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.
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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. In many cases, yield maintenance is less expensive than defeasance, though this can depend on a variety of factors, including the current interest rates for U.S. Treasury bills or agency bonds, depending on what type of security the borrower’s loan agreement allows them to defease the loan with.
Related Questions
What is yield maintenance and how does it relate to CMBS loans?
Yield maintenance is a clause in a loan agreement that allows a borrower to prepay their 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. Yield maintenance is typically less expensive than defeasance, though this can depend on a variety of factors, including the current interest rates for U.S. Treasury bills or agency bonds, depending on what type of security the borrower’s loan agreement allows them to defease the loan with. For lenders, yield maintenance helps them to sell commercial loans for securitization, and for borrowers, yield maintenance is particularly desirable in an environment where interest rates are expected to rise. Source & Source
What are the benefits of yield maintenance for CMBS loans?
Yield maintenance is beneficial for CMBS lenders because it helps them to protect themselves from lost revenue. It also helps them to sell commercial loans for securitization, as yield maintenance clauses typically guarantee a set percentage of return to the purchasers of the repackaged debt. For borrowers, yield maintenance can be less expensive than defeasance, depending on the current interest rates for U.S. Treasury bills or agency bonds.
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What are the drawbacks of yield maintenance for CMBS loans?
The biggest downside of yield maintenance occurs if this option is exercised in an environment where interest rates are falling. If a borrower plans to refinance at a lower interest rate, for example, the cost of yield maintenance may be greater than just continuing to make payments on the existing loan. As a result, the penalty could be far more expensive than if a loan had any one of a number of other prepayment penalties.
Source: cmbs.loans/blog/yield-maintenance and www.commercialrealestate.loans/blog/defeasance-vs-yield-maintenance
How does yield maintenance affect the interest rate of a CMBS loan?
Yield maintenance can help to protect lenders from lost revenue when a borrower prepays their CMBS loan. It involves the borrower paying off the balance of their 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. In many cases, yield maintenance is less expensive than defeasance, though this can depend on a variety of factors, including the current interest rates for U.S. Treasury bills or agency bonds, depending on what type of security the borrower’s loan agreement allows them to defease the loan with. Additionally, the inclusion of yield maintenance typically denotes that the loan is assumable, which can be a desirable benefit to some investors. Source and Source
What are the risks associated with yield maintenance for CMBS loans?
The main risk associated with yield maintenance for CMBS loans is that the borrower may end up paying more than they would have if they had chosen to defease the loan. This is because the borrower must pay the difference between the loan’s interest rate and U.S. Treasury yields for the remainder of the term. Additionally, if the borrower does not negotiate the exact terms of the yield maintenance clause, they may end up paying more than they expected.
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