The formula is simple; the definition is not, and the same prepayment costs anything from $959,464 to $2,265,000 depending on four words.
Spread maintenance is the margin the lender would have earned on the prepaid amount for the rest of the spread maintenance period: balance × spread × months remaining / 12. On an illustrative $45,000,000 bridge loan at SOFR + 3.25 per cent with 18 months of spread maintenance, repaying after month 10 costs $975,000, 2.17 per cent of the balance, plus a $225,000 exit fee. The same words can also mean a discounted figure, an actual/360 figure or a minimum interest figure, and the spread between them reaches $1.3 million.
Worked in full in How to Read a Real Estate Loan Agreement by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
Floating-rate lenders do not lose money on rates when a loan is repaid, because the base rate resets anyway. What they lose is the margin they priced the loan to earn, and the origination effort that margin was meant to pay for. Spread maintenance, sometimes loosely labelled minimum interest or a floating-rate make-whole although the definitions can differ widely (see below), makes the borrower pay that margin for a fixed lock-out window, usually 12 to 24 months on a bridge loan. After the window, the loan can be repaid at par, subject to any exit fee.
Spread maintenance = prepaid amount × spread × months left in the spread maintenance period / 12
Discounted version = PV of each month's spread payment, at the rate the agreement names
In Excel, the discounted version: =PV(4.30%/12, 8, -45000000*3.25%/12)
| Input | Value |
|---|---|
| Balance | $45,000,000 |
| Rate | SOFR + 3.25% |
| SOFR at prepayment, illustrative | 4.30% |
| Spread maintenance period | 18 months |
| Prepayment after month | 10 |
| Exit fee | 0.50% |
| Refinancing offer | SOFR + 2.25% |
Step 1, months remaining. 18 less 10 leaves 8 months inside the period.
Step 2, the monthly spread. $45,000,000 × 3.25 per cent / 12 = $121,875.
Step 3, spread maintenance. 8 × $121,875 = $975,000, 2.17 per cent of the balance.
Step 4, the exit fee. 0.50 per cent of $45,000,000 is $225,000, payable on any repayment, so the borrower writes a cheque for $1,200,000, 2.67 per cent, on top of the principal.
Step 5, the drafting variants. The amount changes with four words in the definition.
| Definition | Amount |
|---|---|
| Spread × months left / 12, undiscounted | 975,000 |
| Same, discounted monthly at 4.30% | 959,464 |
| Spread on actual/360 for the 243 days left | 987,188 |
| Minimum interest: SOFR + spread, 7.55%, for 8 months | 2,265,000 |
Discounting saves the borrower only $15,536 over eight months. Actual/360 costs it a little more, because 243 days over 360 is more than 8 twelfths. The minimum interest drafting is a different animal: it charges the base rate too, which the lender recovers anyway by redeploying the repaid cash at the prevailing rate, so it more than doubles the amount. A term sheet that says "spread maintenance" and a loan agreement that defines it as "the interest that would have accrued" are not the same deal, and on this loan the gap is $1,290,000.
The borrower has an offer at SOFR + 2.25 per cent, one point cheaper, worth $37,500 a month. Refinancing now saves that margin for the eight months left in the window, $300,000, and costs $975,000 of spread maintenance. The exit fee and the new lender's costs are paid whenever the refinancing happens, so they do not affect the timing. Waiting to month 18 is better by $675,000. Spread maintenance is designed to make that answer come out this way: inside the window, a refinancing pays only if the margin saving is larger than the margin the lender is owed, which by construction it cannot be unless the new loan is also larger or longer.
| Prepaid after month | Months left | Spread 2.75% | Spread 3.25% | Spread 3.75% | % of balance at 3.25% |
|---|---|---|---|---|---|
| 3 | 15 | 1,546,875 | 1,828,125 | 2,109,375 | 4.06% |
| 6 | 12 | 1,237,500 | 1,462,500 | 1,687,500 | 3.25% |
| 10 | 8 | 825,000 | 975,000 | 1,125,000 | 2.17% |
| 15 | 3 | 309,375 | 365,625 | 421,875 | 0.81% |
| 18 | 0 | 0 | 0 | 0 | 0.00% |
The charge falls in a straight line to zero at the end of the window, unlike fixed-rate yield maintenance, which depends on where Treasuries sit. That makes spread maintenance easy to plan around: a sale or refinancing that can be pushed past the window saves the whole amount. A partial prepayment, such as $10,000,000 from the sale of one building, is charged on the amount prepaid only: $216,667 at month 10, unless the agreement grants a free prepayment allowance.
Some agreements exempt prepayments funded by casualty or condemnation proceeds, or reduce spread maintenance on a release under a portfolio loan. Read the carve-outs before assuming the full figure: they are often worth more than the arithmetic of discounting.
Computing spread maintenance on the all-in rate. A borrower who multiplies the balance by 7.55 per cent overstates the cost of an early sale by $1,290,000 on a clause that names the spread, and may turn down a good exit. A lender who drafts a minimum interest clause and describes it as spread maintenance in the term sheet is relying on the reverse error. The definition section decides, not the heading.
The prepayment terms of the book's case loan, with the cure and extension arithmetic, are in the free workbook for this book. For the fixed-rate equivalent, see how yield maintenance is calculated.
Spread maintenance applies to floating-rate loans and charges only the lender's margin for the rest of a fixed window, so it falls in a straight line to zero. Yield maintenance applies to fixed-rate loans and depends on the gap between the note rate and Treasuries. On $45,000,000 at a 3.25 per cent spread, eight months of spread maintenance cost $975,000.
Usually only on the amount prepaid, unless the agreement grants a free prepayment allowance or a release price regime applies. Prepaying $10,000,000 of a loan at a 3.25 per cent spread with eight months left in the window costs $216,667, against $975,000 for the full $45,000,000 balance.
Commonly 12 to 24 months from closing, often followed by an exit fee of 0.25 to 1 per cent. The charge is largest early: on the worked loan with an 18-month window, prepaying after month 3 costs $1,828,125, 4.06 per cent of the balance, against $365,625 after month 15.
This article is one calculation from How to Read a Real Estate Loan Agreement. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
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