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

Richard Hoyt, Robert Aalberts and Percy Poon

Journal of Real Estate Practice and Education, 2009, vol. 12, issue 1, 17-32

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.

Date: 2009
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DOI: 10.1080/10835547.2009.12091653

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