Looking at a deal that was just financed with a 15-year Life Co loan. Our projected hold period is 7-10 years, so part of the exercise is modeling out what the prepayment penalty might look like as we would obviously need to net that out of our disposition pricing.
I'll use round numbers to simplify.
$100MM funding 4% coupon - fully amortizing Month 1 at 30 years
The penalty is defined as the GREATER of the following:
The product of one percent (1%) of the principal amount being prepaid multiplied by the quotient of the number of full months remaining until the Maturity Date, calculated as of the prepayment date, divided by the number of full months comprising the term of the Note.
The Present Value of the Loan less the amount of principal and accrued interest (if any) being prepaid, calculated as of the prepayment date. The Present Value of the Loan shall be determined by discounting all scheduled payments remaining to the Maturity Date attributable to the amount being prepaid at the Discount Rate. The Discount Rate is the rate which, when compounded monthly, is equivalent to the Treasury Rate when compounded semi-annually. The Treasury Rate is the semi-annual yield on the Treasury Constant Maturity Series with maturity equal to the remaining weighted average life of the Loan, for the week prior to the prepayment date, as reported in Federal Reserve Statistical Release H.15 - Selected Interest Rates, conclusively determined by Lender (absent a clear mathematical calculation error) on the prepayment date.
To keep the math simple, assuming prepayment occurred at the end of Year 10 (Month 120 of Loan).
Using Method 1, 1% times Loan Balance ($78.8MM) times 33.3% (60 months remaining / 180 total months) = $267,000. Am I correct in my interpretation?
On Method 2, can anyone help as to how to set up the calc?
This is how I am reading #2, please let me know if you disagree or think that I am missing something: Prepayment = PV - Principal Repaid Principal Repaid = $78.78mm (as of month 120) PV=Future cash flows (monthly pmts of $477k for months 121-180, and a balloon payment of ~$65mm in month 180) discounted at the 5-yr (term matching remaining life of loan at month 120) treasury rate (calculated by converting the average of the last week's 5-yr rates from semiannual to monthly) Discount Rate = 1.86% based on the last week's yield curves. PV = $86.15mm Prepayment = 86.15mm-78.78mm = 7.37mm
Discount rate is the biggest variable in the YM equation. This rate will presumably be different 120 months from now, but your guess is better than mine as to what it will be. The closer to 4% it is, the less you're prepayment will be (with a floor of method 1). Hope this makes sense...
I didn't check the math, but @bolo up is correct in how to interpret the calculation. The closer you think the 5 year treasury will be to 4% at the time of disposition, the less you will pay.
Loan Prepayment - Write off? (Originally Posted: 03/22/2017)
Have heard through other groups that there are write offs associated with yield maintenance/defeasance penalties. Curious how this works to offset the penalties.
I'm not a CPA and I'm sure there are a hundred different tax laws that could affect each individual company's situation, but should be standard that the YM/deference penalty (ie the amount not included in the principal balance) is considered to be interest and can be written off as such. That obviously does not include the cost of defeasance which usually runs $40-50K just to have lawyers draw up the docs/traders to price & execute the trade to replace bonds/other BS fees involved with anything associated with CMBS.
Urgent help please! Debt prepayment fees (Originally Posted: 10/25/2015)
Ran a search for this and couldn't find an answer.
If you take a loan out, and then let's say before maturity you refi it with a 1% prepayment fee, what is the correct accounting treatment for the fee?
Can you capitalize it and amortize it over the life of the new loan, or do you have to expense it straight away?
Also, are prepayment fees tax deductible?
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