Defeasance is a prepayment mechanism that substitutes a portfolio of U.S. Treasury securities for loan collateral, allowing the borrower to release the property while the securities replicate the remaining loan payments. This article is not about how defeasance works — Pensford has published 11 detailed articles on defeasance mechanics that remain the best resource for understanding the process itself. This article is about when defeasance makes strategic sense in the context of your broader debt portfolio, and how to build a decision framework that accounts for rate environment, hold period, and opportunity cost.
When Does Defeasance Actually Make Strategic Sense?
Defeasance makes sense when the cost of executing it is materially less than the value you unlock — through a sale, a refinancing at better terms, or releasing capital trapped in an underperforming structure. The decision is never about defeasance cost in isolation. It’s about defeasance cost relative to the next-best alternative. According to Mortgage Bankers Association data, CMBS defeasance volume hit $28.3 billion in 2024, up 22% from the prior year, driven by borrowers repositioning portfolios after the 2023-2024 rate volatility.
The framework starts with a simple question: what are you trying to accomplish?
What Are the Four Paths When You Want Out of a Fixed-Rate Loan?
Every fixed-rate CRE loan with a prepayment lockout eventually presents the borrower with a decision. The four paths are hold, sell with assumption, defease and sell, or defease and refinance. Each has a different cost profile, timeline, and portfolio impact.
Hold to maturity or open period. Cost: zero. But you’re locked into the current structure, current rate, and current collateral. If the property is underperforming or you have a better use of equity, the opportunity cost of holding can exceed the defeasance penalty.
Sell with loan assumption. The buyer assumes the existing loan, bypassing defeasance entirely. In a higher-rate environment, an assumable below-market loan is a genuine asset — Bloomberg data shows that CMBS loans originated in 2020-2021 at sub-4% rates carried assumption premiums of 2-5% of loan balance in 2025 transactions. But assumption requires lender approval, buyer qualification, and the buyer must want your loan terms.
Defease and sell. You purchase Treasuries to replace the loan collateral, release the property, and sell it free and clear. The defeasance cost becomes part of your sale economics.
Defease and refinance. Same mechanics, but instead of selling, you refinance into a new structure — different rate, different leverage, different term. This makes sense when your current loan is restricting your ability to recapitalize or execute a business plan.
How Does the Rate Environment Change Defeasance Economics?
Rate environment is the single largest variable in defeasance cost, and it moves defeasance economics in the opposite direction most borrowers expect. Understanding this relationship is essential for timing defeasance decisions across your portfolio.
When Treasury rates are below your loan coupon, defeasance is expensive. You’re buying Treasuries that yield less than what your loan pays, so you need more principal to replicate the same cash flows. A 200 bps gap between your loan rate and Treasury yields on a $20M loan with 5 years remaining can produce a defeasance cost exceeding $1.5M.
When Treasury rates are above your loan coupon, defeasance gets cheap — sometimes dramatically so. The Treasuries you purchase yield more than your loan requires, so you need less principal. Bloomberg rate data from early 2025 showed 5-year Treasuries near 4.25%, which meant loans originated at 3.5-4.0% in 2020-2021 had defeasance costs at or near par.
The practical implication: defeasance cost is not static. It changes daily with Treasury rates. A defeasance that costs $800,000 today might cost $600,000 in three months — or $1.1M. If you’re considering defeasance on multiple loans, the sequencing and timing can materially affect total portfolio cost.
How Do You Build a Defeasance Decision Framework for a Portfolio?
A single-property defeasance decision is relatively simple: compare the cost to the benefit, make the call. A portfolio-level decision is different because you have multiple loans with different coupons, different remaining terms, and different defeasance cost sensitivities to rate movements. The framework needs to account for all of them simultaneously.
Step 1: Map Every Loan’s Defeasance Position
For each fixed-rate loan with a defeasance provision, you need four data points updated regularly:
- Current defeasance cost estimate (updated with live Treasury rates)
- Defeasance cost sensitivity (how much does cost change per 25 bps rate move?)
- Remaining lockout period (when does the open period begin?)
- Loan-level strategic intent (hold, sell, refi, undecided)
Step 2: Identify the Portfolio Inflection Points
Not all defeasance decisions are independent. Common portfolio scenarios where defeasance analysis becomes interconnected:
- 1031 exchange timing: You need to sell Property A to acquire Property B. Defeasance on A’s loan is a transaction cost of the exchange, and the exchange timeline is rigid.
- Fund lifecycle: A closed-end fund approaching disposition creates defeasance obligations on multiple loans with a fixed deadline. Sequencing matters.
- Recapitalization: You want to pull equity from stabilized assets to fund value-add acquisitions. Defeasing one loan to refinance at higher leverage releases capital for the next deal.
- Lender concentration risk: If you have multiple loans with the same CMBS trust, defeasing one may affect your negotiating position on others.
Step 3: Run the Alternatives Analysis
For every loan where defeasance is on the table, compare the all-in cost of each path:
| Defease + Sell | Assume + Sell | Hold to Open | Defease + Refi | |
|---|---|---|---|---|
| Direct cost | Defeasance cost + fees | Assumption fee (1%) | $0 | Defeasance cost + fees |
| Opportunity cost | None (immediate) | Buyer finding + approval (60-90 days) | Time value of trapped equity | None (immediate) |
| Rate risk | Locked at execution | None (existing terms) | Open period rate uncertainty | New rate at refi |
| Timeline | 30-45 days | 60-120 days | Months to years | 30-45 days + refi close |
The MBA reports that the average CMBS defeasance transaction takes 33 days from engagement to closing, with costs ranging from $50,000 to over $2M depending on loan size, remaining term, and rate differential.
What Role Does the Forward Curve Play in Timing?
If defeasance cost moves with Treasury rates, should you try to time it? In practice, you shouldn’t speculate on rate direction — but you should understand what the market is pricing and how it affects your decision window.
Bloomberg forward curves give you the market’s expectation of where Treasury rates will be at future dates. If the forward curve shows rates declining over the next 12 months, the market is telling you defeasance costs will likely increase. If the curve shows rates rising, costs may decrease.
This doesn’t mean you wait for the “perfect” moment. It means you use the forward curve as one input in your timeline decision. If you’re planning to sell a property in Q4 and the forward curve suggests defeasance costs will rise between now and then, executing the defeasance earlier (and warehousing the cost) may save money — even accounting for the carrying cost of the Treasury portfolio.
Pensford’s rate advisory practice publishes regular analysis of forward curves and their implications for prepayment decisions. Their defeasance resources provide the detailed mechanics for how to think about timing.
How Does LoanBoss Track Defeasance Costs Across Your Portfolio?
LoanBoss calculates estimated defeasance costs for every eligible loan in your portfolio, updated daily with live Treasury rates. The platform doesn’t replace your defeasance consultant — you’ll still need Pensford or another advisor to execute — but it gives you the portfolio-level visibility that makes strategic decisions possible.
What this looks like in practice:
- Daily cost estimates for every defeased-eligible loan, based on current Treasury curves
- Rate sensitivity analysis showing how each loan’s defeasance cost changes with 25, 50, and 100 bps rate moves
- Open period countdown so you know exactly when each loan’s penalty-free window begins
- Portfolio-level dashboard that lets you compare defeasance costs across all loans, sorted by cost efficiency
When rates move 30 bps overnight — which happened repeatedly during 2023-2024 — your defeasance economics change across every loan simultaneously. LoanBoss shows you the new numbers by the time you open your laptop. No calling three different servicers. No rebuilding a Treasury strip model in Excel.
What Are the Hidden Costs Beyond the Treasury Portfolio?
The Treasury securities are the headline cost, but the all-in defeasance expense includes several additional line items that borrowers often underestimate:
- Legal fees: $15,000-$40,000 for borrower’s counsel, plus lender’s counsel (which you also pay)
- Accountant opinion letter: $5,000-$15,000
- Rating agency fees (CMBS): $10,000-$25,000 if the trust requires rating agency confirmation
- Successor borrower fee: The entity that assumes the defeased loan charges an administrative fee, typically $10,000-$25,000
- Defeasance consultant fee: $10,000-$25,000 for structuring and executing the Treasury portfolio
On a $15M loan, these soft costs typically run $75,000-$125,000 on top of the Treasury portfolio cost. They don’t change with rates, so they represent a fixed floor on your total defeasance expense.
Frequently Asked Questions
Can I partially defease a loan to release one property from a portfolio? Some CMBS loan agreements allow partial defeasance — releasing individual properties from a cross-collateralized pool while the remaining properties and a proportional Treasury portfolio secure the balance. The loan documents must explicitly permit it, and the remaining collateral must meet the original underwriting thresholds. Check your docs before assuming this is available.
Is it ever better to pay yield maintenance instead of defeasing? If your loan allows either option, yield maintenance is typically cheaper and faster — it’s a cash payment to the lender rather than a structured Treasury substitution. But many CMBS loans only offer defeasance. For loans that offer both, compare the two costs directly. Our article on yield maintenance covers the mechanics.
Should I defease today or wait for rates to move? This is a market timing question, and the honest answer is: nobody knows where rates are going. What you can know is your current cost, your cost sensitivity to rate changes, and your transaction timeline. If you have a sale or refinance that depends on defeasance, the execution risk of waiting usually outweighs the potential savings from a favorable rate move.
How far in advance should I start planning a defeasance? Begin the analysis 6-12 months before your target transaction date. This gives you time to monitor rate movements, engage a defeasance consultant, coordinate with your servicer, and execute at a favorable window. The actual execution takes 30-45 days, but the strategic planning should start much earlier.
Does defeasance affect my borrowing capacity for new loans? Not directly — once defeasance is complete, the property is released and the old loan is no longer your obligation. However, some lenders view recent defeasance activity as a signal that you’re repositioning your portfolio, which can lead to additional diligence questions on new originations.
This framework reflects general defeasance considerations for CMBS and other fixed-rate CRE loans. Your specific loan documents define the available prepayment mechanisms and their requirements. At LoanBoss, we track defeasance eligibility and estimated costs across your entire portfolio — daily — so you never have to guess where you stand.