Commercial Financing and Exit Fees

Most commercial property investors and commercial mortgage bankers are used to loan fees being charged up-front.  But did you know that some commercial mortgage lenders, mezzanine lenders, and preferred equity investors charge a fee when the loan or equity investment pays off?  This kind of fee is known as an exit fee.

An exit fee is different than a prepayment penalty.  An exit fee is charged regardless of whether the loan (or preferred equity investment) is paid off early, paid off exactly on time, or paid off late.  It is owed when the relationship is over, and the exit fee serves to enhance the yield of the lender or investor.

The typical exit fee is one or two points, but some hard money lenders charge an exit fee as large as ten points!

So why would a lender or preferred equity investor structure a deal with an exit fee?  Exit fees are most commonly found on value-added deals, where the proceeds of the loan are being used to fix up the property and/or improve its cash flow. 

When the value-added loan (think: renovation loan) is first made, the operating budget of the property is tight.  The property may not even be generating any income at all.  But after the property is renovated and re-leased, there may be plenty of cash flow to service a much larger loan, with which the borrower can easily afford the exit fee.

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