Yield Maintenance
Yield maintenance: prepayment penalty compensating lender for lost interest. Makes lender whole: same yield as if all payments made. Calculation: PV of (loan rate - Treasury rate) x balance x remaining term. Example: a loan at 6% with 5 years left and a 4% Treasury rate yields a penalty equal to the present value of the lost spread. Decreases over time. Common: CMBS, life insurance, commercial. Negotiation: lockout period, cap, sunset, and same-lender refinance. Attorney review of prepayment provisions recommended.
What It Is
- Lender compensation
- Lost interest income
- CMBS, commercial loans
Calculation
- PV of rate difference
- x balance x remaining term
- Decreases over time
Negotiation
- Lockout, cap, sunset
- Same-lender refinance
- Attorney review
Related Terms
Barnes Walker Real Estate
Barnes Walker’s attorneys handle FL commercial loans. Request a legal inquiry for assistance.
Reviewed by the attorneys at Barnes Walker, Goethe, Shea & Robinson, PLLC