Defeasance is a prepayment mechanism on CMBS and some agency loans that substitutes Treasury securities for the original collateral, effectively paying off the loan without triggering prepayment penalty language.
Defeasance allows the borrower to sell the underlying property while keeping the loan in place on paper — with Treasury bonds producing the income stream to service the debt. The cost of defeasance depends on current Treasury rates relative to the loan rate; can be substantial.
For LA multifamily sellers with CMBS debt originated in the 2019–2022 period at low rates, defeasance costs in the current higher-rate environment can be meaningful. Factor defeasance into net sale proceeds calculations before committing to a listing.
From the Sterman LA Multifamily Glossary — defined the way a broker with $1.41 billion across 254 closed transactions actually uses these terms.
Michael Sterman, Senior Managing Director Investments, Marcus & Millichap.
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