Defeasance Calculator

Estimate CMBS loan exit costs and bond portfolio premiums accurately.

Category	Current State	Defeasance Cost	Difference

What is a Defeasance Calculator?

A defeasance calculator is a specialized financial tool used by commercial real estate owners, CMBS borrowers, and investors to estimate the cost of exiting a fixed-rate loan before its maturity date. Unlike a simple prepayment penalty, which is often a percentage of the loan balance, defeasance is a complex legal and financial process where the borrower replaces the real estate collateral with a substitute portfolio of government securities—typically U.S. Treasury bonds.

Anyone managing Commercial Mortgage-Backed Securities (CMBS) loans should use a defeasance calculator to understand their liability. A common misconception is that defeasance is the same as yield maintenance; however, defeasance technically leaves the debt “in place” while freeing the property from the lien, whereas yield maintenance settles the debt entirely through a penalty payment.

Defeasance Calculator Formula and Mathematical Explanation

The math behind a defeasance calculator relies heavily on the Time Value of Money (TVM). To successfully “defeasance” a loan, you must purchase a portfolio of bonds that exactly matches the remaining payment schedule (principal and interest) and the final balloon payment of the original loan.

The Core Logic

The calculation follows these primary steps:

1. Calculate the Present Value (PV) of all future monthly payments.
2. Calculate the Present Value (PV) of the balloon payment at maturity.
3. Sum these PVs to determine the “Portfolio Cost.”
4. The “Defeasance Premium” is the Portfolio Cost minus the current Loan Balance.
5. Add legal, accounting, and custodian fees to find the Total Exit Cost.

Variable	Meaning	Unit	Typical Range
P&I	Monthly Debt Service	Currency ($)	Varies
Yt	Treasury Yield	Percentage (%)	1% – 5%
N	Remaining Months	Time (Months)	12 – 120
B	Balloon Payment	Currency ($)	70-100% of Principal

Practical Examples (Real-World Use Cases)

Example 1: The Small Office Building

Imagine a borrower with a $2,000,000 loan balance, 36 months remaining, and a $12,000 monthly payment. If the current Treasury yield is 3.00% and the loan interest rate was 6.00%, the defeasance calculator will show a significant premium. Because the Treasury yield is lower than the loan rate, the borrower must buy more “face value” in bonds to generate the 6.00% equivalent cash flow. Total costs might exceed $150,000 including fees.

Example 2: Large Retail Center

A $10,000,000 loan with a $8,500,000 balloon payment due in 60 months. With a Treasury yield of 4.5% and a loan rate of 4.0%, the defeasance calculator might show a “discount” or a very small premium because the replacement securities are yielding more than the debt service requirements. However, transaction fees of $70,000 still apply, making the total exit cost roughly $70,000 plus or minus the yield spread.

How to Use This Defeasance Calculator

Using our defeasance calculator is straightforward:

• Step 1: Enter your current outstanding loan balance.
• Step 2: Input your monthly Principal and Interest (P&I) payment.
• Step 3: Specify the months remaining until your loan’s maturity date.
• Step 4: Input the expected balloon payment (the amount due at the end of the term).
• Step 5: Look up current U.S. Treasury yields for your remaining term and enter the percentage.
• Step 6: Estimate transaction fees (standard is $65,000).

The defeasance calculator will instantly update the “Total Estimated Defeasance Cost,” helping you decide if refinancing or selling the property is financially viable.

Key Factors That Affect Defeasance Calculator Results

1. Treasury Yield Environment: This is the most critical factor. When Treasury yields rise, the cost to purchase the bond portfolio drops, lowering your defeasance cost.
2. Loan Interest Rate: If your loan rate is much higher than current Treasury yields, your premium will be higher.
3. Time to Maturity: The longer the remaining term, the more payments the defeasance calculator must account for, generally increasing the cost.
4. Balloon Amount: A larger balloon payment requires a larger Treasury purchase at the end of the term.
5. Transaction Fees: Legal counsel, securities intermediaries, and successor borrowers all charge fees that can range from $40,000 to over $100,000.
6. Prepayment Lockout: Most CMBS loans have a “lockout period” where you cannot defeasance or prepay at all. Ensure you are past this date before using the defeasance calculator for planning.

Frequently Asked Questions (FAQ)

Is defeasance the same as yield maintenance?

No. While both are used to protect the lender’s yield, the defeasance calculator determines the cost of buying bonds to replace collateral, whereas yield maintenance is a direct penalty payment to the lender.

Why is the cost so high when rates are low?

When interest rates (Treasury yields) are low, the defeasance calculator shows that you need to spend more money today to buy enough bonds to cover your future high-interest loan payments.

Who are the players in a defeasance transaction?

The process involves the borrower, the servicer, legal counsel, a defeasance consultant, an accountant for verification, and a successor borrower.

Can I use municipal bonds for defeasance?

Usually, no. Most CMBS agreements specifically require “government securities,” which typically means non-callable U.S. Treasury obligations.

How long does the defeasance process take?

A typical transaction takes 30 to 45 days. Our defeasance calculator provides a snapshot, but the actual bond pricing happens on the day of closing.

Does the lender get the defeasance premium?

No, the “premium” is simply the cost of the market-priced bonds. The lender continues to receive their scheduled interest and principal payments from the bond portfolio.

Is the defeasance cost tax-deductible?

Generally, yes. The costs associated with defeasance, including the premium and fees, are often deductible as a business expense, but consult a tax professional.

What is a successor borrower?

In a defeasance, the original borrower transfers the loan and the new bond collateral to a “successor borrower” (an SPV), which assumes the obligation of the debt.