Lockouts in Relation to CMBS Loans
For borrowers, prepayment penalties can be one of the most challenging aspects of CMBS loans. In addition to prepayment penalties, however, most conduit loans have a lockout period, a period of time in which the loan cannot be prepaid at all.
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For borrowers, prepayment penalties can be one of the most challenging aspects of CMBS loans. In addition to prepayment penalties, however, most conduit loans have a lockout period, a period of time in which the loan cannot be prepaid at all. The vast majority of conduit loans have lockout periods of between 2 and 5 years. Despite that, even CMBS loans with shorter lockout periods are still typically are locked out from the period between securitization and sale on the secondary market, which typically takes a few months.
After the lockout period is over, the borrower can usually prepay the loan using either yield maintenance or defeasance, depending on the terms of the loan agreement. Yield maintenance involves paying a specific fee, often between 1-3%, in addition to the remaining loan balance, in order to prepay the loan. In comparison, defeasance involves purchasing replacement securities (often U.S. Treasury bonds) to replace the collateral and interest income that the conduit loan provided.
Related Questions
What is a CMBS loan lockout period?
A CMBS loan lockout period is a period of time in which the loan cannot be prepaid at all. The vast majority of conduit loans have lockout periods of between 2 and 5 years. Despite that, even CMBS loans with shorter lockout periods are still typically are locked out from the period between securitization and sale on the secondary market, which typically takes a few months.
Source: cmbs.loans/blog/cmbs-lockouts
What are the benefits of a CMBS loan lockout period?
CMBS loan lockout periods can provide borrowers with a number of benefits. For one, they can help protect lenders from borrowers who may be tempted to refinance their loan too soon. Lockout periods also provide borrowers with a certain amount of security, as they know that their interest rates won't suddenly increase a day or two before closing. Additionally, many lenders offer 30-day rate locks on certain CMBS loans, which can help reduce a borrower's financial risk.
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What are the risks associated with a CMBS loan lockout period?
The risks associated with a CMBS loan lockout period include difficulty releasing collateral, expensive exit costs, dealing with a master servicer may be challenging for borrowers, reserves required, secondary financing is sometimes prohibited, loans are fully assumable, and legal fees can be particularly expensive.
Difficulty releasing collateral is a risk associated with CMBS loan lockout periods because the borrower is unable to prepay the loan during the lockout period. Expensive exit costs are also a risk, as the borrower may need to pay a fee of 1-3% in addition to the remaining loan balance in order to prepay the loan. Dealing with a master servicer may be challenging for borrowers, as the servicer is responsible for managing the loan and ensuring that all payments are made on time. Reserves are also required, as the borrower must have enough funds to cover any potential losses or defaults. Secondary financing is sometimes prohibited, as the loan agreement may not allow for additional financing. Loans are also fully assumable, meaning that the borrower is responsible for any payments made by the new borrower. Finally, legal fees can be particularly expensive, as the borrower must pay for any legal services related to the loan.
How can I avoid a CMBS loan lockout period?
The best way to avoid a CMBS loan lockout period is to negotiate a shorter lockout period with your lender. Most conduit loans have lockout periods of between 2 and 5 years, but some lenders may be willing to offer a shorter lockout period. Additionally, many lenders offer 30-day rate locks on certain CMBS loans, which can help reduce your financial risk.
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What are the alternatives to a CMBS loan lockout period?
The alternatives to a CMBS loan lockout period are yield maintenance and defeasance. Yield maintenance involves paying a specific fee, often between 1-3%, in addition to the remaining loan balance, in order to prepay the loan. In comparison, defeasance involves purchasing replacement securities (often U.S. Treasury bonds) to replace the collateral and interest income that the conduit loan provided.
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