Prepayment Penalties

Property loans very often carry prepayment penalties, sometimes called “yield maintenance” provisions. A fact pattern that suggests the property will be sold in a manner that triggers a penalty requires that you separately determine the present value of the penalty that would be triggered at the future date of the sale. This might happen if, say, a sale is forced through a partition action, or perhaps by a partner in a general partnership who has a right to cause the property to be sold. First calculate the penalty, then determine how the penalty will be paid. Will it be split between the parties, or will the forcing party be forced to cover it because he or she caused the hypothetical sale? The present value of the subject interest’s share of the penalty is then deducted from the concluded (discounted) value. The penalty does not change the discount calculated by PVX, but it does change the effective discount from NAV because it reduces the concluded value. You can read more here.

A prepayment penalty could make refinancing difficult (say, for a higher interest rate loan during a period of lower interest rates); see also Nonmarket Financing.