Defeasance is a financial strategy primarily used in commercial real estate to release a property from a mortgage lien without the lender technically foreclosing. This is typically achieved by the borrower purchasing a portfolio of U.S. Treasury securities that, when combined with their interest payments, will mature on or before the maturity date of the original loan and generate sufficient cash flow to cover the remaining loan balance. Essentially, the borrower substitutes the Treasury securities as collateral for the real estate.
This process is often employed when a borrower wishes to sell a property that is encumbered by a mortgage with a prepayment penalty. Instead of paying the potentially substantial penalty, the borrower can defease the loan. The borrower's existing investment portfolio is then utilized to meet the loan obligations, effectively satisfying the debt.
How the Defeasance Calculator Works:
This calculator helps you estimate the feasibility and potential outcome of a defeasance strategy. It takes into account:
Initial Investment Amount: The principal amount you start with.
Annual Rate of Return (%): The projected annual growth rate of your investment portfolio.
Investment Period (Years): The duration over which your investment is expected to grow.
Target Future Value for Defeasance: This is the projected total amount needed from your investment to cover the loan balance *plus* any defeasance transaction costs. It's the ultimate goal your investment needs to reach.
Remaining Loan Balance: The outstanding principal amount of your mortgage.
Estimated Defeasance Transaction Costs (%): These are fees associated with the defeasance process, including legal fees, trustee fees, and the cost of purchasing the Treasury securities. This is calculated as a percentage of the remaining loan balance.
The Calculation Logic:
The calculator first determines the total amount required for defeasance by adding the Remaining Loan Balance to the calculated Defeasance Transaction Costs (Remaining Loan Balance * Defeasance Costs %).
It then projects the future value of your Initial Investment Amount based on the Annual Rate of Return and Investment Period using the compound interest formula:
FV = P * (1 + r)^n
Where:
FV = Future Value of the investment
P = Principal (Initial Investment Amount)
r = Annual Rate of Return (as a decimal)
n = Investment Period in Years
Finally, it compares the projected Future Value of your investment with the total amount required for defeasance.
Interpreting the Results:
The calculator will display the projected Future Value of your investment and indicate whether it is sufficient to cover the total defeasance requirement.
If Projected Future Value >= Total Defeasance Amount: Defeasance appears financially feasible based on these projections.
If Projected Future Value < Total Defeasance Amount: Your investment may not be sufficient to cover the defeasance, and you might need to consider other options or adjust your investment strategy.
Disclaimer: This calculator provides an estimation for educational purposes only. It does not constitute financial advice. Actual defeasance costs and investment returns can vary significantly. Always consult with a qualified financial advisor and legal professional before making any decisions regarding defeasance.
function calculateDefeasance() {
var initialInvestment = parseFloat(document.getElementById("initialInvestment").value);
var annualRateOfReturn = parseFloat(document.getElementById("annualRateOfReturn").value);
var investmentPeriodYears = parseFloat(document.getElementById("investmentPeriodYears").value);
var remainingLoanBalance = parseFloat(document.getElementById("remainingLoanBalance").value);
var defeasanceCostsPercent = parseFloat(document.getElementById("defeasanceCosts").value);
var resultElement = document.getElementById("defeasanceResult");
var resultDetailsElement = document.getElementById("resultDetails");
// Clear previous results
resultElement.innerText = "–";
resultDetailsElement.innerText = "";
// Input validation
if (isNaN(initialInvestment) || initialInvestment < 0 ||
isNaN(annualRateOfReturn) || annualRateOfReturn < 0 ||
isNaN(investmentPeriodYears) || investmentPeriodYears < 0 ||
isNaN(remainingLoanBalance) || remainingLoanBalance < 0 ||
isNaN(defeasanceCostsPercent) || defeasanceCostsPercent < 0) {
resultElement.innerText = "Invalid Input";
resultDetailsElement.innerText = "Please enter valid non-negative numbers for all fields.";
return;
}
// Calculate defeasance transaction costs in dollar amount
var defeasanceTransactionCosts = remainingLoanBalance * (defeasanceCostsPercent / 100);
// Calculate the total amount needed for defeasance
var totalDefeasanceAmount = remainingLoanBalance + defeasanceTransactionCosts;
// Calculate the future value of the investment using compound interest formula
var rateDecimal = annualRateOfReturn / 100;
var projectedFutureValue = initialInvestment * Math.pow((1 + rateDecimal), investmentPeriodYears);
// Format numbers for display
var formatter = new Intl.NumberFormat('en-US', {
style: 'currency',
currency: 'USD',
minimumFractionDigits: 2,
maximumFractionDigits: 2,
});
var formattedProjectedFutureValue = formatter.format(projectedFutureValue);
var formattedTotalDefeasanceAmount = formatter.format(totalDefeasanceAmount);
// Display the results
resultElement.innerText = formattedProjectedFutureValue;
var detailsHtml = "Projected Future Value of Investment: " + formattedProjectedFutureValue + "";
detailsHtml += "Remaining Loan Balance: " + formatter.format(remainingLoanBalance) + "";
detailsHtml += "Estimated Defeasance Transaction Costs: " + formatter.format(defeasanceTransactionCosts) + "";
detailsHtml += "Total Amount Required for Defeasance: " + formattedTotalDefeasanceAmount + "";
if (projectedFutureValue >= totalDefeasanceAmount) {
detailsHtml += "Congratulations! Your projected investment growth appears sufficient to cover the total defeasance amount.";
} else {
detailsHtml += "Warning: Your projected investment growth may NOT be sufficient to cover the total defeasance amount. Further analysis is recommended.";
}
resultDetailsElement.innerHTML = detailsHtml;
}