Below is a breakdown of the average closing costs on commercial mortgages, on either an investment or owner occupied properties. This overview is relevant for loans between $200,000 to $8,000,000.
If you’d like to get a break down of the closing costs on SBA loans, go here.
Virtually all banks and lenders have the same set of costs and third party reports that have to be completed. The differences in price is normally around 10% to 15% from one lender to the next. Closing costs are virtually the exact same whether the transaction is a purchase or refinance.
Commercial Mortgage Closing Costs – Bank Fees
Bank Fees aka Origination Fees – Virtually all lenders charge a 1% bank fee. It’s calculated off of the total loan amount. On refinances, its normally financed into the loan, on purchases the borrower normally pays for this in cash at closing. On investment properties, you’ll likely find some lenders that want to charge more than 1%. For example, most life insurance lenders (life insurance companies that lend their own money on commercial mortgages) currently charge between 2% to 2.75% of the total loan amount (and a great portion of this is due in cash, before closing).
Though rare, it’s not unheard of for a traditional bank to waive or reduce their bank fee if they really want you as a long term client and you’re willing to have your deposits or a portion of them held at the bank. But again, this is rare.
Other Misc Bank Fees – Most lenders have other various fees and call them a variety of names, such as loan packaging fees, loan processing fees, documentation prep fees, credit report fees, UCC Search, loan set up fees, loan underwriting fees, etc. These are normally a set amount such as $100 – $750 for each, with a total of appr $1,000 – $3,000 for all. Most of these fees are financed into the loan amount on refinances. On purchases they are normally paid for by the borrower in cash, at funding.
Third Party Costs/Reports
Banks and lenders need to have various third party reports done to help them underwrite transactions and to protect them from liability. Here they are:
Appraisal Reports – The appraisal fee is paid outside of closing (normally in the beginning of the process), in cash by the borrower. This is the case regardless if its a purchase or refinance. The cost is due to the appraisal company, once the report is engaged and completed, regardless if the loan closes or not.
Many borrowers expectations of the appraisals costs are not in line with reality, as they often compare a commercial appraisal with a residential appraisal. The typical cost for a “bank quality” appraisal report is an absolute minimum of $2,500 (even if your loan request is only $100,000). Average cost is $3,500 and takes appr 3 to 4 weeks to get done. On special purpose properties (such as a hotel or marina), a property that is in a rural location and or a larger building will require a more extensive report and thus the cost goes up and can considerably. If you need the appraisal rushed, expect the cost to go up by approximately 25%.
Environmental Reports – This fee is paid outside of closing, ie the borrower normally pays for this in cash, before funding and regardless if the loan closes or not.
There is a wide variety of environmental reports. On the low side of the spectrum is whats called an environmental screening, these are normally $200 – $400. Here a title search is done to see what the previous uses where and what the neighboring uses are. On the higher end is whats referred to as a Phase One. The typical costs on these is $1,800. If any issues are discovered with the Phase One than a Phase Two will be required and these get expensive. $10,000 would be the average cost of a Phase 2. Many deals die at this point.
Buildings that are new and that are non industrial such as office or retail for example, can normally get away with the environmental screening. Any type of industrial property and or a property located directly next to one will likely have to get a Phase One.
As a side point, you do not want to buy a building and not have the environmental status checked. If you bought a property that did have issues the liability and clean up costs could easily be more than what the property is worth.
Building Inspection Reports – The building inspection report fee is paid outside of closing, in cash by the borrower before closing. This is the case regardless if it is a purchase or refinance. The cost is due regardless if the loan closes or not. Costs are normally $1,500 on the high end and as low as $200.
Last point regarding third party reports. Most lenders will wait until your loan is approved, ie you have an official commitment on it, before they order these reports and spend your money on them. If you have a timing issue you may have to order them ahead of getting the commitment, but if there isn’t a rush, most banks will want to wait to get the approval before they order reports. This way, if your loan is declined, you have not wasted any money.
Closing Services/ Title Insurance
Depending on what state you are in, the closing services themselves may be preformed by a variety of companies such as an attorney, escrow officer and or performed by the title insurance company themselves.
Good news is that, within each state the costs between one title company/attorney/closing officer vs the next one, are virtually identical. Some state governments even mandate the costs. For this reason, most borrowers do not need to shop. Also, by the time the loan is ready to close, they normally just want to get it over with.
With that said, here is a basic overview of the generic costs associated with closing/title insurance: Loan Policy, Loan Endorsements, Settle Fees and the Owners Policy itself. Some of these are flat rate fixed costs (like $900 Settlement Fee), while others are tied to the size of the transaction. Generally title insurance related costs are one time fees and protect the lender against liability associated with improperly performed lien/title searches.
Commercial Property Insurance – Just like on your house, lenders require you to have hazard insurance. This protects the lender and you if your building is damaged (by fire, or vandalism for example). This is an ongoing cost associated with ownership. The cost also ranges widely from state to state and depends on the replacement value of the property. Due to this, it is difficult to provide much more information than this.
Other Misc. Commercial Loan Closing Costs
Pre Paid Interest – Pre paid interest is not really a closing cost, but rather interest that is being paid to cover the rest of the month’s interest that is due. For example, if your loan closes on the 5th of the month, the prepaid interest will cover the remaining 25 days of that month (Assuming it is a 30 day month). So if your monthly mortgage payment is $100 per day or $3,000 per month, you would owe $2,500 of pre paid interest in this example. This amount would be rolled into the closing costs. It can be financed or paid in cash.
Property Tax Escrow– Escrowing property taxes is becoming more and more prevalent on commercial mortgages. The government always really has first lien position, and even if the borrower pays his mortgage on time, the government will aggressively act to collect their taxes, if the borrower fails to pay them. Lenders can require that the property tax escrow account be pre funded into the closing depending on the time of year and when real estate taxes are due in your state.
TI/LC Escrow Accounts– (On investment properties only) Tenant Improvement and Leasing Commission escrow accounts are becoming more prevalent especially with properties that have short term leases/high turnover and if the borrowers liquidity is relatively low compared to the loan amount. The idea here is that when a tenant leaves, the space will have to be released (commission paid to a broker) and potentially built out to suit a new tenant. If the owner does not have enough cash on hand to cover these costs they will likely not be able to lease out the space, creating long term cash flow problems for the borrower and for the lender.
We have seen lenders require TI/LC accounts to be pre funded by a set amount and or added to monthly, similar to a property tax escrow. Lenders will require this account to be maintained over a course of time, say 5 years and or the entire life of the loan. The reserve account is released when the money is needed by the owner to cover these costs.
Hope this report on commercial mortgage closing costs was helpful!
By Jeff Rauth. Email Here or 248 885-8797. SBA Loan Officer at a Bank That Lends Nationally. 15 Years Commercial Real Estate Experience. Past Commercial Mortgage Broker.