Lock Out Period
See Lock Out
Frequently Asked Questions about Lock Out Periods in CRE Loans
What is a lock out period in a loan agreement?
A lock out period is a specified timeframe during which a borrower is prohibited from prepaying a commercial real estate loan. It ensures the lender receives consistent interest income for a minimum number of years.
How long do lock out periods typically last?
Lock out periods commonly last between 3 to 5 years. For example, the James River Apartments case involved a 5-year lock out period included in the loan agreement.
What happens if a borrower wants to prepay during a lock out period?
During the lock out period, borrowers typically cannot prepay the loan at all, regardless of penalties. If attempted, they may face contractual restrictions or be required to pay significant fees or damages.
Why do lenders require a lock out period?
Lenders use lock out periods to guarantee a stream of interest income for a set time. It protects their expected yield on the capital disbursed, especially after incurring origination and underwriting costs.
What options do borrowers have after the lock out period ends?
After the lock out period ends, borrowers are generally allowed to prepay the loan, often with prepayment penalties that decrease over time (e.g., 3% in year 6, 2% in year 7, etc.).
How should investors plan for a lock out period?
Investors should align the lock out period with their intended hold period and exit strategy. For example, if a property is planned to be sold in year 3, a 5-year lock out would restrict that flexibility.
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