One of the most contemptuous issues in the commercial mortgage lending industry is; fees. How much are they, what are they for, who's got to pay them and when. Lenders and brokers want their expenses covered, borrowers don't want to pay any more than what is absolutely necessary. Disagreements over a deal's fee structure have killed many loans that otherwise would have closed.
Third Party Report Fees
I can say unequivocally that borrowers are always responsible for third party fees. Appraisals, environmental reports, feasibility studies, legal opinions and other consultant reports are always paid for by the borrower. The third parties preparing these types of reports require payment prior to issuing their findings or conducting their research. Some lenders have third parties pay vendors directly but most collect third party fees from borrowers and make payments through their corporate accounts. The reports that third party professionals create generally remain the property of the lender even though the borrower paid for them. Borrowers get copies but usually can't use them in future deals.
Unfortunately, in the world of commercial mortgage lending, borrowers have no leeway in the matter of third party fees; they must pay and they must pay before the service is rendered. Asking a lender to cover third party fees is a futile gesture. Not only will they refuse, but they will consider you inexperienced and unserious just for asking.
Borrowers are entitled to know what reports are required and how much they cost. Most lenders will provide an itemized third party expense report and credit any overpayment to the borrower at closing or issue a refund of the unused money if the deal falls apart.
Due Diligence Fees
A lender will devote significant time and effort into underwriting a commercial mortgage loan. This process is referred to as conducting their “due-diligence". Unlike third party fees, due diligence is an internal expense. Some lenders consider due diligence part of the cost of doing business and they build its value into their overall pricing. Many, however, require the borrower to cover some or all of their due diligence expenses. If an investor has a particularly attractive deal they would do well to shop for lenders with the most advantageous due diligence fee arrangements. It's also not considered unprofessional to question the price of due diligence and negotiate a due-diligence fee.
Avoid Lenders who require a due-diligence fee just to review a loan or take an application, paying someone simply to look at your loan is wholly unnecessary. But, if they like your deal and issue a letter-of-intent or term sheet, don't’ be surprised when you see a due-diligence fee requirement before they get down to the serious business of crunching the numbers and checking out you and your project.
It is common for private lenders to insist on one or more site visits and a face-to-face meeting with principal borrowers. Conventional lenders tend to hire third parties to do their inspections but, especially on large deals, may need to conduct off site meetings with principals. If a representative of a lender needs to fly in to inspect a building or job site or attend a meeting, the borrower may very well be billed for the flight and a hotel room. These costs should be reasonable and stated up-front before the travel takes place.
Not all lenders bill for travel, but if a property owner is dealing with a private firm or a small shop, or if a particular trip is extraordinary, the question of travel costs needs to be addressed.
If a commercial mortgage borrower uses a broker to source a loan, that broker will need to be compensated. Broker's fees are in-addition to any lender fees and are usually expressed in “points" or percentages of the gross loan amount. The borrower hires the broker and, it follows that, the borrower pays the broker.
It is very typical for a broker, or any other intermediary, to be paid directly from the proceeds of the loan closing. In-fact investors and developers should be suspicious of any broker who asks to be paid in some other manner. Question any up-front fee or deposit requested by a broker. Payments to brokers are not altogether unheard of but they should only be made if they are to cover an actual, out-of-the-ordinary expense, will be applied to lender fees or is fully refundable if the loan fails to close.
A knowledgeable, professional broker with good connections to the banking world can be indispensable to commercial property investors. They increase the chances of securing approvals and speed up the loan process. I strongly recommend investors use them. You may have to reimburse them for some out-of-pocket expenses but, beware of any loan agent that asks for a deposit or payment just to take you on as a client.
Document Preparation & Administrative Fees
If investors read lender term-sheets carefully they will discover various other fees financial firms call “administrative fees". These fees are thrown in as nickel & dime fees and can sometimes be eliminated or reduced if a borrower argues about them. They are so inconsequential to the overall deal that they often don't get noticed until just before the loan closes. They come in the form of document preparation fees, filing fees, logistics fees as-well-as by other names. The practice of tacking on a couple extra bucks in junk fees is pretty common, but in the scheme of things amounts to little more than an annoyance. Smart borrowers use them as little bargaining chips to be given and taken away to advance the bigger cause of getting a deal done. These fees should not total more than around a thousand bucks for most deals and not more than a couple of thousand even for big ones.
Commercial Real Estate Mortgage Loans cost money
The process of underwriting and closing a commercial mortgage loan costs money. The burden of incidental fees falls to the borrower more often than to the lender. But, in-the-end it is the borrower who will reap the huge capital gains and income that commercial property can provide. If a project is successful the fees it took to get into a deal will have been well worth paying.
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The author, Glenn Fydenkevez, is a 20 year Wall Street veteran who has served as an officer at one of the worlds most prestigious investment banks. He is currently the President of MasterPlan Capital, a commercial real estate investment banking firm offering debt placement, equity financing and asset management to commercial real estate investors and developers.