Defeasance vs. Yield Maintenance: CMBS

Two prepayment structures, very different mechanics, and a single math test that decides whether your refi or sale is economic. A worked example with current-market numbers.

CMBS loans are non-recourse, fixed-rate, and securitized into bonds, a structure that delivers higher LTV than a bank or life co will reach, on a wider range of property types. The trade is rigidity. CMBS bonds are sold to investors who expect a contractually fixed cash-flow stream for ten years, which means the borrower cannot prepay without making the bondholder whole. The two mechanisms for doing that are defeasance and yield maintenance, and which one your loan uses materially changes the cost, and the timing, of every future refinancing or sale decision.

This is not academic. On a $20M, 10-year CMBS loan originated at 4.5% in 2021, a refi or sale in mid-2025 routinely produced a prepayment penalty of $1.5M to $2.5M. Borrowers who did not model that cost into their hold-period plan got blindsided. Borrowers who did model it usually found a cleaner answer: wait, structure differently, or accept that the embedded penalty is the cost of the original LTV they took.

What defeasance does

Defeasance is the more common of the two on conduit CMBS originated after 2010. The mechanic is unusual but the logic is clean: the borrower buys a portfolio of US Treasury securities (or, in some loans, agency bonds) sized so that the coupons and principal payments on those bonds exactly replicate the remaining payment stream of the CMBS loan through maturity. That Treasury portfolio is delivered into a successor borrower entity that takes over the loan. The property is released from the lien. The bondholders keep receiving their scheduled cash flow, now from the Treasuries instead of the property.

Defeasance also carries fixed transaction expenses: defeasance consultant ($25K to $50K), securities firm fees, accountant opinions, rating agency confirmations, lender's counsel. Plan on $80K to $150K of fixed costs even on a small deal. On a $5M loan the fixed costs can rival the economic cost of the bonds themselves; on a $50M loan they are noise.

What yield maintenance does

Yield maintenance is the older mechanic and still used on some CMBS, life co, and bank loans. The borrower prepays the outstanding principal in cash plus a penalty equal to the present value of the lender's "lost yield" over the remaining loan term. The PV is calculated by taking the difference between the loan coupon and a reference Treasury rate (matched to the remaining term), multiplying by the outstanding balance, and discounting back at that same Treasury rate.

Compared to defeasance, yield maintenance is simpler, no bond portfolio, no successor borrower, no rating agency confirmations. It is also typically slightly more expensive in low-rate environments because the defeasance bond portfolio can be assembled from purpose-matched Treasury strips that align to each scheduled payment date, while yield maintenance is computed off a single blunt PV formula. The fixed transaction costs on yield maintenance are much lower (under $25K).

Worked example

For a proposed payoff, begin with the current loan balance and contractual payment schedule. A defeasance consultant uses those cash flows and current security prices to estimate the replacement portfolio.

The remaining loan term is roughly 5.5 years.

A defeasance estimate depends on the loan’s remaining payment schedule, the eligible replacement securities and their actual prices. A single Treasury yield does not determine the portfolio cost.

Scenario B, same loan, yield maintenance instead, same 4.0% reference Treasury: The yield maintenance penalty is approximately the present value of (4.50% − 4.0%) × $19.3M annually, over 5.5 years, discounted at 4.0%. That works out to roughly $475K, plus de minimis transaction costs. Total prepayment cost: approximately $475K, or 2.5% of the outstanding balance.

Higher available security yields can reduce the replacement portfolio cost, but the result depends on the payment schedule and documents. Include consultant, legal, servicing and other transaction expenses in the estimate.

The takeaway: which structure your loan carries is the difference between a $1.3M penalty and a $475K penalty in the same rate environment, on the same loan. And in either case, the rate environment at the moment of prepayment moves the penalty by an order of magnitude. Defeasance loans favor sellers when rates rise; yield maintenance loans are more predictable but typically more expensive when rates fall.

How to use this in deal decisions

• Before signing a CMBS loan: ask the lender to model defeasance and yield maintenance costs at three rate scenarios (Treasury -100, flat, +100 bps). Use the larger number as the embedded "exit cost" of the structure when comparing CMBS against a bank or life co quote at lower LTV.
• Before listing the property for sale: get a defeasance quote (typically free from one of three or four major defeasance consultants) thirty days before going to market. Buyers will want to see it to underwrite their bid.
• Before refinancing into agency or life co: calculate the breakeven hold period at the new loan terms net of the prepayment cost. For a multifamily property where the agency execution is 75 bps tighter and offers $2M more in proceeds, defeasance frequently pays back inside 24 months. For a retail or office property with 25 bps of improvement, the math is much tighter.
• Watch the open prepayment window: most CMBS loans become freely prepayable (penalty waived to 1% or zero) for the final 90 days before maturity. If the deal can wait, that window is the cheapest exit.

What an advisor should do

For a loan with defeasance or another prepayment provision, obtain a current estimate early in the transaction. The amount can change with timing and market inputs, so confirm it again before committing to an exit.

Frequently asked questions