Defeasance is the process of replacing the real estate collateral on a CMBS loan with a portfolio of US Treasury or agency securities that pays the exact same scheduled cash flows. The original loan stays in the securitization trust, and the borrower walks away with title to the property free of the mortgage.
Why is defeasance even a thing?
CMBS loans are securitized into bonds. Bondholders priced their bonds on a specific schedule of cash flows from a specific pool of loans. Letting a borrower prepay the loan in cash would shorten the bond and re-introduce reinvestment risk. Defeasance lets the loan keep paying, to bondholders, but with risk-free Treasuries instead of the original real estate.
From the borrower's perspective, defeasance achieves what a prepayment would have: the property is freed from the lien. From the bondholder's perspective, the cash flows continue exactly as scheduled.
What does defeasance cost?
The economic cost is the difference between the loan's remaining principal and the cost of buying the Treasury/agency portfolio that exactly replicates the loan's remaining cash flows. When market rates are below the loan rate (you locked at a higher rate than today's), the cost is high because you must overpay for the security portfolio. When market rates are above the loan rate, defeasance can be cheap or even produce positive economics.
Hard costs run $30,000 to $80,000 in transaction fees: defeasance consultant, Treasury broker-dealer, securities intermediary, accountant, rating agency, and lender's counsel.
Sources
- Treasury Constant Maturity Series (DGS5, DGS10) · Federal Reserve Bank of St. Louis (FRED) · weekly
- Quarterly Survey of Commercial/Multifamily Mortgage Bankers Originations · Mortgage Bankers Association · 2026-Q1