Replacing CMBS loan collateral with Treasuries to enable early payoff.
Defeasance is the mechanism CMBS loans use to allow early payoff. Rather than receiving cash to retire the loan, the lender accepts a portfolio of US Treasury securities that produces exactly the same cash flow as the remaining loan payments. The loan continues to "perform" from the Treasuries, and the borrower walks away with the property free of the mortgage.
Defeasance is uniquely CMBS. Conduit lenders securitize hundreds of loans into bonds sold to institutional investors — bondholders bought the right to receive the loan's payment stream. The borrower can't simply hand over cash for early payoff because that would disrupt the bond payments. Instead, the borrower substitutes Treasuries with matching cash flow, and the bondholders continue receiving payments as scheduled.
The process is complex. Step 1: Borrower engages a defeasance consultant (firms like Commercial Defeasance LLC, Chatham Financial). Step 2: Consultant calculates the exact Treasury portfolio needed to replicate remaining loan cash flow. Step 3: Borrower buys the Treasuries (cost varies with current Treasury yields). Step 4: Treasuries replace the property as loan collateral. Step 5: Property is released; borrower can sell or refinance.
Cost dynamics depend on Treasury yields vs. loan rate. When Treasury yields are below the loan rate (typical in declining-rate environments), the Treasury portfolio costs more than the remaining loan balance — borrower pays a premium. When yields are above the loan rate (rising-rate environments), the portfolio costs less — sometimes substantially less. In 2022–2024 rate spikes, many CMBS borrowers experienced "negative defeasance" where defeasance was cheaper than the remaining balance.
Total execution costs include defeasance consultant fees ($15k–$40k), attorney fees ($10k–$30k), accounting / tax ($5k–$15k), servicer / custodian fees ($5k–$15k), and various administrative costs — totaling $25k–$100k+ for the execution alone. On smaller CMBS loans, execution costs can be a significant percentage of total payoff cost.
| Original CMBS loan | $10,000,000 @ 4.50% / 10-yr / 30-yr amort |
| Loan balance at year 5 | $9,180,000 |
| Remaining payments to maturity | 60 monthly payments |
| Scenario A: Treasury yields at 3.5% (50 bps below loan rate) | |
| Treasury portfolio cost | ~$9,580,000 |
| Execution costs | $45,000 |
| Total payoff cost | ~$9,625,000 (4.8% premium) |
| Scenario B: Treasury yields at 6.0% (150 bps above loan rate) | |
| Treasury portfolio cost | ~$8,790,000 |
| Execution costs | $45,000 |
| Total payoff cost | ~$8,835,000 (3.8% discount) |
A CMBS loan prepayment mechanism that replaces the loan's collateral with US Treasury securities producing the same cash flow as the remaining loan payments. Lets the borrower release the property without disrupting bondholder payments.
Yield maintenance is a cash payment to the lender. Defeasance is a Treasury portfolio substitution. YM is simpler; defeasance is more complex but lets the property be released entirely from the loan.
Two components: (1) Treasury portfolio cost (varies sharply with Treasury yields vs. loan rate — can be premium or discount), and (2) execution costs (consultants, attorneys, servicer, etc. — typically $25k–$100k+).
Yes — in rising-rate environments where Treasury yields exceed the loan rate, the required Treasury portfolio costs less than the outstanding loan balance. "Negative defeasance" was common in 2022–2024.
30–60 days from engagement of defeasance consultant to closing. Requires coordination among multiple parties: defeasance consultant, attorneys, servicer, custodian, and broker.
Matrix structures perm and bridge takeouts for CMBS borrowers post-defeasance. Quick execution, market pricing.
