In one sentence
Releasing property collateral from a loan by substituting a portfolio of government securities engineered to make the remaining loan payments.
The longer version
Standard in CMBS, where prepayment is prohibited but defeasance is permitted after a lockout. A successor borrower takes the loan, the securities pay it, and the real estate goes free for sale or refinance.
The process involves defeasance consultants, rating agency confirmations, and securities purchases timed to closing. It is expensive when rates are low and cheap when rates are high, since the securities cost moves inversely.
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