Defeasance
Quick answer
Defeasance is a prepayment method in which a borrower substitutes government securities for the property as loan collateral instead of paying the loan off in cash.
Defeasance is standard in CMBS and many life company loans. Rather than repaying principal, the borrower buys a portfolio of Treasury securities that replicates the remaining payment stream, releasing the property from the lien. Cost depends on the spread between the loan rate and current Treasury yields, and can be substantial when rates have fallen since origination.
Related product: Permanent Debt
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