# What Is Defeasance? Published: 2025-10-19 Author: Warren Team URL: https://www.heywarren.com/blog/defeasance --- Imagine signing a commercial real estate loan with a locked-in interest rate — only to discover that paying it off early could cost you hundreds of thousands of dollars more than your remaining balance. That scenario plays out every year for property owners who didn't understand **defeasance** before they signed. Most borrowers assume they can pay off any loan whenever they want, often for just a small [prepayment](/blog/prepayment-bill) penalty. In the world of commercial real estate and securitized debt, that assumption is dangerously expensive. Many CMBS (commercial mortgage-backed security) loans prohibit simple prepayment entirely, making defeasance the only viable exit strategy when you need to sell or refinance. In this guide, you'll learn exactly what defeasance means, how the process works step by step, what it costs in real dollar terms, and how it compares to yield maintenance — the main alternative. You'll also discover the hidden fees most borrowers miss and the specific situations where defeasance actually makes strategic sense. Defeasance is more common than most property owners realize. Roughly 85% of CMBS loans originated in the last decade include defeasance clauses rather than standard prepayment options, according to industry data from the Mortgage Bankers Association — making this one of the most consequential loan terms in commercial real estate finance. --- ## What Is Defeasance? **Defeasance is a financial arrangement in which a borrower replaces a loan's original collateral — typically a commercial property — with a portfolio of government securities carefully sized to generate the exact cash flow needed to cover all remaining debt payments. The property is released from the lien, but the loan technically continues until its scheduled maturity date.** The word comes from the Old French *defaire*, meaning "to undo." In legal and financial contexts, defeasance means neutralizing an obligation — though in modern real estate practice, the loan isn't cancelled outright. Instead, the debt is economically neutralized by substituting equally reliable collateral in the form of [U.S. Treasury](https://home.treasury.gov/) securities or government agency bonds. This distinction matters enormously. In a traditional prepayment, you retire the loan balance early and pay a penalty. In defeasance, you hand the lender a portfolio of securities that will make every remaining scheduled payment on your behalf — principal, interest, and the final balloon. The property is freed from its lien, and you can sell or refinance it. But the loan keeps running in the background, now backed by government bonds instead of real estate. Defeasance appears most often in: - **CMBS loans** backed by commercial mortgage-backed securities - **Life insurance company loans** for office, multifamily, or retail properties - **Agency loans** from Freddie Mac or Fannie Mae for multifamily assets - **Some municipal bond and corporate bond structures** where in-substance defeasance is used for balance sheet management --- ## How Defeasance Works: A Step-by-Step Breakdown **The defeasance process involves calculating and assembling a qualifying securities portfolio, transferring loan obligations to a new successor borrower entity, and obtaining a lien release on the original property — all typically completed within 30 to 60 days of initiating the [transaction](/blog/what-is-a-transactions).** ![The four sequential steps to complete a commercial real estate defeasance, from eligibility check to lien release.](data:image/svg+xml,%3Csvg%20xmlns%3D%22http%3A%2F%2Fwww.w3.org%2F2000%2Fsvg%22%20viewBox%3D%220%200%20875%20125%22%20width%3D%22875%22%20height%3D%22125%22%20role%3D%22img%22%3E%3Ctitle%3EFlow%20diagram%3C%2Ftitle%3E%3Crect%20width%3D%22100%25%22%20height%3D%22100%25%22%20fill%3D%22%23f8fafc%22%2F%3E%3Crect%20x%3D%2230%22%20y%3D%2225%22%20width%3D%22170%22%20height%3D%2275%22%20rx%3D%2210%22%20fill%3D%22white%22%20stroke%3D%22%232563eb%22%20stroke-width%3D%222%22%2F%3E%3Ctext%20x%3D%22115%22%20y%3D%2258.5%22%20text-anchor%3D%22middle%22%20font-family%3D%22system-ui%2C-apple-system%2Csans-serif%22%20font-size%3D%2214%22%20font-weight%3D%22600%22%20fill%3D%22%230f172a%22%3ECheck%20Eligibility%3C%2Ftext%3E%3Ctext%20x%3D%22115%22%20y%3D%2278.5%22%20text-anchor%3D%22middle%22%20font-family%3D%22system-ui%2C-apple-system%2Csans-serif%22%20font-size%3D%2211%22%20fill%3D%22%2364748b%22%3EConfirm%20lockout%20passed%3C%2Ftext%3E%3Cline%20x1%3D%22205%22%20y1%3D%2262.5%22%20x2%3D%22237%22%20y2%3D%2262.5%22%20stroke%3D%22%2364748b%22%20stroke-width%3D%222%22%2F%3E%3Cpolygon%20points%3D%22244%2C62.5%20235%2C57.5%20235%2C67.5%22%20fill%3D%22%2364748b%22%2F%3E%3Crect%20x%3D%22245%22%20y%3D%2225%22%20width%3D%22170%22%20height%3D%2275%22%20rx%3D%2210%22%20fill%3D%22white%22%20stroke%3D%22%232563eb%22%20stroke-width%3D%222%22%2F%3E%3Ctext%20x%3D%22330%22%20y%3D%2258.5%22%20text-anchor%3D%22middle%22%20font-family%3D%22system-ui%2C-apple-system%2Csans-serif%22%20font-size%3D%2214%22%20font-weight%3D%22600%22%20fill%3D%22%230f172a%22%3EBuild%20Portfolio%3C%2Ftext%3E%3Ctext%20x%3D%22330%22%20y%3D%2278.5%22%20text-anchor%3D%22middle%22%20font-family%3D%22system-ui%2C-apple-system%2Csans-serif%22%20font-size%3D%2211%22%20fill%3D%22%2364748b%22%3EMatch%20bond%20cash%20flows%3C%2Ftext%3E%3Cline%20x1%3D%22420%22%20y1%3D%2262.5%22%20x2%3D%22452%22%20y2%3D%2262.5%22%20stroke%3D%22%2364748b%22%20stroke-width%3D%222%22%2F%3E%3Cpolygon%20points%3D%22459%2C62.5%20450%2C57.5%20450%2C67.5%22%20fill%3D%22%2364748b%22%2F%3E%3Crect%20x%3D%22460%22%20y%3D%2225%22%20width%3D%22170%22%20height%3D%2275%22%20rx%3D%2210%22%20fill%3D%22white%22%20stroke%3D%22%232563eb%22%20stroke-width%3D%222%22%2F%3E%3Ctext%20x%3D%22545%22%20y%3D%2258.5%22%20text-anchor%3D%22middle%22%20font-family%3D%22system-ui%2C-apple-system%2Csans-serif%22%20font-size%3D%2214%22%20font-weight%3D%22600%22%20fill%3D%22%230f172a%22%3ESuccessor%20Entity%3C%2Ftext%3E%3Ctext%20x%3D%22545%22%20y%3D%2278.5%22%20text-anchor%3D%22middle%22%20font-family%3D%22system-ui%2C-apple-system%2Csans-serif%22%20font-size%3D%2211%22%20fill%3D%22%2364748b%22%3ENew%20SPE%20assumes%20loan%3C%2Ftext%3E%3Cline%20x1%3D%22635%22%20y1%3D%2262.5%22%20x2%3D%22667%22%20y2%3D%2262.5%22%20stroke%3D%22%2364748b%22%20stroke-width%3D%222%22%2F%3E%3Cpolygon%20points%3D%22674%2C62.5%20665%2C57.5%20665%2C67.5%22%20fill%3D%22%2364748b%22%2F%3E%3Crect%20x%3D%22675%22%20y%3D%2225%22%20width%3D%22170%22%20height%3D%2275%22%20rx%3D%2210%22%20fill%3D%22white%22%20stroke%3D%22%232563eb%22%20stroke-width%3D%222%22%2F%3E%3Ctext%20x%3D%22760%22%20y%3D%2258.5%22%20text-anchor%3D%22middle%22%20font-family%3D%22system-ui%2C-apple-system%2Csans-serif%22%20font-size%3D%2214%22%20font-weight%3D%22600%22%20fill%3D%22%230f172a%22%3EClose%20%26amp%3B%20Release%3C%2Ftext%3E%3Ctext%20x%3D%22760%22%20y%3D%2278.5%22%20text-anchor%3D%22middle%22%20font-family%3D%22system-ui%2C-apple-system%2Csans-serif%22%20font-size%3D%2211%22%20fill%3D%22%2364748b%22%3ELien%20cleared%20on%20property%3C%2Ftext%3E%3C%2Fsvg%3E) *The four sequential steps to complete a commercial real estate defeasance, from eligibility check to lien release.* The mechanics feel complex at first glance, but they follow a logical and well-established sequence. Here is how a typical commercial real estate defeasance transaction unfolds. ### Step 1: Confirm Eligibility and Check the Lockout Period Start by reviewing your loan documents to confirm defeasance is permitted. Not all commercial loans include this provision. Most CMBS loans do; many bank-held portfolio loans do not. Also check for a **lockout period** — the window after origination during which defeasance is completely prohibited. Lockout periods of 24 to 36 months are standard. Attempting to defease during a lockout is contractually impossible, so timing your loan origination to your likely exit window is important. Once you're past the lockout, identify your **defeasance date** — almost always a scheduled loan payment date. Even a one-day timing error can require purchasing extra securities to cover an additional interest accrual, adding unnecessary cost. ### Step 2: Engage a Defeasance Consultant and Build the Securities Portfolio This is the financial core of the transaction. A **defeasance consultant** — a specialized third-party advisor — calculates the precise portfolio of qualifying securities needed to replicate every remaining payment. Qualifying securities typically include U.S. Treasury bonds and notes, Treasury STRIPS (Separate Trading of Registered Interest and Principal of Securities), and sometimes FNMA or FHLMC agency obligations, depending on what your loan documents permit. The portfolio must be calibrated to the day. Each security's maturity date and coupon must align with scheduled payment dates. The consultant models the entire cash flow schedule and selects securities that match it with precision. This is where the hidden cost lives: if your loan carries a 6% interest rate and current Treasuries yield 4%, you need to buy *more* bonds — at a higher price — to generate the same cash flow. That spread between your loan rate and current market yields is what drives the total defeasance cost. ### Step 3: Establish a Successor Borrower Entity You cannot simply hand a portfolio of bonds to your lender. Instead, you create a new single-purpose entity — the **successor borrower** — that formally assumes the loan obligations and holds the securities. This entity has no other function. It collects income from the securities on each payment date and forwards those funds as loan payments. It makes no business decisions and owns no other assets. Your legal counsel typically handles the successor borrower formation, and your defeasance consultant coordinates with lender counsel to satisfy the loan agreement's specific requirements for entity structure and documentation. ### Step 4: Close the Transaction On the closing date, you fund the securities portfolio, the successor borrower assumes the loan, and the lender releases the lien on your original property. Title is cleared. You can proceed with your property sale or refinancing transaction. From start to finish, a defeasance closing typically takes 30 to 60 days from first engagement — which is why early planning is so critical. --- ## Types of Defeasance in Real Estate Finance **Defeasance appears in two primary forms: full defeasance, which releases all collateral backing a single loan, and partial defeasance, which releases a specific property or portion of collateral from a multi-property portfolio loan while leaving the remaining collateral in place.** ![The two primary real estate defeasance structures plus the accounting-only in-substance variant used in bond markets.](data:image/svg+xml,%3Csvg%20xmlns%3D%22http%3A%2F%2Fwww.w3.org%2F2000%2Fsvg%22%20viewBox%3D%220%200%20600%20211%22%20width%3D%22600%22%20height%3D%22211%22%20role%3D%22img%22%3E%3Ctitle%3EHierarchy%3C%2Ftitle%3E%3Crect%20width%3D%22100%25%22%20height%3D%22100%25%22%20fill%3D%22%23f8fafc%22%2F%3E%3Crect%20x%3D%22220%22%20y%3D%2220%22%20width%3D%22160%22%20height%3D%2258%22%20rx%3D%228%22%20fill%3D%22%232563eb%22%2F%3E%3Ctext%20x%3D%22300%22%20y%3D%2254%22%20text-anchor%3D%22middle%22%20font-family%3D%22system-ui%2C-apple-system%2Csans-serif%22%20font-size%3D%2214%22%20font-weight%3D%22700%22%20fill%3D%22white%22%3EDefeasance%3C%2Ftext%3E%3Cpath%20d%3D%22M%20300%2078%20L%20300%20105.5%20L%20120%20105.5%20L%20120%20133%22%20stroke%3D%22%23cbd5e1%22%20stroke-width%3D%222%22%20fill%3D%22none%22%2F%3E%3Crect%20x%3D%2240%22%20y%3D%22133%22%20width%3D%22160%22%20height%3D%2258%22%20rx%3D%228%22%20fill%3D%22white%22%20stroke%3D%22%230891b2%22%20stroke-width%3D%222%22%2F%3E%3Ctext%20x%3D%22120%22%20y%3D%22158%22%20text-anchor%3D%22middle%22%20font-family%3D%22system-ui%2C-apple-system%2Csans-serif%22%20font-size%3D%2213%22%20font-weight%3D%22600%22%20fill%3D%22%230f172a%22%3EFull%3C%2Ftext%3E%3Ctext%20x%3D%22120%22%20y%3D%22176%22%20text-anchor%3D%22middle%22%20font-family%3D%22system-ui%2C-apple-system%2Csans-serif%22%20font-size%3D%2210%22%20fill%3D%22%2364748b%22%3ESingle%20property%20released%3C%2Ftext%3E%3Cpath%20d%3D%22M%20300%2078%20L%20300%20105.5%20L%20300%20105.5%20L%20300%20133%22%20stroke%3D%22%23cbd5e1%22%20stroke-width%3D%222%22%20fill%3D%22none%22%2F%3E%3Crect%20x%3D%22220%22%20y%3D%22133%22%20width%3D%22160%22%20height%3D%2258%22%20rx%3D%228%22%20fill%3D%22white%22%20stroke%3D%22%230891b2%22%20stroke-width%3D%222%22%2F%3E%3Ctext%20x%3D%22300%22%20y%3D%22158%22%20text-anchor%3D%22middle%22%20font-family%3D%22system-ui%2C-apple-system%2Csans-serif%22%20font-size%3D%2213%22%20font-weight%3D%22600%22%20fill%3D%22%230f172a%22%3EPartial%3C%2Ftext%3E%3Ctext%20x%3D%22300%22%20y%3D%22176%22%20text-anchor%3D%22middle%22%20font-family%3D%22system-ui%2C-apple-system%2Csans-serif%22%20font-size%3D%2210%22%20fill%3D%22%2364748b%22%3EMulti-property%20portfolio%3C%2Ftext%3E%3Cpath%20d%3D%22M%20300%2078%20L%20300%20105.5%20L%20480%20105.5%20L%20480%20133%22%20stroke%3D%22%23cbd5e1%22%20stroke-width%3D%222%22%20fill%3D%22none%22%2F%3E%3Crect%20x%3D%22400%22%20y%3D%22133%22%20width%3D%22160%22%20height%3D%2258%22%20rx%3D%228%22%20fill%3D%22white%22%20stroke%3D%22%230891b2%22%20stroke-width%3D%222%22%2F%3E%3Ctext%20x%3D%22480%22%20y%3D%22158%22%20text-anchor%3D%22middle%22%20font-family%3D%22system-ui%2C-apple-system%2Csans-serif%22%20font-size%3D%2213%22%20font-weight%3D%22600%22%20fill%3D%22%230f172a%22%3EIn-Substance%3C%2Ftext%3E%3Ctext%20x%3D%22480%22%20y%3D%22176%22%20text-anchor%3D%22middle%22%20font-family%3D%22system-ui%2C-apple-system%2Csans-serif%22%20font-size%3D%2210%22%20fill%3D%22%2364748b%22%3EBalance%20sheet%20only%3C%2Ftext%3E%3C%2Fsvg%3E) *The two primary real estate defeasance structures plus the accounting-only in-substance variant used in bond markets.* ### Full Defeasance Full defeasance is the standard structure. A borrower with a single commercial property — an apartment complex, office building, or retail center — uses full defeasance to release that property entirely from its CMBS loan lien. Once the transaction closes, the property is unencumbered and ready to sell or refinance. ### Partial Defeasance Partial defeasance applies when a single loan is secured by multiple properties and the borrower wants to release only some of them. A real estate private [equity](/blog/equity-meaning-in-business) fund with a cross-collateralized portfolio loan backed by eight industrial buildings might use partial defeasance to release two buildings for sale while keeping the loan intact for the remaining six. Partial defeasance documentation is more complex — it requires a precise allocation of loan principal to each released property, approval from the CMBS servicer, and often a review by the rating agencies that originally rated the securities pool. But it offers substantial strategic flexibility for portfolio management. ### In-Substance Defeasance for Corporate and Municipal Bonds In bond markets, accountants recognize a related concept: **in-substance defeasance**. Under U.S. [GAAP](https://www.fasb.org/), a company can remove a bond [liability](/blog/examples-liabilities) from its balance sheet if it irrevocably places essentially risk-free securities — typically U.S. Treasuries — into a dedicated trust that will service all future payments. The company is not legally released from the debt, but the accounting treatment allows the [liability](/blog/examples-of-liabilities) to be considered economically extinguished. This approach became popular for corporate debt restructuring in the 1980s and 1990s and still appears in municipal finance today, particularly when issuers want to refinance outstanding bonds without a formal call or redemption. --- ## Why Lenders Require Loan Defeasance Instead of Simple Prepayment **Lenders — particularly CMBS servicers — require defeasance rather than simple prepayment because CMBS loans are packaged into securities and sold to third-party investors who purchased bonds based on specific expected yields. Early prepayment would deprive those investors of the income stream they paid for.** When a commercial bank holds a loan on its own balance sheet, it can usually accept a prepayment and redeploy that capital into new loans. CMBS structures are fundamentally different. The loan has been pooled with dozens or hundreds of other commercial mortgages, bundled into a trust, and sold to pension funds, insurance companies, and other institutional investors as mortgage-backed securities. Those investors paid prices based on the assumption that the underlying loans would remain outstanding until their scheduled maturity. If borrowers could prepay freely, investors would lose expected interest income — a particularly painful outcome when market interest rates have fallen, since reinvestment yields would be lower than the original loan rate. Defeasance elegantly solves this problem. The CMBS servicer doesn't lose its expected cash flow; it just receives it from a portfolio of government securities instead of from the property's mortgage payments. Investors receive their scheduled distributions without interruption. This structural reality is also why yield maintenance exists — and why understanding the difference between the two exit mechanisms is essential for any commercial real estate borrower. --- ## Defeasance vs. Yield Maintenance: Understanding the Difference **Defeasance and yield maintenance both compensate lenders for lost interest when a loan is retired before its scheduled maturity, but they calculate that compensation differently. Defeasance requires purchasing a securities portfolio at actual market prices; yield maintenance applies a formula based on the present value of remaining payments discounted at a Treasury rate.** The cost difference between the two approaches depends almost entirely on where interest rates stand at the time of payoff. **When rates have fallen since loan origination:** Defeasance tends to be more expensive. You need to buy more low-yielding Treasuries to replicate the loan's higher cash flows, and the securities portfolio may cost significantly more than your outstanding loan balance. Yield maintenance produces a mathematically similar — sometimes nearly identical — penalty in this environment. Borrowers should model both carefully. **When rates have risen since origination:** Defeasance becomes less expensive, sometimes dramatically so. Treasury yields are now higher, so you need a smaller portfolio to match the loan's payment schedule. In a rising-rate environment, defeasance can cost meaningfully less than yield maintenance, and occasionally less than the outstanding principal balance itself. The choice of which mechanism applies to your loan is determined entirely by your loan documents — you don't choose at exit time. But if you're negotiating a new loan and have the leverage to request one over the other, understanding this dynamic helps you choose the provision most favorable given your likely exit scenario. Most experienced borrowers work with both a defeasance consultant and an independent financial advisor to model total exit costs under multiple interest rate scenarios before signing any commercial loan that includes either provision. --- ## Common Mistakes in the Defeasance Process **The most costly defeasance mistakes involve poor timing, misunderstanding lockout and eligibility requirements in loan documents, and severely underestimating total transaction costs — which extend well beyond the securities portfolio itself.** ![Transaction fees beyond the securities portfolio typically add $30,000–$75,000 to defeasance cost on a standard deal.](data:image/svg+xml,%3Csvg%20xmlns%3D%22http%3A%2F%2Fwww.w3.org%2F2000%2Fsvg%22%20viewBox%3D%220%200%20800%20210%22%20width%3D%22800%22%20height%3D%22210%22%20role%3D%22img%22%3E%3Ctitle%3EComparison%3C%2Ftitle%3E%3Crect%20width%3D%22100%25%22%20height%3D%22100%25%22%20fill%3D%22%23f8fafc%22%2F%3E%3Ctext%20x%3D%22230%22%20y%3D%2257.5%22%20text-anchor%3D%22end%22%20font-family%3D%22system-ui%2C-apple-system%2Csans-serif%22%20font-size%3D%2214%22%20font-weight%3D%22600%22%20fill%3D%22%230f172a%22%3EMin.%20Ancillary%20Fees%3C%2Ftext%3E%3Crect%20x%3D%22240%22%20y%3D%2225%22%20width%3D%22180%22%20height%3D%2255%22%20rx%3D%226%22%20fill%3D%22%232563eb%22%2F%3E%3Ctext%20x%3D%22432%22%20y%3D%2257.5%22%20font-family%3D%22system-ui%2C-apple-system%2Csans-serif%22%20font-size%3D%2214%22%20font-weight%3D%22700%22%20fill%3D%22%232563eb%22%3E%2430K%3C%2Ftext%3E%3Ctext%20x%3D%22230%22%20y%3D%22152.5%22%20text-anchor%3D%22end%22%20font-family%3D%22system-ui%2C-apple-system%2Csans-serif%22%20font-size%3D%2214%22%20font-weight%3D%22600%22%20fill%3D%22%230f172a%22%3EMax.%20Ancillary%20Fees%3C%2Ftext%3E%3Crect%20x%3D%22240%22%20y%3D%22120%22%20width%3D%22450%22%20height%3D%2255%22%20rx%3D%226%22%20fill%3D%22%237c3aed%22%2F%3E%3Ctext%20x%3D%22702%22%20y%3D%22152.5%22%20font-family%3D%22system-ui%2C-apple-system%2Csans-serif%22%20font-size%3D%2214%22%20font-weight%3D%22700%22%20fill%3D%22%237c3aed%22%3E%2475K%3C%2Ftext%3E%3C%2Fsvg%3E) *Transaction fees beyond the securities portfolio typically add $30,000–$75,000 to defeasance cost on a standard deal.* First-time commercial real estate borrowers are especially vulnerable to these errors. ### Underestimating Total Transaction Costs The securities portfolio is the largest line item, but it's far from the only cost. A complete list of typical defeasance transaction expenses includes: - **Defeasance consultant fee**: $10,000–$25,000 - **Borrower's legal counsel**: $10,000–$20,000 for successor borrower formation and loan assumption documentation - **Lender's counsel fees** (typically passed to the borrower): $5,000–$15,000 - **Rating agency review fees** (required for many CMBS pools): $5,000–$15,000 - **Accounting fees** for successor borrower entity setup - **Title insurance and escrow charges** Total ancillary costs outside the securities portfolio often run $30,000–$75,000 on a standard transaction. On a $3 million loan, those fees are material. Budget for them at the start of your exit planning, not as an afterthought. ### Misreading the Lockout Period Many borrowers believe they can defease a loan at any time after closing. In reality, most CMBS loans include a **lockout period** — commonly 24 months, sometimes as long as 36 — during which neither defeasance nor any other prepayment is permitted. Attempting to sell a property during a lockout period with a CMBS loan attached forces you into either waiting out the lockout, negotiating a complex loan assumption with your buyer, or finding a lender willing to take out the CMBS note through another mechanism. Review the lockout terms before you sign any commercial loan, not after you have a buyer in hand. ### Starting the Process Too Late Defeasance takes time. Between engaging a consultant, modeling the securities portfolio, negotiating successor borrower documents with lender counsel, obtaining any required rating agency sign-off, and coordinating a closing date, the process reliably takes 30 to 60 days. Borrowers who begin defeasance after signing a purchase and sale agreement frequently find themselves in breach of their closing timeline. The moment you sign a letter of intent to sell a property secured by a CMBS loan, contact a defeasance consultant. The earlier you start, the more control you have over timing and the lower your risk of a blown closing. --- ## Authoritative Sources For deeper background and primary-source data on this topic, the following authoritative sources are useful starting points: - [IRS](https://www.irs.gov/) - [SEC](https://www.sec.gov/) - [Federal Reserve](https://www.federalreserve.gov/) - [Consumer Financial Protection Bureau](https://www.consumerfinance.gov/) ## Conclusion Defeasance is one of the most consequential and least understood clauses in commercial real estate lending. Signing a CMBS loan without a clear grasp of its defeasance provisions can cost property owners six figures or more at exit. Here are the key takeaways to carry forward: - **Defeasance substitutes collateral** — it replaces your property with a government securities portfolio sized to match every remaining loan payment, freeing the property from its lien without formally retiring the debt. - **Total cost is driven by the rate spread** between your loan's interest rate and current Treasury yields at the time of defeasance — a gap that can push the securities portfolio far above your outstanding principal balance. - **Transaction fees add $30,000–$75,000** on top of the portfolio cost and should be budgeted from day one. - **Lockout periods are absolute** — defeasance is contractually impossible during the first 24 to 36 months of most CMBS loans. - **Start the process at least 60 days before your target closing date** to avoid delays and protect your sale transaction. Understanding defeasance before you borrow — and modeling your likely exit cost under multiple rate scenarios — transforms a potentially ruinous surprise into a manageable, plannable expense. The borrowers who get burned are almost always the ones who discovered the mechanics only after they had a buyer under contract. Ready to put this knowledge to work? Try Warren, your AI financial advisor — get personalized, conflict-free guidance at heywarren.com