What is a T-12 in real estate?

A T-12 (Trailing Twelve Months) is an operating statement showing the last 12 months of income and expenses for a property. Lenders use it to calculate Net Operating Income (NOI) and determine loan amounts. Bhumi provides forensic T-12 audits that reconcile every line item to bank statements.

How long does a T-12 audit take?

Bhumi delivers a complete, lender-ready T-12 package within 48 hours of receiving your documents. Full forensic reconstruction typically takes 1-2 weeks. Deal closing support runs approximately 30 days.

What size multifamily portfolios does Bhumi work with?

Bhumi specializes in $500K to $5M multifamily portfolios with 5-50 units. This is the sweet spot where institutional lenders require documentation but owners often lack institutional-grade bookkeeping - too complex for most accountants, too small for institutional advisors.

What documents do I need to start a T-12 audit?

To start, Bhumi needs three things: 12 months of bank statements for all accounts touching the property, a current rent roll showing units, tenants, and rent amounts, and your most recent tax return or Schedule E for the property.

How much does a T-12 audit cost?

Bhumi charges a flat fee based on portfolio complexity - number of units, bank accounts, and document condition. No hourly billing surprises. Contact for a specific quote based on your situation.

What lenders does Bhumi work with?

Bhumi is lender-agnostic and has prepared packages for Freddie Mac Small Balance Loans, Fannie Mae Small Loans, regional banks, credit unions, and private lenders. The documentation standards are tailored to each lender's requirements.

What is NOI variance and why does it matter?

NOI variance is the gap between what your T-12 operating statement shows and what your bank deposits prove. Lenders require zero variance for loan approval. Bhumi's forensic reconciliation traces every dollar of revenue to a specific bank deposit, eliminating phantom income and protecting your loan amount.

Can Bhumi help with inherited real estate portfolios?

Yes. Bhumi specializes in inherited portfolios where the previous generation ran operations manually. We've handled portfolios with Venmo payments, cash deposits with no paper trail, commingled personal and business expenses, and decades of accumulated documentation gaps.

What is defeasance in commercial real estate?

Defeasance is a prepayment method that releases your property from the mortgage lien by substituting a portfolio of U.S. Treasury securities that will make the remaining loan payments. Instead of paying a penalty, you purchase bonds that 'defeat' your obligation. The loan technically continues, but it's now secured by Treasuries instead of your property, freeing you to sell or refinance.

How is defeasance different from yield maintenance?

Yield maintenance is a cash penalty payment; defeasance is a bond substitution. With yield maintenance, you pay a lump sum calculated to make the lender whole. With defeasance, you buy Treasury securities that replicate remaining payments. Defeasance costs are similar but involve more complexity, third-party consultants, and a 60-90 day process versus immediate payment for yield maintenance.

When is defeasance economically viable?

Defeasance makes sense when: (1) you're selling the property and the buyer wants clean title, (2) interest rates have dropped significantly and you're refinancing to a lower rate, (3) the property has appreciated substantially and you need to extract equity, or (4) you're exchanging into a different property via 1031. Run the numbers—if the rate savings or sale premium exceeds defeasance cost, proceed.

How long does the defeasance process take?

Plan for 60-90 days minimum. The process involves: engaging a defeasance consultant (week 1), structuring the Treasury portfolio (weeks 2-4), legal documentation (weeks 3-6), lender review and approval (weeks 5-8), and closing coordination (weeks 7-12). Rush requests are possible but expensive. Start the process immediately when you decide to sell or refinance.

What are the tax implications of defeasance?

Defeasance has complex tax implications. The substitution of collateral may trigger recognition of any deferred gain. Interest deductions shift from property debt to the successor borrower. Consult a tax advisor before proceeding—the structure can be optimized to minimize tax impact, but it requires advance planning.

Defeasance: Escaping Your Fixed-Rate Lock

Definition

Defeasance: A prepayment method that releases the property from the mortgage lien by substituting a portfolio of U.S. Treasury securities sufficient to make all remaining loan payments, effectively "defeating" the borrower's obligation while the loan continues to maturity.

You locked in a 5.5% fixed rate when rates were rising. Now rates have dropped to 4.25%, and you want out. Or you've found a buyer willing to pay a premium for your property, but they don't want to assume your loan. The problem: your Freddie Mac loan has a lockout period followed by defeasance requirements. Here's how to navigate the escape hatch.

How Does Defeasance Work?

Defeasance doesn't actually prepay your loan—it substitutes the collateral:

You purchase Treasury securities that will make each remaining loan payment (principal + interest) exactly when due
These securities replace your property as collateral for the loan
The lien on your property is released, allowing you to sell or refinance
A successor borrower (typically an SPE created by the defeasance consultant) takes over the loan
The loan continues to maturity, paid by the Treasury portfolio

The lender receives exactly what they were promised—all payments on schedule. You get your property back, free and clear.

Defeasance vs. Yield Maintenance vs. Prepayment Penalty

Method	How It Works	Typical Cost	Timeline
Lockout	No prepayment allowed at all	N/A—not possible	N/A
Defeasance	Substitute Treasury portfolio for collateral	$50K-$500K+	60-90 days
Yield Maintenance	Pay present value of rate differential	Similar to defeasance	Immediate
Step-Down Penalty	Fixed percentage declining over time (5-4-3-2-1)	% of balance	Immediate
Open Period	No penalty in final 90 days	$0	Immediate

Key Point

Most Freddie Mac SBL loans have a structure like: 2-year lockout → defeasance until final 90 days → open period. Check your loan documents for the exact structure—it varies by product and vintage.

The Defeasance Cost Components

1. Treasury Portfolio Cost

The biggest cost: purchasing Treasuries to replicate remaining payments. This cost depends on:

Remaining loan balance: Larger balances = larger portfolios
Remaining term: More payments to replicate = more bonds needed
Interest rate environment: If rates have dropped, Treasuries cost MORE than remaining payments (premium). If rates have risen, they cost LESS (discount)

Example: Rate Environment Impact

Loan terms: $4M balance, 5.5% rate, 7 years remaining

If current Treasury yield is 4.0%: You must buy Treasuries at a premium to generate 5.5% cash flow. Cost: ~$350,000 above par.

If current Treasury yield is 6.5%: Treasuries are cheaper because they yield more. Cost: ~$280,000 below par savings offset portfolio cost.

2. Defeasance Consultant Fee

Third-party specialists manage the process:

Portfolio structuring: Designing the exact Treasury mix
Successor borrower: Setting up the SPE that takes the loan
Coordination: Managing lender, servicer, attorneys

Typical fees: $25,000-$75,000 depending on loan size and complexity

3. Legal Fees

Multiple attorneys involved:

Your attorney (borrower counsel)
Lender's counsel
Successor borrower counsel
Rating agency counsel (for securitized loans)

Typical total: $30,000-$100,000

4. Servicer and Rating Agency Fees

Servicer consent fee: $5,000-$15,000
Rating agency fees: $10,000-$25,000 (if loan is securitized)

5. Accounting and Tax Advisory

Tax structuring: Minimizing recognition of gain
Accounting treatment: Proper book treatment of the transaction

Typical fees: $5,000-$25,000

The Defeasance Process Timeline

Week	Activity	Who's Involved
1	Engage defeasance consultant, preliminary analysis	Borrower, Consultant
2-3	Notify servicer, request payoff and defeasance package	Consultant, Servicer
3-4	Structure Treasury portfolio, preliminary cost estimate	Consultant, Bond desk
4-6	Legal document preparation and review	All attorneys
5-8	Lender/servicer approval process	Lender, Servicer, Rating agencies
7-10	Finalize successor borrower, coordinate closing	Consultant, Attorneys
10-12	Lock Treasury portfolio, fund and close	All parties

Warning

Treasury prices move daily. You won't know your final defeasance cost until you lock the portfolio, typically 3-5 days before closing. Budget for variance—rates can move significantly over a 60-90 day process.

When Does Defeasance Make Economic Sense?

Scenario 1: Selling the Property

Your buyer wants clean title (no loan assumption):

Item	Amount
Sale price	$7,500,000
Loan balance	($4,200,000)
Defeasance cost	($380,000)
Closing costs	($150,000)
Net proceeds	$2,770,000

Compare to waiting until the open period: If you'd net $2.9M by waiting 18 months for the open period, but the buyer is offering a premium now, the math may favor defeasance.

Scenario 2: Refinancing to Lower Rate

Rates have dropped and you want to capture savings:

Item	Current Loan	New Loan
Balance	$4,200,000	$4,200,000
Rate	5.50%	4.25%
Annual debt service	$312,000	$268,000
Annual savings	$44,000

If defeasance costs $350,000 and you'll save $44,000/year for 7 remaining years, you break even in 8 years—longer than the loan term. In this case, defeasance doesn't make sense. But if the rate differential is larger or the remaining term is shorter, the math can work.

The Break-Even Formula

Break-even period = Defeasance cost ÷ Annual savings

If break-even period < remaining term, refinancing via defeasance is profitable.

If break-even period > remaining term, keep the existing loan.

Defeasance and 1031 Exchanges

Defeasance creates complications for 1031 exchanges:

Timing pressure: 45-day identification and 180-day closing windows don't flex for defeasance timelines
Cost allocation: Defeasance costs may or may not be includable in exchange basis
Boot concerns: Structure carefully to avoid taxable boot

If you're planning a 1031 exchange, engage your defeasance consultant and exchange accommodator simultaneously, and allow extra time.

Alternatives to Defeasance

Loan Assumption

If you're selling, the buyer may assume the loan:

Pro: Avoids defeasance cost entirely
Pro: Buyer gets your favorable rate
Con: Buyer must qualify under Freddie Mac standards
Con: 1% assumption fee still applies

Wait for Open Period

If you can wait, the final 90 days before maturity have no penalty:

Pro: Zero prepayment cost
Con: Must time your transaction to the open window
Con: Market conditions may change while waiting

Supplemental Loan Instead

If you need capital but don't need to exit the loan, a supplemental loan may work:

Pro: Access equity without prepaying first mortgage
Pro: Preserve your favorable rate
Con: Additional debt service
Con: Must qualify under combined metrics

Selecting a Defeasance Consultant

Key factors when choosing a consultant:

Experience: How many defeasances have they completed?
Lender relationships: Do they know your servicer's process?
Bond desk relationships: Can they get competitive Treasury pricing?
All-in fee transparency: Beware hidden costs and markups
Timeline track record: Can they meet your deadline?

Major defeasance consultants include Chatham Financial, Commercial Defeasance, and AST Defeasance. Get quotes from at least two.

Insider Terminology

Successor Borrower

The SPE (special purpose entity) that takes over the defeased loan, with the Treasury portfolio as its only asset. Created by the defeasance consultant.

Treasury Portfolio

The combination of U.S. Treasury securities structured to exactly replicate all remaining loan payments—principal and interest—through maturity.

Lockout Period

The initial period (often 2 years) during which no prepayment is permitted at all—not even through defeasance.

Open Period

The final 90 days before maturity when prepayment is permitted without penalty. The cheapest exit window.

Defeasance Consultant

Third-party specialist who structures the Treasury portfolio, manages the process, and creates the successor borrower entity.

Key Takeaways

Bottom Line

Defeasance substitutes collateral: Treasuries replace your property, releasing the lien
Cost depends on rate environment: Falling rates increase defeasance cost
60-90 days minimum: Start early when you decide to sell or refinance
Run the math: Break-even analysis determines if defeasance makes sense
Consider alternatives: Assumption, supplemental loans, or waiting for open period may be better