Defeasance

Defeasance is a method of prepaying a commercial mortgage (commonly CMBS loans) by substituting the loan's collateral with a portfolio of government securities that replicate the remaining payment schedule. Unlike yield maintenance (which is a cash penalty), defeasance replaces the real estate collateral with U.S. Treasury securities that generate the same cash flows the lender would have received. The borrower is released from the mortgage and can sell or refinance the property. Defeasance can be expensive - the cost depends on the difference between the loan rate and current Treasury yields. When rates are higher than the loan rate (as in 2023-2024), defeasance can actually be cheaper than yield maintenance. For NNN investors, understanding defeasance is important when acquiring properties with existing CMBS debt, as the cost of defeasing the existing loan must be factored into the acquisition analysis.

Defeasance is a key concept that affects property valuation, financing decisions, and investment returns in the triple net lease market. Understanding Defeasance helps investors make informed acquisition and management decisions.

Defeasance directly influences how commercial properties are valued, financed, and traded. Changes in Defeasance can impact cap rates, NOI calculations, and overall investment performance for net lease properties.

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