Yield Maintenance vs. Defeasance: CMBS Prepayment Explained

When you take out a CMBS loan, you are not just borrowing money — you are creating collateral for a bond that investors are counting on for a predictable stream of interest. That is why conduit loans restrict prepayment so tightly. You generally cannot just pay off the balance early; instead, you must either pay yield maintenance or execute a defeasance. Understanding the difference is essential before you sign, because the wrong assumption can cost hundreds of thousands of dollars when you sell or refinance.

Both mechanisms exist to protect bondholders' expected yield. They achieve it in very different ways, and which one your loan uses — and what it will cost — should be modeled before closing, not discovered at exit.

What Is Yield Maintenance?

Yield maintenance is a prepayment penalty calculated as a lump sum that compensates the lender for the interest it will lose by being repaid early. In simple terms, the borrower pays the difference between the loan's contract interest and what the lender could earn by reinvesting the prepaid principal in Treasuries of comparable maturity, discounted to present value — usually subject to a minimum penalty (often 1% of the balance).

The key dynamic: yield maintenance is largest when market rates have fallen below your loan rate (because the lender would have to reinvest at a lower yield) and smallest when rates have risen (the reinvestment gap shrinks). It is the more common structure on agency loans and some CMBS loans.

What Is Defeasance?

Defeasance does not pay off the loan at all. Instead, the borrower purchases a portfolio of government securities (typically U.S. Treasuries or agency bonds) whose payments exactly replicate the remaining principal and interest of the loan. That securities portfolio is substituted for the real estate as the loan's collateral. The bond investors keep receiving their scheduled payments — now from the securities instead of the property — and the borrower walks away with a free-and-clear building.

Defeasance involves more moving parts: a successor borrower, an accountant to verify the cash flows, legal documentation, and transaction costs. But it has a powerful advantage when rates rise.

The Rate-Environment Difference

Scenario	Yield Maintenance	Defeasance
Rates rose since closing	Smaller penalty (near minimum)	Can be cheap; may even produce a small gain on the securities
Rates fell since closing	Larger penalty	Larger cost (securities more expensive)
Mechanism	Lump-sum payment, loan retired	Buy securities, swap collateral, loan stays outstanding
Complexity / cost to execute	Lower	Higher (multiple parties, fees)

The critical insight for 2026: because rates rose substantially after the low-rate origination years, many borrowers with defeasance loans are finding their defeasance cost is far lower than they feared — sometimes a fraction of a comparable yield-maintenance penalty. This matters enormously for owners deciding whether to sell or refinance ahead of maturity.

The Open Prepayment Window

Most CMBS loans include an "open" period — typically the final 3 to 6 months before maturity — during which the loan can be repaid at par with no penalty. If your sale or refinance can wait until that window, you avoid both yield maintenance and defeasance entirely. Timing your exit around the open window is one of the simplest ways to save money on a CMBS loan.

What This Means When You Borrow

Before you sign a CMBS term sheet, ask three questions: Which prepayment structure applies — yield maintenance or defeasance? What is the lockout period before prepayment is even allowed? When does the open window begin? Then model the likely exit cost under both rising- and falling-rate scenarios. If you expect to sell or refinance before maturity, prepayment terms can matter as much as the headline rate.

Frequently Asked Questions

First Realty Capital models prepayment cost under multiple rate scenarios before you sign, so there are no surprises at exit. Contact us to review your CMBS prepayment options.

Related reading: How CMBS Loans Work  |  CMBS vs. Agency Loans  |  What Is a Conduit Loan?