Usually, yes. Most commercial multifamily loans include prepayment protection for the lender, and a sale that triggers an early payoff usually triggers the protection. The actual cost depends on the structure of the protection in the loan documents — and the variation between structures is large enough that one building's prepayment penalty can be a rounding error while another's is a meaningful share of the sale proceeds. Knowing exactly what your loan requires before you list is one of the higher-value pre-listing exercises an LA multifamily owner does.
The three main structures, in order of how often they show up on LA multifamily loans, are step-down prepayment, yield maintenance, and defeasance. Each works differently and produces materially different costs.
The simplest structure. The penalty is a fixed percentage of the outstanding loan balance, and the percentage decreases (steps down) over the loan term according to a defined schedule. A typical step-down schedule on a five-year commercial multifamily loan looks like 5% in year one, 4% in year two, 3% in year three, 2% in year four, 1% or open in year five.
The penalty is mechanically simple to calculate: outstanding principal balance multiplied by the applicable percentage at the date of payoff. A $2,000,000 balance paid off in year three of a 5-4-3-2-1 schedule produces a $60,000 penalty.
Step-down structures show up most often on smaller commercial multifamily loans, on bank loans from regional and community banks, and on some bridge and value-add loan products. They are predictable and easy to plan around — the seller can run the cost in 30 seconds.
Common on agency multifamily loans (Fannie Mae, Freddie Mac) and on portfolio lenders' fixed-rate products. The penalty is calculated to "maintain" the lender's expected yield through the original loan term, by paying the difference between the contract interest and what the lender can re-invest at current market rates over the remaining term.
The formula varies by loan document but the rough mechanic: take the present value of the remaining interest payments at the contract rate, subtract the present value of the remaining interest payments at the current market rate on a comparable Treasury, and the difference is the prepayment cost. The math is sensitive to two variables: how much time is left on the loan, and how far current Treasury rates have moved from the rate at loan origination.
When current rates are higher than the contract rate (as has often been the case in the recent rate cycle), yield maintenance penalties can be small or even zero — the lender can re-invest the payoff at current rates and earn more than the contract was paying, so there's no "maintenance" needed. Many sellers in 2023-2024 found their yield maintenance was effectively zero because of this dynamic.
When current rates are lower than the contract rate, yield maintenance penalties become real. The lender is being repaid early in a market where they cannot re-invest at the contract rate, so they collect the difference. On a 4.5% contract rate loan with three years remaining and current comparable rates at 3.5%, yield maintenance on a $5M balance can run several hundred thousand dollars.
A yield maintenance penalty calculation should always be obtained from the loan servicer in writing within 30 days of the planned payoff date. The number changes daily as Treasury rates move; an estimate from three months ago is unreliable. The servicer's quote is what you will actually pay.
Common on CMBS (commercial mortgage-backed securities) loans and some agency loans. Instead of paying off the loan, the borrower substitutes a portfolio of Treasury securities that produces cash flows matching the remaining debt service. The loan technically remains outstanding; the building is released from the lien and the Treasury portfolio takes its place as the collateral.
The cost of defeasance is the cost of buying the Treasury portfolio. When current Treasury rates are higher than the loan rate, the Treasury portfolio costs less than the loan balance (the bonds yield more than the loan needs to service, so fewer bonds are required). When current Treasury rates are lower than the loan rate, the portfolio costs more than the loan balance. Defeasance is the only structure where the borrower can sometimes come out ahead of paying off — a phenomenon called negative defeasance — though it is rare and depends on the rate environment at the time of payoff.
Defeasance is logistically more complex than other payoff structures. It requires a defeasance consultant, a Treasury portfolio purchase, legal documentation transferring the security to a successor borrower entity, and rating agency or trustee approvals depending on the CMBS structure. The transactional cost of executing a defeasance — separate from the cost of the Treasury portfolio — typically runs $30,000 to $75,000 in professional fees. The timeline is typically 30 to 45 days from initiation to release.
Some loans include open prepayment windows — periods (often the final 90 days of the loan term, or specific anniversary windows) during which prepayment is allowed without penalty. Selling during an open window eliminates the prepayment cost entirely.
For a seller who has flexibility on timing, identifying the loan's open windows and structuring the closing to fall inside one can save significant money. The trade-off is the seller's flexibility to time the sale to the open window may conflict with the market's optimal timing. For most sales the market timing wins; for sales where market timing is roughly neutral and the prepayment savings are large, aligning to the open window is the right call.
Beyond prepayment penalties, a commercial multifamily loan often includes provisions that affect the sale mechanics.
Due-on-sale clauses. Most commercial multifamily loans accelerate the full balance on sale. The buyer's purchase price is used at close to pay off the seller's loan, and the buyer obtains new financing. This is the standard structure.
Loan assumption. Some loans are assumable by a qualifying buyer with lender approval. Assumption fees typically run 1% of the loan balance. Assumability matters when the seller's loan is at a below-market rate; a buyer who can assume it gets the benefit of the rate, and the seller can often capture that benefit through pricing. Most commercial multifamily loans are not assumable, but checking the loan documents takes ten minutes and the upside is sometimes substantial.
Yield-maintenance lockout. Some loans prohibit prepayment entirely during defined lockout periods. The lender will not accept a payoff during the lockout, period. If you have a hard lockout, you have to wait for it to expire or negotiate an exit (rare and expensive).
The first thing to do, before any listing decision, is pull the loan documents and identify the prepayment structure. If it's step-down, the cost is calculable in a minute. If it's yield maintenance or defeasance, request a quote from the loan servicer based on a target payoff date — and ask for a second quote 30 days later to understand how the number is moving with current rates.
The number from the servicer is the number that matters. Not the original loan documents' formula in the abstract; the actual current calculation. Most yield maintenance and defeasance calculations are surprising in one direction or the other depending on rate movement since origination. A seller who has not pulled the current calculation is operating on assumptions that are usually wrong.
The other thing I tell sellers is that the prepayment cost is a known input to the sale economics. It does not change the decision to sell; it changes the math on what the sale produces. Sellers who run the full math — sale price minus loan payoff minus prepayment minus transaction costs minus taxes — make better decisions than sellers who run a partial calculation that omits the prepayment.
Prepayment penalties on commercial multifamily loans range from trivial to consequential depending on the loan structure and the rate environment at payoff. The seller who knows the number before listing has clean inputs to the sale decision. The seller who doesn't know the number until the title company requests the payoff demand letter sometimes discovers a surprise that materially changes the economics. Pull the documents. Get the number. Decide from full information.
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Michael Sterman is Senior Managing Director Investments at Marcus & Millichap, specializing in Los Angeles multifamily transactions.
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