What is the correct way to project a yield maintenance prepay on a SOFR-benchmarked construction loan?
Assuming a 36 month YM provision, if the building is completed ahead of schedule and refinanced in month 30, what would be the proper method for computing that 6 months of yield maintenance, would it be calculated using the 6 month Treasury? Or?
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Should be stipulated in your loan docs, if it’s not or it is vague like “lender shall be paid a yield maintenance fee that covers losses associated with prepayment” then next time you guys should iron it out. For construction / bridge loans yield maintenance is typically 3-6 months at whatever the expected interest income is to cover the time it takes to reinvest. For long-term loans you’ll see yield maintenance equal the difference between interest based on the loan versus current market rates, discounted back (only applicable if result is greater than zero). For your case - safe bet is to just use a forward curve and calculate whatever your forecasted 6 months interest payments would have been and assume that’s the penalty.
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