Does a prepayment penalty on a commercial loan apply if the property is sold before the end of the loan term?

In other words, if it decided upon by the owner(s) to sell a commercial property before the end of the loan term (typically 10 years), does a prepayment penalty generally apply? Or is it only on the occasion of paying down the loan amount, or refinancing an existing loan?
In Selling Property - Asked by Andrew B. - Aug 15, 2015
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Marie T.
Pasadena, CA

Yes, unless the loan is assumable.

Aug 19, 2015
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eli g.
El Paso, TX

it only depends what you agreed on in the loan agreement when you purchased the property if you choose the option of no prepay penaltiy then you do,nt have to pay anything

Aug 19, 2015
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Francis L.
Santa Clarita, CA

You can have a ten year loan and a three year prepayment penalty. The loan term doesn't really matter. It's the prepayment penalty period within the loan term that you need to know or verify. You need to look at the loan terms that are already in place. The owner(s) should contact the existing lender(s) and verify specific amounts and/or details. Prepayment penalties are not the same for every loan. It has to do with the type of loan as well. I always presume that there is one until otherwise verified by the owner(s) or by viewing the loan documents in place.

Aug 19, 2015
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Julia R.
Torrance, CA

It would normally be applied regardless of how the loan was paid off (either refi or sale). Some commercial loans are assumable - and if the terms are decent enough - you might be able to get around it that way. Prepays are often declining over the years - so look into your agreement as to how it works. If it makes sense to just wait a few months until the next anniversary to save another $20k, for example, you'll have to determine if that makes enough sense.
Otherwise, weigh out your opportunity costs for where else your money might be utilized to determine if it makes sense to hold on just for the purpose of saving the prepayment penalty money. If its a defeasance clause - all bets are off. Can get pretty hefty of the fees, which is why a lot of sellers require that the buyer takes it over. Look into your details - and/or have a number cruncher such as myself help you figure out your best option! I'm happy to help if you want to reach out to me.
Good luck to you!
Julia Ragland - KW Commercial

Aug 19, 2015
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Ronnie M.
Houston, TX

Yes, with the exception being your buyer assumes the note. Then there will be other costs, assumpition charges etc. Typically prepayment penalties and defeasance burn off quickly as the loan nears maturity. Many CMBS loans have a "penalty free" period in the last 6-12 month of the note. Check you loan docs.

Aug 31, 2015
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