Yield Maintenance vs Defeasance: CRE Prepayment Options
Compare yield maintenance and defeasance, learn why the loan documents control costs, and work through an illustrative present-value calculation.
Yield maintenance is a contractual prepayment premium. Defeasance generally substitutes acceptable collateral and its cash flows for the property under an eligible loan's terms. Their costs, timing and availability depend on the loan documents. Request the servicer's transaction-specific quote before comparing exit options.
A sale or refinance model should include the cost and timing of releasing the existing collateral. A generic interest-rate spread is not a payoff quote, and the cheaper option is not necessarily available under the loan.
How the options differ
| Question | Yield maintenance | Defeasance |
|---|---|---|
| Basic mechanism | Premium calculated under the prepayment provisions | Substitute collateral and required cash flows |
| Main cost drivers | Contract formula, remaining protected period, specified reference yield and any minimum | Required collateral, cash-flow matching and transaction expenses |
| Timing | Notice and payment provisions govern | Eligibility, collateral purchase and document process matter |
| What to obtain | Written payoff and premium calculation | Written eligibility, process, collateral and fee estimates |
Fannie Mae's prepayment guidance directs the servicer to the loan documents for the premium and describes a minimum-premium mechanism. Its defeasance guidance describes substitute collateral and related obligations. Those sources describe Fannie procedures, not identical rules for every CRE loan. Sources checked September 19, 2026.
An illustrative present-value calculation
Consider a simplified interest-only balance of $10,000,000, a 6% loan rate and an assumed 4% discount/reference rate, with three annual periods remaining. The annual interest difference is $200,000:
Annual difference = $10,000,000 Ă— (6% - 4%) = $200,000
Illustrative PV = $200,000 / 1.04
+ $200,000 / 1.04^2
+ $200,000 / 1.04^3
= approximately $555,018
This demonstrates discounting only. It is not a universal yield-maintenance formula. A real quote can use different timing, reference yields, amortization, protected periods, minimums and fees. The undiscounted $600,000 interest difference would not be the same figure as this present value.
What happens when interest rates rise?
A smaller or negative spread in a simplified model does not establish a zero contractual premium. Check any minimum payment and the actual calculation provisions. Also distinguish the yield-maintenance end date from the loan maturity and any subsequent open-prepayment period.
Compare the full cost of the exit
Record the expected closing date, unpaid balance, accrued interest, premium or collateral cost, legal/servicing expenses and new financing costs. Ask which estimates can change before closing. Compare those costs with sale or refinance proceeds using the bridge-to-permanent workflow.
Before selecting a new loan, compare these exit mechanics alongside recourse, covenants and flexibility in the loan-types guide. Do not assume a borrower can switch between prepayment and defeasance at will.
Frequently asked questions
Is defeasance always cheaper than yield maintenance? No. Price the options actually available under the loan for the expected transaction date, including expenses and timing.
Can a calculator provide my payoff amount? A calculator can illustrate assumptions. The servicer's contractual calculation and quote are needed for the actual payoff or release.
Is yield maintenance just the remaining interest? No. The contractual calculation can involve a reference yield, discounting and a minimum. The worked example above only illustrates one simplified present-value concept.
What should I ask the servicer first? Ask which exit provisions apply, when they become available, what notice is needed, what costs are included and when a written quote expires.
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