Defeasance

Defeasance is a provision that allows a borrower to relieve themselves of the obligations of a loan by providing the lender with a substitute collateral, usually a package of U.S. Treasury securities. This effectively pays off the loan, and the borrower is released from further obligations under the loan contract.

The process of defeasance usually involves the borrower purchasing a portfolio of government-backed securities (typically U.S. Treasuries) sufficient to cover the remaining principal and interest payments on the loan. This portfolio is then pledged to the lender as collateral in place of the original asset (e.g., the real estate property). Once the defeasance process is complete, the borrower no longer has any obligations under the loan, and the lender's risk is effectively transferred from the original borrower to the U.S. government (as the provider of the new collateral).

Defeasance is commonly used in commercial real estate transactions, particularly in cases where the borrower wishes to sell the property or refinance the loan before the end of the loan term. It allows the borrower to remove the loan from their balance sheet, even if the loan contract includes prohibitions against prepayment or strict prepayment penalties. However, the process of defeasance can be complex and costly, involving various legal, transactional, and advisory fees, and it typically requires the assistance of a defeasance consultant or attorney.ring thoughts, questions, etc. The Comment feature allows for discussion with several people as it is threaded and has a Reply box.