CRE 101 · deweyluong.realtor

Prepayment Penalties Explained: Yield Maintenance, Defeasance, and Step-Down Schedules for Commercial Loans

Residential mortgages can usually be paid off any time. Commercial loans are built the other way: the lender priced the loan on receiving interest for the full term, and the note charges the borrower for leaving early. The three structures that do that work are yield maintenance (a formula that makes the lender whole for the lost interest), defeasance (the borrower swaps the property for a portfolio of government securities that keeps paying the loan), and a step-down schedule (a fixed percentage of the balance that shrinks each year). On the made-up example on this page, the same $2,000,000 loan costs $217,794 to exit under yield maintenance and $60,000 under a step-down — a $157,794 difference decided entirely by which clause is in the note. By Túy “Dewey” Luong, CCIM — Founding Broker, SERHANT. Atlanta · 318 closed sales / $281.2M career volume · 678-707-2498

The worked example uses made-up, rounded numbers and a simplified yield maintenance calculation to teach the mechanics. The exact formula, the Treasury index, the floor, and the open window are defined loan by loan in the note — read the prepayment article of the actual loan documents before pricing any sale or refinance. This page is general education, not legal or tax advice.

Three structures, three very different exit prices

• Yield maintenance: the borrower pays a premium equal to the present value of the interest the lender loses between the payoff date and maturity. The bigger the gap between the note rate and current Treasury yields, and the more term remains, the bigger the premium. Most notes set a floor, commonly 1% of the balance. Yield maintenance is standard on larger balance-sheet and conduit loans. See also debt yield and LTV and amortization for the loan math around it.
• Defeasance: there is no payoff at all. The borrower buys a portfolio of government securities sized to make every remaining loan payment on schedule, the property is released from the lien, and a successor borrower steps in for what is left of the loan. The economics track the same rate gap as yield maintenance, plus third-party fees for the consultant, counsel, and accountants who run the process. Defeasance is the standard exit on securitized (CMBS) loans after the lockout period.
• Step-down (fixed percentage): the penalty is a stated percentage of the outstanding balance that steps down on a schedule — 5-4-3-2-1 across five years is the classic shape. No Treasury index, no formula dispute: the price of leaving is knowable the day the loan closes. This is the common structure on smaller bank and portfolio loans.
• Lockout and the open window: many commercial notes ban prepayment entirely for an opening period (the lockout, often the first two to three years), and most allow a penalty-free payoff in the final few months before maturity (the open window). Between those two ends, the clause in the note is the price of the exit.

Worked example: one $2,000,000 loan, three exit prices (made-up numbers, labeled as such)

• The loan: $2,000,000 outstanding balance, 7.0% fixed note rate, exactly 4 years left to maturity. The comparable Treasury yield today is 4.0%, so the rate gap is 7.0% − 4.0% = 3.0%.
• Yield maintenance, step by step: the lender loses 3.0% of $2,000,000 = $60,000 of interest per year for 4 years — $60,000 × 4 = $240,000 undiscounted. Discounted back at the 4.0% Treasury yield (annuity factor 3.6299), the present value is $60,000 × 3.6299 = $217,794. The note's 1% floor is 1% × $2,000,000 = $20,000, and yield maintenance is the greater of the two — so the exit premium is $217,794, roughly 10.9% of the balance.
• The same exit under a step-down: on a 5-4-3-2-1 schedule, a payoff in year 3 costs 3% × $2,000,000 = $60,000 — fixed, knowable in advance, and $217,794 − $60,000 = $157,794 cheaper than yield maintenance on these facts.
• The same exit by defeasance: the borrower funds a securities portfolio that replicates the remaining payments. The portfolio's premium over the balance tracks the same rate-gap economics as yield maintenance — about $217,794 on this simplified math — and the process adds third-party fees, $25,000 on this made-up example, for an all-in exit cost of about $217,794 + $25,000 = $242,794. In exchange, the loan is not paid off: the property is simply released, which is exactly what a seller who needs a clean title at a sale closing needs.
• What it does to a sale: the property sells for $3,200,000. Under yield maintenance the seller's proceeds after the payoff are $3,200,000 − $2,000,000 − $217,794 = $982,206 before other closing costs. Under the step-down they are $3,200,000 − $2,000,000 − $60,000 = $1,140,000. The clause in the note — signed years earlier, usually skimmed — is worth $157,794 at this closing table.

What to check before you sign, sell, or refinance

• Read the prepayment article before you price the exit: the structure (yield maintenance, defeasance, step-down, or lockout), the Treasury index and spread, the floor, and the open window are all in the note. A payoff quote from the servicer is the only number that closes — get it in writing before the sale price is final, the same way you verify the leases in due diligence.
• Rates moving up can shrink the penalty: yield maintenance and defeasance costs fall as Treasury yields rise toward the note rate, because the lender's lost interest is worth less. A penalty that looks impossible in a low-rate year can become routine after rates reset — timing a sale or refinance around the clause is real money.
• Negotiate the clause at origination, not at exit: a shorter lockout, a step-down instead of yield maintenance, or a wider open window is cheapest to win when the lender still wants the loan. Once the note is signed, the clause is the clause.
• Partial prepayment and assumption are separate doors: some notes allow partial curtailments up to a stated percentage each year, and some loans are assumable by a qualified buyer — an assumable below-market loan can be a selling feature that adds to the price instead of subtracting from the proceeds. Check both before defaulting to a full payoff, and see exit cap rate for how the exit price itself is underwritten.

Cho nhà đầu tư người Việt

Khác với vay mua nhà ở, hầu hết khoản vay thương mại đều phạt khi trả nợ trước hạn, vì ngân hàng đã định giá khoản vay dựa trên tiền lãi của toàn bộ kỳ hạn. Ba cơ chế chính: yield maintenance (phạt theo công thức — bồi hoàn cho ngân hàng giá trị hiện tại của tiền lãi bị mất), defeasance (không trả hết nợ; người vay mua một danh mục trái phiếu chính phủ trả thay các kỳ còn lại và bất động sản được giải chấp), và step-down (phạt theo phần trăm cố định của dư nợ, giảm dần mỗi năm, ví dụ 5-4-3-2-1). Ví dụ giả định trên trang này: khoản vay $2.000.000, lãi suất cố định 7,0%, còn 4 năm, lãi suất trái phiếu kho bạc 4,0% — chênh lệch 3,0% tương đương $60.000 tiền lãi mỗi năm, chiết khấu về hiện tại còn $217.794 theo yield maintenance. Cùng khoản vay đó, nếu theo step-down năm thứ 3 thì chỉ mất 3% × $2.000.000 = $60.000 — rẻ hơn $157.794. Bán bất động sản với giá $3.200.000, người bán còn $982.206 sau khi trả nợ và nộp phạt yield maintenance, so với $1.140.000 nếu theo step-down. Bài học: điều khoản trả trước hạn ký từ nhiều năm trước quyết định số tiền thật còn lại khi bán hoặc tái cấp vốn — phải đọc kỹ điều khoản này trong khế ước vay và xin báo giá trả nợ bằng văn bản trước khi chốt giá bán. Đây là thông tin giáo dục chung, không phải tư vấn pháp lý hay thuế.

Frequently asked questions

What is yield maintenance on a commercial loan?

Yield maintenance is a prepayment premium that makes the lender whole for the interest it loses when a loan is paid off early. It is roughly the present value of the rate gap — the note rate minus the current Treasury yield — applied to the outstanding balance over the remaining term, usually subject to a floor such as 1% of the balance. On this page's made-up example, a $2,000,000 balance at 7.0% with 4 years left and a 4.0% Treasury yield produces a $217,794 premium.

How is defeasance different from yield maintenance?

Yield maintenance pays the loan off: the borrower wires the balance plus the premium and the debt is retired. Defeasance does not pay the loan off at all — the borrower buys government securities that make every remaining payment on schedule, the property is released from the lien, and a successor borrower takes over the loan's remaining life. The cost tracks the same rate-gap economics, plus third-party process fees, and defeasance is the standard exit on securitized CMBS loans after the lockout.

What is a step-down prepayment penalty?

A step-down penalty is a fixed percentage of the outstanding balance that shrinks on a stated schedule — 5% in year one, then 4%, 3%, 2%, and 1% is the classic shape. There is no Treasury index or formula to argue about: the cost of leaving is knowable the day the loan closes. On the worked example, a year-3 payoff on a $2,000,000 balance costs 3%, or $60,000 — $157,794 less than yield maintenance on the same facts.

Can you sell a property with a commercial loan before the loan matures?

Usually yes, but the note sets the price of the exit. During a lockout period prepayment may be banned outright; after it, the exit runs through yield maintenance, defeasance, or the step-down in the note; and most loans open a penalty-free window in the final few months. Some loans are also assumable, which can turn a below-market loan into a selling feature. Get the servicer's written payoff or defeasance quote before the sale price is final — on the worked example the clause alone moved the seller's proceeds by $157,794.

Phạt trả nợ trước hạn trong vay thương mại gồm những loại nào?

Ba loại chính: yield maintenance — phạt theo công thức, bằng giá trị hiện tại của tiền lãi ngân hàng bị mất, tính theo chênh lệch giữa lãi suất vay và lãi suất trái phiếu kho bạc; defeasance — không trả hết nợ mà mua trái phiếu chính phủ trả thay các kỳ còn lại để được giải chấp bất động sản; và step-down — phạt theo phần trăm cố định của dư nợ, giảm dần theo năm như lịch 5-4-3-2-1. Trong ví dụ trên trang này, cùng một khoản vay $2.000.000 tốn $217.794 theo yield maintenance nhưng chỉ $60.000 theo step-down. Đây là thông tin giáo dục chung, không phải tư vấn pháp lý hay thuế.

Looking at a sale or refinance where the loan's prepayment clause is the deal? Call Túy “Dewey” Luong, CCIM at 678-707-2498 or see SERHANT. Atlanta.