Questions about defeasance, answered

Defeasance is the process of releasing a property from its mortgage lien by replacing the real estate collateral with a portfolio of government securities structured to cover all remaining loan payments.

Defeasance typically occurs when a borrower sells or refinances a property before the loan's maturity date and the loan is still within its permitted defeasance window.

A standard payoff simply repays the outstanding balance. Defeasance substitutes collateral instead, since the underlying securitization does not allow the loan itself to be prepaid.

Defeasance is most common on securitized commercial mortgage loans, particularly those originated for inclusion in a CMBS trust.

Yield maintenance is a cash prepayment penalty calculated to replace the lender's lost interest. Defeasance instead substitutes collateral, keeping the loan itself in place within the trust.

Most defeasance transactions are completed within three to six weeks, depending on the complexity of the loan documents and the coordination required among the parties involved.

Borrowers should typically begin the defeasance process four to six weeks before their target closing date to allow time for document review, securities purchase, and servicer approval.

Timing can be affected by servicer responsiveness, the complexity of the loan documents, market conditions for securities purchases, and coordination among counsel and other transaction parties.

A typical defeasance involves the borrower, their counsel, a defeasance consultant, the loan servicer, and the successor borrower entity formed to assume the loan.

Borrowers generally need the loan agreement, note, and related security instruments, along with organizational documents for the successor borrower entity.

Costs typically include the price of the replacement securities, third-party fees such as legal and accounting, servicer processing fees, and the defeasance consultant's fee.

Third-party fees can vary based on loan complexity, the number of parties involved, and the specific requirements of the servicer and rating agencies.

The cost of the replacement securities portfolio moves with Treasury yields, so changes in rates can meaningfully affect the total cost of a defeasance transaction.

A defeasance advisor manages the transaction from start to finish, coordinating with the servicer, counsel, and other parties to keep the process on schedule.

Most borrowers stay minimally involved day-to-day. Your advisor and counsel handle coordination, while you review and sign key documents as they're finalized.

Common causes of delay include slow servicer turnaround, incomplete loan documentation, and last-minute changes to the closing timeline.

The calculator gives you an early estimate of your defeasance cost so you can plan around a sale, refinance, or other closing date.

Paragon's calculator is built by practitioners who have priced defeasance transactions directly, so the underlying assumptions reflect real transaction experience.

Estimates can shift with Treasury rate movements and loan-specific details, so it's best to refresh your estimate as your closing date approaches.

You'll generally need your loan balance, interest rate, maturity date, and anticipated payoff or closing date.