Prepayment penalty Modeling (defeasance or yield maintenance)

[Anonymous]

Hello Spencer,

During the hold or sell decision process, CRE owners often have to consider prepayment penalty. Would you discuss the modeling for defeasance or yield maintenance later in the training?

Thanks,

Kyle

[Spencer Burton]

Kyle,

I hadn’t considered including a section on modeling defeasance or yield maintenance, but this is a great suggestion. I’ll plan to add a tutorial on the subject at some point in the near future. And as an initial launch member of the Accelerator, you have lifetime access to any changes to the program so I’ll be sure to let you know when I’ve added that tutorial.

Thanks for the suggestion!

Spencer

[Spencer Burton]

Let me add a quick comment.

In practice, the prepayment penalty is generally calculated by the lender for the borrower. So the borrower most often requests a payoff, including the the prepayment penalty, and then the borrower uses that amount when modeling the transaction.

When doing back of the back of the envelope analysis, real estate professionals will generally just use an online defeasance or yield maintenance calculator to calculate the payoff and then plug that into their model.

In fact, I’ve had to model a deal with a defeasance just once in my career, and we used a defeancance calculator from a defeasance consultant! That calculator is here: https://www.defeasewithease.com/tools/defeasance-calculator

Nevertheless, I think it’s a good skill to know, only to better understand the concepts. So I’ll be sure to add a tutorial for calculating both at some point soon.

[Author]

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