Yield Maintenance vs Defeasance: The Real Cost of Exiting a CMBS Loan Early

The choice between yield maintenance vs defeasance is not usually a choice at all. Your loan documents already dictate which one governs your exit, and most CMBS loans require defeasance. The real work is understanding what each costs, because the answer swings with two variables most sponsors ignore until they are already at the closing table: the direction of Treasury yields since origination, and how much time is left on the loan. Both structures exist to make the lender whole for the income it loses when you prepay. They arrive at that outcome by opposite mechanics, and in the current rate environment those mechanics produce sharply different bills. The thesis: do not ask which is cheaper in the abstract. Ask what your specific loan requires, then price it against today's Treasury curve and your remaining term, because that is where the real cost lives.

Key Takeaways

Yield maintenance and defeasance both compensate a lender for lost interest when a CMBS loan is prepaid, but yield maintenance is a cash penalty paid to the lender while defeasance substitutes a Treasury portfolio for the collateral.
Which one applies is usually not your decision. Most CMBS loans require defeasance to preserve the securitization structure, while yield maintenance is more common on loans a lender holds directly.
Rate direction drives cost. When Treasury yields have risen above the loan's coupon since origination, both penalties fall toward their floor, and defeasance can even generate residual value; when yields have fallen, both penalties climb.
Time remaining is the second lever. Defeasance carries high fixed transaction costs regardless of term, so with under 18 to 24 months left, yield maintenance is often the cheaper structure when a loan permits a choice.
In normal rate conditions, both commonly cost more than 3 percent of the loan balance, per industry sources, which is why the exit cost belongs in the acquisition model, not the exit surprise.

What is the difference between yield maintenance and defeasance?

Yield maintenance and defeasance are two prepayment mechanisms that make a lender whole for interest lost when a borrower exits a fixed-rate CMBS loan early. Yield maintenance is a cash penalty paid directly to the lender. Defeasance replaces the loan's real estate collateral with a portfolio of government securities that reproduces the remaining payment stream. Same goal, opposite method.

The distinction is structural, and it traces back to who holds the loan. With yield maintenance, the borrower pays off the balance plus a make-whole fee, and the loan is retired. With defeasance, the loan does not go away. The borrower buys a basket of Treasury or agency securities whose cash flows match the loan's remaining scheduled payments, and that portfolio is substituted in as collateral. The property is released, but the loan continues to exist, now backed by bonds instead of a building. This is why CMBS pools favor defeasance: the securitization's investors keep receiving the exact payment stream they were promised, so the bonds' ratings and structure stay intact.

Feature	Yield maintenance	Defeasance
Mechanism	Cash make-whole penalty to lender	Substitute Treasury portfolio as collateral
Loan after exit	Retired	Continues, backed by securities
Property	Released at payoff	Released, collateral swapped
Typical setting	Loans held by the lender	Securitized CMBS pools
Main cost drivers	Rate spread, remaining term	Cost of securities, transaction fees, remaining term

See the yield maintenance and cmbs loan glossary entries for the underlying mechanics of each.

How is each one calculated?

Yield maintenance is calculated as the present value of the interest the lender will lose, found by discounting the remaining payments at a current Treasury yield and multiplying by the spread between the loan's rate and that yield, often plus a small make-whole margin. Defeasance is calculated as the market cost of the Treasury portfolio needed to replicate the loan's remaining cash flows, plus third-party transaction fees.

The two formulas respond to Treasury yields in the same direction, which is the key insight. In yield maintenance, per industry descriptions, the penalty equals the present value of the lost coupon discounted at Treasury plus a make-whole spread commonly cited at 25 to 50 basis points. When Treasury yields rise toward or above the loan's coupon, the spread the lender is being compensated for shrinks, and the penalty falls toward the floor, often a minimum of 1 percent of the balance. In defeasance, the borrower must buy securities that generate the loan's remaining payments. When Treasury yields are high, those securities are cheaper, because each dollar of bonds throws off more income, so fewer are needed. When yields are low, the borrower must buy more bonds to hit the same cash flows, and the cost climbs.

A worked example makes the symmetry concrete. Suppose $10 million remains on a loan at a 4.5 percent coupon with five years left. If comparable Treasury yields sit at 4.5 percent, the yield maintenance penalty collapses to roughly its 1 percent floor, about $100,000, because the lender can redeploy the prepaid balance at the same rate and loses almost nothing. If instead Treasury yields sit at 2.5 percent, the lender loses roughly 2 percentage points a year for five years, and the present-valued make-whole runs into the high six figures. Defeasance on the same loan moves the same way: at 4.5 percent Treasury yields the replacement bond portfolio is cheap, while at 2.5 percent it is expensive. The expert-voice line worth keeping: yield maintenance and defeasance are two prices for the same thing, and in a high-rate market they can both round down to almost nothing, which is exactly when most sponsors assume they will be punished.

Which one is cheaper, and when?

Which structure is cheaper depends on rate direction and time remaining, not on the labels. When Treasury yields have risen above the loan's coupon since origination, both penalties fall toward their floors, and defeasance can occasionally return residual value to the borrower. When yields have fallen below the coupon, both penalties rise, and the borrower pays to make the lender whole for a below-market loan.

Time remaining is the second and often decisive lever. Defeasance carries substantial fixed costs regardless of how much term is left: accountant verification, a defeasance consultant, legal fees, a successor borrower, and rating agency involvement. Those costs do not scale down as the loan approaches maturity. Yield maintenance has far lower transaction overhead. So with a short remaining term, commonly cited as under 18 to 24 months, yield maintenance is frequently the cheaper structure when a loan permits a choice at all. Over a longer remaining term, the fixed costs of defeasance are spread across a larger benefit, and in a favorable rate environment defeasance can win.

Scenario	Rate direction	Time left	Likely cheaper structure
Yields up since origination	Above coupon	Any	Both low; defeasance may return residual value
Yields down since origination	Below coupon	Long	Both high; compare portfolio cost vs penalty
Short-fuse exit	Either	Under ~18-24 months	Yield maintenance, if permitted
Long remaining term, rates favorable	Near or above coupon	Long	Defeasance, spread over larger base

Industry sources note both structures commonly exceed 3 percent of the loan balance in normal rate conditions, so the exit is rarely free. But in the elevated-rate environment of 2026, sponsors with loans originated at low coupons may find the exit far cheaper than the loan documents' scary language implies, because rising Treasury yields have compressed the make-whole toward its floor. The mistake is assuming the penalty without pricing it.

Frequently Asked Questions

Can I choose between yield maintenance and defeasance?

Usually not. Your loan documents specify which prepayment mechanism governs, and most securitized CMBS loans require defeasance to keep the payment stream intact for bond investors. Yield maintenance is more common on loans a lender holds on its own balance sheet. Some loans offer a choice or a defeasance-to-yield-maintenance conversion, but that is the exception, not the rule.

Does defeasance get cheaper when interest rates rise?

Yes, generally. Defeasance requires buying a Treasury portfolio that replicates the loan's remaining payments. When Treasury yields rise, each bond generates more income, so fewer bonds are needed and the portfolio costs less. When yields have risen above the loan's coupon, defeasance can even produce residual value, though transaction fees still apply.

Why do CMBS loans usually require defeasance instead of yield maintenance?

CMBS loans usually require defeasance because it preserves the exact cash flows promised to the securitization's bondholders. By substituting a Treasury portfolio for the property as collateral, the loan continues to make its scheduled payments, keeping the bond structure and ratings intact. A simple cash payoff would disrupt that payment stream.

How much does it cost to exit a CMBS loan early?

In normal rate conditions, both yield maintenance and defeasance commonly cost more than 3 percent of the loan balance, per industry sources, plus transaction fees for defeasance. The actual cost swings with Treasury yields and remaining term: when yields have risen above the loan's coupon, both can fall toward their floors and become far cheaper.

Conclusion

Yield maintenance vs defeasance is the wrong question if you frame it as a preference. Your loan already picked one, and the securitization structure is why. The right question is what your specific exit costs, and that answer lives at the intersection of two variables: how far Treasury yields have moved since you originated, and how much term is left. Both structures exist to make the lender whole, and both respond to rates the same way, falling toward their floors when yields rise above your coupon and climbing when yields fall below it. For the operator, the discipline is to price the exit at acquisition, not discover it at disposition. Pull the prepayment language, identify the mechanism, and run the make-whole or the portfolio cost against today's curve. In a high-rate market, a low-coupon loan can often be exited for far less than the documents' language suggests. The cost is not fixed and it is not a surprise. It is a calculation, and it belongs in the model long before it belongs at the closing table.