Defeasing a Loan: How It Works and What It Costs

Defeasing a loan is the process of substituting the original collateral on a commercial mortgage with a portfolio of US government securities, allowing a borrower to effectively retire the debt before maturity without triggering a traditional prepayment penalty. According to the Mortgage Bankers Association, commercial and multifamily mortgage debt outstanding surpassed $4.7 trillion in the most recent reporting period, and a substantial share of that fixed-rate, securitized debt contains defeasance clauses. Understanding how defeasing a loan works can save borrowers tens of thousands of dollars in transaction costs.

What Defeasing a Loan Actually Means

Defeasance is a legal and financial mechanism most commonly attached to commercial mortgage-backed securities (CMBS) loans. Instead of paying off the principal directly, the borrower purchases a basket of US Treasury or government-agency bonds whose payment schedule precisely matches the remaining principal and interest payments on the loan. The collateral on the loan switches from the underlying property to this securities portfolio. According to data from the Securities Industry and Financial Markets Association (SIFMA), the US Treasury securities market exceeded $27 trillion in outstanding debt in recent figures, providing the deep liquidity needed to assemble these portfolios. The Internal Revenue Code, specifically Section 860 governing Real Estate Mortgage Investment Conduits (REMICs), is the reason defeasance exists: it lets lenders maintain their tax-advantaged status while releasing the property lien. For borrowers, the appeal is freedom—selling or refinancing the asset becomes possible. The trade-off is cost: defeasance transactions commonly run $50,000–$120,000 in combined fees, separate from the cost of the replacement securities themselves.

How the Defeasance Process Works Step by Step

The mechanics involve several parties working on a compressed timeline. According to industry data compiled by Commercial Real Estate Finance Council (CREFC) members, a typical defeasance closes in 30–45 days. The borrower first notifies the loan servicer of intent, then engages a defeasance consultant who models the exact securities needed. A successor borrower—a special-purpose entity—assumes the defeased loan and the securities portfolio. Legal counsel, an accountant verifying the cash-flow match, and a securities intermediary all participate.

1. Notification: Provide written notice to the servicer, usually 30 days in advance per loan documents.
2. Securities modeling: The consultant calculates the precise bond portfolio to cover remaining payments.
3. Purchase and verification: An independent accountant confirms the cash flows match within IRS tolerances.
4. Closing: The lien releases, and the successor entity takes on the loan.

Each professional charges a fee: legal counsel runs $15,000–$50,000, accountant verification $5,000–$15,000, and consultant fees $20,000–$40,000. The Federal Reserve’s interest-rate environment directly affects the securities cost, making timing financially material.

Defeasance vs. Yield Maintenance: How to Choose Between Options

Borrowers paying off fixed-rate commercial debt early usually face one of two prepayment structures, and the choice is dictated by the loan documents rather than borrower preference. With yield maintenance, the borrower pays a lump-sum penalty calculated to compensate the lender for lost interest, then the lien releases immediately. With defeasance, the borrower buys securities to replace the collateral. According to Trepp, a leading CMBS analytics firm, the majority of conduit loans originated in recent years carry defeasance provisions rather than yield maintenance.

The cost comparison hinges on interest rates. When Treasury yields are higher than the loan’s interest rate, defeasance can produce a slight gain on the securities, narrowing the net cost; when rates are lower, the securities cost more, sometimes exceeding 10% of the loan balance. Yield maintenance penalties commonly range from 1% to 10% of the outstanding principal. Borrowers should request both an estimated defeasance cost from a consultant and a yield maintenance quote from the servicer before deciding which path the documents permit—and which one is cheaper at current rates.

What Defeasing a Loan Costs in 2026

Total cost breaks into two buckets: the securities portfolio and transaction fees. The securities purchase is the largest expense and fluctuates with US Treasury yields. As of 2026, with the federal funds rate elevated relative to the historically low rates of the prior decade, replacement securities for older low-rate loans cost more because bonds must generate the same fixed payments. According to SIFMA, intermediate-term Treasury yields have ranged from roughly 3.5% to 4.8% in recent figures.

Transaction fees include:

• Consultant fee: $20,000–$40,000
• Legal fees (borrower and lender counsel): $15,000–$50,000
• Accountant verification: $5,000–$15,000
• Rating agency and servicer fees: $5,000–$15,000
• Successor borrower fee: $1,000–$5,000

For a $5 million loan, total transaction costs frequently land between $50,000 and $120,000, excluding the securities. The Better Business Bureau advises verifying that any defeasance consultant has a verifiable track record before signing engagement letters, since these fees are non-refundable once work begins.

Red Flags to Avoid When Defeasing a Loan

Because defeasance is a niche transaction, borrowers face elevated risk of overpaying or working with underqualified intermediaries. The FTC consumer complaint database catalogs disputes involving financial service providers who misrepresent fees, and commercial borrowers should apply the same scrutiny. Watch for these warning signs:

• Vague fee structures: A consultant who will not provide a written, itemized estimate covering the $50,000–$120,000 fee range is a concern.
• No independent accountant: IRS REMIC rules require a verified cash-flow match; skipping this jeopardizes the transaction.
• Pressure to skip securities competitive pricing: Borrowers should confirm the securities are priced at market, not marked up.
• Unfamiliarity with your loan’s specific defeasance clause: Terms vary by loan and servicer.

The Securities and Exchange Commission regulates the broker-dealers selling Treasury securities, so confirm your intermediary is registered. Borrowers can verify registration through FINRA’s BrokerCheck tool, which lists licensing and disciplinary history at no cost. Roughly 1 in 8 financial-service complaints involve fee disputes, underscoring the value of upfront documentation.

When Defeasing a Loan Makes Financial Sense

Defeasance is worth pursuing primarily when a borrower needs to sell or refinance a commercial property before the loan matures. According to the Mortgage Bankers Association, hundreds of billions in commercial mortgages mature annually, and owners frequently transact ahead of those dates to capture favorable market conditions. If a property’s market value has risen 15%–30% above its purchase price, the cost of defeasance—$50,000–$120,000 in fees plus the securities—may be easily justified by the sale proceeds or improved refinancing terms.

Defeasance makes less sense when the loan is close to maturity. Because the securities portfolio must cover all remaining payments, defeasing a loan with only 6–12 months left often costs little less than simply waiting and paying off at maturity. The break-even calculation depends on the remaining term, the interest-rate spread, and the property’s value. Borrowers should run a net-present-value analysis comparing the all-in defeasance cost against the opportunity cost of holding the asset. The Federal Reserve’s published yield curve is the key input, since it determines the securities pricing that drives the entire transaction.

What Experts Recommend

Commercial finance professionals consistently advise borrowers to engage a defeasance consultant early—ideally 60 days before a planned sale or refinance. Industry analysts at firms tracked by the Commercial Real Estate Finance Council emphasize obtaining competing quotes from at least two consultants, since the $20,000–$40,000 consultant fee is negotiable on larger transactions. Specialists also recommend requesting a preliminary cost estimate the moment a sale becomes likely, because securities pricing shifts daily with the Treasury market.

Tax advisors stress coordinating with a CPA familiar with IRS REMIC requirements under Internal Revenue Code Section 860, since an improperly structured defeasance can create unintended tax consequences. Real estate attorneys recommend reviewing the original loan documents to confirm whether defeasance is even permitted and whether a lockout period—commonly the first 24 months of the loan—blocks any prepayment. According to Trepp, securitized loans frequently include such lockout windows. Finally, experts advise budgeting a 10%–15% contingency above the initial fee estimate, because rate movements between the quote and the closing date can change the final securities cost. Locking the closing date promptly reduces that exposure.

Steps to Start the Defeasance Process

Borrowers ready to defease should move methodically to control costs that range from $50,000 to $120,000 in fees alone. Begin by pulling the original loan documents and locating the prepayment and defeasance provisions, including any lockout period. Next, contact the loan servicer in writing to confirm the loan is eligible and to learn the required notice window, commonly 30 days.

1. Review loan documents for defeasance eligibility and lockout dates.
2. Notify the servicer and request the official defeasance requirements.
3. Engage a qualified consultant—verify the firm through the Better Business Bureau and confirm any broker-dealer through FINRA BrokerCheck.
4. Obtain a written cost estimate itemizing securities and the $50,000–$120,000 fee range.
5. Coordinate your CPA and attorney for IRS REMIC compliance and lien-release review.
6. Lock the closing date to minimize Treasury-rate exposure.

As of 2026, the elevated rate environment makes timing especially consequential. The FTC reminds consumers that non-refundable professional fees should be confirmed in writing before engagement. A disciplined process, started 45–60 days ahead, gives borrowers the best leverage to negotiate fees and time the securities purchase favorably.

Frequently Asked Questions

What does it mean to defease a loan?

Defeasing a loan means replacing the property collateral on a commercial mortgage with a portfolio of US Treasury or government-agency securities that exactly match the loan’s remaining payments. The lien on your real estate is released, allowing you to sell or refinance, while the lender continues receiving payments from the securities. It is most common on CMBS loans governed by IRS REMIC rules under Internal Revenue Code Section 860. Defeasance differs from a simple payoff because you do not retire the principal directly—you substitute the collateral instead, which keeps the loan technically outstanding but secured by bonds.

How much does it cost to defease a loan?

Defeasance costs split into two parts: the securities portfolio and transaction fees. Transaction fees—covering consultants, legal counsel, accountants, and servicer charges—commonly total $50,000–$120,000, depending on loan size and complexity. The securities purchase is separate and varies with US Treasury yields; in a higher-rate environment, replacement bonds for older low-rate loans cost more. Consultant fees run $20,000–$40,000, legal fees $15,000–$50,000, and accountant verification $5,000–$15,000. Because these fees are largely non-refundable once work begins, the Better Business Bureau recommends getting an itemized written estimate before signing any engagement letter.

Is defeasance better than yield maintenance?

Neither is universally better—your loan documents usually dictate which applies. Yield maintenance charges a lump-sum penalty (commonly 1%–10% of principal) and releases the lien immediately, while defeasance requires buying matching securities. The cost comparison depends on Treasury yields: when rates are higher than your loan rate, defeasance securities can cost less; when rates are lower, defeasance can exceed 10% of the balance. Request both a defeasance estimate from a consultant and a yield maintenance quote from your servicer, then compare net costs at current rates before deciding which permitted path is cheaper.

How long does the defeasance process take?

A typical defeasance closes in 30–45 days, according to figures cited by Commercial Real Estate Finance Council members. Most loan documents require at least 30 days’ written notice to the servicer before closing. The timeline includes securities modeling, independent accountant verification of the cash-flow match, legal review, and lien release. Experts recommend starting 45–60 days ahead of a planned property sale or refinance to allow room for negotiation and rate timing. Because securities pricing shifts daily with the Treasury market, locking your closing date early reduces the risk of cost increases between the estimate and final purchase.

Can any commercial loan be defeased?

No. Defeasance must be specifically permitted in your loan documents, and it is most common on securitized CMBS loans rather than bank portfolio loans. According to Trepp, many conduit loans include a lockout period—often the first 24 months—during which no prepayment or defeasance is allowed. After the lockout, defeasance typically becomes available. Some loans use yield maintenance instead. Review your original loan agreement’s prepayment section, or ask your servicer directly, to confirm whether defeasing a loan is an option and when the lockout window expires before planning a sale or refinance.

Do I need a consultant to defease my loan?

In practice, yes. Defeasance requires precise securities modeling and an independent accountant to verify the cash-flow match meets IRS REMIC requirements, so borrowers nearly always engage a specialized defeasance consultant. Consultant fees range from $20,000–$40,000 and are negotiable on larger transactions. Before hiring, verify the firm through the Better Business Bureau and confirm any associated broker-dealer through FINRA’s BrokerCheck tool, which is free. Coordinate the consultant with your CPA and real estate attorney to ensure tax compliance under Internal Revenue Code Section 860 and a clean lien release. Obtaining two competing quotes helps control costs.