CAPITAL STRUCTURE
A Practitioner's Guide to CMBS Prepayment: Conduit vs SASB, Yield Maintenance, and Defeasance
Key Takeaways
- CMBS prepayment has three phases: a lockout (the REMIC rules bar a defeasance release within 2 years of the securitization closing), a defeasance or yield maintenance window (~93 months on a typical 10-year conduit loan), then the open period (typically the last two to three months, sometimes longer) where par prepay is free. Map your current month before quoting any cost.
- Yield maintenance charges the greater of a documented minimum premium or the PV of the remaining scheduled payments at the matched Treasury yield, less the principal repaid. Defeasance substitutes government securities that replicate the loan's cash flows. Cost scales with the coupon-to-Treasury gap and the time left: the $50M example below costs about 0.55% of balance at a 30 bp gap with 21 months to the open date.
- Negative defeasance (the securities cost less than the loan balance, so the borrower exits at a discount to par) returned in fall 2022 for the first time since 2006. In October 2026 it is material for low-coupon 2019–2021 vintage loans with years left to run: an illustrative 3.25% loan with 57 payments to its open date defeases at about a 7.2% discount to par, before fees.
- SASB structures (single asset, single borrower) negotiate prepayment terms; conduit borrowers take the market-standard provisions. Per Moody's, SASB loans accounted for 45% of CMBS debt issuance in 2024, compared to 20% in 2023.
- Defeasance is a 30–45 day operational lift involving the consultant, loan servicer, servicer's counsel, successor borrower, securities intermediary, independent accountant, and borrower's counsel. Start the conversation 90+ days before intended prepayment; the balance-sheet number isn't the only cost.
The Prepayment Question Practitioners Need Answered
Every CMBS borrower eventually confronts the same question: what does it cost to prepay this loan? The answer depends on which side of the lockout window the loan is in, whether it's in the yield-maintenance period or the defeasance period (most modern CMBS uses defeasance), and what the Treasury yield curve looks like on the day the prepayment calculation runs. The math is straightforward in the abstract and easy to get wrong in practice.
Defeasance consultants such as Chatham Financial and AST Defeasance offer free prepayment estimates, and Chatham describes the general yield maintenance assumption behind its online calculator. What a calculator returns is a single number for one loan. This article works through the math behind that number so a borrower can check a quote.
The audience is institutional borrowers approaching CMBS maturity, capital markets desks running prepay vs hold analysis, asset managers evaluating refinance optionality, and debt brokers structuring CMBS placements. The article works through CMBS conduit vs SASB structural differences, the yield maintenance formula, the defeasance portfolio construction, a worked $50M example, and the 2026 specific story: which loans can defease at a discount to par now that Treasury yields sit above the coupons written in the low-rate years.
THE 30-SECOND VERSION
A CMBS loan held in a REMIC cannot be defeased within two years of the securitization closing. After that lockout comes a prepayment penalty window (yield maintenance or defeasance), then an open period (typically the last two to three months, sometimes longer). Yield maintenance pays the lender the greater of a minimum premium or the present value of the remaining scheduled payments at the matched Treasury yield, less the principal repaid. Defeasance substitutes a portfolio of government securities that replicates the loan's cash flow. Cost scales with the gap between the coupon and the matched Treasury yield and with the time left to the open date. Negative defeasance, where the securities cost less than the loan balance, returned in fall 2022 for the first time since 2006 as Treasury yields rose above the coupons on loans originated in the low-rate years.
CMBS Structure: Conduit vs SASB
Commercial mortgage-backed securities come in two structural flavors that matter for prepayment mechanics:
Conduit CMBS pools loans from multiple borrowers, multiple property types, and multiple markets into a single securitization. The pool diversification provides credit enhancement; the resulting securities are tranched A-AAA through B-piece. Conduit loans are typically 10-year fixed-rate loans, each small relative to the pool. Borrowers in a conduit pool can't choose their pool-mates, can't negotiate the prepayment terms (they're standard market), and have limited ongoing communication with the master servicer (the entity that collects payments and enforces the loan terms).
SASB (Single Asset, Single Borrower) CMBS securitizes one large loan to one borrower as a standalone deal. The borrower negotiates the loan structure directly; prepayment terms can include shorter lockouts, partial-release mechanics, and yield-maintenance instead of defeasance. Many SASB loans are floating-rate, and their prepayment protection works differently from the fixed-rate yield maintenance and defeasance mechanics described here. SASB borrowers maintain direct relationships with the servicer and have more flexibility on operational provisions. According to Moody's, as reported by Bisnow, SASB loans accounted for 45% of CMBS debt issuance in 2024, compared to 20% of volume in 2023 (a base that includes agency CMBS).
KBRA's 2026 U.S. CMBS outlook (November 2025) forecasts private-label commercial real estate securitization volume, including CRE CLOs, of $183 billion in 2026, an 18% increase from its full-year 2025 estimate. KBRA expects single-borrower transactions to account for more than half of that issuance and conduits to be dominated by five-year deals, against $525 billion of loans maturing in 2026. For comparison, KBRA reported 2024 CMBS issuance of $104.1 billion plus $8.7 billion of CRE CLOs, and2025 CMBS issuance of $125.8 billion.
The Prepayment Timeline
A typical 10-year CMBS conduit loan has a three-phase prepayment structure:
The defeasance lockout comes from the tax rules for the REMIC that holds the loans. Under26 CFR 1.860G-2(a)(8)(ii), a REMIC can release its lien through defeasance without disqualifying the mortgage only if the substitute collateral consists solely of government securities, the mortgage documents allow the substitution, the release facilitates a disposition or other customary commercial transaction, and the release is not within 2 years of the startup day (the securitization closing). Because conduit loans close before they are pooled and securitized, the lockout usually runs somewhat past month 24 counted from origination. The penalty window protects the investors against rate-driven prepayment that would force them to reinvest at lower yields. The open period at the end provides operational flexibility for the borrower to refinance during the last few months before balloon maturity without paying penalty.
Yield Maintenance: The Formula
Yield maintenance is a closed-form prepayment premium. Chatham Financial'sgeneral formula sets it at the greater of the minimum penalty or the present value of all scheduled future debt payments, discounted at a Treasury yield, less the principal repaid:
YIELD MAINTENANCE PENALTY FORMULA
YM = max( Minimum Premium, Σt=1N [ Scheduled Paymentt ÷ (1 + Treasury Yield ÷ 2)t/6 ] − Principal Prepaid )
Where N is the number of months remaining until the original maturity (or until the open period begins, if the documents measure to that date), Scheduled Paymentt is each remaining principal and interest payment including the balance due on the final date, Treasury Yield is the yield on the U.S. Treasury that matures closest to the loan's maturity date (the documents set the exact benchmark), converted from its semiannual quoting basis to a monthly discount rate (the documents set the exact conversion), and Principal Prepaid is the outstanding balance repaid. The Minimum Premium is set by the loan documents, so yield maintenance never falls below it even when Treasury yields exceed the coupon.
The intuition: the lender is being paid out today the present value of the payments it would have received between today and maturity, measured against what it can earn reinvesting at the current Treasury yield. If the loan coupon is 4.0% and the Treasury yield is 4.2%, the lender can reinvest the prepayment proceeds at a higher rate than the loan coupon, so the present-value term is negative and the borrower pays the documented minimum premium. If the loan coupon is 4.0% and the Treasury yield is 2.0%, the lender loses 200 bps per year (about 16.7 bps per month) on the balance for the remaining term; YM compensates for that loss.
Daily Treasury yields by maturity are published in the Fed's H.15 release and on the U.S. Treasury's daily par yield curve. Any spread added above Treasury is deal-specific and not part of Chatham's general formula, so check the loan agreement before adding one.
Defeasance: How It Actually Works
Defeasance is structurally different from yield maintenance. Instead of paying the lender a cash penalty, the borrower substitutes a portfolio of government securities (typically U.S. Treasuries), sized and timed to replicate the remaining loan cash flows, for the underlying real estate collateral. The loan continues to exist; a successor borrower assumes it, and what changes is what's behind it.
The mechanics, as Chatham Financial's defeasance FAQ describes them:
1. The borrower instructs a defeasance consultant. The consultant identifies the securities required to match the loan's remaining scheduled payments. The loan documents govern whether the portfolio must cover payments through maturity or only up to the open prepayment date; when an open window exists, Chatham attempts to structure the bonds to the start of that window only. If the documents permit, the borrower may buy the bonds from any securities provider.
2. The borrower funds the securities purchase. The cost of the portfolio, less the loan balance, is the defeasance cost. When Treasury yields are below the loan coupon, the portfolio costs more than the loan balance; the borrower pays the difference. When Treasury yields are above the loan coupon (the "negative defeasance" case), the portfolio costs less than the loan balance, and the borrower exits the loan at a discount to par before third-party fees.
3. The collateral substitution closes. The bonds are transferred to a newly created successor borrower, a single-purpose entity that assumes the loan. A securities intermediary holds the bonds in a restricted account and sends the cash receipts to the loan servicer, and an independent accountant certifies that the portfolio covers the remaining payments. The master servicer (for example Trimont, which acquired Wells Fargo's non-agency third-party commercial mortgage servicing business in March 2025, or another rated master servicer), servicer's counsel, and the borrower's counsel close the substitution. The real estate collateral is released, and the borrower is free to sell or refinance it.
Defeasance has no minimum penalty, so when Treasury yields are near or above the coupon it lets the borrower capture the full benefit of higher rates. When yields are below the coupon,Chatham notes that yield maintenance is usually the less expensive and less time-consuming route, and its only transaction fee is a small servicer processing fee. Defeasance takes 30–45 days end-to-end and carries fees from several third parties: the loan servicer (which asks for an up-front deposit), servicer's counsel, rating agencies on large deals, the securities intermediary, the independent accountant, the successor borrower and its counsel, the title company, the defeasance consultant, and the borrower's counsel. Servicer processing fees alone often ran $15,000 to $25,000 per defeasance, according to a 2016 AST Defeasance article.
Worked Example: $50M CMBS Loan
An illustrative $50M CMBS conduit loan originated in 2018 at a 4.50% coupon, 10-year term, 30-year amortization, with monthly principal and interest of $253,343. Eight years in (month 96 of 120), the borrower wants to prepay to refinance into agency debt at 5.75%. The loan is in the defeasance period (months 25–117), and the balance after the 96th payment is approximately $42.41M. The open period starts at month 118, so the borrower is 21 payments from the open date and 24 from maturity. In this example the loan documents let the defeasance portfolio run to the open date.
The defeasance calculation:
- Required cash flows: 21 monthly payments of $253,343 (months 97–117; the first is about $159K of interest and $94K of principal), plus the $40.35M balance due at the open date. Total required cash flows: ~$5.32M of P&I + ~$40.35M = ~$45.67M.
- Securities portfolio cost: Assuming a 4.20% Treasury yield for the 21-month term (an illustrative assumption; in practice the price comes from the securities bought on the pricing date), the PV of $45.67M of cash flows ending in 21 months is approximately $42.64M. Here and below, each Treasury par yield, which is quoted on a semiannual basis, is converted to monthly compounding before discounting the monthly payments; dividing the yield by 12 instead gives a cost of about 0.49% rather than 0.55%.
- Defeasance cost: Portfolio cost ($42.64M) minus loan balance ($42.41M) = ~$0.23M, or about 0.55% of loan balance, plus the third-party transaction fees listed above. If the documents required the portfolio to run to maturity (24 payments plus a $40.04M balloon at month 120), the portfolio would cost about $42.67M and the defeasance cost would rise to about $0.27M (0.63%).
The defeasance cost is low in this example because the assumed Treasury yield (4.20%) is below the loan coupon (4.50%) by only 30 bps and the loan is less than two years from its open date. If the same loan were defeased when Treasury yields were 100 bps below the loan coupon (3.50%), the portfolio would cost about $43.13M and the defeasance cost would be about $0.72M, or 1.7% of loan balance (1.9% if defeased to maturity). Larger percentages need a wider gap or more years left. On the actual October 6, 2026 curve, this loan sits on the other side of the line: interpolating between the 1-year (4.46%) and 2-year (4.79%) Treasury par yields gives about 4.71% for a 21-month term, above the 4.50% coupon, and the portfolio would cost about $0.11M less than the loan balance (a discount to par of about 0.27%, before fees).
Negative Defeasance in 2026: Which Loans Qualify
Negative defeasance happens when the Treasury yield matched to a loan's remaining term exceeds the loan coupon: the securities needed to defease the loan cost less than its balance, and the borrower exits at a discount to par. It is not new to 2026. Chatham Financialexecuted its first defeasance with a negative penalty since 2006 on September 1, 2022, letting the borrower exit at a ~$553,000 discount to the outstanding principal balance. The window has stayed open on and off since then whenever Treasury yields exceed loan coupons: the 2-year par yield closed at or above 5.00% on 38 trading days in 2023, including 5.14% on October 19, 2023 (per the2023 daily par yield curve).
Which loans benefit in 2026 depends on the time left to the open date as much as on the coupon. Treasury par yields stood at 4.21% on the 3-month bill, 4.46% on the 1-year, 4.79% on the 2-year, 5.03% on the 5-year, and 5.27% on the 10-year as of October 6, 2026 (per theU.S. Treasury daily par yield curve):
2014–2016 vintage 10-year loans have matured or are at the end of their term, usually already in the open period where par prepayment is free. An illustrative interest-only loan at a 4.0% coupon with three months left, priced at the 4.21% 3-month yield, would defease at a discount of only about 0.04% of balance.
2019–2021 vintage loans, written at low coupons with years left to run, are where the discount is material. An illustrative $50M interest-only loan from late 2021 at a 3.25% coupon, with 57 payments left to its open date, priced at about 5.01% (interpolated between the 3-year 4.88% and 5-year 5.03% yields), would cost about $46.39M to defease: a discount of about $3.61M, or 7.2% of balance, before fees.
For those borrowers, the prepayment calculus changes materially. A loan that would have been a "wait for the open period" decision when defeasance was expensive can now be a "prepay at a discount" decision. The discount moves with rates, so the number has to be rerun on the pricing date.
When YM, When Defeasance, When Hold
Three considerations drive the prepayment decision:
Where is the loan in its life? If the loan is in the lockout period, prepayment isn't an option; the only choices are workout (which requires lender consent and typically isn't available for a performing loan) or assumption (transferring the loan to a buyer at sale). If the loan is in the open period, prepayment is at par with no penalty; just do it.
What are current yield-curve conditions? When Treasury yields are well below the loan coupon, defeasance and YM both have meaningful cost, and YM is usually the cheaper and simpler route. When Treasury yields are at or above the loan coupon (the October 2026 condition for low-coupon loans written in 2019–2021 that still have years left to run), defeasance can produce a discount to par, while YM still charges its minimum premium.
What's the refinance arbitrage? Even with a material defeasance cost, prepaying makes sense if the refinanced loan terms (lower rate, longer term, cash-out, removed recourse) produce more value than the prepayment cost. Run the math both ways: present value of remaining payments under the existing loan vs prepayment cost plus present value of remaining payments under the refinanced loan.
For SASB loans with negotiated terms, the prepayment options are often broader than for conduit loans: partial releases, restructure provisions, and modified penalty curves are sometimes available. Read the specific loan agreement, because SASB terms vary deal by deal.
Five Mistakes Borrowers Make
Computing YM with the wrong discount rate. The loan documents set which Treasury yield applies, whether any spread is added, and the minimum premium. A 25 bp error in the discount rate moves YM by roughly 0.5% of loan balance with two years left and about 1.1% with five years left.
Assuming defeasance is "free" in a negative-defeasance market. Even when the securities portfolio costs less than the loan balance, defeasance still involves servicer, counsel, successor borrower, securities intermediary, accountant, and consultant fees, plus 30–45 days of timeline. The discount to par is a balance-sheet calculation; the operational cost still exists.
Not modeling the open period in refinance optionality. If the loan is 6 months from the open period, often the right answer is to wait. For the $50M example loan at a 100 bp gap, defeasing six months before the open date would still cost about 0.5% of balance plus third-party fees, which a slightly better refinance rate rarely clears when free prepayment is six months away.
Failing to consult the master servicer early. The master servicer (Trimont or another rated master servicer) controls the prepayment process. Their cooperation, timeline, and document requirements vary. Start the conversation 90+ days before intended prepayment date.
Underestimating the operational burden. Defeasance involves 30–45 days of coordination among the defeasance consultant, loan servicer, servicer's counsel, successor borrower and its counsel, securities intermediary, independent accountant, title company, borrower's counsel, and, on large deals, rating agencies, whose review can add as many as 10 business days. Plan for the operational lift, not just the balance-sheet number.
Do It in Apers
DO IT IN APERS
You can build the yield-maintenance and defeasance math in Excel from the formulas above using current Treasury yields from the Fed H.15 release. In Apers, you can run the prepayment cost calculation for both YM and defeasance scenarios alongside the refinance analysis on your specific deal, in minutes, before committing to a defeasance consultant engagement. Try it →
Related Articles
- Construction Loans: Draws and Interest Reserves: the construction-period mechanics that precede a CMBS takeout.
- Bridge Loans: Floating-Rate Risk and Exit Assumptions: the bridge debt that often precedes CMBS placement.
- Cap Rate Calculator and Formula: the exit-cap assumption that drives refinance value.
- IRR Calculator and Formula for Real Estate: the return metric that prepayment cost feeds into.
FAQ
Frequently Asked Questions
What is yield maintenance?
Yield maintenance is a prepayment premium on fixed-rate CMBS loans. Chatham Financial's general formula sets it at the greater of a minimum penalty or the present value of all remaining scheduled loan payments, discounted at the yield on the U.S. Treasury maturing closest to the loan's maturity date, less the principal repaid. The loan documents set the minimum, the Treasury benchmark, and any spread; a spread over Treasury is deal-specific rather than standard. Because of the minimum, yield maintenance never drops to zero even when Treasury yields exceed the coupon.
What is defeasance?
Defeasance is a CMBS prepayment mechanism that substitutes a portfolio of government securities (typically U.S. Treasuries), sized and timed to cover the remaining loan payments through maturity or, if the documents allow, through the open date, for the underlying real estate collateral. A successor borrower assumes the loan, a securities intermediary holds the bonds, and an independent accountant certifies they are sufficient. The cost is the securities price less the loan balance (positive when Treasury yields are below the coupon, negative when they are above it) plus fees to the servicer, servicer's counsel, successor borrower, securities intermediary, accountant, consultant, and borrower's counsel. Servicer processing fees alone often ran $15,000 to $25,000 as of 2016, according to AST Defeasance.
Is defeasance cheaper than yield maintenance?
Usually not when Treasury yields are below the loan coupon: Chatham Financial notes that yield maintenance is then usually less expensive and less time-consuming, with only a small servicer processing fee. Defeasance has no minimum penalty, so it wins when Treasury yields are near or above the coupon; when they exceed it, the borrower can exit at a discount to par (negative defeasance). As of October 2026, that applies to low-coupon loans with years left to their open date, such as many written in 2019-2021.
What is a CMBS lockout period?
The period at the start of a CMBS loan's life during which it cannot be prepaid or defeased. For loans held in a REMIC, 26 CFR 1.860G-2(a)(8)(ii) bars a defeasance release within 2 years of the securitization's startup day, so conduit defeasance lockouts run at least two years from the securitization closing, which is somewhat longer than 24 months from loan origination. SASB lockouts are negotiated deal by deal. The lockout protects CMBS investors against early rate-driven prepayment that would force reinvestment at lower yields.
What is negative defeasance?
A condition where the U.S. Treasury yield for a maturity matching the loan's remaining term exceeds the loan's contractual coupon. The securities required to defease the loan then cost less than the loan balance, so the borrower exits at a discount to par, before third-party fees. Chatham Financial executed its first negative-penalty defeasance since 2006 on September 1, 2022, and the window has opened whenever Treasury yields exceed loan coupons since then. In October 2026 it is material for low-coupon 2019-2021 vintage loans with years left to their open date; 2014-2016 vintage loans have matured or are in their open period.
What's the difference between conduit and SASB CMBS?
Conduit CMBS pools loans from multiple borrowers into a single securitization. Loan terms are standardized; borrowers have limited communication with the master servicer. SASB (Single Asset, Single Borrower) securitizes one large loan to one borrower as a standalone deal: terms are negotiated, prepayment provisions can be customized, and the borrower-servicer relationship is more direct. Per Moody's, SASB loans were 45% of CMBS debt issuance in 2024, compared to 20% in 2023.
How long does defeasance take?
Typically 30-45 days end-to-end, per Chatham Financial. The defeasance consultant coordinates the loan servicer, servicer's counsel, successor borrower and its counsel, securities intermediary, independent accountant, title company, and borrower's counsel; rating agency review on large deals can add as many as 10 business days. Start the conversation 90+ days before intended prepayment date.
Should I prepay my CMBS loan in 2026?
Depends on three factors: (1) where the loan is in its lockout / penalty / open period structure; (2) the gap between the loan coupon and the Treasury yield matched to the time left to the open date; (3) the refinance arbitrage available. For low-coupon 2019-2021 vintage loans with years left to run, October 2026 Treasury yields above the coupon can make defeasance a discount to par before considering refinance terms. Loans within months of their open date usually do better waiting for free par prepayment. Run both scenarios.