Quick overview

Alternative fee structures—commonly called yield maintenance, step-downs, and stretch fees—are contract tools lenders use to manage interest-rate risk, borrower behavior, and project timing. Each structure reallocates cost and flexibility in different ways: yield maintenance protects the lender’s lost interest when a loan is prepaid; step-down fees reduce charges over time or after performance milestones; stretch fees let borrowers extend terms or timing for a price.

This article explains how each works, shows practical examples and simple formulas, highlights when they’re most used, and offers negotiation tactics and red flags to watch for. Internal resources: read more on prepayment clauses and negotiating penalties in our guide to prepayment clauses explained and how to avoid prepayment penalties when refinancing commercial mortgages in refinancing commercial mortgages without triggering prepayment penalties.

Yield maintenance: what it is, how it’s calculated, and when you’ll see it

What it is

  • Yield maintenance is an early-payoff fee designed to make the lender “whole” for the interest income lost when a borrower repays a fixed-rate loan before maturity. It’s common in commercial real estate and some corporate loans.

How it’s typically calculated

  • At a high level, the lender computes the present value of the remaining scheduled interest (and sometimes principal) payments and compares that to the proceeds the lender can reinvest at current market rates. The difference is the yield maintenance fee.
  • A simplified formula (conceptual):
  • Fee ≈ PV of contractual remaining payments – PV of reinvestment at market rates
  • Lenders often set the reinvestment rate equal to a reference Treasury yield plus a spread or to a comparable swap rate. Exact formulas vary by contract; always request the lender’s exact yield-maintenance worksheet.

When you’ll see it

  • Fixed-rate commercial mortgages, CMBS loans, and some business loans. The fee protects lenders when market rates fall and borrowers refinance at lower rates.

Practical example

  • A borrower repays a commercial mortgage with five years remaining. The lender computes the present value of the five years’ interest at the loan rate and then discounts future cash flows using current Treasury yields. If the difference is $25,000, that is the yield maintenance charge.

What to watch for

  • Look for the precise reinvestment rate in the note (Treasury plus spread, swap rate, or a bank’s internal rate).
  • Some agreements include a “cure” period or a cap; others don’t. Ask for the lender’s calculation in writing before closing.

Authoritative context: regulators and consumer resources don’t publish a uniform formula for yield maintenance, but the Consumer Financial Protection Bureau discusses prepayment penalties and borrower rights; see CFPB guidance on prepayment features (https://www.consumerfinance.gov/).

Step-down fees: how staged fee reductions work and why lenders offer them

What it is

  • Step-down fees reduce certain loan charges—origination fees, yields, or penalty rates—over time or after benchmarks are met. They reward borrower performance (timely payments, covenant compliance) or simply reflect lower lender risk as a loan seasones.

How they’re structured

  • Time-based: fee reduces by X basis points each year (e.g., 0.50% the first year, 0.25% the second year).
  • Performance-based: fee steps down when the borrower hits revenue, DSCR, or occupancy targets.

When they’re useful

  • Growing businesses that expect improving cash flows, or projects where early-stage risk is higher (construction phase) and stabilizes later.

Example

  • A $1,000,000 credit facility charges an annual facility fee of 1.5% in year one, stepping down by 0.25% each year if covenants are met; after three years the fee could be 0.75%.

Negotiation levers

  • Ask for clearly defined milestones, independent verification of performance triggers, and a cap on step-backs if the borrower outperforms.

Stretch fees: paying for extra time or flexibility

What it is

  • Stretch (or extension) fees are charged when a borrower needs extra time to complete a project, extend a maturity, or defer amortization milestones. Stretch fees compensate the lender for additional risk and administrative burden.

Common uses

  • Construction loans with delays, development loans awaiting permits, or term loans where borrowers need to push the maturity date.

Typical mechanics

  • A one-time fee (fixed dollar or percentage) or a rolled-in higher interest rate for the extension period.

Example

  • A developer facing construction delay pays a one-time stretch fee equal to 0.75%–2.0% of the outstanding balance to extend the loan by six months. Alternatively, the lender may increase the interest margin by 100–200 basis points for the extension term.

How these fees interact with prepayment penalties and refinancing

Yield maintenance and step-downs are forms of prepayment or timing economics in disguise. If you’re refinancing, you must account for yield maintenance charges: failure to plan can wipe out refinancing savings. See our guides on prepayment penalties and refinancing commercial mortgages without triggering prepayment penalties for tactical steps.

Practical decision rule

  • Run a refinance break-even: compare the present value of expected savings against the combined value of yield-maintenance, breakage fees, and transactional costs. Include tax effects—prepayment fees may be deductible as interest expense for businesses but consult your tax advisor.

Red flags and contract language to negotiate

Red flags

  • Undefined reinvestment or discount rate for yield maintenance.
  • Open-ended or ambiguous stretch terms (no maximum extension or fee cap).
  • Step-down triggers tied to subjective lender judgments.

Negotiation points

  • Request the lender’s yield-maintenance worksheet and an example calculation.
  • Push for objective, measurable step-down triggers and periodic testing.
  • Limit stretch extensions (e.g., one 180-day extension) and cap the fee or margin increase.

Practical checklist before you sign

  1. Ask the lender to provide sample fee calculations in writing.
  2. Run a refinance sensitivity (how big must rate savings be to justify prepaying?).
  3. Define step-down triggers and verify how results will be measured.
  4. Limit extension lengths and set fee caps for stretch fees.
  5. Confirm tax treatment with your CPA—fees may be interest or another deductible cost depending on the loan and entity type.

Negotiation strategies lenders commonly accept

  • Offer a partial yield-maintenance buyout: pay a percentage of calculated yield maintenance in exchange for partial release.
  • Trade off: accept a slightly higher ongoing spread in exchange for reduced or no prepayment fee after Year X.
  • Provide additional security or stronger covenants in exchange for lower extension fees.

FAQs (brief)

  • Are yield maintenance fees the same as prepayment penalties? Not exactly—yield maintenance is a type of prepayment charge calculated to preserve lender yield, while ‘prepayment penalty’ can be a simpler fixed schedule or percentage.
  • Can stretch fees be negotiated? Yes; borrowers can often negotiate limits on duration, caps on fees, or trade concessions for lower fees.
  • Do step-downs benefit borrowers? Yes, when future performance is likely to improve; but confirm triggers are objective.

Sources and further reading

Professional note and disclaimer

This article is educational and reflects common market practice as of 2025. It does not replace legal or tax advice. For loan-specific guidance, ask your lender for written fee calculations and consult a qualified attorney, CPA, or financial advisor before signing.