Here's a quick tip on a topic that can help your clients manage their properties: Weighing Loan Prepayment Fees Against a Sale/Refinancing. Feel free to pass along the attached flyer to any clients who are new to property ownership or could use the information in managing their portfolios.

Loan Prepayment Fees are a requirement of many commercial mortgages and can prove to be a deterrent to what is otherwise a perfect opportunity to refinance or sell one's property. Prepayment fees come in many different forms, but are generally designed to compensate the lender (or bondholders, in the case of Commercial Mortgage Backed Securities (CMBS)) for the foregone interest they would have received had the loan continued to maturity. Borrowers should understand that even if the fees appear too great to consider an early payoff, a closer examination may reveal that locking in profits and mitigating risk may be well worth the upfront fee.

Key Points:

1.) The decision to sell or refinance a property early, and thereby incur loan prepayment fees, involves a tradeoff: unlocking guaranteed equity now, albeit reduced by the fee paid; or waiting until maturity in order to avoid fess. Choosing the latter will subject the borrower to the uncertainty of future interest rates and market conditions.

2.) Industry specialists (certain lawyers, mortgage brokers, etc.) are available to counsel borrowers on their options, but the decision largely depends on one's unique situation and investment strategy. The borrower's risk tolerance, current cash needs and the magnitude of the fee compared to the expected payout are just a few of the considerations to be addressed.

3.) Yield Maintenance and Defeasance are two specific types of prepayment fees that involve a greater amount of complexity to execute. A number of specialists will normally be required to guide a borrower through these processes, thus increasing their cost. Conversely, increased interest rates may greatly diminish the cost to execute theses strategies. As a result, it is crucial that borrowers understand all the variables at play before making a decision.

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Weighing Loan Prepayment Fees Against a Sale/Refinancing

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