Includes legal, accounting, servicer, and intermediary fees.
Cost Estimate Summary
Estimated Securities Cost:$0.00
Defeasance Premium:$0.00
Transaction Fees:$0.00
Total Estimated Cost:$0.00
Understanding Defeasance in Commercial Real Estate
Defeasance is a process frequently used in CMBS (Commercial Mortgage-Backed Securities) financing where the borrower replaces the physical real estate collateral with a portfolio of government securities—typically U.S. Treasuries. This "defeasance collateral" is structured to replicate the cash flows (interest and principal) that the original loan would have generated for the lenders through the maturity date.
Defeasance vs. Yield Maintenance
Unlike yield maintenance, which is a cash prepayment penalty, defeasance is technically a collateral substitution. The loan is not "paid off" in the traditional sense; instead, it is legally discharged from the property, allowing the owner to sell or refinance. The primary cost components are the purchase price of the securities and the transaction fees associated with the various third parties involved (accountants, lawyers, and securities intermediaries).
Key Factors Affecting the Cost
The Spread: The difference between your loan coupon rate and the current Treasury yields. If Treasury yields are significantly lower than your interest rate, the premium will be higher.
Remaining Term: The longer the time left until maturity, the more Treasury securities you must purchase to cover those future payments.
Transaction Fees: Defeasance is a complex legal process involving multiple parties, usually costing between $40,000 and $100,000 depending on the loan size.
Example Calculation
If you have a $10,000,000 loan balance at a 5% interest rate with 24 months remaining, and 2-year Treasuries are currently yielding 2%, you are paying a 3% spread. To defease, you must buy enough Treasuries to cover that 3% difference for 2 years, plus the original $10M principal. This results in a premium of roughly $600,000 plus closing costs.
function calculateDefeasance() {
var balance = parseFloat(document.getElementById('loanBalance').value);
var coupon = parseFloat(document.getElementById('couponRate').value) / 100;
var months = parseFloat(document.getElementById('remainingTerm').value);
var yield = parseFloat(document.getElementById('treasuryYield').value) / 100;
var fees = parseFloat(document.getElementById('legalFees').value);
if (isNaN(balance) || isNaN(coupon) || isNaN(months) || isNaN(yield) || isNaN(fees)) {
alert("Please fill out all fields with valid numeric values.");
return;
}
// Time in years
var years = months / 12;
// Simplified Present Value of the cash flows required to pay off the loan
// Defeasance cost = Sum of [Interest payments + Principal] discounted at the Treasury yield
// We use a monthly compounding approximation for standard CMBS loans
var monthlyCoupon = coupon / 12;
var monthlyYield = yield / 12;
// Calculate security cost to cover monthly interest-only payments + principal balloon at end
var securityCost = 0;
var monthlyPayment = balance * monthlyCoupon;
// Sum of PV of monthly interest payments
var pvInterest = monthlyPayment * ((1 – Math.pow(1 + monthlyYield, -months)) / monthlyYield);
// PV of the final principal balloon
var pvPrincipal = balance / Math.pow(1 + monthlyYield, months);
securityCost = pvInterest + pvPrincipal;
var premium = securityCost – balance;
var total = securityCost + fees;
// Update UI
document.getElementById('resSecurities').innerText = formatCurrency(securityCost);
document.getElementById('resPremium').innerText = formatCurrency(premium);
document.getElementById('resFees').innerText = formatCurrency(fees);
document.getElementById('resTotal').innerText = formatCurrency(total);
document.getElementById('resultsArea').style.display = 'block';
document.getElementById('resultsArea').scrollIntoView({ behavior: 'smooth' });
}
function formatCurrency(num) {
return "$" + num.toLocaleString(undefined, {minimumFractionDigits: 2, maximumFractionDigits: 2});
}