The decision between a step-down prepayment and a Yield Maintenance prepayment option is one that operators and borrowers should not take lightly. Your Exit strategy will be the key determination on what you should choose.  If you are planning on selling property or paying off loan in the first 5 years, a step-down penalty is recommended (with today’s Yield Curve), however the interest rate on the loan will likely be 20 to 25 bps higher. 

Assuming interest rates stay exactly the same as today, the picture above is what a Yield Maintenance decision looks would look like with a flat yield curve (Loan amount of $2,300,000).

If rates go up, the Yield Maintenance penalties should be less, however it would take a nice increase in the underlying treasuries for Yield Maintenance to be advantageous.

In the above example, the underlying treasury in years 4 and 5 would need to increase 125 bps to break even on a step-down prepayment penalty. Even with an increase of 100 bps in the underlying treasury for years 1-3 it may not be an advantage to take Yield Maintenance if you are planning on selling your property within the time frame. The savings in interest may not compute to overall savings when you are selling the property.

On the Flip Side, For the buy and hold operators, Yield Maintenance is a great way to save interest over the course of the loan. If you do not plan on selling your property and want a long-term asset, then Yield Maintenance should be your choice.

Happy New Year!