Assumable debt, defeasance and yield maintenance: the exit is written at the start

Residential borrowers refinance freely. Commercial multifamily borrowers often cannot, because the loan was written to protect the lender's yield for its whole term. Two structures dominate. Yield maintenance requires the borrower to pay a penalty calculated so the lender receives roughly what it would have earned had the loan run to term; it falls as maturity approaches and can be very large early. Defeasance, common in securitised loans, requires the borrower to buy a portfolio of securities that replicates the remaining payments and substitute it as collateral — with its own transaction costs and a process that takes weeks. Step-down prepayment penalties are the gentler version: a declining percentage of the balance by year. A lockout period is the bluntest: no prepayment at all for a stated number of years. The reason this belongs in the buying decision rather than the selling decision is simple. A business plan that says "renovate, raise rents, refinance in year three" is incompatible with a loan that makes year three prohibitively expensive to exit. The plan and the debt have to be chosen together. Assumability is the other side of it. A loan a future buyer can take over — at a rate that looks attractive by then — is a genuine asset at sale. It comes with a lender approval process, a fee, and conditions on the assuming borrower. Ask for the prepayment language and the assumption clause in the term sheet stage. By the closing documents it is not negotiable any more. This article is general information, not legal, tax or financial advice. Rules change and every deal is different — check your own case with a licensed professional. Alberto Zaltzberg — Adonait · adonait.com