise quote before proceeding.