Engineering Fee

Definition of an Engineering Fee

In the context of a commercial mortgage, an Engineering Fee is a non-refundable, upfront cost paid by the borrower to cover a professional assessment of the physical condition and structural integrity of the subject property. This fee is used to hire a licensed third-party engineer or a qualified building inspector to conduct what is formally known as a Property Condition Assessment (PCA) or a Property Condition Report (PCR).

Detailed Description of the Engineering Fee

The engineering fee is a critical component of the lender's due diligence process. Before a lender commits to financing a commercial asset, they must ensure that the collateral is structurally sound and that there are no hidden physical liabilities that could compromise the property's value or the borrower's ability to repay the loan.

The scope of the assessment funded by this fee typically includes an evaluation of the following areas:

• Structural Systems: Examination of the foundation, building frame, and load-bearing walls.
• Building Envelope: Inspection of the roofing system, windows, and exterior finishes to ensure they are weather-tight.
• Mechanical and Plumbing: Review of the HVAC units, boilers, and plumbing infrastructure to determine their remaining useful life.
• Electrical Systems: Assessment of the main electrical panels, wiring, and overall capacity.
• Life Safety: Verification of fire alarms, sprinkler systems, and emergency exits.
• ADA Compliance: A general overview of the property's adherence to the Americans with Disabilities Act.

Once the inspection is complete, the engineer produces a comprehensive report that highlights two specific categories of expenses:

• Immediate Repairs: Critical items that must be addressed within 90 to 180 days of loan closing. Lenders often require these funds to be escrowed at a rate of 125% of the estimated cost.
• Replacement Reserves: An estimate of the costs required to replace major systems (like the roof or parking lot) over the next 10 to 12 years. This calculation often determines the Capital Expenditure (CapEx) reserves the borrower must set aside monthly.

The cost of the Engineering Fee varies depending on the size, age, and complexity of the building. For a standard office building or multi-family complex, the fee usually ranges from $2,000 to $5,000. While the borrower pays the fee, the engineer is ultimately answerable to the lender, ensuring an unbiased perspective on the property's long-term viability.