Conduit Loan Lockouts Prevent Repayment for Specific Periods
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.