Defeasance Calculator

Defeasance is a complex financial strategy often used in commercial real estate finance to replace collateral on a loan with government securities, allowing the borrower to be released from the mortgage lien. But calculating the total cost of defeasance—including securities cost, administrative fees, and legal charges—can be daunting without the right tools.

This is where our Defeasance Calculator comes in. Designed for real estate investors, borrowers, financial consultants, and commercial lenders, this tool simplifies the entire calculation process. With a clean interface and detailed inputs, it provides accurate cost breakdowns and helps you plan ahead.

In this article, you’ll learn how to use the tool, the formulas behind the scenes, and how to interpret the results for better financial decision-making. We’ll also cover common questions at the end.

What Is a Defeasance Calculator?

A Defeasance Calculator is a digital tool that estimates the total cost required to defease a commercial real estate loan. It calculates:

• The securities cost to replace the loan cash flows
• The administrative and legal fees
• The total defeasance cost
• And the cost as a percentage of the loan balance

It helps borrowers assess whether defeasing their loan early is financially viable compared to prepayment or yield maintenance options.

How to Use the Defeasance Calculator

The calculator is user-friendly and structured in three key sections:

1. Loan Information

Enter your loan details:

• Current Loan Balance – The remaining principal amount on your loan.
• Interest Rate – The rate charged on the loan (e.g., 4.5%).
• Remaining Term – Months left until the loan matures.
• Payment Frequency – Choose from Monthly, Quarterly, Semi-Annually, or Annually.

2. Securities Information

Input assumptions related to Treasury yields and fees:

• Treasury Yield Rate – The current yield of U.S. Treasury securities.
• Administration Fee – Typically around 0.5% of the loan balance.
• Legal and Processing Fee – A flat fee, commonly $25,000.

3. Results

Click Calculate, and the tool provides:

• Estimated Securities Cost
• Administrative Cost
• Total Defeasance Cost
• The cost expressed as a percentage of your loan balance

Use Reset to clear values and try again.

Example Calculation

Let’s assume:

• Loan Balance = $5,000,000
• Interest Rate = 4.5%
• Remaining Term = 120 months
• Payment Frequency = Monthly
• Treasury Rate = 2.5%
• Admin Fee = 0.5%
• Legal Fee = $25,000

Results:

• Securities Cost (Defeasance Premium): ~$385,000
• Admin Cost: $50,000
• Total Cost: ~$435,000
• Cost as % of Loan: 8.7%

This gives borrowers an immediate and clear sense of how defeasance impacts their exit cost.

Key Features of the Calculator

✅ User-Friendly Interface
Clearly labeled input fields and dropdowns.

✅ Real-Time Calculation
Uses JavaScript to compute instantly when the “Calculate” button is clicked.

✅ Accurate Formulas
Leverages present value calculations of future loan payments discounted at the Treasury yield rate.

✅ Breakdown of Costs
Displays individual line items, not just the total—ideal for reporting and presentations.

✅ Responsive Design
Well-styled for web and mobile interfaces.

Benefits of Using a Defeasance Calculator

1. Saves Time: No manual financial modeling required.
2. Improves Decision-Making: Know when defeasance makes sense financially.
3. Transparency: See how changes in treasury rates or loan terms affect the cost.
4. Risk Management: Prevent surprises with legal or admin fees.
5. Planning Ahead: Evaluate potential refinancing or sale of the property.

Behind the Scenes: How It Works

The tool uses the following financial logic:

1. Loan Payment Calculation

The periodic payment is based on:

iniCopyEditPMT = P × r × (1 + r)^n / [(1 + r)^n – 1] 

Where:

• P = Loan Balance
• r = Periodic Interest Rate
• n = Total Payment Periods

2. Securities Cost

It’s the present value of all future loan payments, discounted using the Treasury yield:

javaCopyEditSecurities Cost = Σ [ PMT / (1 + treasuryRate)^i ] 

3. Defeasance Premium

This is the difference between the securities cost and the current loan balance.

4. Admin Cost

pgsqlCopyEditAdmin Cost = Loan Balance × Admin Fee % + Legal Fee 

5. Total Cost

iniCopyEditTotal = Defeasance Premium + Admin Cost 

20 FAQs About the Defeasance Calculator

1. What is defeasance?

Defeasance is the substitution of collateral (typically U.S. Treasuries) for an existing loan to allow early release from lien obligations.

2. Who uses this calculator?

Commercial real estate borrowers, mortgage brokers, loan advisors, and investment analysts.

3. Is this calculator suitable for residential loans?

No, defeasance applies to commercial real estate loans, especially those part of CMBS structures.

4. How accurate is the securities cost estimate?

It’s a strong approximation, but actual cost may vary based on market timing and selected securities.

5. Does it include prepayment penalties?

No. Prepayment and defeasance are different; this calculator is for defeasance only.

6. How often are Treasury yields updated?

You must enter the current yield manually. These can be found on financial news or Federal Reserve websites.

7. Can I change the legal fee?

Yes. The default is $25,000 but it’s customizable.

8. What does "admin fee" cover?

It typically includes costs of coordination, escrow, trustee management, etc.

9. Can I save the results?

You can manually copy results. For advanced use, integrate with a backend database.

10. What is a defeasance premium?

The extra amount over your loan balance needed to buy replacement securities.

11. What if my loan has a balloon payment?

This version assumes full amortization. Custom versions can add balloon payment support.

12. Can I use this calculator offline?

Yes, if embedded into a local HTML file with JavaScript enabled.

13. What programming languages are used?

The tool uses HTML, CSS, and JavaScript—but users only interact with the interface.

14. Is the calculator mobile-friendly?

Yes, it is responsive for most modern devices.

15. Can this help in refinancing decisions?

Absolutely. Comparing defeasance cost vs. interest savings from refinancing is common.

16. Are there any subscription charges?

No, this tool is free to use.

17. Is this tool secure?

There’s no data storage involved, making it privacy-safe for users.

18. Can I integrate it into my website?

Yes, you can embed the code or contact your developer for integration.

19. Is legal advice required for defeasance?

Yes, always consult a legal or financial advisor before committing to defeasance.

20. How is this different from yield maintenance?

Yield maintenance is a penalty-based prepayment method; defeasance involves buying securities to replace loan payments.

Final Thoughts

Understanding and calculating defeasance costs doesn’t have to be complicated. With our Defeasance Calculator, you can take control of your commercial real estate finances. Whether you’re exploring exit strategies, preparing to refinance, or negotiating with lenders, this tool is a must-have for clear and confident decision-making.