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Defeasance in Real Estate Finance: Process and Timing, Prepayment and Lockout Provisions

CMBS and SPE Concerns, Structuring Around Mortgage Taxes, Economics of Prepayment vs. Defeasance

Note: CPE credit is not offered on this program

Recording of a 90-minute premium CLE video webinar with Q&A

This program is included with the Strafford CLE Pass. Click for more information.
This program is included with the Strafford All-Access Pass. Click for more information.

Conducted on Tuesday, March 16, 2021

Recorded event now available

or call 1-800-926-7926

This CLE course will examine the mechanics of defeasance in CMBS and other yield protected commercial real estate loans. The panel will discuss restrictions inherent in yield maintenance and lockout provisions, the timing complexities and documentation of defeasance transactions, CMBS servicing issues, and additional steps required to avoid mortgage taxes in states like New York and Florida.


Defeasance allows a borrower to prepay its existing loan after a specified lock-out period by substituting for the real estate collateral a basket of U.S. government-backed securities that generate cash flow sufficient to pay the ongoing debt service and the principal amount due at maturity. Defeasance thus results in yield protection for CMBS and other lenders that have been promised continued payments throughout the loan term.

The decision to refinance may be governed by the cost of defeasing the existing loan. Counsel must weigh the economic costs and benefits of defeasing a higher interest rate loan with lower yielding securities. Documentation is significant and typically includes the formation of a new SPE and transfer of the mortgage. Additional issues must be considered in states with significant mortgage taxes. If allowed, simple prepayment (with a prepayment penalty) might be the better option.

When involved in a refinance or sale that will require a defeasance to close, counsel must consider the transaction process and timing. All parties must agree to the closing timeline because once the borrower "pushes the defeasance button," the borrower must purchase securities and close the defeasance and the new loan within the allotted window or incur high breakage costs. In the CMBS context, servicer and rating agency approval must be obtained before closing.

Listen as our authoritative panel discusses the legal and economic complexities of defeasance.



  1. Defeasance and yield protection
  2. Economics of defeasance: weighing costs and benefits of refinancing
  3. Defeasance, prepayment, and lockout provisions
  4. Documentation of the transaction
  5. Parties to defeasance
  6. Process and timing issues
  7. Mortgage tax considerations


The panel will review these and other key issues:

  • What is the rationale for requiring defeasance in CMBS and other commercial real estate loans?
  • How should borrowers calculate the cost of defeasance? Why does defeasance make more economic sense later in the loan term?
  • Are there times when a cash prepayment is an option? When is prepayment preferable to defeasance?
  • How should the transaction be structured in a heavy mortgage tax state?


Herman, Steven
Steven M. Herman

Cadwalader Wickersham & Taft

Mr. Herman concentrates his practice in the areas of real estate finance, development, joint ventures, acquisitions,...  |  Read More

Weitzman, Andrea
Andrea G. Weitzman

Cadwalader Wickersham & Taft

Ms. Weitzman is an associate in Cadwalader’s Finance Group. Her practice is concentrated in the area of...  |  Read More

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