A prepayment premium is the cost a borrower pays to retire fixed-rate CRE debt early. Three common forms exist: yield maintenance (cash payment that preserves the lender's yield), defeasance (substitute Treasuries collateral), and step-down (declining percentage of outstanding principal each year).
When does each form apply?
Yield maintenance is standard on agency, life-company, and bank perm. Defeasance is required on most CMBS. Step-down (e.g. 5-4-3-2-1) is common on community-bank perm and some smaller CMBS programs. Bridge debt typically has no prepayment penalty after a 12- or 18-month lockout.
How is yield maintenance calculated?
Yield maintenance equals the present value of the remaining loan payments, discounted at the current matching Treasury, minus outstanding principal. When Treasuries have fallen, the number can be large. When they have risen, it often falls to zero or to a contractual minimum, for example 1% of principal. The 1% is a floor, not a cap.
How is defeasance different?
Defeasance does not pay off the loan, it substitutes a portfolio of U.S. Treasuries that produces cash flow matching the remaining loan payments. The Treasuries are pledged as substitute collateral; the original loan stays in place. Cost is similar to yield maintenance but with execution complexity (defeasance consultant, attorney, accountant).
Sources
- Quarterly Survey of Commercial/Multifamily Mortgage Bankers Originations · Mortgage Bankers Association · 2026-Q1
- Multifamily Market Commentary · Fannie Mae Economic & Strategic Research · 2026-Q1