Defeasance vs Yield Maintenance: CRE Prepayment Guide

No. Defeasance must be explicitly permitted in the loan document. Most CMBS (conduit) loans and agency loans (Fannie Mae, Freddie Mac, HUD) allow defeasance. However, many portfolio loans, bridge loans, and specialized loans (mezzanine, preferred equity) do not. Always check the loan documents or contact the lender first. If defeasance isn't permitted, yield maintenance (or a prepayment lock-out period) is typically the only option.

Treasury rates are volatile and can shift between defeasance initiation and closing. Most defeasance agreements lock in the Treasury yield curve at a specific date (often the defeasance closing date or 1–2 business days prior). If rates move significantly before you close, the cost of the Treasury portfolio changes. You have a few options: (a) accept the new cost, (b) delay closing to wait for more favorable rates, or (c) switch to yield maintenance. Always build a small cushion in your cost estimate to account for rate volatility during the 3–6 week closing process.

The successor borrower entity (typically a special-purpose LLC or trust) remains the formal obligor under the loan. However, it has no active management: it simply holds Treasuries in a trust account, and those Treasuries generate cash flows that automatically pay the debt service to the lender (or to a trustee who remits to the lender). From your perspective as the original borrower, you are released of all liability. The successor borrower is passive and requires no ongoing work.

Yes, after defeasance the property is free and clear, so you can refinance with a new loan. However, you're paying defeasance costs upfront and then incurring new loan origination costs. If you're planning to refinance anyway, yield maintenance (or choosing not to prepay and riding out the existing loan) may be more economical. Defeasance is most valuable when you want the property free and clear for sale or long-term hold without encumbrance.

Often, yes. Many loans have a lockout period (typically 3–5 years) during which prepayment is prohibited entirely. After the lockout expires, you can usually choose between defeasance and yield maintenance (if the loan permits defeasance) or yield maintenance only (if defeasance isn't allowed). Some loans also have a "yield maintenance only" period between lockout and end of term. Check your loan documents for the exact prepayment schedule.

Treasury curve shape matters significantly. A steep curve (short-term Treasuries yielding much less than long-term) increases defeasance costs because matching long-dated loan payments requires purchasing longer-dated Treasuries at premium prices. A flat curve reduces this premium. In an inverted curve environment, defeasance can be cheaper because you may find attractive yields at shorter maturities. Always examine the full Treasury curve when analyzing defeasance cost.

Yes, most Fannie Mae and Freddie Mac loans explicitly permit defeasance. However, the mechanics differ slightly from CMBS defeasance. Agency lenders typically provide detailed defeasance guidelines and approved defeasance counsel lists. The process is similar: construct a Treasury portfolio, set up a successor borrower, and the property is released. Costs are comparable to CMBS defeasance. Always confirm permissibility with your loan servicer before proceeding.

Yield maintenance closings are much faster than defeasance—typically 1–2 weeks from initiation to payoff. The process is simple: (a) contact the lender for a payoff quote (which includes the yield maintenance penalty), (b) wire funds, (c) the loan is paid off and released. Minimal documentation is required. If you need to close quickly (e.g., for a property sale), yield maintenance is the faster path—assuming it's permitted and economically competitive.

This is a real risk. If Treasury rates jump (narrowing the spread between your loan coupon and Treasury yields), the defeasance cost drops dramatically. Conversely, if rates fall (widening the spread), the cost increases. Most defeasance agreements allow a small rate tolerance or require you to accept the rates prevailing at closing. Some borrowers include a rate "lock" in the defeasance contract (the intermediary commits to a specific portfolio cost for a limited period, typically 1–3 days). If rates move beyond your tolerance, you can renegotiate or pivot to yield maintenance.

You can estimate, but it's complex. Yield maintenance is easier to estimate (PV of rate differential over remaining term). Defeasance requires detailed Treasury yield curve modeling and portfolio construction, which is best done by a specialist. Use the CRELYTIC Defeasance Calculator to quickly model both scenarios with your loan parameters and current Treasury yields. This gives you a reliable comparison and helps you decide which path to pursue before engaging legal counsel.