Yield Maintenance Prepayment Guide

1. What is Yield Maintenance?

Yield Maintenance is one of several types of commercial real estate prepayment penalties — others include defeasance, step-down (5-4-3-2-1%), and open prepayment. Unlike defeasance, which replaces collateral, Yield Maintenance is a cash payment made directly to the lender designed to compensate them for the interest income they would have received if the loan had not been prepaid.

The penalty is calculated based on the difference between your loan's interest rate and current Treasury rates, discounted back to present value over the remaining loan term. Because Treasury rates fluctuate daily, the penalty changes constantly — which means timing and expert calculation both matter significantly.

2. Why Do I Need a Consultant?

While the servicer will provide you with a Yield Maintenance payoff figure, that number is not always accurate — and servicers are not always incentivized to find savings on your behalf. A consultant provides an independent check on the servicer's calculation and advocates for interpretations of your loan documents that minimize the penalty.

Specific ways a consultant adds value:

• Confirming the Treasury rate the servicer used — Treasury rates are a moving target and the rate selected can materially affect the penalty
• Identifying language in the loan documents that may reduce the penalty — intricacies that servicers routinely overlook
• Managing the 30-day advance notice requirement (no more than 60 days) to hit your target closing date
• Ensuring the closing date falls on a payment date, which avoids additional interest accrual through the next payment date

What AST delivers on every transaction:

• Review and verify the penalty calculations
• Confirm the exact payoff amounts before closing
• Negotiate any possible reductions in penalties
• Guarantee your closing is completed on time
• Leverage established servicer relationships to reduce delays and headaches

3. What Are the Advantages Over Other Prepayment Penalties?

Yield Maintenance's primary advantage over defeasance is cost. Because it is a direct cash payment rather than a securities transaction, it does not require the involvement of accountants, attorneys, broker-dealers, rating agencies, or a successor borrower entity. This elimination of third-party infrastructure typically saves the borrower $50,000–$60,000 in fees compared with a comparable defeasance.

The tradeoff is that the penalty amount itself is determined by formula and current market rates, so it can be higher or lower than a defeasance cost depending on the interest rate environment at the time of prepayment. In general, Yield Maintenance tends to be less expensive when Treasury rates are high (because the interest rate differential is smaller) and more expensive when Treasury rates are low.

4. Are There Any Upfront Costs?

No. AST does not charge any upfront fees on yield maintenance payoffs. We coordinate with the servicer to obtain the payoff statement and manage the process through closing. Our consulting fee is collected only after the payoff has been successfully completed.

5. Are All YM Penalties Calculated the Same Way?

No — and this is one of the most important things to understand about Yield Maintenance. Prepayment provisions in loan documents vary greatly. Each provision specifically dictates the Yield Maintenance methodology, the index reference rate, and how the discount rate is calculated, along with many other details.

There are no industry-wide standards. A knowledgeable drafter can make small changes to a Yield Maintenance provision that have an outsized impact on the penalty a borrower ultimately pays. This is precisely why reading your loan documents carefully — ideally with the help of a consultant — matters before assuming you understand what your prepayment will cost.

6. What Types of Yield Maintenance Methodologies Are There?

The five most common Yield Maintenance calculation frameworks — all of which lenders may refer to generically as “Yield Maintenance” — are:

1. Net Present Value of future payments — Discounts all remaining scheduled loan payments back to present value using the applicable Treasury rate.
2. Interest differential × PV factor — Calculates the difference between the note rate and the Treasury rate, then applies a present value factor over the remaining term.
3. NPV of interest differential on prepaid balance — Applies the interest rate differential only to the outstanding loan balance at prepayment, discounted to present value.
4. NPV of interest differential on amortizing balance — Similar to the above, but uses the projected amortizing balance over the remaining term rather than the current balance.
5. YM penalty = cost of a defeasance portfolio — Explicitly ties the Yield Maintenance penalty to what a defeasance of the same loan would cost, making the two methods directly comparable.

Within each of these five frameworks, small language variations in the loan documents can produce meaningfully different results. The applicable methodology for your loan is always determined by your specific promissory note.

7. Can I Ever Pay Off at Par or at a Discount?

In almost all cases, no. CMBS loans with Yield Maintenance provisions contain a prepayment floor — typically 1–3% of the outstanding loan balance — that acts as a minimum penalty regardless of the formula result. If the Yield Maintenance calculation produces a number below the floor, you pay the floor instead.

In practice this means: if Treasury rates have risen significantly above your loan rate (making the interest differential negative), the Yield Maintenance formula might theoretically produce zero or a discount — but the prepayment floor prevents you from benefiting from that. Most borrowers will always pay at least 1–3% of their loan balance to exit.

8. Glossary

Prepayment Floor

A minimum Yield Maintenance penalty — typically 1–3% of the outstanding loan balance — that applies regardless of the formula result. If the YM calculation produces a number below the floor, the borrower pays the floor instead.

Yield Maintenance

A prepayment penalty applied to a loan as an alternative to defeasance. The penalty is designed so the lender receives the same interest income they would have earned if the loan had not been prepaid early. Yield Maintenance penalties require substantially lower third-party fees than defeasance.