Yield Maintenance: What CMBS Borrowers Need to Know

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.