Defeasance is the process by which a loan that has been securitized can be paid off prior to the maturity date and/or open period. In CMBS lending, defeasance refers to the substitution of collateral for a loan that is secured by the subject property. The collateral that replaces the property is a basket of U.S. Government securities. The cash flow from the securities must meet the debt service needs of the loan for the remaining term.
The actual cost of the defeasance loan varies in relation to the coupon of the mortgage and the current state of market interest rates. Low rates in comparison to the loan coupon would mean a high cost of defeasance. The other costs involved are those that would go to the defeasance firm coordinating the process, which can be complicated. Those costs can also be significant at up to $50k.
If you currently have a securitized loan and want to know what your defeasance costs would be, contact Clopton Capital and we’ll calculate that and all other relevant costs for you.