What Is Defeasance?

PAYING A COMMERCIAL REAL ESTATE LOAN EARLY THROUGH DEFEASANCE

Defeasance is a strategy that permits the repayment of a commercial property loan on a property, to facilitate sale or refinance. Many securitized mortgages are packaged to create investment products called CMBS,Commercial Mortgage Backed Securities. Because the stability of these products depends on the guaranteed return of the investment from the interest charged over the original term of the loan, prepayment is generally prohibited.

Defeasance, is the replacement of the loan proceeds with government-backed securities such as treasury bonds, that offer the same return. The security offered by the defeasance process must promise enough cash flow to pay the original commercial property loan's interest and principal, so that the lender does not end up with less money than if the loan had remained intact.
The result is that the borrower is able to pay off the commercial mortgage loan early and sell the property without a lien transferred to the buyer. The securities are transferred to a successive borrower, who can make an additional profit off the transaction.

Check out this defeasance calculator and set up your refinance smoothly.


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