Prepayment Penalty: What is Yield Maintenance?

When it comes to prepayment penalties in commercial real estate loans, yield maintenance is more complex.

A yield maintenance prepayment penalty is determined by calculating the present value of the remaining loan payments, factoring in the difference between the loan’s interest rate and the current yield of the U.S Treasury with a term closest to the loan’s remaining term.

Example:

We are prepaying a loan with a balance of $10,000,000, 5 years remaining on the term, and a 6.00% interest rate.  Given that there are 5 years remaining, we will use the 5 YR CMT Yield Rate which is 4.43% as of 1/24/25. 

To calculate the Present Value Factor: (1 – (1 + 4.43%)^(-60/12))/4.43% = 4.40

Yield Maintenance Calculation: $10,000,000 x (6.00% - 4.43%) x 4.40 = $690,573

This prepayment penalty charge would ensure that the lender maintains a similar yield even if the loan is paid off early.  Seeing how the formula works, when this option is exercised in an environment of falling interest rates, it can be even more expensive.