If you’re financing a commercial property, be sure to carefully read — not just skim over — the lockout period.
Lockouts in a loan agreement can prevent you from refinancing into a lower-rate loan, selling the property to capture gains, or exiting the investment early without having to pay a substantial penalty.
What is a Lockout Period in Commercial Real Estate?
A lockout essentially blocks you from paying off the loan early for a set period of time.
This means that you cannot make any transaction that would fully pay off the loan — including replacing it with a new one from another lender or transferring ownership of the property to someone else if the sale proceeds would be used to repay the loan.
This lockout period can last several years and usually starts from the day your loan closes. During this time, if you try to prepay, you’ll trigger a penalty.
And depending on how the contract is written, that penalty could eat into your returns or cancel out the benefits of refinancing.
Some lenders are a bit more flexible, but most will draw a hard line when it comes to enforcing lockout provisions in commercial real estate loans.
That’s why you need to know exactly what you’re agreeing to before you sign.
Why do lenders include lockout periods — and how does it affect you?
Lenders invariably want to make a certain return on the commercial property loan they’re extending, and they lose that income if you pay everything off too soon.
So from their perspective, having a lockout period in the contract protects their bottom line by making sure that the loan stays active long enough to justify their investment in it.
But lockouts can be quite restrictive for you as the borrower. If interest rates drop and property values spike, for example, you might want to refinance or sell to take advantage of that.
But your hands are tied if you’re still within the lockout period, unless you’re willing to pay a hefty penalty.
What happens if you break the lockout?
At a minimum, you’ll pay a penalty. In some cases, you could face legal action if you breach the contract outright.
Lockout periods are enforceable legal terms, so you could face serious consequences if you try to pay off the loan early without following the rules.
The actual consequences will depend on what’s stipulated in the loan agreement.
Some lenders use what’s called a ‘step-down structure,’ where the prepayment penalty shrinks over time.
Other lenders prefer to enforce a strict no-prepay policy for a fixed number of years (with absolutely no exceptions).
How long do lockout periods usually last?
There’s no universal rule. Some lockout periods last just six months and others stretch to three years.
In a few cases, they can extend to five years — or even cover the entire life of the loan.
Don’t assume your loan follows a standard structure.
A three-year lockout on a five-year hold plan might work, but if you’re looking at a shorter turnaround, even a 12-month lockout could interfere with your goals.
How do lockout periods affect your CRE strategy?
For you as the borrower, the single biggest drawback of a lockout period is the loss of control.
You can’t sell the property or refinance the loan during the lockout window — at least not without paying a penalty that could wipe out your gains.
Let’s say someone approaches you with an irresistibly strong purchase offer during the lockout.
You could, technically, sell the property to them — but you’d have to factor in the penalty before you can close the deal. And depending on your numbers, that could turn a profitable exit into a wash (or worse).
If market conditions change or your property does not perform as well as you’d hoped, the lockout clause also keeps you locked into the current loan even if it no longer makes financial sense.
And if rates fall dramatically, you won’t be able to refinance and capture those savings — you’re basically stuck paying more while the lender reaps the benefits.
Lockout periods inherently exist to protect the lender’s returns and not you as a borrower.
That’s why you need to treat them as seriously as interest rates and loan-to-value ratios.
If you skip over this clause during negotiations, it could cost you more than you expect.
Are there CRE loan options with shorter or no lockout periods?
Yes. Not all commercial property loans come with a lockout.
Bridge loans, for instance, often skip them altogether or limit them to just a few months.
These short-term loans are meant to help you finance a property quickly and then refinance or sell once conditions improve.
Of course, it’s still crucial to read the fine print because some commercial real estate bridge loans do include prepayment clauses, except the penalties tend to be lighter and the restrictions shorter than those found in traditional long-term loans.
The key here is comparison. Line up the terms side by side and don’t just focus on rate.
If one loan locks you in for five years and another gives you more freedom, that difference could change your returns more than a few basis points on the interest rate.
Can you avoid or negotiate a lockout clause?
Some lenders are open to removing or shortening the lockout clause if you’re a strong borrower with solid financials and a good property.
Are current market conditions on your side of the table? Use that to your advantage.
If market indicators suggest that rates are likely to fall and your project has strong upside, you might be able to convince a lender to cut back the lockout period or eliminate it entirely.
If you want to avoid getting boxed in in the first place, read the loan agreement inside out, scouring for the lockout language.
Ask questions about how long it will last, how it will be enforced, and whether it’s possible to shorten or remove it (and how).
Negotiation is certainly possible when you bring data to make your case, such as a current appraisal, a strong rent roll, and evidence of clear cash flow projections.
Can you convince the lender that you are a low-risk borrower? Then they may be more open to adjustments.
And if they’re not? Don’t be afraid to walk away.
There are plenty of lenders out there, and some are more willing to structure terms that support your goals.
Finance your next investment without getting locked in
Lockout periods can look harmless on paper, but you’re at the mercy of that clause once you put that pen to paper and sign.
These clauses prevent you from refinancing or selling during a critical window in your investment, so you could lose a lot of money if market conditions change.
Be sure to read the lockout language closely before signing any commercial loan. Ask questions and compare alternatives.
And if you’re in a position to negotiate, use it. Don’t be afraid to walk away and keep looking. There are other options out there.
At Private Capital Investors, we specialize in flexible commercial real estate loans with transparent terms and no hidden restrictions.
Contact us to talk about customizing CRE loan structures based on your project.
