Professional Fees

Professional Fees in Commercial Mortgages

Professional Fees are the third-party costs incurred during the application, underwriting, and closing stages of a commercial mortgage. Unlike residential mortgages, where many costs are standardized or covered by the lender, commercial real estate transactions involve a high level of complexity and risk. Consequently, lenders require various independent experts to verify the value, legal standing, and physical condition of the security property. These fees are almost exclusively the responsibility of the borrower.

A detailed description of the most common professional fees includes:

• Valuation and Appraisal Fees: This is typically the first major expense. Lenders require a formal valuation from an approved RICS (Royal Institution of Chartered Surveyors) qualified surveyor to determine the market value and the reinstatement value (for insurance purposes). This ensures the loan-to-value (LTV) ratio meets the lender's criteria.
• Legal Fees: Commercial transactions involve two sets of lawyers: one representing the borrower and one representing the lender. The borrower is usually required to pay the legal costs for both parties. These fees cover title searches, the drafting of the charge deed, reviewing lease agreements, and ensuring all "conditions precedent" are met before funds are released.
• Building Survey and Environmental Fees: For older properties or industrial sites, a lender may mandate a structural survey or an environmental report. These reports identify potential liabilities, such as structural defects, asbestos, or soil contamination, which could impact the property's future salability.
• Arrangement and Brokerage Fees: While the lender charges an arrangement fee for setting up the loan, a commercial mortgage broker may also charge a fee for sourcing the deal, managing the application process, and negotiating terms. These are often calculated as a percentage of the total loan amount.
• Commitment Fees: Some lenders require a non-refundable "commitment fee" or "payout fee" upfront. This covers their initial administrative costs and demonstrates the borrower's intent to proceed with the offer.

It is important to note that many of these professional fees are non-refundable, even if the mortgage application does not reach completion. Because these fees can be substantial—often ranging from 1% to 3% of the total loan amount—borrowers should request a Fees Mandate or a detailed estimate before officially instructing third-party professionals.

Properly accounting for these Professional Fees is a vital part of a borrower's capital expenditure planning, as they are usually paid out of pocket rather than being added to the loan balance, depending on the lender's specific policy.