{"id":20335,"date":"2026-08-25T08:00:53","date_gmt":"2026-08-25T05:00:53","guid":{"rendered":"https:\/\/www.commercialcafe.com\/blog\/?p=20335"},"modified":"2026-08-14T20:38:11","modified_gmt":"2026-08-14T17:38:11","slug":"defeasance-process-used-defeasance-process-works","status":"publish","type":"post","link":"https:\/\/www.commercialcafe.com\/blog\/defeasance-process-used-defeasance-process-works\/","title":{"rendered":"What Is Defeasance in Commercial Real Estate? How the Process Works"},"content":{"rendered":"<p>If you have a commercial mortgage and you want to sell or refinance before the loan matures, you may not be able to simply pay it off. Many loans, particularly securitized ones, require <strong>defeasance<\/strong> instead: you swap the property securing the loan for a portfolio of government securities that keeps paying the lender exactly what the loan would have.<\/p>\n<p>The idea is straightforward. The execution involves a dozen parties, a new legal entity, and a bill that moves with interest rates. Here is how it works and what it costs you.<\/p>\n<blockquote style=\"background: #f9f9f9; border-left: 10px solid #0bbfeb; padding: 24px 28px; font-style: normal !important; margin: 36px 0;\">\n<h2 style=\"color: #1e2d45; margin: 0 0 16px; font-weight: bold; line-height: 1.3;\">Key Takeaways<\/h2>\n<ul style=\"list-style: none; padding-left: 0; margin: 0;\">\n<li style=\"margin-bottom: 12px; font-size: 16px; line-height: 1.6; padding-left: 24px; text-indent: -24px;\"><span style=\"display: inline-block; width: 24px; text-indent: 0; color: #0bbfeb; font-weight: bold;\">\u25aa<\/span>Defeasance substitutes government securities for the property as collateral. The loan stays in place; the building is released.<\/li>\n<li style=\"margin-bottom: 12px; font-size: 16px; line-height: 1.6; padding-left: 24px; text-indent: -24px;\"><span style=\"display: inline-block; width: 24px; text-indent: 0; color: #0bbfeb; font-weight: bold;\">\u25aa<\/span>It exists because securitized loans promise bondholders a fixed income stream that early repayment would interrupt.<\/li>\n<li style=\"margin-bottom: 12px; font-size: 16px; line-height: 1.6; padding-left: 24px; text-indent: -24px;\"><span style=\"display: inline-block; width: 24px; text-indent: 0; color: #0bbfeb; font-weight: bold;\">\u25aa<\/span>Yield maintenance does the same job differently, by paying off the loan with a penalty attached.<\/li>\n<li style=\"margin-bottom: 12px; font-size: 16px; line-height: 1.6; padding-left: 24px; text-indent: -24px;\"><span style=\"display: inline-block; width: 24px; text-indent: 0; color: #0bbfeb; font-weight: bold;\">\u25aa<\/span>Cost moves with interest rates. When rates have risen since origination, defeasance is usually cheaper, and can even produce residual value.<\/li>\n<li style=\"margin-bottom: 12px; font-size: 16px; line-height: 1.6; padding-left: 24px; text-indent: -24px;\"><span style=\"display: inline-block; width: 24px; text-indent: 0; color: #0bbfeb; font-weight: bold;\">\u25aa<\/span>There is normally a lockout period after securitization before defeasance is permitted at all.<\/li>\n<li style=\"margin-bottom: 0; font-size: 16px; line-height: 1.6; padding-left: 24px; text-indent: -24px;\"><span style=\"display: inline-block; width: 24px; text-indent: 0; color: #0bbfeb; font-weight: bold;\">\u25aa<\/span>Budget 30 to 45 days and engage a defeasance consultant early, since the process runs on a fixed sequence.<\/li>\n<\/ul>\n<\/blockquote>\n<h2>What Is Defeasance?<\/h2>\n<p>Defeasance means substituting one form of collateral for another. In commercial real estate, the borrower buys a portfolio of government securities structured to produce exactly the payments still owed on the loan, transfers that portfolio and the loan obligation to a new entity, and in return the lender releases its lien on the property.<\/p>\n<p>The loan itself is never repaid early. It continues to run to maturity, funded by the securities rather than by rent from the building. That distinction is the whole point.<\/p>\n<h2>Why Lenders Require It<\/h2>\n<p>Defeasance goes hand in hand with <a href=\"https:\/\/www.commercialcafe.com\/blog\/cmbs-loans-for-commercial-real-estate\/\" target=\"_blank\" rel=\"noopener\">CMBS loans<\/a>. When a lender securitizes a loan and sells bonds against it, investors are promised a set income over a set period. If the borrower repays early, that income stops and the promise breaks.<\/p>\n<p>Defeasance solves it by keeping the payment stream intact from a different source. Bondholders continue to receive what they were promised, and the borrower gets the freedom to sell or refinance the property. Many commercial loans include a defeasance clause even when they are not initially securitized, so the lender keeps the option to securitize later.<\/p>\n<h2>When Borrowers Use Defeasance<\/h2>\n<p>Two situations account for most defeasances: selling the property, and refinancing it. In both cases the buyer or the new lender needs clear title, which means the existing lien has to go.<\/p>\n<p>Some constraints apply:<\/p>\n<p><strong>A lockout period.<\/strong> Securitized loans typically cannot be defeased until a set period after securitization has passed, commonly two years.<\/p>\n<p><strong>The clause has to already exist.<\/strong> Defeasance must be provided for in the original loan documents. It cannot be added later.<\/p>\n<p><strong>Only certain collateral qualifies.<\/strong> Substitute collateral is generally restricted to noncallable government securities.<\/p>\n<h2>Defeasance or Yield Maintenance?<\/h2>\n<p>Both compensate the lender for losing the income stream. They work differently, and one is usually meaningfully cheaper depending on where rates sit.<\/p>\n<div style=\"overflow-x: auto; margin: 24px 0 40px; box-shadow: 0 1px 3px rgba(0,0,0,0.08); border-radius: 4px;\">\n<table style=\"width: 100%; border-collapse: collapse; font-size: 16px; line-height: 1.5; border: 1px solid #e1e5eb;\">\n<thead>\n<tr style=\"background: #1e2d45; color: #ffffff;\">\n<th style=\"padding: 14px 16px; text-align: left; font-weight: bold; border: 1px solid #1e2d45;\"><\/th>\n<th style=\"padding: 14px 16px; text-align: left; font-weight: bold; border: 1px solid #1e2d45;\">Defeasance<\/th>\n<th style=\"padding: 14px 16px; text-align: left; font-weight: bold; border: 1px solid #1e2d45;\">Yield maintenance<\/th>\n<\/tr>\n<\/thead>\n<tbody>\n<tr style=\"background: #ffffff;\">\n<td style=\"padding: 14px 16px; border: 1px solid #e1e5eb; font-weight: bold; color: #1e2d45;\">What happens to the loan<\/td>\n<td style=\"padding: 14px 16px; border: 1px solid #e1e5eb;\">Stays in place, funded by securities<\/td>\n<td style=\"padding: 14px 16px; border: 1px solid #e1e5eb;\">Paid off early<\/td>\n<\/tr>\n<tr style=\"background: #f9f9f9;\">\n<td style=\"padding: 14px 16px; border: 1px solid #e1e5eb; font-weight: bold; color: #1e2d45;\">What the borrower provides<\/td>\n<td style=\"padding: 14px 16px; border: 1px solid #e1e5eb;\">A portfolio of government securities<\/td>\n<td style=\"padding: 14px 16px; border: 1px solid #e1e5eb;\">The balance plus a prepayment penalty<\/td>\n<\/tr>\n<tr style=\"background: #ffffff;\">\n<td style=\"padding: 14px 16px; border: 1px solid #e1e5eb; font-weight: bold; color: #1e2d45;\">Complexity<\/td>\n<td style=\"padding: 14px 16px; border: 1px solid #e1e5eb;\">High: multiple parties, new entity, 30 to 45 days<\/td>\n<td style=\"padding: 14px 16px; border: 1px solid #e1e5eb;\">Lower: a calculation and a payment<\/td>\n<\/tr>\n<tr style=\"background: #f9f9f9;\">\n<td style=\"padding: 14px 16px; border: 1px solid #e1e5eb; font-weight: bold; color: #1e2d45;\">Cheaper when<\/td>\n<td style=\"padding: 14px 16px; border: 1px solid #e1e5eb;\">Rates have risen since origination<\/td>\n<td style=\"padding: 14px 16px; border: 1px solid #e1e5eb;\">Rates have fallen since origination<\/td>\n<\/tr>\n<tr style=\"background: #ffffff;\">\n<td style=\"padding: 14px 16px; border: 1px solid #e1e5eb; font-weight: bold; color: #1e2d45;\">Upside for the borrower<\/td>\n<td style=\"padding: 14px 16px; border: 1px solid #e1e5eb;\">Possible residual value if securities overperform<\/td>\n<td style=\"padding: 14px 16px; border: 1px solid #e1e5eb;\">None; the penalty is a cost<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<\/div>\n<p>The reason rates matter: defeasance requires buying securities that generate the loan&#8217;s remaining payments. When Treasury yields are high, fewer securities are needed, so the portfolio costs less. When yields are low, it costs more. Yield maintenance behaves in the opposite direction.<\/p>\n<p>If your loan permits both, model each before choosing. Where only defeasance is allowed, that is worth raising when the loan is negotiated rather than discovering later.<\/p>\n<h2>How the Defeasance Process Works<\/h2>\n<p>The process usually runs 30 to 45 days and follows a set sequence.<\/p>\n<div style=\"background: #f9f9f9; border-left: 4px solid #0bbfeb; padding: 20px 24px; margin: 24px 0;\">\n<ol style=\"margin: 0; padding-left: 22px; font-size: 16px; line-height: 1.7;\">\n<li style=\"margin-bottom: 10px;\"><strong>Engage a defeasance consultant.<\/strong> They confirm defeasance is permitted, review the loan documents and balance, and model the cost against yield maintenance.<\/li>\n<li style=\"margin-bottom: 10px;\"><strong>Give notice of intent to defease.<\/strong> The servicer usually requires written notice and a good faith deposit toward the lender&#8217;s costs.<\/li>\n<li style=\"margin-bottom: 10px;\"><strong>Assemble the parties.<\/strong> The consultant coordinates the servicer, securities custodian, accountant, rating agencies, title company, and attorneys.<\/li>\n<li style=\"margin-bottom: 10px;\"><strong>Draft the defeasance agreement.<\/strong> The lender prepares the documents and may request further information from the borrower.<\/li>\n<li style=\"margin-bottom: 10px;\"><strong>Form the successor borrower.<\/strong> A special purpose entity is created to take on the loan and hold the substitute collateral.<\/li>\n<li style=\"margin-bottom: 10px;\"><strong>Structure and verify the collateral.<\/strong> A securities portfolio is built to match the remaining payments, and an accountant confirms it covers everything due to maturity.<\/li>\n<li style=\"margin-bottom: 10px;\"><strong>Obtain rating agency approval where required.<\/strong> Smaller loans, or loans representing a small share of the pool, often do not need it.<\/li>\n<li style=\"margin-bottom: 10px;\"><strong>Close.<\/strong> The borrower buys the collateral, assigns the loan and collateral to the successor borrower, and the lender releases its lien so the property can be sold or refinanced.<\/li>\n<li style=\"margin-bottom: 0;\"><strong>Settle any residual value.<\/strong> If the portfolio produces more than the loan requires, the surplus is negotiated in advance and returned to the borrower.<\/li>\n<\/ol>\n<\/div>\n<h2>What Defeasance Costs<\/h2>\n<p>There are two parts to the bill. The larger is the securities portfolio itself, which depends entirely on the remaining balance, the time to maturity, and prevailing Treasury yields. The smaller is transaction costs: the consultant, accountant, attorneys, rating agencies where involved, and the successor borrower entity.<\/p>\n<p>Because the portfolio cost moves daily with the bond market, quotes are time-sensitive. Timing the transaction thoughtfully can make a real difference on a large loan.<\/p>\n<p>One point worth negotiating up front: ask whether the lender will accept agency securities alongside Treasuries. Higher-yielding agency paper can mean buying fewer securities to produce the same payments, which lowers the cost.<\/p>\n<h2>What This Means If You Are Selling or Refinancing<\/h2>\n<p>Build the defeasance timeline and cost into the deal from the start. A buyer expecting to close in three weeks will not appreciate discovering a 45-day defeasance sitting in the way, and the cost can be large enough to change whether a sale or <a href=\"https:\/\/www.commercialcafe.com\/blog\/refinancing-commercial-real-estate\/\" target=\"_blank\" rel=\"noopener\">refinancing<\/a> makes sense at all.<\/p>\n<p>Get a defeasance quote early, treat it as a live number rather than a fixed one, and give the process the time it needs.<\/p>\n<p><em>This article is for general information and is not legal, tax, or financial advice. Loan terms and defeasance provisions vary. Consult your loan documents and qualified advisers before proceeding.<\/em><\/p>\n<blockquote style=\"background: #f9f9f9; border-left: 10px solid #0bbfeb; padding: 24px 28px; font-style: normal !important; margin: 40px 0;\">\n<h2 style=\"color: #1e2d45; margin: 0 0 24px; font-weight: bold; line-height: 1.3;\">Frequently Asked Questions<\/h2>\n<div style=\"border-bottom: 1px solid #e6e9ee; padding-bottom: 18px; margin-bottom: 18px;\">\n<h3 style=\"font-size: 18px; color: #1e2d45; margin: 0 0 8px; font-weight: bold; line-height: 1.4;\">What is defeasance in commercial real estate?<\/h3>\n<p style=\"font-size: 16px; line-height: 1.6; margin: 0;\">Substituting government securities for the property as loan collateral. The securities produce the payments still owed, the loan continues to maturity, and the lender releases its lien so the property can be sold or refinanced.<\/p>\n<\/div>\n<div style=\"border-bottom: 1px solid #e6e9ee; padding-bottom: 18px; margin-bottom: 18px;\">\n<h3 style=\"font-size: 18px; color: #1e2d45; margin: 0 0 8px; font-weight: bold; line-height: 1.4;\">How much does defeasance cost?<\/h3>\n<p style=\"font-size: 16px; line-height: 1.6; margin: 0;\">Mostly the cost of the securities portfolio, which depends on the remaining balance, time to maturity, and current Treasury yields, plus transaction fees for the consultant, accountant, and attorneys. The figure moves with the bond market, so quotes are time-sensitive.<\/p>\n<\/div>\n<div style=\"border-bottom: 1px solid #e6e9ee; padding-bottom: 18px; margin-bottom: 18px;\">\n<h3 style=\"font-size: 18px; color: #1e2d45; margin: 0 0 8px; font-weight: bold; line-height: 1.4;\">What is the difference between defeasance and yield maintenance?<\/h3>\n<p style=\"font-size: 16px; line-height: 1.6; margin: 0;\">Defeasance replaces the collateral and leaves the loan running. Yield maintenance pays the loan off early with a penalty covering the lender&#8217;s lost interest. Defeasance is usually cheaper when rates have risen since origination; yield maintenance when they have fallen.<\/p>\n<\/div>\n<div style=\"border-bottom: 1px solid #e6e9ee; padding-bottom: 18px; margin-bottom: 18px;\">\n<h3 style=\"font-size: 18px; color: #1e2d45; margin: 0 0 8px; font-weight: bold; line-height: 1.4;\">How long does defeasance take?<\/h3>\n<p style=\"font-size: 16px; line-height: 1.6; margin: 0;\">Typically 30 to 45 days from notice to closing, because of the number of parties involved and the need to form a successor borrower and verify the collateral. Start early if a sale or refinancing depends on it.<\/p>\n<\/div>\n<div style=\"margin-bottom: 0;\">\n<h3 style=\"font-size: 18px; color: #1e2d45; margin: 0 0 8px; font-weight: bold; line-height: 1.4;\">Can any commercial loan be defeased?<\/h3>\n<p style=\"font-size: 16px; line-height: 1.6; margin: 0;\">No. The loan documents must provide for it, and securitized loans normally have a lockout period after securitization before defeasance is permitted. Some loans allow yield maintenance instead, and a few allow either.<\/p>\n<\/div>\n<\/blockquote>\n<p><script type=\"application\/ld+json\">\n{\n  \"@context\": \"https:\/\/schema.org\",\n  \"@type\": \"FAQPage\",\n  \"mainEntity\": [\n    {\n      \"@type\": \"Question\",\n      \"name\": \"What is defeasance in commercial real estate?\",\n      \"acceptedAnswer\": {\n        \"@type\": \"Answer\",\n        \"text\": \"Substituting government securities for the property as loan collateral. 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Delve into the particulars of Defeasance and learn why this process is very important in commercial real estate investment.<\/p>\n","protected":false},"author":3163,"featured_media":19924,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"_jetpack_memberships_contains_paid_content":false,"footnotes":"","jetpack_publicize_message":"","jetpack_publicize_feature_enabled":true,"jetpack_social_post_already_shared":true,"jetpack_social_options":{"image_generator_settings":{"template":"highway","default_image_id":0,"font":"","enabled":false},"version":2},"_wpas_customize_per_network":false},"categories":[37,39],"tags":[],"class_list":["post-20335","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-commercial-real-estate-news","category-office","wpautop"],"acf":[],"yoast_head":"<!-- This site is optimized with the Yoast SEO Premium plugin v28.0 (Yoast SEO v28.0) - https:\/\/yoast.com\/product\/yoast-seo-premium-wordpress\/ -->\n<title>What Is Defeasance in Commercial Real Estate? 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