Colorado Real Estate Journal – Prepayment Versus Defeasance

In light of the recent “return” of some commercial mortgage-backed securities loan originators to the capital markets, and the outstanding volume of pre-2008 CMBS loans that require defeasance in lieu of prepayment, now is an ideal time for a refresher on the nuances of defeasance. This article will provide a brief overview of CMBS defeasance and distinguish it from loan prepayment. Although both yield a similar result for the borrower – release of the deed of trust from its property – the transactions provide a much different result for the lender – satisfaction of the promissory note when the loan is prepaid, versus assumption and continuation of the note when the loan is defeased. Note: This article applies to performing loans, and is not intended to address defaulted loans.

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