Prepayment penalties

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Commercial Loan
Posted by: Joel Jun 26 2004, 01:52 PM
I have negotiated the price and terms for a large commercial building that I have occupied for 12 years. I am a practicing dentist and my son will be coming into the practice shortly. The present owner is selling the building and carrying the paper to fund his retirement and the terms would be for 25 years and fully amortized. Are there any guidelines or laws that affect prepayment penalties specifically in California?
Posted by: loanuniverse Jun 26 2004, 04:53 PM

I did a search on the net for information pertinent to your situation and it was difficult to find related articles or cases. The trouble was compounded due to:

1 – The loan is commercial in nature and not residential financing { a lot more laws protecting the consumer than a business }

2 – You are 7 states away, and it would probably be useless to ask someone in legal in my bank about it.

3 – You are dealing with seller financing, and not from an institution that is required to follow more rules.

Having said that, I think I found a good article. {Of course, you know that this is not legal advice, that I am not an attorney, and that you should consult one}

Here are some quotes, and a link to the full article.

“Federal associations have, for many years, been able to include prepayment penalty clauses in commercial loan documents and enforce such clauses according to their terms regardless of any state law to the contrary………….”

” The Parity Act permits covered lenders to preempt state law prohibitions and restrictions on prepayment penalties and provides for the insertion and enforcement of prepayment penalties in “alternative mortgage” instruments such as adjustable-rate and balloon mortgages……….”

The article gives a rough idea, but it also raises some questions as to whether or not your seller/lender would be covered by these laws. I think is a matter of looking at the kind of financing that the seller is giving and trying to figure out if it would be more beneficial to get a loan from a third-party. Of course, the seller has a vested interest in keeping the financing with him if the rate he gets is above what he could get from a different investment.


Good luck
Posted by: Dave Jul 1 2004, 11:31 PM
Check out : – for all the information in california
laws…great search engine but you’ll be reading ALOT of legal mumbo-jumbo!

Also: has a site to ask particular legal questions.

My opinion FWIW..most sub-prime lenders charge 6 months interest on 80% of the balance if paid off in less than 2 or 3 years. If he can’t live with that (and it’s not unreasonable for him to want that) then he’s charging too much!

Author: Commercial Loan Underwriter