CMBS defeasance: swapping your property for Treasuries

Defeasance replaces your property as collateral with a portfolio of U.S. Treasury or other government securities that pays every remaining loan payment, so the mortgage lien comes off and you can sell or refinance. Federal REMIC rules do not allow it within two years of the trust’s startup day (26 CFR 1.860G-2(a)(8)), and loan agreements require at least 30 days’ notice.

The loan itself does not go away. It stays in the CMBS trust, paid by the securities, and a new single-purpose entity (the successor borrower) takes it over. You walk away with the property free of the lien. Most fixed-rate conduit loans use this structure: in the BANK5 2025-5YR14 prospectus, 21 of 25 loans (82.3% of the pool) permit defeasance after a lockout that ends at least two years after closing (pp. 226-227).

To size it before you call anyone, run the defeasance calculator. It prices the securities against today’s Treasury curve, pulled live.

What the loan documents require

The conditions below come from Section 2.8 of a loan agreement dated October 1, 2025 between 1010 Pacific Owner LLC and Citi Real Estate Funding Inc. and Morgan Stanley Bank, N.A. (filed as Exhibit 10.1 by Clipper Realty). They match the general description in the BANK5 prospectus. Your agreement will be similar in shape and different in detail.

1. Timing. Defeasance is available after the “Release Date” (here, the earlier of the fourth anniversary of closing and two years after the REMIC startup day) and before maturity, with no event of default outstanding.
2. Notice. At least 30 and no more than 90 days’ notice naming the defeasance date. A draft lien release goes to the lender at least 15 business days ahead.
3. Payments on the day. Principal and interest through the defeasance date (or the next payment date if it falls between), all other sums due, and every fee and cost of the lender, its agents and the rating agencies, plus any transfer or recording taxes.
4. The securities. Enough government securities to make each scheduled payment through maturity, or through the first day of the open period where the loan allows that (BANK5 prospectus, p. 226), deposited in a dedicated account and pledged to the lender.
5. Opinions and certificates. A first-priority security interest opinion, a tax opinion that the defeasance is not a deemed exchange, a bankruptcy preference opinion, a REMIC opinion, a non-consolidation opinion for the successor borrower, an officer’s certificate, and an accounting firm’s certificate that the securities cover every scheduled payment.
6. Rating agency confirmation that the defeasance will not hurt the bonds’ ratings, where the servicing agreement requires one (see below).
7. A successor borrower, a single-purpose entity that assumes the note so the original borrower is released.

Who approves it, and how long each step can take

In BANK5 2025-5YR14, the pooling and servicing agreement puts defeasance with the master servicer, not the special servicer.

Step	Who	What the document says
Processing the request	Master servicer	Processes all defeasance transactions and is entitled to all defeasance fees (PSA 3.18(h); 3.11(a))
Approval	Master servicer alone	Approving a defeasance is a “Master Servicer Decision” (PSA 3.18(m)(xii))
Exceptions	Special servicer and Directing Certificateholder	Collateral other than non-callable U.S. obligations, or a prepayment in place of defeasance, is a Major Decision (PSA 6.08(a)(xv))
Successor borrower	Sometimes the loan seller	For loans sold by Morgan Stanley, Wells Fargo and Bank of America, the seller kept “Retained Defeasance Rights and Obligations”; the master servicer must notify it within 5 business days of a request (PSA 3.18(i))
Rating agencies	Master servicer requests	Not needed if the loan is under $20 million, under 5% of the pool and not a top-ten loan, with a defeasance certificate delivered instead (PSA 3.18(h))
Rating agency silence	Master servicer	If an agency does not respond within 10 business days of the posting, the servicer asks again; after 5 more business days of silence the requirement is treated as not applying (PSA 3.25(a))

Sources: BANK5 2025-5YR14 Pooling and Servicing Agreement, dated as of April 1, 2025, sections cited.

The REMIC rules set the outer limits. A defeasance is allowed only if the substitute collateral is solely government securities, the mortgage documents allow the substitution, the lien is released to facilitate a sale or another customary commercial transaction, and the release is not within two years of the startup day (26 CFR 1.860G-2(a)(8)(ii)). That is why a servicer cannot simply agree to let you defease early. More on the tax side: what a REMIC is and why it limits your servicer.

What defeasance costs

There is no published fee schedule, and no primary source states a typical total. The costs fall into these buckets:

• The securities. The largest item by far. You buy a portfolio whose payments match your remaining loan payments. When Treasury yields are below your note rate, the portfolio costs more than the loan balance; when they are above it, it can cost less. That gap is why defeasance cost moves with the market every day.
• Servicer fees. The master servicer keeps 100% of defeasance fees in BANK5 2025-5YR14 (PSA 3.11(a)(ii)); the amount is set in your loan documents or the servicer’s schedule.
• Successor borrower. Formed or designated for the loan, and paid to carry the loan to maturity. Under PSA 3.18(h) the master servicer must try to have the borrower pay “all costs of such defeasance, including but not limited to the cost of maintaining any successor mortgagor”.
• Opinions and verification. Your counsel’s opinions, the lender’s counsel, and the accounting firm’s certificate.
• Securities broker and custodian for buying and holding the portfolio.
• Rating agency fees, where confirmation is required and the documents put the cost on you.

Defeasance or yield maintenance?

Your loan documents usually decide this for you, not a preference. Read the prepayment clause first. A side-by-side of every structure is on CMBS prepayment penalties.

	Defeasance	Yield maintenance
What happens to the loan	Stays in the trust, assumed by a successor borrower	Paid off in full
What you pay	The cost of a Treasury portfolio plus transaction costs	A premium on top of the balance, often the greater of 1% and a present-value formula
Who calculates	You, your defeasance consultant and an accounting firm	The servicer, under the loan’s definition
Typical approver in BANK5	Master servicer	Set by the loan’s prepayment terms; waiving it is a Major Decision
Detail	This page	Yield maintenance

What to prepare

• The loan agreement, note and any amendments, with the prepayment and defeasance sections flagged.
• The servicer’s loan number and the trust name (on your monthly statement, or look it up on who is my special servicer).
• The target closing date of your sale or refinance, and a defeasance date at least 30 days out.
• Your choice of successor borrower, if the loan lets you choose, and whether the loan seller kept that right.
• A current payoff of escrows and reserves held by the servicer, so you know what comes back to you.

Defeasing one parcel of a multi-property loan works differently: see partial releases. If the property is being sold and the buyer would rather keep the loan, compare against an assumption.

Refinancing or selling after you defease

Defeasance is usually one half of a transaction: it clears the lien so a sale or a new loan can close. If you are refinancing, start the new loan at the same time as the defeasance notice so the two closing dates line up. Janover Capital LLC arranges the replacement financing; it is a commercial mortgage advisor, not a lender. Get a CMBS quote, or read the CMBS refinance guide first.

This page describes loan documents and federal tax rules. It is not legal or tax advice; your loan agreement and your counsel govern.

Sources: BANK5 2025-5YR14 PSA sections 3.11, 3.18(h), 3.18(i), 3.18(m), 3.25, 6.08(a); BANK5 2025-5YR14 prospectus, pp. 224-227; 1010 Pacific Street loan agreement, October 1, 2025, Section 2.8 and “Release Date”; 26 CFR 1.860G-2(a)(8).