Fees on commercial loans, what's considered "reasonable"?

Question

Greetings from N CA.

Hope everyone is making deals left and right, collecting lots of money, and spend some to boost the economy.  :)

Okay, so I just bought a mix used multi-building to use for non-profit purposes.  It has a single house, 2 units apartment, a big building with church upstairs and classrooms downstairs.  I'm renting everything out except the big building, which is used for church (my seller, renting back) in the morning upstairs, and for our youth group in the afternoon (Sundays).

Now I need to refi to pay off my seller carry back and hard loans.

Chase wouldn't want to do my loan, so they recommend a local broker who after talking to me verbally said he can get a loan (about $700K) for me.

He's asking for $1000 of "packaging" fee up front, plus 2% (of which he said usually bank would pay him 1%, I'd pay the rest).  This is my first commercial loan so not sure what would be normal fees in general, and in my area in particular.

I also asked him to do a cash out refi on my primary residence.  He said he would credit back the $1000 if I'm doing both with him.  This residential loan wouldn't have any fee at all.

His reason for the $1000 is not to waste his time since there are people who had his company does all the work, but at the end decided not to go through with the loans.  :)

Please advice.

Thanks.

Mark Creason · Answer

Nhi,

The lender may be paying the investor a one point fee out of the two.  I see this occasionally on odd ball properties.  He may also have a minimum fee.  My firm currently has a 15k minimum fee, which is about equal to your two points.  Is the deal worth doing with a 2 point loan fee?  That is the question you need to ask.  If you are going to shop for a loan, you really should do this before purchasing the property.  You do not want to waste your due diligence time.

Mark

Joel Owens · Answer

"If so how/should I shop for rate?  I have posters in this forum referred 1 or 2 phone numbers which I didn't call because I'm not sure how to compare them!"

And that's the issue. You do not know how to compare debt and packages offered so you are relying more on the knowledge of the mortgage broker you are contacting to help. These smaller properties take a lot of heavy lifting and helping the borrower/purchaser.

These days I take on new clients for commercial but only if they trust in the process. It's takes a lot to get them educated on what has to happen and if they are creating issues and fighting every step of the way then I don't work with them. I pretty much know from the first phone call how they are going to be.

The phone calls mean nothing. They can tell you whatever on the phone. Until you have a commitment letter you do not have any meat on the bone.

What kind of records have you kept with this property?? The sloppier the records and the worse you can document then the worse the rate as the lender cannot validate 100% what you are presenting to them in underwriting.

Bill Gulley · Answer

I would think, that if Chase sent to this broker, he's probably okay to deal with, it's rare a bank will refer a broker, they need a comfort level before they will do that and obviously they have worked with him.

One way to reduce is costs, begin with the home refi first. Then ask him what docs he would need for the commercial loan.

If you package the deal up for him, he'll have much less time involved and negotiate that fee.

But, no loan is a slam dunk with a church involved, horrible risk issues, so his time may be in searching for a lender, you don't want that.

Church loans are unique, revenues are unreliable in small churches, no one wants the PR of kicking people out of a church and foreclosing.

Google Church Loan Broker and see what you get, there are brokers who specialize in church properties as well as non-profits, which are also unique. In this niche, you may find the lender and then refer your broker to them, that solves his time issues to an extent. With that, together with your package, your home refi, a list of lenders in hand, his time should be down to processing and placing the application, that should save you from his "mess with you fee". Good luck :)

Joel Owens · Answer

Yeah you have a small mixed use property. The loan is small and the property is odd ball which creates a "double whammy" with lenders.

It's going to be a hard one to get a loan on.

700,000 loan in commercial is like a 40k house in residential. In fact many brokers will not touch anything under 2 million for starters. Minimum fee Is usually 1 point but if it falls under a certain loan amount say 1 million then they have a 10k minimum etc.

The loan brokers at the large banks often have friends that they refer to when they can't fund something like that which sounds like what happened to you.

What the loan broker is saying is they do not want to present a loan to the lender to work on with pre-screen and then you SHOP the rate and they waste time. Just be warned if you do shop the rate that it's nothing concrete and rate can be re-traded until it's locked. Also when it hits underwriting and approval was based on certain items which turn out to be different the lender can deny the loan altogether or change the terms of the approval etc.

This is why when you pay for appraisal, inspection, etc. it is usually from a lender deposit and the reports go to the lender. They do not want you running with the reports mid deal to someone else. The lender does not want to spend valuable resources and time with flaky buyers and the deals do not close etc. They want to hit certain lending volume goals for the year.

No legal advice.

Nhi Nguyen · Answer

Thanks @Mark Creason @Joel Owens & Bill Gulley for tips & advices.

- This is no longer a church.  Church is just renting back from me temporarily while looking to find a smaller place for themselves.

- Since I just bought it Jan/2014, the only record I have would be lease contracts & P&L, and that's all he said he would need.

- From the last conversation, they would credit back the $1000 if I let them do both commercial & residential re-fi.

- The questions I have now are: 1) just like Mark mentioned, is the 2 pts worth it.  I'll do some more math on my end for better decision.  And if it's only 1 pt as he mentioned (since bank usually pay him 1pt), would it hurt my rate or not.  2) how to determine if this broker is a good fit for me, so I can trust and follow through with him without wasting both sides' time shopping around?

Lots of newbie questions as you can see.  :)

Les Jean-Pierre · Answer

Also, be prepared for some silly things because they are going off a list. They wanted the insurance company to be NY based which I think it was not but they accepted my insurance. They asked for a cost of living increase clause in my commercial lease but it was a two year lease. The loan terms were ok at the end of the day.  The process did force me to have all docs pertaining to the property scanned and filed so, that is now a nice thing.

Nhi Nguyen · Answer

thanks @Les Jean-Pierre for the pointer. I did go to a credit union and a local bank. Also asked on this forum a while back but the CU & bank I went to don't do commercial, referrals from the forum are all brokers.

I'll talk to some more to see what's going on.

I'm also in talk to some of my clients to get private $ from them too. If I can get a sizable amount from them with low enough rate, maybe that's good enough for the time being.

Les Jean-Pierre · Answer

Hi, I don't know if the NYC market is one to compare but I just did a refi on a three unit mixed use(two residential, one commercial). I went directly to the lender. I didn't have to pay points. They had a 1% item that included the appraisal, inspection and underwriting fee. If the building did not pass inspection, I got most of it back. In NYC, a lot of people use brokers but I had seen on another blog this lender did not charge points so I went with them. In terms of putting a package together, it was some work but nothing you can't handle. Might try a local bank that does small mixed use. Overall, I think I did ok.

Nhi Nguyen · Answer

Thanks @Joel Owens for your clear advice.

If so how/should I shop for rate?  I have posters in this forum referred 1 or 2 phone numbers which I didn't call because I'm not sure how to compare them!

Fees on commercial loans, what's considered "reasonable"?

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