# Yield maintenance defeasance and commercial prepayment costs

Canonical: https://chicagocommercialfunding.com/guides/yield-maintenance-defeasance-and-commercial-prepayment-costs/
Markdown: https://chicagocommercialfunding.com/guides/yield-maintenance-defeasance-and-commercial-prepayment-costs/index.md
Resource ID: yield-maintenance-defeasance-and-commercial-prepayment-costs
Published: 2026-10-21
Updated: 2026-10-21
Attribution: Chicago Commercial Funding Editorial
Topic: financing
Asset types: All commercial
Investment stage: Finance
Experience level: Intermediate

Commercial prepayment mechanisms can change sale and refinance proceeds substantially. Model the actual contract, notice dates, quote validity, and all release expenses.

Evaluate commercial prepayment costs before choosing a loan and again before planning a sale or refinance. Yield maintenance, defeasance, percentage charges, minimum interest, lockouts, and open periods are different contractual mechanisms. The actual note and related documents determine what is available and what it costs.

The investor should compare net proceeds and the full holding-period economics. A lower new interest rate or an attractive sale price does not establish a profitable exit if the existing loan's release cost is omitted.

## Start with a timeline of permitted actions

Identify the initial lockout, periods with a premium or substitution mechanism, any open window, maturity, notice requirements, deposits, and required closing procedures. Record whether the borrower has a contractual option or needs discretionary consent.

An investment with an uncertain sale date should test several exit dates. The prepayment cost can differ materially across the calendar. A model that assumes one favorable month while the business plan could take another year needs a broader comparison.

Obtain current transaction-specific information from the servicer or authorized provider. A spreadsheet estimate is useful for planning, while actual payoff and release amounts must be confirmed through the required process.

## Yield maintenance protects specified economics

A yield-maintenance provision uses the contract's formula to determine a premium associated with early repayment. Its inputs, benchmark, remaining period, payment schedule, discounting, floors, and minimum amounts can vary.

Do not assume a generic calculator implements the signed clause. Read the definition, then build or obtain an illustration matching it. A result labeled yield maintenance without identifying the contractual assumptions is not yet reliable.

Fannie Mae's multifamily prospectus and servicing materials distinguish prepayment structures within its programs. That provides a primary example of documented alternatives, rather than a universal commercial formula. [Fannie Mae multifamily prospectuses](https://capitalmarkets.fanniemae.com/mortgage-backed-securities/multifamily-mbs/mbs-prospectuses-multifamily)

## A deliberately simplified present-value illustration

Assume a hypothetical $2 million interest-only loan has three annual payments remaining: $120,000 after year one, $120,000 after year two, and $2,120,000 after year three including principal. Assume an illustrative 3% discount rate.

The present value of those payments is approximately $2,169,716.68. The difference from $2 million principal is approximately $169,716.68. This demonstrates one economic idea behind protecting scheduled cash flows when the replacement yield is lower.

At 6% discounting, the same cash flows have present value of approximately $2 million. At 8%, their present value is approximately $1,896,916.12, below principal. An actual contract can contain a minimum premium or other formula, so the negative difference does not imply the borrower receives a credit.

| Illustrative discount rate | Present value of stipulated cash flows | Difference from principal |
|---|---:|---:|
| 3% | $2,169,716.68 | $169,716.68 |
| 6% | Approximately $2,000,000 | Approximately $0 |
| 8% | $1,896,916.12 | ($103,083.88) |

This annual-payment example is educational arithmetic, not a payoff calculation for a real monthly loan. Do not substitute it for the actual provision.

## Defeasance is a different transaction

Defeasance generally concerns replacing the property's collateral role with eligible substitute collateral under the applicable documents and process. The borrower must identify the precise permitted securities, matching requirements, parties, notices, and costs.

Fannie Mae's January 2026 Fixed-Rate Defeasance prospectus describes acceptable substitute collateral generally consisting of Treasury or Fannie Mae securities, with cash possible near the end of the term. The loan remains outstanding and substitute collateral funds its remaining scheduled payments. That is a specified program framework; the subject documents determine eligible collateral and procedures. [Fannie Mae 2026 defeasance prospectus](https://capitalmarkets.fanniemae.com/media/document/pdf/jan-1-2026-mf-prospectus-fixed-rate-defeasance.pdf)

A borrower should obtain an authorized estimate and understand how market movement affects it. The cost includes more than a simple principal payment. Securities purchase, professional fees, administration, and other document-specific expenses can matter.

## Compare release cost with principal payoff

Assume a hypothetical sale price is $6 million, ordinary selling costs are $120,000, and existing principal is $3.5 million. Before prepayment-related cost, proceeds are $2.38 million.

If the confirmed release transaction requires another $220,000 of premium or substitute-collateral cost above principal plus $30,000 of related expenses, proceeds fall to $2.13 million before taxes and other unmodeled items. Omitting that $250,000 overstates cash available to equity.

Use the actual quoted structure so principal and collateral costs are not counted twice. A defeasance estimate can be presented differently from a conventional payoff. Reconcile each line with the provider before inserting it into the sale model.

## Percentage charges and minimum interest need their own treatment

A declining percentage schedule can be easier to model, but timing and the balance base still matter. Confirm whether the percentage applies to original principal, outstanding principal, the amount prepaid, or another defined amount.

Minimum-interest provisions can make a short hold expensive even when the loan is outstanding for only a few months. Exit fees may be additional to interest or other charges under the actual agreement. Do not infer that a zero stated prepayment penalty means no exit cost.

The SEC 2026-5 C 8 term sheet provides a primary example of commercial loan features disclosed in a securitization. It should be consulted as an example alongside the actual subject note, not as a rulebook for every borrower. [SEC 2026-5 C 8 term sheet](https://www.sec.gov/Archives/edgar/data/850779/000153949726000345/n5644_x5-ts.htm)

## Refinance savings require a complete comparison

Compare staying in the existing loan with refinancing using dated cash flows. Include prepayment or defeasance, new loan costs, reserves, payments, principal balances, maturity, and any cash-out. A simple monthly payment saving divided into closing cost can be an initial screen, not the final analysis.

A new amortization schedule can lower payments by slowing principal repayment, even when financing is not cheaper economically. Conversely, a higher payment can build equity faster. Separate interest, principal, and liquidity.

Run several holding periods. Paying a large exit cost for small annual savings may be unattractive if the property will sell soon. A longer hold or materially reduced risk could support a different decision. State the reasoning rather than let the new coupon decide automatically.

## Consider assumption and permitted transfer alternatives

A buyer may prefer to assume attractive existing financing, subject to actual approvals, fees, guarantor requirements, and timing. That path can avoid one kind of exit while introducing another set of conditions.

Do not advertise a loan as freely assumable without confirming the process and eligibility. A buyer may need more equity if the balance is low relative to price, and supplemental borrowing may require separate permission.

Compare seller net proceeds and transaction certainty under payoff, defeasance, and assumption where actually available. The highest nominal price is not necessarily the highest executable net outcome.

## Manage quotation and closing timing

Identify quote date, validity, market sensitivity, deposit requirements, notice periods, and the last date to complete required actions. Coordinate the sale contract, title process, securities purchase where relevant, and lender release.

Assign one person to maintain the closing checklist. A change in sale date or principal balance can require an updated quote. Do not preserve an outdated estimate because it is already embedded in the investor presentation.

Maintain contingency for reasonable quote movement and identified fees. If the exit is highly sensitive, show owners the range before the transaction becomes unconditional. A precise estimate without its date and assumptions can imply more certainty than exists.

## Chicago investment application

A retail, office, industrial, or mixed-use sale should include both local transaction expenses and the existing loan's national contractual economics. Research the actual jurisdiction and property structure rather than use a generic all-in closing percentage.

This guide supplies no current market yield, security price, or Chicago payoff premium. Its purpose is to make the investor's required research explicit and demonstrate how release costs flow through proceeds.

For financing inquiries, Jaken's commercial resource can help organize the comparison. Ask for the full prepayment structure before selecting a loan, particularly when early sale or refinance is part of the plan. [Jaken commercial financing](https://jakenfinancegroup.com/commercial-property-loans-by-asset-class/)

The decision should preserve both flexibility and transparency: what actions are permitted, what each costs at relevant dates, and how the investor's net cash changes. Prepayment belongs in acquisition underwriting rather than appearing as a surprise during disposition.


## Compare waiting with selling now

A later open-prepayment window can reduce a release cost, but waiting also changes operating cash, carrying expense, debt balance, and market exposure. Evaluate the actual incremental cash flows instead of assuming the avoided premium is pure benefit.

For a simplified example, suppose waiting six months avoids a $250,000 release-related cost but requires $40,000 monthly net carrying cash. The six-month carrying requirement is $240,000, leaving only $10,000 before discounting, price changes, additional capital, and other differences. The simple cost-only break-even is 6.25 months, but it is not a recommendation to wait because sale price and timing remain uncertain.

A stronger analysis models the owner's realistic alternatives and capacity to carry the property. If liquidity is insufficient or a major tenant expires during the wait, the nominally cheaper loan exit might create a worse investment outcome. Preserve those dependencies in the disposition decision memo.

Compare quotations on the same proposed closing date.

Request quotations for the same hypothetical payment date and payoff balance. A changing settlement date can alter interest, security purchase requirements, and administrative costs. Archive the date, assumptions, expiry, and exclusions with each estimate so a later difference is explainable rather than misread as a lender error.

## Source registry

- [Fannie Mae — 2026 Fixed-Rate Defeasance prospectus](https://capitalmarkets.fanniemae.com/media/document/pdf/jan-1-2026-mf-prospectus-fixed-rate-defeasance.pdf): accessed 2026-10-21
- [Fannie Mae — Multifamily MBS prospectuses](https://capitalmarkets.fanniemae.com/mortgage-backed-securities/multifamily-mbs/mbs-prospectuses-multifamily): accessed 2026-10-21
- [SEC — Wells Fargo Commercial Mortgage Trust2026-5C8 term sheet](https://www.sec.gov/Archives/edgar/data/850779/000153949726000345/n5644_x5-ts.htm): accessed 2026-10-21
- [Jaken Finance Group — Commercial property financing by asset class](https://jakenfinancegroup.com/commercial-property-loans-by-asset-class/): accessed 2026-10-21

## Related resources

- [The commercial investor’s guide to financing and capital stacks](https://chicagocommercialfunding.com/learn/financing/)
- [LTV DSCR and debt yield the three loan-sizing constraints](https://chicagocommercialfunding.com/guides/ltv-dscr-and-debt-yield-the-three-loan-sizing-constraints/)
- [Bank loans versus debt funds for commercial acquisitions](https://chicagocommercialfunding.com/guides/bank-loans-versus-debt-funds-for-commercial-acquisitions/)