A fee charged by a lender for agreeing to allow a borrower to payoff a loan prior to the end of the contractual loan period. A prepayment penalty (i.e. prepayment fee) is meant to cover the cost to lender of a loan paid off prior to the agreed upon date, especially as it relate to the lender’s reinvestment cost and interest rate risk.
Common forms of prepayment penalty in commercial real estate include a percentage of outstanding loan balance, Defeasance, and Yield Maintenance.