Soft Step Down In Commercial Property Loans
A step down requires the payment of a set percentage of the outstanding amount of the loan. That percentage declines as the loan ages. While a typical step down might decline by 1% a year, for example 5 % in year one, 4 % in year two and 3 % in year three, a soft step down starts at a lower rate and declines less quickly. While a step down might have terms that equate to 5-4-3-2-1, a soft step down might be 3-2-2-1-1.
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Soft Step-Downs as a Prepayment Penalty for Commercial Property Loans
During the life of a commercial loan, the prepayment penalty may decrease over time as the lender earns interest income and recoups principal balance. Among the different prepayment penalty options of commercial loans, are yield maintenance and defeasance requirements. These essentially replace the original financial benefit to the lender, while discharging borrowers early from their mortgage obligations.
For borrowers who anticipate difficulties meeting the financial obligations of those aforementioned prepayment options, lenders may agree to step-down clauses in mortgage contracts. A step-down requires the payment of a set percentage of the outstanding amount of the loan. That percentage declines as the loan ages. While a typical step-down might decline by 1% a year, for example 5 % in year one, 4 % in year two and 3 % in year three, a soft step-down starts at a lower rate and declines less quickly. While a step-down might have terms that equate to 5-4-3-2-1, a soft step-down might be 3-2-2-1-1.
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Related Questions
What is a soft step down in commercial property loans?
A soft step down in commercial property loans is a type of prepayment penalty that starts at a lower rate and declines less quickly than a typical step-down. For example, a typical step-down might be 5% of the outstanding balance in the first year, 4% in the second year, 3% in the third year, and so on. A soft step-down might be 3-2-2-1-1. Most lenders will not charge a step-down penalty in the last 90 days of the loan term.
For more information, please see Soft Step Down In Commercial Property Loans and Step-Down Prepayment Penalties on Commercial Property Loans.
What are the benefits of a soft step down in commercial property loans?
The main benefit of a soft step down in commercial property loans is that it starts at a lower rate and declines more slowly than a traditional step down. This can be beneficial for borrowers who anticipate difficulties meeting the financial obligations of the prepayment penalty options of commercial loans, such as yield maintenance and defeasance requirements.
For example, a typical step-down might decline by 1% a year, for example 5 % in year one, 4 % in year two and 3 % in year three, while a soft step-down might start at a lower rate and decline more slowly, such as 3-2-2-1-1.
For more information, please see Soft Step Down In Commercial Property Loans and Prepayment Penalties in Commercial Real Estate.
What are the risks associated with a soft step down in commercial property loans?
The main risk associated with a soft step down in commercial property loans is that the borrower may not be able to pay the penalty if they decide to prepay the loan. This is because the penalty starts at a lower rate and declines more slowly than a step down penalty. This means that the borrower may have to pay a higher penalty if they decide to prepay the loan before the penalty has fully declined. Additionally, the borrower may have to pay a higher penalty if interest rates have declined since the loan was taken out, as the penalty is based on the original interest rate.
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How does a soft step down in commercial property loans work?
A soft step down in commercial property loans is a type of prepayment penalty that starts at a lower rate and declines more slowly than a typical step-down. For example, a typical step-down might decline by 1% a year, for example 5 % in year one, 4 % in year two and 3 % in year three, while a soft step-down might start at a lower rate and decline more slowly, such as 3-2-2-1-1.
What are the requirements for a soft step down in commercial property loans?
A soft step down in commercial property loans requires the payment of a set percentage of the outstanding amount of the loan. That percentage declines as the loan ages. While a typical step-down might decline by 1% a year, for example 5 % in year one, 4 % in year two and 3 % in year three, a soft step-down starts at a lower rate and declines less quickly. While a step-down might have terms that equate to 5-4-3-2-1, a soft step-down might be 3-2-2-1-1.
For more information, please see Soft Step Down In Commercial Property Loans and Prepayment Penalties in Commercial Real Estate.
What are the alternatives to a soft step down in commercial property loans?
The alternatives to a soft step down in commercial property loans are Defeasance and Yield Maintenance. Defeasance is a strategy that allows a borrower to replace an existing loan with a new loan, while Yield Maintenance is a prepayment penalty that requires the borrower to pay a fee to the lender in order to pay off the loan early.