Standard commitment fee for commercial loan

Board Topic: What is the commitment fee ? Commercial mortgage
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Commercial mortgage

Posted by: Ron Aug 22 2004, 12:08 PM
I am in the process of obtaing a commercial mortgage. My loan has been approved. I have received a letter from the bank stating the conditions
of the mortgage. There is an item in the letter "Commitment fee". What is this fee for? It is 1% of the purchase price of the property. It is not mentioned that this fee is a point. If it is not a point then what is it for? I appreciate your explanation. Is this a usual fee that bank charge?

Posted by: loanuniverse Aug 22 2004, 02:53 PM
Ron:

A 1% fee on the amount of the loan is pretty much standard for commercial real estate loans. While customers have been able to bargain for a lower fee, the willingness to lower it depends on how badly the lender wants to make the deal. By the way, fees over 1% are rare from bank lenders, but finance companies are in the habit of charging more than 1%.

Do not get me wrong, the fact that the commitment letter states 1% fee does not mean that you can not negotiate. I would try to get it down to 0.5%. I think halving might be achievable. I do not think getting rid of it is possible. If we are talking about a small amount of money {under $250,000}, the bank might not want to even bother negotiating, but the larger the amount the more desirable your loan is.

This is how you approach it from a negotiating standpoint:

1- Ask what this fee is for?

The lender will give you an answer about the costs involved with the transaction, documentation, manpower, attorney {if one was involved} etc.

2- If you paid for an appraisal, or an environmental, you can say something like “This is turning more expensive that I thought, I already spent money on this and that”. If the appraisal has been received and you already paid for it, this is a good time to ask for your copy and insinuate that you want this other lender to take a look at it.

3- You can also say something like “so this fee is inclusive of legal fees”? If there is an attorney involved, the fee is not. So when the lender says that it isn’t you can say something like “You mean I have to pay for that too” When you say that make sure to shake your head. wink.gif

4- Essentially if the commitment fee is the only thing that you don’t like about the commitment, you want to come to a point in the conversation where you say something like “I understand that your bank has expenses, however I just don’t feel comfortable paying a commitment fee when you guys are already going to be charging me a rate on the money that I am borrowing. However, I want to meet you halfway and offer to pay half of a percentage”.

It all comes down to negotiating skills and how strong your position is.

The lender will probably have to discuss this with the supervisor since the loan was approved by at least a couple of people. The worst thing they can do is say no, and then I guess it will be time for either giving in or having to look for another lender. In this situation, time is not on your side “unless we are talking a refinance”. So you might want to give the lender as little time as possible to get back to you.

Good luck.


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