We’re honored to be featured in the latest edition of The Real Reporter alongside so many respected names in the CRE industry. A special highlight: our Chief Legal Officer, Dawn Holland, contributed an article, “Defining Defeasance in Today’s CRE Market,” where she breaks down what every owner and operator should know about defeasance in this shifting environment.
If you’ve been investing in commercial real estate long enough, you probably have seen the term “defeasance” buried somewhere in your loan documents. For most owners, it’s a footnote, until it isn’t. When it becomes relevant, it’s no longer just legal boilerplate; it’s the gatekeeper between you and the transaction you’re trying to close. And here’s the thing – if you wait until you’re already under contract to learn how it works, you’ve waited too long. In today’s market, understanding defeasance early can save you time, money, and a lot of headaches.
Defeasance is a term that tends to catch owners off guard. At its simplest, it’s a substitution of collateral. You don’t literally pay off the loan early. Instead, you replace the real estate securing the loan with a portfolio of government securities, typically U.S. Treasuries, that generate enough cash flow to make the scheduled loan payments through maturity.
While it’s most common in CMBS loans, defeasance is not confined to Wall Street paper. Certain bank, agency, and life company loans, especially those that have been securitized, also carry defeasance clauses. And despite popular belief, it’s not something reserved for public REITs or large institutional owners. We regularly see private developers, family offices, and single-asset owners face defeasance when they need to sell or refinance before loan maturity.
The reason it matters? If you have a fixed-rate, securitized loan, defeasance may be your only contractual path to releasing the property from the loan. But this is not a process to “discover” after you’ve signed a purchase and sale agreement or locked a term sheet with a new lender.
At this point, it’s also worth clarifying that defeasance is not the same as Yield Maintenance. Yield Maintenance is a formulaic penalty calculation that provides a lump sum amount that the Borrower is required to give the Lender to pay off the loan. Yield Maintenance calculations are usually based on the net present value of future interest payments at a single predetermined discount rate. Yield Maintenance also carries a floor, or minimum prepayment, so the loan cannot be prepaid at ‘par’, without penalty or at a discount. For a Yield Maintenance payoff, Borrowers simply request a payoff statement and wire the funds at closing.
Defeasance, on the other hand, is a weeks-long transaction involving multiple parties, legal documentation, due diligence items (including legal opinions), and a two-day closing process. Defeasance leaves the loan outstanding but swaps the collateral and provides for an assumption by a third-party, allowing for a release of the property and original borrower.
Check out the rest of the article here: The Real Reporter – Defining Defeasance In Today’s CRE Market
