What does "Yield maintenance" mean in real estate?

Yield maintenance is a prepayment penalty in commercial real estate loans that ensures lenders keep the same yield or return they expected when the loan was originated, even if the borrower pays off the loan early. The fee compensates the lender for interest income lost when a borrower prepays and the lender must reinvest principal at current, often lower, market rates.

How yield maintenance works

When a borrower prepays a loan before maturity, they pay the outstanding principal plus a yield maintenance fee.
The fee is calculated using the present value of the remaining scheduled loan payments discounted at the current yield of a comparable Treasury security, adjusted to preserve the lender’s original interest margin.
Effectively, the penalty offsets the lender’s lost interest income if market interest rates have fallen since the loan was made.

Simple example

Imagine a 10‑year commercial loan at 7% where the borrower prepays after 7 years. If comparable Treasury yields are now 4%, the borrower owes the outstanding principal plus a yield maintenance fee equal to the lost 3% interest margin over the remaining term. The lender discounts the remaining scheduled payments at the current Treasury rate and calculates the difference necessary to maintain the original yield.

Yield maintenance vs. defeasance

Yield Maintenance	Defeasance
Borrower prepays principal plus a one‑time penalty fee	Borrower substitutes loan collateral with government securities to replicate payments
Penalty equals present value of remaining payments discounted at Treasury yield	No penalty payment but involves buying securities to match the loan’s cash flows
Lower capital and administrative burden	Higher complexity and capital costs
Common in commercial and multifamily loans	Used when loan documents require asset release or specific cash‑flow replication

Real-world use and implications

Yield maintenance is common in multifamily and commercial mortgages and is used by large lenders, including Fannie Mae and Freddie Mac.
Borrowers planning to refinance should calculate the yield maintenance fee before proceeding—if market rates have fallen substantially, the prepayment penalty can exceed the savings from a new lower‑rate loan.
Compared with defeasance, yield maintenance offers a straightforward one‑time payoff rather than the operational complexity of replacing collateral with government securities.

Practical tips for borrowers

Request a payoff estimate that itemizes the yield maintenance calculation before negotiating or accepting refinance terms.
Compare the penalty to projected savings from refinancing to see if prepayment makes financial sense.
Consider timing: market interest moves affect the size of the fee—prepaying when Treasuries are low typically increases the penalty.

In short, yield maintenance balances a borrower’s desire for early payoff or refinance with a lender’s need to preserve the contract yield, making it a critical concept in commercial real estate finance when loans are repaid before maturity.