Defeasance is a CMBS loan prepayment mechanism in which the borrower substitutes a portfolio of U.S. Treasury securities for the mortgaged property as collateral — with cash flows exactly matching the remaining loan payments — releasing the property from the lien without paying a cash prepayment penalty.
Defeasance is one of two standard prepayment structures on CMBS loans (the other being [[yield-maintenance]]). Instead of paying a cash penalty to retire the loan early, the borrower purchases a portfolio of U.S. government securities (typically Treasuries and agency securities) whose scheduled interest and principal payments match exactly the remaining scheduled loan payments through maturity. The mechanics: (1) Borrower engages a defeasance consultant and purchases the Treasury portfolio. (2) The Treasury portfolio is pledged to the servicer as replacement collateral for the loan. (3) The real property is released from the mortgage lien — the borrower can sell or refinance the property. (4) The servicer continues to receive debt service from the Treasury portfolio through loan maturity. (5) The loan pays off at maturity from Treasury principal proceeds. Economic comparison to yield maintenance: both mechanisms protect the bondholder's yield, so the economic cost is theoretically similar. In practice, the relative cost depends on the shape of the Treasury yield curve and the spread between the loan rate and current Treasury yields. Defeasance requires upfront cash to purchase the Treasury portfolio (often larger than a yield maintenance penalty in a low-rate environment) but avoids certain tax characterizations that a cash penalty may trigger. Defeasance is governed by each loan's CMBS PSA (pooling and servicing agreement) and typically requires servicer consent, a legal opinion, rating agency confirmation, and a seasoning period (usually no earlier than 2 years from loan origination). Process takes 30–60 days. See treasury.gov for current Treasury securities pricing and sec.gov/cgi-bin/browse-edgar for CMBS offering documents.
Defeasance typically takes 30–60 days from initiation to property lien release. Key steps include engaging a defeasance consultant, servicer notification and consent, legal opinion preparation, Treasury portfolio purchase, rating agency confirmation (for certain deal structures), and closing documentation. Most CMBS loans require a minimum seasoning period (typically 2 years from origination) before defeasance is permitted. Plan ahead — defeasance cannot be rushed to a same-week closing.
It depends on the rate environment. In a rising-rate environment (current Treasury yields approaching or exceeding the loan rate), defeasance is typically cheaper because the Treasury portfolio required to replicate loan payments costs less. In a falling-rate environment, yield maintenance may be cheaper. A defeasance consultant can model both scenarios for your specific loan. See treasury.gov for current Treasury rates.
No — defeasance is specific to CMBS loans and some life company loans whose loan agreements explicitly permit it. Conventional bank loans, SBA loans, and most balance-sheet lender loans do not support defeasance — they use standard prepayment penalties or step-down structures instead. Check your loan agreement's prepayment section for whether defeasance is an available election. See sec.gov/cgi-bin/browse-edgar for CMBS PSA documents.