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Commercial Mortgage Prepayment: Prepayment Fee, Yield Maintenance, or Defeasance

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  • Richard Hoyt
  • Robert Aalberts
  • Percy Poon

Abstract

Commercial real estate mortgages are commonly paid off prior to their termination date. This may come about because of a sale, a refinancing, or an involuntary situation, such as foreclosure or bankruptcy. Early prepayment typically has an associated fee to compensate the lender for the change in income pattern. These include a lock-out, prepayment penalty, yield maintenance or a defeasance. This article explains the different options, their legality, and then presents models to calculate the cost of each. Such knowledge enables the participants in the mortgage situation to act so as to best meet their needs and minimize their costs.

Suggested Citation

  • Richard Hoyt & Robert Aalberts & Percy Poon, 2009. "Commercial Mortgage Prepayment: Prepayment Fee, Yield Maintenance, or Defeasance," Journal of Real Estate Practice and Education, Taylor & Francis Journals, vol. 12(1), pages 17-32, January.
    • Handle: RePEc:taf:rjrpxx:v:12:y:2009:i:1:p:17-32
    DOI: 10.1080/10835547.2009.12091653
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