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Do you want to add value to your client’s next Commercial Real Estate transaction? Remind them to negotiate pre-payment penalties and language with their Lender during loan discussions.

Educating borrowers is a challenge that every broker often faces, whether it’s finding the right location, negotiating price or arranging client financing. Borrowers usually do a great job shopping rates or comparing loan terms, but they often need additional support negotiating the prepayment language from the lender.

Prepayment penalties vary from one institution to another, there is no exact methodology. A typical prepayment penalty can run from the first three, five or 10 years of the loan term. The prepayment penalty is a percentage of the loan balance at the time of payoff within a predetermined time frame. Example: Year One 5 percent, Year Two 3 percent and Third Year 1 percent.

Commercial real estate loans that fall under the SBA 7(a) and 504 loan programs, the prepayment penalty is not determined by the originating lender, therefore, each lender does not have the ability to waive or reduce on a case-by-case basis.

If the borrower is unable to reduce the prepayment penalty or remove altogether, advise them to limit the language of the prepayment penalty to third-party lenders only. Third-party lenders is just another term for the competition, other banks, credit unions or financial institutions. Having this language embedded is critical, because it allows the borrowers the flexibility to pay off the loan, in case they decide to sell the property or have a financial windfall to retire the debt.

REALTORS® Federal Credit Union, a Division of Northwest Federal Credit Union specializes in Commercial Real Estate Lending for REALTORS® and Associations. In addition, RFCU offers a wide variety of personal and business financial products and resources for REALTORS®.

For more information, visit