Chatham Defeasance Calculator

What is a Chatham Defeasance Calculator?

A chatham defeasance calculator is a financial tool designed to estimate the cost for a borrower to exit a fixed-rate commercial real estate loan, such as a CMBS loan, through the process of defeasance. Instead of a traditional prepayment, which often comes with a hefty prepayment penalty, defeasance involves substituting the real estate collateral with a portfolio of government securities. The cash flows from these securities are structured to cover all remaining loan payments.

This process is complex, involving multiple parties like a defeasance consultant, a loan servicer, and a securities intermediary. A reliable chatham defeasance calculator simplifies this by providing a close estimate of the primary cost component: the securities portfolio. This allows borrowers to make informed decisions when considering a sale or refinance of their property.

The Defeasance Formula and Explanation

The core of a defeasance calculation is determining the present value of all remaining loan payments, discounted at the current yield of the replacement securities. This determines the cost of the securities portfolio required to meet the loan’s obligations.

Formula for Portfolio Cost (Simplified):

Portfolio Cost = Σ [ Pmt / (1 + r)^n ]

Where:

Pmt = Each remaining monthly loan payment (principal + interest)
r = The monthly yield of the replacement securities (Treasury Yield / 12)
n = The number of the payment period (from 1 to the remaining term)

Variables in a Defeasance Calculation
Variable	Meaning	Unit	Typical Range
Remaining Loan Balance	The outstanding principal of the loan.	Currency (USD)	$1M – $500M+
Loan Interest Rate	The fixed interest rate on the original loan.	Percentage (%)	2% – 8%
Remaining Term	Number of months left until loan maturity.	Months	1 – 120+
Replacement Securities Yield	The market yield on the bonds used for replacement collateral.	Percentage (%)	0.5% – 6%

Practical Examples

Example 1: Higher Loan Rate than Treasury Yield

This is the most common scenario, resulting in a defeasance penalty.

Inputs:
- Remaining Loan Balance: $5,000,000
- Loan Interest Rate: 5.0%
- Remaining Term: 36 months
- Replacement Securities Yield: 3.0%
- Transaction Fees: $80,000
Results:
- Securities Portfolio Cost: ~$5,280,000
- Defeasance Penalty: ~$280,000
- Total Estimated Defeasance Cost: ~$5,360,000

Example 2: Lower Loan Rate than Treasury Yield (Negative Penalty)

A less common scenario where a borrower can realize a gain from the defeasance.

Inputs:
- Remaining Loan Balance: $10,000,000
- Loan Interest Rate: 3.5%
- Remaining Term: 24 months
- Replacement Securities Yield: 4.5%
- Transaction Fees: $85,000
Results:
- Securities Portfolio Cost: ~$9,810,000
- Defeasance (Gain): ~($190,000)
- Total Estimated Defeasance Cost: ~$9,895,000

How to Use This Chatham Defeasance Calculator

Using our chatham defeasance calculator is a straightforward process to get a quick and accurate estimate.

Enter Remaining Loan Balance: Input the current outstanding principal of your loan.
Enter Loan Interest Rate: Provide the note rate for your existing debt.
Enter Remaining Term: Input the number of monthly payments left on your loan.
Enter Replacement Securities Yield: Input the current yield for a portfolio of U.S. Treasuries that would match your loan’s remaining payments. You can find this data on financial news sites or consult with a defeasance expert.
Enter Estimated Transaction Fees: Include an estimate for third-party costs.
Click “Calculate”: The calculator will display the total estimated defeasance cost, the cost of the securities portfolio, and the resulting penalty or gain.

Key Factors That Affect Defeasance Costs

Interest Rate Spread: The difference between your loan’s interest rate and the yield on replacement securities is the single most important factor. A larger positive spread (loan rate > treasury yield) leads to a higher defeasance penalty.
Remaining Term: A longer remaining term amplifies the effect of the interest rate spread, leading to a potentially larger penalty or gain.
Loan Payments: The size of your monthly payments directly impacts the amount of securities that need to be purchased.
Transaction Timing: Market yields for securities fluctuate daily. The cost can change significantly from the time of estimation to the date of closing.
Successor Borrower Rights: The terms negotiated in your original loan documents regarding the successor borrower can influence costs and complexity.
Third-Party Fees: Fees from the defeasance consultant, servicer, and legal counsel are a fixed component of the total cost.

FAQ

1. Is defeasance the same as yield maintenance?: No. Yield maintenance is a prepayment of the loan that includes a penalty, while defeasance is a substitution of collateral. The legal and economic implications are fundamentally different.
2. Why can’t I just prepay my CMBS loan?: CMBS loans are structured to provide a consistent stream of payments to bondholders. Prepayment disrupts this, so defeasance was created as an alternative to protect those investors while allowing the borrower to exit the loan.
3. What is a “negative penalty” or defeasance gain?: This occurs when the yield on government securities is higher than your loan’s interest rate. The portfolio costs less than your outstanding balance, creating a “gain” that can offset transaction fees.
4. How accurate is this chatham defeasance calculator?: This calculator provides a very strong estimate for planning purposes. However, the final cost will depend on the exact market rates and fees at the time of the transaction. For a precise quote, you should engage a professional defeasance consultant.
5. What are the typical fees for a defeasance?: Total third-party fees typically range from $60,000 to $100,000, depending on the complexity and size of the loan.
6. How long does the defeasance process take?: A typical defeasance process takes between 30 and 45 days from start to finish.
7. What is a successor borrower?: A successor borrower is a special-purpose entity created to legally assume the loan obligations from the original borrower. This is what allows the original borrower to be released from the debt.
8. Can I choose the securities for the portfolio?: The loan documents specify the type of securities that can be used. Typically, they must be direct, non-callable obligations of the U.S. government.

Related Tools and Internal Resources

Explore more of our financial tools and insights to help you manage your real estate investments and financial risk.

Official Defeasance Calculator: For more in-depth analysis of your defeasance options.
Defeasance & Prepayment Solutions: Learn more about how Chatham can assist with your defeasance.
Defeasance FAQs: A detailed list of frequently asked questions about the defeasance process.
About Chatham Financial: Discover more about our company and our mission.
ChathamDirect Platform: Our technology platform for financial risk management.
What We Do: An overview of our services and expertise.