What is Defeasance?
- Defeasance is the substitution of one type of collateral for another
- In commercial real estate, defeasance is the process of releasing a commercial property from the lien of a mortgage and replacing it with a portfolio of government securities
- Once a defeasance takes place, the securities portfolio effectively replaces the borrower’s payment stream and makes the remaining mortgage payments on the loan, insuring that the lender receives full payments through maturity
- Defeasance is effectively a prepayment from the borrower’s perspective, since it enables them to get out of their loan prior to maturity; but unlike a prepayment it keeps the loan payment stream intact for the lender
Existing Loan Prepayment Structure
Defeased Loan Structure
