Understanding Yield Maintenance

What is yield maintenance and how does it differ from defeasance?

Both yield maintenance and defeasance allow borrowers to unencumber the underlying real estate asset. However, from a legal and economic perspective, the two processes are fundamentally different. Yield maintenance is the actual prepayment of the loan. Defeasance on the other hand entails a substitution of collateral and assumption of the loan by the Successor Borrower.
A yield maintenance prepayment usually consists of two portions:
  • The loan’s unpaid principal balance. 
  • A prepayment penalty – this is typically determined by calculating the Present Value of the remaining loan payments, with a discount factor equal to the current yield on the U.S. Treasury that matures closest to the loan’s maturity date.

The only transaction fee associated with yield maintenance is a small processing fee to the loan servicer. In contrast, the cost of defeasance is determined by the price of a portfolio of bonds that are sufficient to provide for the remaining loan payments, plus transaction fees to several third parties. For borrowers, yield maintenance is generally simpler and less time-consuming than defeasance.

Chatham’s online Prepayment Calculator is designed to give an estimated prepayment penalty for the specified loan. It is designed for use with fixed-rate, US-denominated debt based on the general assumption that the prepayment premium equals the greater of the minimum penalty, or the present value of all scheduled future debt payments (after the prepayment date) discounted at a treasury yield, less the principal repaid.

Important note

The Prepayment Calculation is only an estimate – specific debt prepayment provisions are not considered in the calculation. The results should not be used as a precise indication of the Yield Maintenance Costs but rather as a guide to help inform a decision as to whether prepayment is a viable strategy for a borrower.


Getting started with Chatham 

Regardless of how easy it is to use Chatham's automated calculator, it's easier to contact the  defeasance and yield maintenance experts for a detailed analysis of prepayment costs at 610.925.3120.

Chatham Financial has executed over $65 billion principal defeased, and returned over $140 million in residual value to borrowers. Defeasance consultants are a part of Chatham's global real estate  financial risk management practice, solving common but complex capital markets challenges for commercial and multifamily real estate investors.

Getting started with Chatham is simple.

Contact the team.


Previous Article
Derivatives: Deal-contingent Hedgers Set Sights on Infrastructure
Derivatives: Deal-contingent Hedgers Set Sights on Infrastructure

Derivatives: Deal-contingent hedgers set sights on infrastructure January 3, 2018 “There is a complicatio...

Next Article
Expert Panel Discussion – Implementing FASB’s Changes to Hedge Accounting
Expert Panel Discussion – Implementing FASB’s Changes to Hedge Accounting

Watch our webcast with experts from the FASB, EY’s national office, GE, Comerica, and Chatham Financial to ...

Get current treasury and
swap rates from Chatham