In commercial real estate finance, unpaid principal balance, or UPB, is the amount of a loan’s principal balance that has not yet been paid back to a lender. To calculate the UPB, a borrower cannot simply subtract their current mortgage payments from the initial loan amount; since they have also been paying interest, they will have to add this into their calculations. The formula for UPB is below:

Unpaid Principal Balance = Original Loan Amount - Total Principal and Interest Payments to Date + Total Interest Payments to Date

For instance, if a borrower has taken out a $2 million commercial property loan, and has made $600,000 of payments, $400,000 of which are interest, the UPB of that loan would be $1.8 million.

Because most commercial property loans come with prepayment penalties, a borrower cannot simply pay the unpaid principal balance and step away from their mortgage. Instead, they will have to pay both the UPB and a prepayment penalty, which compensates a lender for the interest payments they will forgo as a result of the borrower paying their loan off early. In most cases, the prepayment penalty is based off of the unpaid principal balance, not the original loan balance, as this would be unfair for borrowers.

For instance, UPB is used to calculate the amount of money a borrower will have to pay when they prepay a loan using yield maintenance. This is because the borrower has already paid the interest on the amount of the principal they have paid off, and interest on the UPB represents the exact amount future interest payments the lender will lose when the borrower prepays their loan.

An unpaid principal balance (UPB) affects a commercial real estate loan in two ways. First, it is used to calculate the total amount of principal and interest payments that have been made to date. The formula for UPB is Original Loan Amount - Total Principal and Interest Payments to Date + Total Interest Payments to Date. For example, if a borrower has taken out a $2 million commercial property loan, and has made $600,000 of payments, $400,000 of which are interest, the UPB of that loan would be $1.8 million.

Second, UPB is used to calculate the amount of money a borrower will have to pay when they prepay a loan using yield maintenance. This is because the borrower has already paid the interest on the amount of the principal they have paid off, and interest on the UPB represents the exact amount future interest payments the lender will lose when the borrower prepays their loan. More information on UPB and commercial real estate loans can be found here.

The main benefit of having an unpaid principal balance in commercial real estate is that it conserves cash flow in the short term. This can be helpful if you are looking to reinvest that cash into other property acquisitions or improvements. Additionally, because you are only paying the interest on the loan, your monthly payments will be lower than if you were paying both principal and interest. This can free up additional cash flow each month.

For more information, please see Unpaid Principal Balance and Commercial Property Loans and The Benefits and Risks of Interest-Only Loans in Commercial Real Estate.

The risks associated with an unpaid principal balance in commercial real estate include the potential for monthly payments to increase significantly at the end of the interest-only period when you are required to start paying both principal and interest. Additionally, if the property’s value decreases, you could find yourself underwater on your loan – owing more than the property is worth. Before taking out an interest-only loan, be sure to speak with a qualified commercial real estate broker to discuss all of the risks and benefits associated with this type of financing. Source

To calculate the unpaid principal balance (UPB) in commercial real estate, you can use the following formula:

Unpaid Principal Balance = Original Loan Amount - Total Principal and Interest Payments to Date + Total Interest Payments to Date

For example, if you have taken out a $2 million commercial property loan and have made $600,000 of payments, $400,000 of which are interest, the UPB of that loan would be $1.8 million.

Additionally, when prepaying a loan, the amount of money a borrower will have to pay is based off of the unpaid principal balance, not the original loan balance.

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The best strategies for managing an unpaid principal balance in commercial real estate are to refinance the loan, pay off the loan in full, or sell the property. Refinancing the loan can help you extend the loan term, reduce the interest rate, or both. Paying off the loan in full can help you avoid a balloon payment. Selling the property can help you pay off the loan principal and avoid a balloon payment.

For more information, please see the following sources:

• Unpaid Principal Balance and Commercial Property Loans from Commercial Real Estate Loans
• 5 Ways to Avoid a Balloon Payment from Multifamily Loans