Commercial Mortgage Lockout Periods & Securitization Prepayment Rules
A lockout period is a contractual clause in a commercial promissory note that strictly prohibits the borrower from paying off or refinancing the mortgage under any circumstances during the initial years of the loan term. Universal in Commercial Mortgage-Backed Securities (CMBS) conduit debt and common in life company loans, lockout periods ensure bond pools maintain stable cash flow duration.
Indicative Underwriting Matrix
Lockout provisions prevent property sales without loan assumption. Borrowers planning short-term sales should avoid lockout structures.
Why Institutional Lenders Enforce Lockout Periods
In CMBS financing, mortgages are pooled together and sold to institutional bond investors as commercial mortgage-backed securities. Real Estate Mortgage Investment Conduit (REMIC) tax rules under the Internal Revenue Code enforce strict regulations regarding changes to pool collateral.
Under REMIC rules, early defeasance or payoff within the first two years of the "startup day" of the securitization trust can trigger severe tax penalties on the bond trust. Consequently, CMBS notes enforce an absolute 2-year lockout period commencing on the date the loan is securitized into the trust.
How Borrowers Can Sell Real Estate During a Lockout Period
If an owner receives an unsolicited purchase offer during an active lockout period, they cannot pay off the debt to deliver free and clear title.
The only mechanism to execute a property sale during a lockout is a formal Loan Assumption. The buyer must apply to the loan master servicer, satisfy all credit, net worth, and liquidity guidelines, execute an Assumption Agreement, and pay a standard 1.0% assumption fee. Planning for loan assumption flexibility is vital when negotiating original loan documents.
Frequently Answered Financing Questions
Verified answers to common borrower and broker inquiries regarding loan sizing, guidelines, and execution.
Can you pay a penalty to exit a commercial mortgage during a lockout period?
No. A lockout period is an absolute contractual prohibition on early payoff; the lender is legally entitled to reject any payoff check regardless of penalty offers.
The borrower must wait until the lockout period expires (converting to defeasance or yield maintenance) or sell the property subject to a formal loan assumption.
Submit Financing Scenario →How long is a typical CMBS loan lockout period?
Typical CMBS lockout periods last exactly 24 to 36 months from the date the loan is securitized into the public trust.
Following the expiration of the 2-year REMIC lockout, the loan converts into a defeasance period through the open window prior to maturity.
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