Your existing mortgage is paid off at closing using proceeds from the sale. The escrow officer obtains a payoff statement from your lender and wires the payoff amount directly from closing funds. Whatever remains after paying off your mortgage, closing costs, and prorations is your net proceeds. The buyer typically secures their own financing and does not assume your loan — unless your loan is specifically assumable, which is uncommon on commercial multifamily. A few specific features of your mortgage can meaningfully change the net math: prepayment penalties, yield maintenance provisions, and defeasance costs on CMBS loans.
Payoff statement. Your escrow officer requests a current payoff statement from your lender. This statement shows principal balance, accrued interest through the close date, and any fees owed.
Funds flow at close. Closing funds are disbursed: seller's mortgage payoff to the lender, transfer taxes and other closing costs per the allocation, brokerage commission, and finally net proceeds to the seller.
Recording. The reconveyance (release of the seller's mortgage lien) is recorded, clearing title. The buyer's new mortgage lien (if any) is recorded in its place. For most LA multifamily sales with standard financing, this process happens smoothly at close without special handling.
Many commercial multifamily loans include prepayment penalty provisions — fees owed when the loan is paid off before maturity. Common structures:
Declining percentage. A percentage of the principal balance that declines over the loan term (e.g., 5% in year 1, 4% in year 2, declining to 0% at maturity).
Step-down. Defined penalty amounts that step down at specific intervals.
Lockout periods. Some loans prohibit prepayment altogether for a specific period. For sellers with time-sensitive transactions, the prepayment penalty should be quantified before committing to a sale timeline. On some loans, delaying the sale by a few months to move past a prepayment step-down can save meaningful dollars.
Some commercial loans — particularly agency loans (Fannie, Freddie, HUD) — include yield maintenance provisions. These are economically equivalent to prepayment penalties but calculated based on the difference between the loan's contract rate and current market rates on comparable-maturity Treasuries. When interest rates have fallen since origination, yield maintenance can be substantial — sometimes a double-digit percentage of the principal balance. When rates have risen, yield maintenance may be minimal. For sellers with yield-maintenance loans, accurate calculation of the payoff cost is essential to the sale decision. Rough estimates can be produced by a mortgage broker or the current servicer.
CMBS (Commercial Mortgage-Backed Securities) loans typically require defeasance rather than traditional prepayment. Defeasance substitutes U.S. Treasury securities for the collateral, allowing the underlying bond to continue receiving its scheduled payments. Defeasance costs vary with interest rates and remaining loan term. The process requires specialized legal and financial counsel and typically takes 45-60 days. For sellers with CMBS loans, the defeasance cost and timeline should be incorporated into sale planning from the start.
Some commercial multifamily loans are assumable — meaning the buyer can take over the existing loan rather than obtaining new financing. Agency loans are often assumable with lender approval and payment of assumption fees. When the existing loan has below-market interest rates or otherwise favorable terms, the assumption can add value to the transaction. Buyers assuming below-market debt typically pay a premium for the assumption. This is a specific negotiation point. Non-agency commercial loans are often not assumable, or are assumable only with lender consent that is frequently withheld.
Request a payoff estimate. Contact your current servicer for an estimated payoff through a reasonable sale date. Ask specifically about any prepayment penalty, yield maintenance, or defeasance costs.
Identify the loan's specific provisions. Prepayment structure, assumability, any specific sale-related triggers in the loan documents.
Model net proceeds including loan payoff. Gross sale price minus loan payoff minus closing costs minus taxes equals realistic net. Skipping loan-specific costs in this model is a common pre-sale mistake.
Consider timing. If prepayment penalty declines over time, and the seller has flexibility, sale timing against the step-down schedule can be material.
For most LA multifamily sellers with standard commercial financing, the mortgage is paid off at close without complication. For sellers with agency loans, CMBS loans, or loans with specific prepayment provisions, the payoff cost is a meaningful variable that should be quantified before committing to the sale strategy.
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Can the buyer take over my loan?
Only if the loan is specifically assumable. Most commercial multifamily loans are not assumable, or are assumable only with lender consent.
Do I pay the prepayment penalty or does the buyer?
The seller pays the prepayment penalty as part of the loan payoff. It is not a buyer cost.
How do I estimate defeasance cost?
Your loan servicer or a specialized defeasance consultant can produce an estimate based on current interest rate conditions and remaining loan term. The cost varies substantially with rate environment.
Michael Sterman is Senior Managing Director Investments at Marcus & Millichap.
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