# Defeasance versus continued ownership before sale

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Status: Published
Publisher: Jaken Finance Group

Avoiding a defeasance cost by waiting to sell is worthwhile only if the later sale, intervening property cash, capital needs, and timing justify the delay. Calculate the future sale price that would make waiting equivalent to selling now, then check whether the owner can finance the wait.

This example uses a quoted defeasance package as an input. It does not price securities or interpret the governing release conditions. All values are hypothetical, and taxes are excluded from both alternatives.

## Reconcile the immediate sale without counting principal twice

Assume the property can sell today for $10 million. Selling costs are 2% of price. Existing principal is $6 million. The stipulated specialist estimate requires $6.45 million to purchase the substitute collateral and $50,000 of additional transaction expenses.

Immediate owner proceeds are:

`$10,000,000 − $200,000 − $6,450,000 − $50,000 = $3,300,000`

The $6.45 million is the full assumed collateral-purchase requirement, including the amount corresponding to the principal obligation. Do not subtract the $6 million principal again. Relative to principal alone, this package costs an additional $450,000 plus $50,000 in fees, or $500,000.

The [2026 Fannie Mae fixed-rate defeasance prospectus template](https://capitalmarkets.fanniemae.com/media/document/pdf/jan-1-2026-mf-prospectus-fixed-rate-defeasance.pdf), printed pages 58–59, describes substituting acceptable collateral while the loan continues to fund its scheduled payments. It also describes the applicable loan-specific lockout and open-prepayment framework. That is the identified securities framework, not proof that the subject loan permits the assumed transaction or future payoff date.

## Define the waiting alternative with dated cash flows

Assume the actual documents permit repayment without premium in 18 months. The $6 million loan remains interest only at 6%, so annual interest is $360,000. The property produces $720,000 annually before financing and the discrete capital expenditures below. This leaves $30,000 of net operating cash at the end of each month.

Waiting also requires $300,000 of capital work immediately and $150,000 at the end of month nine. These expenditures are incremental to the monthly property cash calculation and are incurred only if the owner continues to hold. The buyer in today's sale takes the property as-is at the stated $10 million price.

| Waiting-path cash event | Amount | Date |
| --- | ---: | --- |
| Immediate capital work | ($300,000) | Today |
| Property cash after debt service | $30,000 monthly | Months 1–18 |
| Additional capital work | ($150,000) | End of month 9 |
| Future sale costs | 2% of future price | End of month 18 |
| Principal repayment | ($6,000,000) | End of month 18 |

The net undiscounted operating-and-capital cash over 18 months is $90,000: $540,000 less $450,000. That positive total does not establish that the owner can fund the initial $300,000.

## Calculate a future sale-price hurdle

First ignore timing. To equal today's $3.3 million proceeds, future net sale equity plus the $90,000 intervening net cash must total $3.3 million. The required future price is approximately $9.398 million:

`0.98 × future price − $6,000,000 + $90,000 = $3,300,000`

Now apply a stipulated 10% annual effective discount rate to the owner's cash flows. This is the owner's scenario assumption, not a market-required return. Convert it to an effective monthly rate of approximately 0.797414% and discount each monthly receipt separately.

The present value of eighteen $30,000 receipts is approximately $501,179. The month-nine $150,000 expenditure has present value of approximately $139,652. The immediate $300,000 expenditure is not discounted.

Solving the following equation gives a future sale-price hurdle of approximately $9,934,890:

`−$300,000 + PV(monthly receipts) − PV(month-nine work) + (0.98 × future price − $6,000,000) ÷ 1.10^1.5 = $3,300,000`

At a $10 million future sale price, the waiting alternative has present value of approximately $3,355,307, only $55,307 above selling now. The apparent $500,000 avoided release cost does not translate into a $500,000 economic advantage after capital needs and delayed sale proceeds.

## Test whether the owner can reach the later sale

Suppose only $100,000 of unrestricted owner cash is available today. The immediate $300,000 work creates a $200,000 funding requirement before any monthly property surplus arrives. Positive total cash over the hold cannot eliminate that first-day deficit.

If another $200,000 is actually supplied, the work leaves zero cash. Nine months of $30,000 receipts build $270,000; the next $150,000 work payment leaves $120,000. The last nine months add $270,000, leaving $390,000 before sale. This balance includes the original $100,000 and the new $200,000 capital plus $90,000 net cash generation. It is not all profit.

The present-value comparison already includes the capital expenditures. Do not subtract the new $200,000 contribution again as an additional property cost. Its separate purpose is to show the owner's financing requirement and whether waiting is feasible. If that capital has a financing cost or investor preference, add the actual incremental obligation to the economic model.

## Challenge the hurdle with property-specific evidence

A $100,000 reduction in the future sale price reduces future net proceeds by $98,000 before discounting. Lower operating cash, higher work costs, or a later open period also increase the required sale price. These are linked exposures if the planned work or tenant retention supports the future valuation.

Obtain a fresh defeasance estimate for the proposed settlement date, including securities, professional costs, quote validity, deposits, and exclusions. Separately verify the exact future date and notice conditions for premium-free repayment. A marketing summary or expected maturity month is insufficient.

The decision is whether the evidence supports the required future price and the owner can fund the path to it. A later open period may create value, but the model should show the price hurdle, interim capital requirement, and margin for error before the owner declines an executable sale today.


## Source references
- [Fannie Mae — Fixed-Rate Defeasance Multifamily MBS Prospectus, 26001](https://capitalmarkets.fanniemae.com/media/document/pdf/jan-1-2026-mf-prospectus-fixed-rate-defeasance.pdf) — Printed pages58–59, Defeasance or Prepayment of a Mortgage Loan · Checked 2026-10-21 · 2026 prospectus template for the identified securities framework; source says actual prospectus date is issue date. Borrower documents and transaction-specific quote govern.