2022 Guide to Commercial Bank
Loan Fees & Requirements
Origination Fee / Doc Fee
- These fee types will be a cash payment (which sometimes can be financed into the loan) due at closing to the bank. The bank will look at the origination fee and the interest rate of your loan in combination with each other to determine overall loan profitability. There is definitely some wiggle room here if you can push back on the initial quote. Also, whether you would like to pay a little more or a little less up front can impact this fee. Some banking institutions prefer to charge lower rates and higher upfront fees while other prefer the opposite. As with most negotiations, soliciting another quote can help you determine if your quote is inline with the current market or if you have some negotiation room. In addition, if you are borderline on approval, you will have less room to bargain and will be in a more, take-it-or-leave-it situation. However, the stronger your business, the more money you can save yourself, as banks will compete for your loans.
- Do not pay something called “Doc Fees.” This is an origination fee under another name. If you agree to an origination fee, get this one removed.
Appraisal
- Banks will engage a third party to provide an estimate of value of the real estate you are financing. This is a legitimate fee and the bank must pay the third party vendor. This fee can range from a few hundred dollars to several thousand, depending on the size and complexity of the property. However, as mentioned above, the stronger you are and the more the bank desires the loan, the more you can negotiate. If you pay a large origination fee, you may be able to talk your banker into paying this fee along with some others mentioned below. It is all negotiable. Occasionally, when a bank/banker is desperate, you can have all of these paid, depending on what you bring to the table, e.g., deposits and Treasury Management.
Appraisal Review
- This fee is an internal fee that some banks will charge to “review” the appraisal they received to see if the appraiser did a good job. Do not pay this fee and negotiate on it.
Environmental / Phase I
- If your loan is big enough or depending on the property type, various kinds of environmental due diligence will be required. Similar to an appraisal, a Phase I is an in-depth environmental review by the third party, which provides the bank comfort that there is no unknown environment hazard. These products can cost several thousand dollars as well and are legitimate fees. However, you can take all of the fees you are paying in totality and use that in your negotiations, as they can add up quickly.
Survey
- A bank wants to make sure that the piece of real property that it is financing has no issues with the neighboring properties or unknown easements that would cause issues with owning the property. For example, if part of the building or driveway is technically on another parcel, which would be found in a survey, the bank would want this rectified before taking a lien against it.
- Regarding the fee, the Bank hires a surveyor to provide a survey to the bank, which can also be in the several thousand dollar range. This fee is legitimate as well and the bank will send a check to the surveyor.
Lender’s Title Policy
- A Bank is going to require you to pay for title insurance up to the amount of the loan. Title Insurance, provided by a Title Company, protects the bank up to a certain dollar amount in the even there is a title issue or dispute down the road. The Bank will also typically require certain endorsements from the title company, which act as add-ons that cover specific issues in title related matters. Endorsements can vary in const but can be several thousand dollars as well. Overall, your title insurance will vary by state and the loan amount (it is more expensive the more you borrow). If this fee runs really high, you can again use that to your advantage to lower the loan fees; however, there is typically not as much negotiating on this fee as it is real fee the bank must pay if you do not.
Tax Tracking / Flood
Determination / Misc.
- These fee types represents actions the Bank took to make various determinations on your bank loan. They are usually small and can be waived/negotiated very easily.
Attorney / Title Company Fees
Attorney Fees
Attorney fees represent the attorney’s
time to prepare loan documents (for
larger loans) or for there time to close
the loan, provide the title searches and
insurance, handle the money (if
needed) and file the necessary
paperwork at the courthouse. These
fees are less negotiable as the attorney
sets them. However, if they do seem
high, questioning your banker can help
lower your overall fee total.
Recording Fees
These fees are set by the local courthouse and must be paid to file the requisite documents. Typically, these are not negotiated and paid by the bower. Should not be more than a few hundred dollars.
Settlement Fees / Wire Fees
IF the title company handles your money and sends it to the seller, you’ll pay wire fees to the them. Banks change varying amount for wire, but this total should be under $50.
Buyer’s Title Insurance
- Similar to a home purchase, you will have the option to purchase title insurance for yourself. The bank is protected up to its loan amount; however, if there is a title dispute over previously unknown liens, ownership claims (divorce ,heirs, etc.), or back taxes, you will have protection against costly legal fees and title work. This fee/policy is typically not required (may depending on the state/lender), and you can have it removed. The fee will typically range from a few hundred to a few thousand dollars. If you intend to own the property and have the bank debt paid off at some point down the road, it is probably a good idea to go ahead and pay for this.
Prepayment Penalties
A prepayment penalty is a fee that a bank will place on a term loan to protect the bank’s overall profit on a loan. Let’s say you take out a 5 year loan on a 15-year amortization at 5.5% fixed for the 5 years. You may commonly see a 3/2/1 prepayment penalty for the first 3 years of the loan (that is 3% in Year 1, 2% in Year 2 and 1% in Year 3). What this means, is that if you decide to pay off the loan or refinance at a lower rate in year 1, you would then have to pay an additional 3% fee of your remaining principal balance. So, in our example, if you had a $500,000 loan and decided to refinance in Year 1, you would owe $14,000-$15,000 in a one time fee to the bank to be able to pay that loan off. Why do banks do this? Banks desire a return on their loans and these fees guarantee a baseline return in the event that you decide to refinance.
Are prepayment fees negotiable? Absolutely, but keep in mind there will probably be a minimum amount that you’ll have to accept, especially if your loan is 7 years or more in term. Perhaps you might be able to agree to a 2/1/.5 percent schedule instead of a 3/2/1. In addition, let’s say rates dropped and you wanted to refinance, you could most likely do it at the same institution and have the bank waive the fee, since they are keeping the loan on their books. As with most commercial loan items, prepayment penalties are certainly negotiable, and a stronger borrower will always have more leverage in negotiations.
In summary, fees can be disguised under various names, but on most large items, they are legitimate fees. You can ask your banker to obtain different quotes if you believe, for instance, the survey or appraisal fees seem too high. If already engaged or received, you can use this high fee as a negotiating tool to lower your overall fee outcome. It helps to know how a banker is paid, and the answer typically is related to loan and fee production. A banker may want to waive other fees to keep his origination fee higher. On the other hand, if you are paying $2 million for a piece of property in Texas, and your total fee amount is $30,000, you have some negotiating power to lower either that total or your rate. The most important thing to remember is that if you don’t ask, you’ll pay higher fees.
