Defeasance
Defeasance is a prepayment mechanism, common in CMBS, in which the borrower substitutes U.S. Treasury securities for the property as collateral so the lender continues receiving scheduled payments.
What it means
In a CMBS defeasance, the borrower purchases a portfolio of U.S. Treasury bonds that will generate cash flows matching the remaining loan payments. Those bonds replace the property as collateral, and the loan effectively continues to its scheduled maturity while the property is released.
Defeasance is expensive when interest rates have fallen since origination (Treasury yields are low, making the required bond portfolio costly). It is cheap when rates have risen. In 2024–2026, rising rates made defeasance much cheaper than it had been in the 2020–2022 era, making it easier to exit low-rate CMBS loans.
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