Defeasance is one of the most misunderstood concepts in commercial real estate finance. If you hold a CMBS conduit loan, Fannie Mae DUS loan, or Freddie Mac loan, there is a good chance your loan documents require defeasance as the only way to exit your mortgage before maturity. Unlike a simple prepayment penalty, defeasance involves substituting your property as collateral with a portfolio of U.S. Treasury securities that replicate the remaining loan payments. The result: your property is released from the mortgage lien, and the lender continues receiving their expected cash flow from the bond portfolio.

For borrowers looking to sell a property, refinance into better terms, or reposition their portfolio, understanding defeasance is not optional. With more than $150 billion in private-label CMBS loans maturing in 2025 alone, thousands of commercial property owners are navigating this exact process right now.

Whether you are weighing a property sale, a refinance, or simply want to understand your exit options, this guide breaks down the full defeasance process, real-world costs, and the alternatives worth considering.

Get expert guidance on your loan exit strategy. Contact our team today.

What Is Defeasance in Real Estate?

Defeasance is the process of releasing a property from a commercial mortgage lien by substituting the collateral with government securities, typically U.S. Treasuries, that generate enough cash flow to cover all remaining loan payments. The word itself comes from the Old French "defaisance," meaning to undo or annul. In the context of commercial real estate, defeasance applies almost exclusively to securitized loans where early repayment would disrupt the cash flows promised to bondholders.

In practical terms, defeasance does not pay off your loan early. Instead, it replaces your property with a bond portfolio as the collateral backing the debt. A successor borrower entity (usually a special-purpose LLC) assumes the loan obligation and holds the securities until the loan reaches its scheduled maturity date. Your property is released free and clear, allowing you to sell it, refinance with a new lender, or redevelop it without the existing mortgage attached.

This process exists because CMBS conduit loans and certain agency loans are pooled into securities that investors purchase. Those investors expect a specific stream of payments over the full loan term. A borrower simply paying off the loan early would disrupt that cash flow, so defeasance ensures continuity by substituting bonds that replicate the exact payment schedule. The successor borrower entity has no economic interest in the property and exists solely to service the remaining debt obligation through the bond portfolio.

How Does the Defeasance Process Work Step by Step?

The defeasance process typically takes 30 to 45 days from start to finish, though expedited transactions can close in as few as seven business days. The process involves multiple parties working in coordination, and each step must be completed before the next can begin. Here is how the process unfolds.

The first step is engaging a defeasance consultant. These specialized firms handle the securities structuring, coordinate with your loan servicer, and manage the legal logistics. They will review your loan documents to confirm the defeasance requirements and provide a preliminary cost estimate based on current market conditions. Next, you or your consultant submit formal notice to the loan servicer, typically 30 to 60 days before the desired closing date. If your pooling and servicing agreement requires rating agency confirmation, plan for a 45-day notice window. The servicer then assigns their legal counsel to the transaction, and you receive a checklist of required documents.

While the legal team prepares closing documents, the defeasance consultant works with a securities broker to design and price the bond portfolio. This portfolio must match your remaining loan payments, including principal and interest, down to the penny on every payment date through maturity. The securities are priced and purchased during a two to three day closing window. Timing this window is critical, because Treasury prices fluctuate daily and even small rate movements can change the total cost by thousands of dollars.

On the closing date, the bond portfolio is funded and delivered to a custodian, the successor borrower entity assumes the loan, and your property is released from the mortgage lien. The entire process requires coordination among your attorney, the servicer's counsel, the defeasance consultant, a securities broker, an accountant (for the defeasance opinion), and potentially a rating agency if required by the pooling and servicing agreement.

How Much Does Defeasance Cost?

Defeasance costs vary dramatically depending on the interest rate environment, the remaining loan term, and your original loan rate. The biggest cost component is the securities portfolio itself. When current Treasury yields are lower than your loan's interest rate, you need more bonds (at a premium) to replicate the higher coupon payments. When Treasury yields are above your loan rate, the cost can drop close to zero or even result in savings. This variability makes it essential to get a real-time quote rather than relying on rules of thumb.

Beyond the securities, borrowers should budget for several additional fees:

• Defeasance consultant fee: Varies by firm and loan complexity
• Servicer's legal counsel: Typically $12,000 to $25,000
• Servicer processing deposit: $25,000 to $50,000 (refundable less actual costs)
• Borrower's legal counsel: $5,000 to $15,000
• Accounting opinion: $2,000 to $4,000
• Rating agency fee (if required): $15,000 to $25,000

The total third-party cost, excluding the securities portfolio, typically runs $60,000 to $120,000. The securities cost is what makes defeasance either a manageable expense or a deal-breaker. For a $10 million loan with five years remaining and Treasury yields 200 basis points below the coupon rate, the securities premium alone could exceed $1 million.

How Do Interest Rates Affect Defeasance Costs?

The interest rate environment is the single largest factor determining defeasance cost, and the relationship is straightforward: when rates fall below your loan's coupon rate, defeasance becomes more expensive. When rates rise above your coupon rate, defeasance becomes cheaper. Understanding this dynamic is critical for timing your exit.

Here is why. Your defeasance portfolio must generate enough cash flow to make every remaining loan payment. If your loan has a 5.5% interest rate but current Treasuries yield only 3.5%, each dollar of required payment takes more principal invested in bonds to produce. The difference compounds over the remaining term, and for loans with several years left, the cost can reach 10% to 20% or more of the outstanding loan balance. Conversely, if Treasury yields have risen to 6.5%, the securities produce more income per dollar invested, and the portfolio can be purchased at or below par value.

According to Waterstone Defeasance's 2026 market outlook, lower Treasury yields in 2026 are projected to reduce replacement collateral costs by an estimated 5% to 15% compared to 2025, bringing more loans back into economic feasibility for defeasance. This sensitivity means timing matters enormously. A defeasance that costs $500,000 today might cost $200,000 (or $800,000) six months from now depending on rate movements. Borrowers should monitor Treasury yields closely and work with their consultant to identify optimal execution windows.

What Is the Difference Between Defeasance and Yield Maintenance?

Defeasance and yield maintenance both compensate the lender for lost interest income, but they work in fundamentally different ways. Yield maintenance is a cash payment calculated as the present value of the difference between your loan's interest rate and the current Treasury yield, multiplied by the remaining payments. Defeasance, by contrast, involves purchasing actual securities to serve as replacement collateral. The two methods can produce significantly different costs depending on market conditions and the remaining loan term.

Yield maintenance is simpler, faster (typically 5 to 10 business days), and involves fewer parties. Most yield maintenance provisions include a minimum premium, usually 1% of the outstanding principal balance, regardless of how the formula calculates. Defeasance requires more participants, more time, and higher transaction costs, but it can sometimes be cheaper than yield maintenance in certain rate environments, particularly when rates have risen above the loan's original coupon.

The critical point is that borrowers rarely get to choose. Your loan documents specify which prepayment mechanism applies. CMBS conduit loans almost universally require defeasance. Many Fannie Mae DUS and Freddie Mac loans also require defeasance, though some offer yield maintenance as an alternative. Life company loans and bank portfolio loans more commonly use yield maintenance or step-down prepayment penalties.

Use our commercial mortgage calculator to estimate your remaining loan payments and compare exit costs.

Which Loan Types Require Defeasance?

Not all commercial mortgages use defeasance. The requirement depends on your loan type, your lender, and the specific terms negotiated at origination. Here is a breakdown of the most common loan types and their typical prepayment provisions.

CMBS conduit loans are the most common loan type requiring defeasance. Because these loans are pooled and securitized, the pooling and servicing agreement (PSA) typically mandates defeasance as the sole prepayment option after the lockout period expires. The lockout period, during which no prepayment of any kind is permitted, usually lasts two to three years from the securitization date. After that window, defeasance is typically available for the remainder of the loan term until the open period begins.

Fannie Mae DUS (Delegated Underwriting and Servicing) loans for multifamily properties generally require defeasance, though some offer a yield maintenance alternative at origination. Freddie Mac multifamily loans can offer either defeasance or yield maintenance, depending on the loan program and terms negotiated. Understanding your specific loan documents before signing is essential, because changing the prepayment structure after closing is typically not possible.

For borrowers who want a deeper look at CMBS loan structures, see our complete guide to CMBS loan defeasance and refinancing.

When Does Defeasance Make Financial Sense?

Defeasance makes sense when the economic benefit of exiting your loan, whether through a sale, refinance, or repositioning, outweighs the total cost of the defeasance transaction. The decision framework depends on your specific scenario, and each situation requires its own cost-benefit analysis.

If you are selling a property and the buyer cannot or will not assume the existing loan, defeasance may be unavoidable. In this scenario, the defeasance cost becomes part of your disposition expenses, and you need to factor it into your net sale proceeds. According to Waterstone Defeasance's year-end 2025 report, approximately 60% or more of 2025 defeasance activity was transaction-driven, meaning it was tied to property sales or mandatory release provisions rather than voluntary refinancing. The multifamily and industrial sectors accounted for the majority of this activity, with these property types expected to represent 65% or more of defeasance volume going into 2026.

Refinancing makes sense when you can secure a meaningfully lower interest rate or better terms that offset the defeasance cost. If your current loan is at 5.5% and you can refinance at 4.0% on a $10 million balance, the annual interest savings of $150,000 could justify a substantial defeasance expense, especially if you have many years remaining on the new loan to recoup the cost. Calculate the breakeven point in months: divide the total defeasance cost by the monthly savings to determine when you start coming out ahead.

Alternatively, if your loan is within 12 to 18 months of its open period (the final months before maturity when prepayment is free), it may be worth waiting rather than incurring defeasance costs. Run the numbers on carry cost versus defeasance cost before deciding.

Talk to our lending team about your exit strategy options.

How Long Does Defeasance Take Compared to Other Exit Options?

Timeline is a practical consideration that can affect transaction planning, particularly for property sales with contractual closing deadlines. Defeasance is significantly slower than yield maintenance or a standard prepayment, primarily because of the number of parties involved and the securities structuring work required.

A standard defeasance takes 30 to 45 days from engagement to closing. This timeline includes the servicer notice period (typically 30 days minimum), legal document preparation, securities pricing, and closing. Expedited defeasances can close in as few as seven business days, but this requires all parties to prioritize the transaction and may incur rush fees. Most practitioners recommend building in extra buffer time rather than relying on an expedited schedule, as delays from any single party can push back the entire closing.

By comparison, yield maintenance can typically close in 5 to 10 business days because it involves a single cash payment rather than a complex securities transaction. If your deal has a tight closing timeline, discuss the schedule with your defeasance consultant early and build in adequate buffer time. Many experienced borrowers begin the defeasance process in parallel with their sale or refinance negotiations rather than waiting until the deal is under contract.

If you are considering a loan assumption as an alternative, that process typically takes 45 to 90 days for CMBS loans and involves its own set of fees and requirements, including lender approval of the new borrower.

Can Borrowers Negotiate Better Prepayment Terms at Origination?

Yes, and this is where proactive planning delivers the greatest savings. The time to negotiate prepayment flexibility is before you sign the loan documents, not when you are trying to exit. Most lenders have some room to modify standard prepayment provisions, and the cost of these concessions at origination is usually minimal compared to the savings they provide at exit.

Several provisions can reduce your future defeasance burden:

• Longer open periods: Negotiate for a 6 to 12 month open window before maturity instead of the standard 3 months, giving you more time to exit without any prepayment cost.
• Yield maintenance option: If your lender offers either defeasance or yield maintenance, having the choice gives you flexibility to select the cheaper option based on market conditions at the time of exit.
• Step-down prepayment schedules: Some lenders offer declining percentage penalties (5%, 4%, 3%, 2%, 1%) as an alternative to defeasance, providing cost certainty.
• Par call dates: Negotiate specific dates after which you can prepay at par (face value) with no penalty.
• Assumability clauses: If your loan is assumable, a qualified buyer can take over the mortgage, avoiding defeasance entirely.

Every percentage point of flexibility you negotiate at origination can save tens of thousands of dollars when you eventually exit the loan. Borrowers who plan their exit strategy from day one consistently achieve better outcomes. Your commercial mortgage broker can help identify which provisions are negotiable for each lender and loan program.

Contact us to discuss loan structures with borrower-friendly prepayment terms.

Frequently Asked Questions

How much does defeasance cost on a typical commercial loan?

Defeasance cost depends primarily on the spread between your loan's interest rate and current Treasury yields. When rates have fallen significantly below your coupon rate, defeasance can cost 5% to 20% or more of the remaining loan balance. When rates are above your coupon, costs can approach zero. Third-party fees (legal, consulting, accounting) typically add $60,000 to $120,000 regardless of the securities cost.

How long does the defeasance process take?

A standard defeasance takes 30 to 45 days, including the servicer notice period, legal preparation, securities structuring, and closing. Expedited transactions can close in as few as seven business days. Borrowers should notify their servicer at least 30 days before the target closing date, and 45 days if rating agency approval is required.

Can I avoid defeasance on my CMBS loan?

If your loan documents require defeasance, you generally cannot avoid it unless you wait for the open period (typically the last 3 to 6 months before maturity). However, you may be able to pursue a loan assumption where a qualified buyer takes over the existing mortgage, or negotiate a discounted payoff with the special servicer if the loan is in distress. Review your loan's pooling and servicing agreement for all available options.

What is the difference between yield maintenance and defeasance?

Yield maintenance is a cash penalty payment based on the present value of lost interest income. Defeasance replaces the property collateral with government securities. Yield maintenance is faster (5 to 10 days) and simpler, while defeasance takes 30 to 45 days and involves more parties. The cost of each depends on market conditions. Most CMBS loans require defeasance, while bank and life company loans more commonly use yield maintenance.

When is defeasance cheaper than yield maintenance?

Defeasance tends to be cheaper when current interest rates are at or above your original loan rate, because the Treasury securities needed to replicate your payments cost less (or even less than par). Yield maintenance can be cheaper when rates have dropped significantly, because the yield maintenance formula typically includes a minimum premium of 1%, while defeasance costs can grow much higher. The crossover point depends on your specific rate, remaining term, and market conditions.

Who handles defeasance, and do I need a consultant?

While not technically required by most loan agreements, a defeasance consultant is practically essential. These firms specialize in structuring the securities portfolio, coordinating with the loan servicer and their counsel, managing the closing process, and ensuring compliance with the pooling and servicing agreement. The consultant also shops the securities across multiple brokers to find the lowest portfolio cost. Major defeasance firms include AST Defeasance, Waterstone Defeasance, and Chatham Financial.