Commercial Loan Origination Fees Defined and Explained
In commercial real estate finance, an origination fee is an amount of money charged by a lender for processing a loan. Loan origination fees can vary, and are often between 0.5% and 1%. For example, most Fannie Mae, Freddie Mac, and HUD multifamily lenders charge a 1% origination fee. Hard money and private money lenders, in contrast, may charge origination fees between 3-5%, partially as compensation for the additional risk they often take on by lending to less than creditworthy borrowers.
On a percentage basis, origination fees are generally higher for smaller loans, and typically lower for larger loans. This is partially because it takes around the same amount of underwriting and labor to underwrite a $1 million loan as a $10 million loan. As the loan gets larger, the lender will receive a higher amount of money, even if the percentage fee is lower. For instance, a 0.5% origination fee on a $20 million loan is $100,000, while a 1.5% origination fee on a $5 million loan is only $75,000.
What is Loan Origination?
Loan origination is a term that encompasses each step of the loan application and disbursal process, starting with the loan application and ending with the disbursal of funds.
Loan Broker Origination Fees vs. Lender Origination Fees
In many situations, a borrower will work with a loan broker to guide them through the borrowing process and solicit offers from different lenders in order to get them the best loan terms for their individual situation. Sometimes, a loan broker may charge a small upfront fee, perhaps $500, to begin this process. Borrowers should be wary of sending any large sums to a loan broker without first being connected to a lender. In general, the borrower will directly pay the lender the origination fees, not the loan broker.
However, in many cases, the borrower is not responsible for paying the loan broker anything. The most common scenario is that the lender pays the loan broker a referral fee of between 0.5-1% of the loan amount, but sometimes, this is the borrower’s responsibility.
Loan Origination Fees and Mortgage Points
In some cases, a commercial borrower can “buy down” their interest rate by a certain percentage by paying an additional fee. This compensates the lender upfront while reducing the mortgage payments of the borrower for the life of the loan.
Can You Negotiate Commercial Loan Origination Fees?
Loan negotiation fees are negotiable. In general, higher qualified borrowers with a higher net worth and a better credit score have more power to negotiate a lower commercial loan origination fee. This may come at the expense of a higher interest rate (which is the exact opposite of buying mortgage points). In some scenarios, the lender may agree to offer a loan without an origination fee, but this usually only happens for extremely well-qualified borrowers.
Loan Origination Fees vs. Other Closing Costs
A loan origination fee is only one closing cost that a borrower should keep in mind when closing on a loan. If you are buying a new property (instead of refinancing a loan for a property you currently own) you will need to pay a commission to your commercial real estate agent, which can vary but is often 3% of the property’s sale price. In some scenarios, the buyer’s agent and the seller’s agent split the commission, though every situation is different. In addition, as previously mentioned, there may also be loan broker fees to contend with.
However, other major fees include:
Lender Legal Fees: These are generally minor, perhaps $1,000 to $3,000, for most types of loans, but are often quite expensive (usually starting at $15,000) for CMBS loans due to the complexities of the CMBS securitization process.
Appraisal: These often cost between a few hundred and $1,000 or more.
Phase I ESA: Phase I Environmental Site Inspections (ESAs) often cost between $1,500 to $6,000, with an average of between $2,000 to $4,000. If a property is found to have been contaminated, a Phase II ESA will be required, which, on average, costs between $5,000 and $8,500, with some going up to $25,000 for special situations or extremely large properties.
Title Fees and Title Search: A title search and title insurance are generally required before a lender approves a loan. Title searches are required before the issuance of title insurance, and these often cost between $150 to $1500. A lender will usually require a borrower to pay for the lender’s title insurance, but may not require the borrower to pay for the owner’s title insurance (though this is usually a good idea). Title insurance rates are often around $2.50 per $1,000 for properties around $1 million, with declining rates for larger properties. Sometimes, an upfront payment is also required.
Property Insurance: Lenders require that a property be suitably insured before providing financing. There may be some upfront property insurance costs when purchasing a property insurance policy, though. Commercial property insurance policies often cost between $1,000 and $3,000 per $1 million of coverage, with an average cost of around $750 per year for commercial properties.
Mortgage Insurance: Unlike residential lenders, commercial lenders do not require private mortgage insurance (PMI). However, HUD multifamily loans do require borrowers to pay a mortgage insurance premium (MIP). Currently, this is 0.65% for market-rate properties, 0.45% for LIHTC or Section 8 properties, and 0.70% for Section 220 urban renewal projects which are not already utilizing the LIHTC or Section 8 programs.
These are just a few of the major closing costs. In many cases, property condition assessments (PCAs) or capital needs assessments (for HUD multifamily loans) are also required. In states with high seismic activity, a seismic report may often be required. For sites with specialized environmental issues, such as mold, radon, or asbestos, specialized environmental inspections may also be needed.