If you hold a conduit loan and want to sell or refinance your commercial property before maturity, CMBS loan defeasance is likely the process standing between you and your next transaction. Defeasance is the legal mechanism that allows a borrower to release commercial real estate collateral from a CMBS (Commercial Mortgage-Backed Securities) loan by substituting U.S. Treasury securities that replicate the remaining debt service payments. It is one of the most misunderstood areas of commercial real estate finance, yet it affects billions of dollars in transactions every year.
This guide breaks down the full CMBS loan defeasance process, the true costs involved, how it compares to yield maintenance, and what alternatives exist for borrowers looking to exit or refinance their conduit loans in 2026.
What Is CMBS Loan Defeasance and How Does It Work?
CMBS loan defeasance is a substitution of collateral. Instead of paying off the loan directly, the borrower purchases a portfolio of U.S. government securities (typically Treasury bonds and STRIPS) that generate cash flows matching the remaining scheduled debt service payments on the loan. Once these securities are in place, the original real estate collateral is released from the mortgage lien, freeing the borrower to sell or refinance the property.
The key distinction is that the CMBS loan itself is not paid off. It continues to exist within the securitized trust, and bondholders continue receiving their expected payments. The source of those payments simply shifts from rental income on a commercial property to coupon payments on government bonds. A successor borrower entity takes over the defeased loan, and the original borrower walks away with a clear title.
The process involves multiple parties working in coordination: the borrower, the master servicer, a defeasance consultant, legal counsel, an accountant to verify cash flow matching, and sometimes a rating agency. Each party charges fees, which is why defeasance can be expensive. Use our commercial mortgage calculator to model your current debt service before starting the process.
Why Do CMBS Loans Require Defeasance Instead of Simple Prepayment?
CMBS loans require defeasance because they have been pooled, securitized, and sold to bondholders as fixed-income investments. Simple prepayment would disrupt expected cash flows to these investors and could trigger negative tax consequences for the trust. When a CMBS loan is originated, it enters a Real Estate Mortgage Investment Conduit (REMIC) trust. Federal tax law prohibits REMIC trusts from receiving prepayment proceeds in most cases, because doing so could jeopardize the trust's tax-exempt status.
Defeasance solves this by swapping real estate collateral for government securities that produce identical cash flows. The trust's income stream remains uninterrupted, bondholders are unaffected, the REMIC status is preserved, and the borrower gets to exit.
Between 2020 and 2025, CMBS defeasance volumes have fluctuated with interest rate movements. The Federal Reserve's rate hikes in 2022 and 2023 made defeasance significantly more expensive. As rates have stabilized in 2025 and into 2026, defeasance activity has picked up again, with projections showing continued growth.
How Much Does CMBS Loan Defeasance Cost?
The total cost typically ranges from 1% to 15% or more of the outstanding loan balance, with the single largest variable being the cost of purchasing replacement Treasury securities. The securities cost depends almost entirely on the spread between the interest rate on the existing CMBS loan and current Treasury yields at the time of defeasance.
If your CMBS loan carries a 4.5% coupon rate and current Treasuries yield 4.0%, you need to buy more in Treasury face value to generate the same dollar amount of cash flow, because each dollar of Treasuries pays less interest than what the CMBS loan requires. That premium is the defeasance cost. Conversely, if Treasury yields have risen above your loan rate, defeasance becomes cheaper.
Beyond the securities purchase, budget for these additional costs:
- Legal fees: ,000 to ,000, covering borrower counsel and servicer counsel
- Accounting verification: ,000 to ,000 for an independent CPA to confirm cash flow matching
- Servicer processing fees: ,000 to ,000 charged by the master servicer
- Rating agency fees: ,000 to ,000 if a rating agency confirmation is required
- Defeasance consultant: ,000 to ,000 for the firm coordinating the entire process
- Successor borrower fee: ,000 to ,000 paid to the entity assuming the defeased loan
For a million loan balance with 5 years remaining and a 150-basis-point rate differential, total defeasance costs could reach ,000 to .2 million. Run the numbers with our DSCR calculator to determine whether the refinancing savings justify the expense.
What Is the Difference Between Defeasance and Yield Maintenance?
Defeasance substitutes collateral while keeping the loan alive, whereas yield maintenance pays off the loan entirely with a financial penalty designed to make the lender whole. Both mechanisms exist to protect CMBS bondholders from prepayment risk, but they work in fundamentally different ways.
With yield maintenance, the borrower pays the remaining loan balance plus a penalty equal to the present value of the interest rate differential over the remaining term. Some CMBS loan documents use the greater of yield maintenance or 1% of the outstanding balance.
Not all CMBS loans offer both options. Many conduit loans originated after 2010 include defeasance as the sole prepayment mechanism, with yield maintenance available only during a narrow window near maturity (often the last 6 to 12 months). Your loan documents will specify exactly which options are available.
In a rising rate environment, yield maintenance penalties shrink. In a falling rate environment, yield maintenance becomes extremely expensive. Defeasance costs follow a similar pattern but involve additional transactional expenses. Contact our team for a complimentary defeasance cost analysis tailored to your loan terms.
What Is the Step-by-Step CMBS Defeasance Process?
The CMBS defeasance process typically takes 30 to 90 days from engagement to closing, depending on servicer responsiveness and document complexity. Here is the complete sequence.
Step 1: Loan Document Review (Days 1 to 5) A defeasance consultant reviews your CMBS loan agreement, promissory note, and pooling and servicing agreement (PSA) to confirm eligibility, lockout periods, and specific procedural requirements.
Step 2: Formal Notice to Servicer (Days 5 to 10) The borrower submits a written defeasance request to the master servicer, typically requiring 30 to 60 days advance notice depending on the PSA terms.
Step 3: Securities Portfolio Design (Days 10 to 25) The consultant works with a securities broker to design a portfolio of U.S. Treasury bonds and STRIPS that precisely matches every remaining scheduled payment, including principal, interest, and any balloon payment at maturity.
Step 4: Legal Document Preparation (Days 15 to 35) Borrower counsel and servicer counsel draft the defeasance agreement, successor borrower documents, security agreements, and opinion letters. This is often the most time-consuming phase.
Step 5: Accounting Verification (Days 30 to 40) An independent certified public accountant verifies that the proposed securities portfolio will generate sufficient cash flows to cover every remaining debt service payment.
Step 6: Rating Agency Confirmation (Days 35 to 50) If required by the PSA, the rating agency confirms the defeasance will not result in a downgrade of any bond class.
Step 7: Servicer Approval and Closing (Days 45 to 80) The master servicer reviews all documents, confirms compliance, and issues approval. On closing day, the borrower funds the securities purchase, all documents are executed, and the real estate collateral is released.
When Is the Best Time to Defease a CMBS Loan?
The optimal timing depends on the interest rate environment, remaining loan term, and your business objectives. Generally, defeasance makes the most financial sense when you are 2 to 4 years from maturity and current Treasury yields are close to or above your existing loan rate.
Approximately 60% of CMBS defeasances occur between 2 and 4 years before loan maturity. At this point, the remaining term is short enough that securities cost is manageable, but the borrower still has enough time left that waiting would delay a time-sensitive sale or refinance opportunity.
Key scenarios where defeasance timing becomes critical:
- Property sale: A buyer wants the property free and clear of CMBS debt
- Refinancing for better terms: Current rates offer significant savings over the existing loan
- Capital event: A recapitalization or partnership buyout requires removing the existing lien
- Property repositioning: The borrower needs construction financing requiring a first lien position
If your property needs interim financing during the defeasance process, a bridge loan can provide flexibility. Learn more about how bridge loans work.
What Role Does the Special Servicer Play in CMBS Refinancing?
The special servicer becomes involved when a CMBS loan is in default, imminent default, or has been transferred from the master servicer due to performance issues. While the master servicer handles routine defeasance on performing loans, the special servicer takes control when the situation is distressed and has broad discretion to negotiate outcomes.
Special servicers can approve loan modifications, discounted payoffs, maturity extensions, and assumptions. If your loan has been transferred to special servicing, the defeasance process changes significantly because the special servicer must approve the transaction and may impose additional conditions.
In 2025 and 2026, the special servicer landscape has become particularly important as CMBS loans originated between 2014 and 2016 reach maturity. The CMBS special servicing rate for office properties has risen above 10%, meaning a significant share of office CMBS loans are now handled by special servicers.
If your loan is with a special servicer, you have additional options including discounted payoffs, loan modifications, and A/B note splits. Contact our team to discuss your specific situation and available options.
What Alternatives Exist to CMBS Loan Defeasance?
Several alternatives to defeasance exist, and the right choice depends on your loan terms, property condition, market conditions, and timeline.
Yield Maintenance Prepayment: If your loan documents permit yield maintenance and the rate environment is favorable, this can be faster and simpler than defeasance with lower transaction costs.
Loan Assumption: If you are selling, the buyer may assume the existing CMBS loan. Assumptions typically cost ,000 to ,000 in processing fees and avoid defeasance costs entirely.
Bridge Loan Strategy: Some borrowers use a bridge loan to acquire or reposition a property while keeping the CMBS loan in place, then defease at a more opportune time. Read our guide on commercial bridge loan fundamentals.
Wait for Open Period: Most CMBS loans have an open prepayment window during the final 3 to 6 months, where the borrower can prepay without penalty. Simply waiting can save hundreds of thousands of dollars.
Negotiated Payoff: For loans in special servicing or with maturity defaults, the special servicer may accept a discounted payoff.
Understanding your down payment requirements for the replacement loan is also critical when planning any CMBS exit strategy.
How Do You Calculate Whether Defeasance Makes Financial Sense?
The financial analysis comes down to comparing total defeasance cost against the economic benefit of exiting the loan early. Start with this framework:
- Estimate total defeasance cost: Securities premium plus all transaction fees
- Calculate refinancing savings: Compare current CMBS rate to available refinance rates over the remaining term
- Factor in cash-out proceeds: Account for the value of accessing equity now rather than at maturity
- Consider opportunity cost: What is the value of completing a sale or repositioning now versus waiting?
For example, suppose you have a million CMBS loan at 5.5% with 4 years remaining. Defeasance costs an estimated .1 million. You can refinance at 6.0% with a new conduit loan, but you need to access million in equity. The rate increase costs ,000 over 4 years, but deploying million in equity into a property generating 8% returns produces ,000. Net result: ,000 minus ,100,000 minus ,000 equals negative ,000. In this case, defeasance may not make sense.
Use our commercial mortgage calculator to model different refinancing scenarios before committing to defeasance.
What Documents Do You Need for CMBS Loan Defeasance?
The documentation requirements are extensive. Gathering materials early helps avoid delays and keeps the 30 to 90 day timeline on track.
From the Borrower:
- Original loan agreement and all amendments
- Promissory note and current rent roll with operating statements
- Entity formation documents and authorization resolutions
- Borrower financial statements and evidence of property insurance
Prepared During the Process:
- Defeasance agreement between borrower, servicer, and successor borrower
- Securities account control agreement and pledge documents
- Accountant verification letter confirming cash flow matching
- Legal opinion letters from borrower counsel and servicer counsel
- Rating agency confirmation letter (if required by PSA)
Choose an experienced defeasance consultant who has completed hundreds of transactions. The fees for a good consultant are a small fraction of total defeasance costs and can prevent costly delays or errors.
What Are the Most Common CMBS Defeasance Mistakes to Avoid?
The most common and costly mistake is not starting early enough. Many borrowers underestimate the 30 to 90 day timeline. Beginning the process at least 90 days before your target closing date provides adequate buffer for unexpected delays.
Other frequent mistakes include:
- Not reading the PSA carefully: Missing a required notice period or failing to use an approved successor borrower can derail the process
- Ignoring rate lock timing: Costs can change by hundreds of thousands of dollars if rates move between engagement and closing
- Failing to coordinate replacement financing: Your new loan must be ready to close simultaneously with the defeasance
- Not exploring alternatives first: Yield maintenance, loan assumption, or waiting for the open period may be more cost-effective
Contact us to ensure your refinancing timeline aligns with the defeasance process.
What Are the Most Frequently Asked Questions About CMBS Defeasance?
Can I defease a CMBS loan during the lockout period? No. The lockout period, typically the first 2 to 3 years, prohibits any form of prepayment or defeasance. Your loan documents specify the exact dates.
Is defeasance tax deductible? The securities premium is generally not deductible as a current expense, but transaction fees (legal, accounting, consulting) are typically deductible. Consult your tax advisor.
What happens to the defeased loan after closing? The loan continues within the CMBS trust, secured by Treasury securities instead of real estate. A successor borrower entity holds the loan until maturity.
Can a partial defeasance release only part of the collateral? Yes, partial defeasance is available for loans secured by multiple properties, subject to release price thresholds in the loan documents.
What is a successor borrower in CMBS defeasance? A special-purpose entity that assumes the defeased loan. Several firms specialize in this role for a flat fee of ,000 to ,000.
Can I defease a CMBS loan if it is in special servicing? Technically yes, but it requires special servicer approval, which adds complexity and time.
What if Treasury rates change significantly before my defeasance closes? If Treasury yields drop between engagement and closing, your defeasance cost increases. Some consultants offer rate lock programs that fix the securities cost in advance.
How does defeasance affect property sale negotiations? Buyers often factor defeasance costs into their purchase price. Structuring the deal as a loan assumption can eliminate defeasance costs entirely.
Where Can You Find Reliable CMBS Defeasance Data and Resources?
The following industry sources provide authoritative data on CMBS defeasance trends, costs, and best practices:
- Commercial Real Estate Finance Council (CREFC), CMBS Market Overview Reports, 2024 to 2025
- Trepp LLC, CMBS Research and Defeasance Activity Reports, 2025
- Mortgage Bankers Association (MBA), Commercial and Multifamily Mortgage Origination Data, 2025
- Federal Reserve Economic Data (FRED), U.S. Treasury Yield Curve Rates, 2024 to 2026
- National Association of Real Estate Investment Trusts (NAREIT), REIT and Commercial Real Estate Market Reports, 2025
- Internal Revenue Service (IRS), REMIC and Securitization Trust Tax Guidance, Revenue Procedure 2024-15
- CMBS Defeasance Consultants Association, Industry Best Practices Guide, 2025 Edition