Defeasance Cost Estimator

What This Estimator Calculates

This is a planning tool, not a quote. Defeasance costs depend on live Treasury bond prices, which move every trading day. The securities cost component is an approximation based on the present value of your remaining loan payments discounted at the current Treasury rate. A qualified defeasance consultant (such as Chatham Financial, AST Defeasance, or Derivative Logic) will provide an exact figure based on actual bond pricing.

The estimator breaks total cost into four components: the cost of purchasing Treasury securities to replace the loan collateral, legal fees for documentation and closing, servicer processing fees, and accounting fees. You can adjust the fee estimates based on quotes you have received.

How Defeasance Works

When a borrower defeases a loan, they are not paying it off. The loan stays in place. Instead, the borrower purchases a portfolio of U.S. Treasury securities structured to generate cash flows that exactly match the loan's remaining payment schedule, month by month, through maturity. A successor borrower (a special purpose entity created specifically for this) assumes the loan with the Treasuries as collateral. The original property is released from the mortgage lien.

This mechanism exists primarily for CMBS loans, where the loan has been packaged into a bond pool. Simple prepayment would disrupt the cash flows promised to bondholders. Defeasance keeps those cash flows intact by swapping the collateral from real estate to government securities, which is why CMBS servicers and rating agencies prefer it.

What Drives Defeasance Cost

The securities purchase is the largest and most variable component. Its cost depends on one key relationship: the loan's note rate versus current Treasury yields.

Rate Environment	Effect on Securities Cost	Example
Treasury yields below note rate	Securities cost more than remaining balance	5.5% note rate, 3.5% Treasury: need more principal to generate same payments at lower yields
Treasury yields equal note rate	Securities cost roughly equal to remaining balance	5.5% note rate, 5.5% Treasury: yields match, so dollar-for-dollar replacement
Treasury yields above note rate	Securities cost less than remaining balance	5.5% note rate, 6.5% Treasury: less principal needed because securities yield more

The remaining term amplifies this effect. A 200 basis point spread with 60 months remaining costs significantly more than the same spread with 12 months remaining, because you are buying securities to cover many more payments.

Defeasance Cost Breakdown

Component	Typical Range	Notes
Replacement Securities	Varies widely	Largest cost; depends on rate environment and remaining term
Legal Fees	$25,000 to $75,000	Borrower's counsel, lender's counsel, opinion letters
Servicer Processing Fee	$25,000 to $50,000	Set by the master servicer or special servicer
Accountant/CPA Fees	$5,000 to $15,000	Tax and accounting opinions for the successor borrower
Rating Agency Fee	$0 to $25,000	Not always required; depends on the CMBS deal structure

The fixed transaction costs ($60,000 to $150,000 regardless of loan size) are why defeasance is rarely practical for loans under $2 million. Those fixed costs represent a significant percentage of a smaller loan balance.

Defeasance vs. Yield Maintenance

Both are prepayment mechanisms, but they work very differently. The choice is usually dictated by the loan documents, not the borrower.

Feature	Defeasance	Yield Maintenance
Mechanism	Replace collateral with Treasury securities	Cash penalty to lender
Loan after prepayment	Stays in place (new collateral)	Terminated
Fixed transaction costs	$60,000 to $150,000+	Minimal (just the penalty calculation)
Variable cost driver	Bond market prices	Rate spread x time remaining
Typical timeline	30 to 45 days	2 to 4 weeks
Best when	Longer remaining term; high-rate environment	Short remaining term; narrow rate spread

With fewer than 18 to 24 months remaining on the loan, yield maintenance is almost always cheaper because defeasance has a high fixed-cost floor. With longer remaining terms, the comparison becomes more nuanced and depends on current bond pricing. Smart borrowers get quotes for both.

The Defeasance Process

The process runs 30 to 45 days from start to finish. Here is what happens at each stage:

1. Review loan documents. Confirm defeasance is permitted, the lockout period has passed, and identify notice requirements. Most servicers want 30 days written notice before you begin.

2. Engage a defeasance consultant. This is not optional. The consultant structures the securities portfolio, coordinates with all parties, and manages closing. Firms like Chatham Financial, AST Defeasance, and Derivative Logic specialize in this.

3. Get a preliminary cost estimate. The consultant models the required Treasury portfolio based on current bond pricing. This number changes daily, so expect an updated figure closer to closing.

4. Obtain servicer consent. The master servicer (or special servicer if the loan is in special servicing) must approve the defeasance, review the successor borrower entity, and sign off on the securities portfolio.

5. Purchase the securities. On the closing date, the borrower funds the Treasury purchase. The securities are placed into a custodial account managed by a third-party trustee.

6. Execute the substitution. The successor borrower assumes the loan. The property is released from the mortgage. The Treasuries pay out monthly to the servicer through original maturity.

When to Consider Alternatives

Loan assumption. CMBS loans are generally assumable with servicer approval. If you are selling and the buyer qualifies to assume the debt, you avoid defeasance entirely. Assumption fees are typically 1% of the outstanding balance plus processing costs ($25,000 to $50,000), which is almost always less than defeasance.

Open prepayment window. Most CMBS loans allow prepayment at par (no penalty) during the last three to six months before maturity. If the timing works, this is the cheapest exit. Even if it means holding the property a few extra months, the savings can be substantial.

Yield maintenance. If your loan documents offer yield maintenance as an alternative to defeasance, compare the costs. Use the yield maintenance calculator to estimate that option.

Common Defeasance Scenarios

Loan Balance	Note Rate	Treasury	Months Left	Approx. Total Cost
$10,000,000	5.5%	3.5%	48	$850,000 to $1,000,000
$10,000,000	5.5%	5.5%	48	$95,000 to $150,000 (fees only)
$10,000,000	5.5%	6.5%	48	Below remaining balance + fees
$5,000,000	6.0%	4.0%	24	$280,000 to $350,000
$20,000,000	5.0%	4.0%	60	$1,100,000 to $1,350,000

Practical Tips for Brokers

If you are helping a client sell or refinance a property with a CMBS loan, defeasance will be part of the deal economics. Start the conversation early.

Get the estimate before the listing. Defeasance cost can make or break a sale. If the premium erodes the profit margin, the client needs to know before they are under contract with a buyer, not after. Run the numbers during the pre-listing analysis alongside the cap rate and NOI calculations.

Factor the timeline into the transaction calendar. A 30 to 45 day defeasance process running in parallel with a loan closing or sale creates coordination challenges. Start the defeasance engagement as soon as the transaction is likely to close.

Defeasance costs are a moving target. A quote from Monday might be meaningfully different by Friday because Treasury prices shift. The consultant will lock pricing on the actual closing date. Budget for a range, not a single number.

For a deeper look at how defeasance fits into CMBS loan structures, see the Broker's Guide to CMBS Lending.