Yield maintenance is a prepayment provision commonly found in fixed-rate commercial real estate loans. It is designed to compensate the lender when a borrower repays a loan before the agreed-upon date and the lender must reinvest that capital at a lower return.
It does not necessarily require the borrower to pay every remaining interest payment. The amount is determined by the specific formula in the loan documents.
A yield maintenance calculation typically considers:
Generally, the penalty may be larger when market rates have fallen below the loan’s rate. If market rates have increased, the calculated amount may be lower, although a minimum premium could still apply.
Because future benchmark rates are unknown, a lender cannot provide an exact prepayment amount years in advance. Borrowers should request an estimate based on a proposed payoff date and confirm the calculation with the lender or servicer.
Yield maintenance allows a borrower to repay the loan while paying a calculated prepayment premium.
Defeasance generally replaces the real estate collateral with a portfolio of qualifying securities designed to support the remaining loan payments. The original debt typically remains in place, making defeasance more complex and potentially involving legal, accounting, and securities-related costs.
Neither structure is automatically less expensive. The loan documents and market conditions determine the outcome.
Before accepting a loan with yield maintenance, investors should ask:
Yield maintenance may have little practical effect on an investor planning to hold the property throughout the protected period. It can be more consequential when an early sale or refinance is likely.
CoreVest’s long-term fixed-rate rental portfolio loans generally include yield maintenance. Other products, including CoreVest’s Line of Credit, may offer different prepayment structures. Borrowers should review the applicable term sheet and loan documents carefully.
Request financing to discuss a loan structure aligned with your investment strategy.
This article is provided for informational purposes only and does not constitute legal, tax, investment, financial, or lending advice. The applicable loan documents control all prepayment calculations and obligations. CoreVest loans are for business and investment purposes only and are subject to underwriting, credit approval, eligibility requirements, and applicable terms and conditions.
CoreVest Finance | NMLS #1627183
