Enter your loan amount, maturity date, and treasury rate into the calculator to determine your defeasance cost.

Defeasance Calculation Formula

The following formula is used to calculate the defeasance cost.

Defeasance Cost = Loan Amount * (1 + Treasury Rate / 100) ^ (Remaining Months / 12)

Variables:

  • Defeasance Cost is the cost of defeasing the loan ($)
  • Loan Amount is the principal amount of the loan ($)
  • Treasury Rate is the interest rate of the treasury securities (%)
  • Remaining Months is the number of months left until the loan’s maturity
< p>To calculate the defeasance cost, multiply the loan amount by the compounded treasury rate over the remaining months until maturity.

What is Defeasance Calculation?

Defeasance calculation refers to the process of determining the cost of defeasing a loan, which involves replacing the collateral of a loan with treasury securities to ensure that the loan obligations are met. This is a common practice in commercial real estate to free up the original collateral for sale or refinancing.

How to Calculate Defeasance Cost?

The following steps outline how to calculate the defeasance cost using the given formula.

  1. First, determine the loan amount and the maturity date of the loan.
  2. Next, determine the current treasury rate applicable.
  3. Calculate the remaining months until the maturity date.
  4. Use the formula from above: Defeasance Cost = Loan Amount * (1 + Treasury Rate / 100) ^ (Remaining Months / 12).
  5. Finally, calculate the defeasance cost by plugging in the values.
  6. After inserting the variables and calculating the result, check your answer with the calculator above.

Example Problem:

Use the following variables as an example problem to test your knowledge.

Loan Amount = $500,000

Maturity Date = 2026-12-31

Treasury Rate = 3%

FAQ

1. What is defeasance?

Defeasance is the process of substituting the collateral of a loan with risk-free securities, usually treasury bonds, to ensure that the loan’s obligations are met.

2. How is defeasance cost calculated?

Defeasance cost is calculated by determining the present value of the remaining payments on the loan, discounted at the treasury rate.

3. Why is defeasance important?

Defeasance is important because it allows borrowers to release the original collateral securing the loan, enabling the sale or refinancing of the asset.

4. Can this calculator be used for different loans?

Yes, you can adjust the loan amount, maturity date, and treasury rate fields to calculate the defeasance cost for different loans.

5. Is the calculator accurate?

The calculator provides an estimate of the defeasance cost based on the inputs provided. For exact figures, it’s best to consult a financial advisor or defeasance expert.