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Defeasance? Ask these questions.


Defeasance is the process through which a borrower is released from the obligations of their debt. This piece helps CRE professionals understand the questions they should ask before defeasing.

While the defeasance process can be summarized in a few lines, in practice it is very complex, involving a large number of parties with competing interests. Having an independent, experienced advisor on the borrower’s side is important to ensuring an on-time, cost-effective, and complication-free close.

Things to look out for when defeasing

  • Has the defeasance consultant thoroughly reviewed the loan documents and provided a comprehensive defeasance analysis to the borrower?
  • Are there ambiguous provisions in the loan documents that could result in value gained or lost by a borrower? If so, how will you approach negotiating them with the other parties involved?
  • Have all anticipated third-party fees been fully disclosed to the borrower?
    • What is the consultant’s fee structure? Is it reasonable?
    • Will the consultant ask for a deposit? Chatham does not charge an upfront deposit for consulting services.
  • Will residual value be generated as a result of the defeasance? If so, is the defeasance consultant returning a significant majority of this value back to the Borrower?
  • Can the defeasance be structured to the early prepayment date, for a complete upfront savings on the last few months of interest?
  • Is the loan subject to rating agency review which will entail additional time and cost?
  • Will the securities portfolio include higher-yielding, lower-cost agency securities in addition to Treasuries, if applicable?
  • How is the defeasance consultant going to purchase securities? Competitive auction or one relationship bank? A competitive auction utilizes the power of the marketplace to drive prices lower through competition.
  • Has the defeasance consultant structured the most efficient portfolio possible? This is best achieved through a competitive auction, which typically results in the lowest all-in defeasance costs, even where a consultant may offer to reduce other fees.
  • Have the changes in defeasance costs over the life of the transaction been reviewed?
    • How much will defeasance costs decrease after every monthly loan payment?
    • How will movements in Treasury yields affect defeasance costs?
  • Is the loan currently eligible for defeasance? All CMBS loans are locked out for a period of two years following securitization. Some CMBS loans are subject to a yield-maintenance penalty instead of defeasance.

Common mistakes made by borrowers when defeasing

  • Not budgeting enough time for the defeasance process
  • Unknowingly accepting costs that are higher than market standard
  • Failing to negotiate favorable defeasance provisions in new loans (for refinances) or Purchase and Sale Agreements (for sales)

Hiring an independent consultant is not only recommended, it's usually a critical piece to avoiding these mistakes and navigating the defeasance process without delaying loan closing.

Chatham Financial has executed over $167 billion total principal defeased and returned over $200 million in residual value to borrowers. Defeasance consultants are a part of Chatham's global real estate financial risk management practice, solving common but complex capital markets challenges for commercial and multifamily real estate investors.

Need help with defeasance?

Contact a Chatham advisor about defeasance or yield maintenance.