Assumption Fee

Assumption Fee: Definition and Overview

In the context of commercial real estate finance, an assumption fee is a payment made to a mortgage lender to process the transfer of an existing loan from the current borrower (the seller) to a new borrower (the buyer). This fee is charged when a property is sold and the buyer "assumes" the legal obligations, interest rate, and remaining term of the seller’s original mortgage instead of securing a new loan.

Detailed Description

Assumption fees are a standard component of commercial mortgage-backed securities (CMBS) and other long-term commercial loans. Because commercial mortgages often include a due-on-sale clause, the lender must formally approve the transfer of the debt to a new entity. The assumption fee compensates the lender for the administrative costs and the risk assessment associated with this transition.

Key elements of an assumption fee include:

• Calculation: The fee is typically calculated as a percentage of the outstanding principal balance of the loan at the time of the transfer. While rates can vary based on the loan agreement, they generally range between 0.5% and 1.0% of the remaining balance.
• Underwriting Costs: The fee covers the lender's costs for performing due diligence on the new borrower. This includes reviewing the buyer's creditworthiness, financial statements, real estate experience, and the new management structure of the property.
• Legal and Processing Expenses: In addition to the percentage-based fee, borrowers are often responsible for third-party costs, such as legal fees for drafting the assumption agreement, processing fees, and potential title insurance updates.
• Negotiability: The specific terms and the exact amount of the assumption fee are usually dictated by the original Loan Agreement or Promissory Note signed by the initial borrower. However, in some cases, these may be negotiated during the initial loan structuring phase.

For a buyer, paying an assumption fee can be highly advantageous if the existing loan carries an interest rate lower than current market rates. For the seller, providing an assumable loan can make the property more attractive to potential investors, especially in a rising interest rate environment. It is important to note that the lender must formally release the original borrower from liability; otherwise, the seller may remain secondary liable for the debt even after the assumption fee is paid and the property is transferred.