Defeasance on a commercial mortgage releases your property from a fixed-rate loan, such as a CMBS loan, before maturity by replacing the property as collateral with government securities that make the loan's remaining payments.
If your note requires defeasance and you plan to sell or refinance before maturity, this is the price of the exit, and that price moves every day with Treasury yields. When yields sit above your loan's interest rate, the securities can cost less than the balance you owe. A cheap defeasance has a catch, though. It means your loan rate is below today's Treasury yields, and a rate that low is worth something on its own.
Key points
- Defeasance does not pay off your loan. The loan stays in place, and the securities make its payments.
- The securities cost more than your balance when Treasury yields are below your loan rate, and less when yields are above it. Third-party fees come on top either way.
- If your loan sits in a REMIC trust, a defeasance release within 2 years of the trust's startup day costs the loan its qualified status under federal tax rules, so plan on no release before then. Your loan documents set the rest of the timing.
What is defeasance on a commercial mortgage?
Defeasance is a substitution of collateral. You fund a portfolio of government securities whose payments match what your loan still owes, the securities are pledged in place of your property, and the lender releases its lien on the property. The loan is not repaid. It stays in place, owed by a successor entity that holds the securities.
CRE Daily's glossary describes it as a method "to reduce the fees associated with prepaying a fixed-rate loan," in which Treasury bonds matching the remaining term are "assigned to a defeasance trust." The trust passes the bond payments to the lender until the bonds mature.
The federal rules matter if your loan sits in a REMIC, the tax structure used for securitized mortgage pools. Under the federal tax regulation on REMIC mortgages, a loan whose lien the REMIC releases through defeasance stays a qualified mortgage only if all four of these conditions hold.
- The substitute collateral consists "solely of government securities."
- Your mortgage documents allow the substitution.
- The release is to facilitate a sale of the property or another "customary commercial transaction."
- The release is not within 2 years of the trust's startup day.
The startup day belongs to the trust, not your loan closing, and your note can add its own lockout on top. Check both dates before you plan a sale.
How much does defeasance on a commercial mortgage cost?
You pay for the securities, and you pay the people who set up the deal.
The securities are the big number. Their price depends on the gap between your loan rate and the yields on the securities the day they're bought. CRE Daily puts it this way: "Defeasance benefits borrowers when interest rates rise above the loan rate, allowing them to purchase required bonds for less" than the loan balance. The reverse holds too. When yields are below your rate, you pay a premium over your balance.
For reference, the U.S. Treasury's daily par yield curve showed the 2-year at 4.74%, the 3-year at 4.82% and the 5-year at 4.89% on October 16, 2026.
Hypothetical example: you owe $10,000,000, interest-only, at 4%, with three annual payments left: $400,000, $400,000, then $10,400,000. Here is roughly what securities built to make those payments would cost at three different yields.
| Yield the securities earn | Approximate securities cost | Compared with your $10,000,000 balance |
|---|---|---|
| 3% | $10,283,000 | about $283,000 more |
| 4% (same as your loan rate) | $10,000,000 | about the same |
| 5% | $9,728,000 | about $272,000 less |
This is simplified. A real portfolio matches your actual payment schedule, often monthly, and is priced off the specific securities available on the purchase date, so a live quote will differ.
The fees come on top of the securities. An article from the law firm Otten Johnson lists fees "for defeasance consultants, loan servicer, lender's account custodian, and attorneys for the lender" among the expenses. Add your own attorney. Ask for every fee in writing before you commit.
Why can a cheap defeasance still be a bad trade?
Look again at the 5% row. The $272,000 discount equals the value, discounted back to today at 5%, of paying 4% instead of 5% on $10,000,000 for three years. The market is paying you to give up your below-market rate.
If you're selling and the buyer won't take your loan, that discount simply lowers your exit cost. If you're defeasing to refinance, your new loan is priced at current rates, so you could collect the discount and pay it back, or more, in higher interest. Defeasing to refinance makes sense when you need something the old loan can't give you, such as cash out, a longer term or different terms, and the numbers still work after the new interest cost.
Should you defease, wait or let a buyer assume the loan?
| Path | What it costs you | When it tends to fit |
|---|---|---|
| Defease now | Securities cost, above or below your balance, plus third-party fees | You're selling to a buyer who won't take the loan, or you need new terms or cash now |
| Wait for an open prepayment window, if your note has one | Interest until that date, then a payoff under your note's terms | The window is close and you don't need the money sooner |
| Let a buyer assume the loan | Assumption fees and approval under your note's terms | Your rate is below market and the buyer wants it |
If a sale is the reason you're looking, the assumption route is worth pricing out. Our loan assumption deep dive covers what lenders review.
In 2023, nearly 70% of CMBS defeasance volume came from loans with less than three years to maturity, according to Moody's research reported by MBA NewsLink. Total CMBS defeasance fell to $11.4 billion that year from $32.2 billion in 2022, and Moody's linked the drop to higher-for-longer rates, which cut sales volume and "the appeal of refinancing." Those figures cover CMBS loans only and are a few years old, but they show that in 2023 most of the dollars came late in the loan term.
How do you prepare for a defeasance?
- Pull the prepayment section of your note. Find the lockout end date, whether defeasance is allowed, the date the securities must cover payments through (maturity or an earlier open date), and any assumption terms.
- Confirm the trust's startup day and that the 2-year bar has passed.
- Check whether your documents let you choose the firm that buys the securities and sets up the successor entity, or whether the lender has kept that right.
- Get a securities estimate based on current Treasury yields and a written list of every fee.
- Price the alternatives side by side: defease now, wait for an open window, or let a buyer assume.
- If the sale or new loan proceeds will pay for the securities, set the defeasance closing to match that closing.
Starting early gives you room to do all six. Our post on planning a maturing CMBS loan well ahead walks through that timeline.
Northern Ridge Capital is a commercial real estate debt broker for $5M to $30M loans. If defeasance on your commercial mortgage stands between you and a sale or refinance, our page on refinancing a commercial property covers the rest of the package, and from there you can book a short call to walk through your note's prepayment terms, your payoff and the refinance numbers with a broker.
FAQ
Is defeasance the same as yield maintenance?
No. With yield maintenance, you pay the loan off plus a prepayment charge meant to compensate the lender for some of the interest income it loses. With defeasance, the loan isn't paid off. Securities replace your property as collateral and keep making the payments. Your note decides which one applies to you.
Can defeasance cost less than my loan balance?
Yes. When Treasury yields are above your loan rate, the securities needed to make your remaining payments can cost less than what you owe. Fees still apply, and the discount reflects the value of the below-market rate you're giving up.
Can I defease in the first two years?
Not if your loan is in a REMIC. Under the federal tax rule, a defeasance release within 2 years of the trust's startup day costs the loan its qualified status, and your note may lock you out longer.
How long does a defeasance take?
It depends on your servicer, your documents and how fast the securities can be bought and delivered. Start well ahead of your sale or refinance date. If the new money is paying for the securities, plan both closings for the same day.