Many commercial real estate loans, particularly CMBS and agency loans, can’t be paid off early. Instead, borrowers must follow the loan’s prepayment provisions, with defeasance being one of the primary methods. Through this process, the real estate collateral securing the loan is replaced with government securities that continue making the loan’s required payments. Borrowers commonly use defeasance when selling or refinancing a property before the loan reaches maturity.
Not all defeasance estimates—or the advisors who prepare them—are the same. Asking the right questions upfront can help you compare estimates, understand what drives costs, and assess how replacement securities are selected and priced throughout the defeasance process.
As a best practice, consider obtaining estimates from more than one consultant to establish a meaningful point of reference throughout the evaluation process.
Building an Accurate Estimate
A reliable estimate begins with complete information. These questions help determine whether your advisor has the information and process needed to produce a reliable estimate and effectively manage the defeasance process.
What documents and information do you need from me to provide the most accurate estimate?
A defeasance estimate starts with a thorough review of your loan documents — most importantly the Promissory Note and Loan Agreement, which outline the loan terms and defeasance requirements. Without them, estimates may rely on assumptions that can lead to inaccurate pricing or unexpected costs later in the process.
What assumptions were used to prepare this estimate?
Ask whether any assumptions were made and, if so, what they are. Once the loan documents have been reviewed, a comprehensive estimate should require few (if any) material assumptions, giving you greater confidence in the projected costs.
Who will coordinate all the parties involved throughout the process?
A defeasance transaction involves multiple parties, including servicers, legal counsel, successor borrower, accountants, and rating agencies. An experienced defeasance consultant serves as the central point of contact, coordinating all parties, ensuring third-party requirements are met, acting as a Borrower advocate if an issue arises with the Servicer, and overseeing the structuring and purchase of the replacement securities portfolio.
What’s included in the estimated defeasance cost?
A complete estimate should clearly separate the projected securities cost from transaction fees and third-party expenses. Two estimates with the same total cost may not include the same expenses — ask for an itemized breakdown to make an apples-to-apples comparison.
Understanding Costs & Variables
Most defeasance costs are predictable, but some variables can change between the initial estimate and closing. These questions help you distinguish fixed costs from market-driven variables and identify factors that could affect your final cost or timeline.
Are there any fees that aren’t included in this estimate? Why is a fee listed as “TBD”?
Most transaction fees can typically be identified after reviewing the loan documents. If multiple costs remain listed as “TBD,” ask why. Undefined fees can create uncertainty and may result in higher-than-expected costs at closing.
Which costs are fixed, and which are estimates?
Most transaction fees are established by servicers or other third parties and generally remain consistent throughout the process. The largest variable is usually the replacement securities portfolio, whose cost fluctuates with market conditions until pricing is locked, typically the business day before closing.
What could cause my final defeasance cost to differ from the estimate?
In most cases, market interest rate movements are the primary reason final costs differ from an initial estimate. Borrowers should also ask whether any loan-specific circumstances, such as unresolved defaults or outstanding obligations, could impact the final settlement amount.
What is the expected timeline, and what could delay the transaction?
A typical defeasance can be completed in approximately 30 days, although expedited timelines may be possible for an additional cost. In most cases, the closing date of your sale or refinance dictates the defeasance timeline, making early coordination an important part of the defeasance process.
Evaluating Execution & Strategy
Not all defeasance advisors approach securities selection, pricing, or compensation the same way. The answers to these questions can help you distinguish between simply completing a defeasance transaction and optimizing one.
How do you structure the defeasance portfolio and purchase the securities?
While the loan documents define which securities are permitted, there is often more than one way to build a compliant replacement portfolio. Ask how the portfolio was structured to satisfy the loan requirements, how replacement securities are purchased, and how pricing is evaluated. The answers can help you determine whether your advisor is focused on meeting the minimum requirements or delivering the best possible outcome.
Am I being charged a securities structuring or purchase fee? If so, why?
Your loan documents may specify whether you retain the right to purchase the replacement securities. If you do, ask why a separate securities structuring or purchase fee is being charged, how that fee was calculated, and what services it covers. The explanation should clearly describe why the fee applies, how it was determined, and who is receiving this fee.
Can you show me exactly where your firm gets paid?
Transparency shouldn’t stop at the quoted consulting fee. Ask for a complete breakdown of how every party is compensated—including consulting fees, securities execution, and any third-party payments—so you can evaluate whether your advisor’s incentives are aligned with your interests.
Is there a difference between buying replacement securities through an auction or directly with a trader?
Different execution strategies can produce different results, even when purchasing the same types of securities. Ask how securities are sourced, how much time traders have to build the portfolio, and what safeguards are in place to help ensure the portfolio reflects current market pricing. Keep in mind that the lowest auction bid isn’t always providing the lowest market pricing.
The defeasance process is complex, but a well-informed borrower is better equipped to evaluate estimates and move forward with confidence. For a convenient reference, download a PDF version of our Borrower’s Guide to Defeasing a Loan.
Have questions about your defeasance estimate?
Whether you’d like a second opinion on an existing estimate or need one prepared for an upcoming transaction, our team is here to help. Contact our team to discuss your transaction.
