Yield Maintenance in Relation to CMBS Loans
While many conduit loans require that borrowers engage in defeasance if they want to prepay their loan, some lenders permit borrowers to prepay using yield maintenance. Yield maintenance involves a borrower paying off the balance of their CMBS loan, plus an additional 1-3% fee in order to compensate the lender for the income they’ve lost as a result of loan prepayment.
Defeasance Definition: How Defeasance Relates to CMBS Loans
Borrowers often consider conduit loans’ strict prepayment penalties to be one of their major downsides. Many CMBS loans must be prepaid in a process called defeasance, which involves a borrower purchasing alternative securities, often U.S. Treasury bonds, to replace the collateral and interest income that the lender will lose as a result of prepayment. Defeasance can be a complicated process, the details of which will typically be spelled out in a borrower’s loan agreement.
Prepayment Penalties for CMBS Loans
If you take out a CMBS loan, and you want to pay off the loan early, perhaps because you’re selling the property, you’ll usually have to pay a prepayment penalty. Prepayment penalties are designed to compensate the lender, or, in the case of CMBS loans, the investors, for the loss of income that will result from a borrower paying off their loan early.