The closing costs on a commercial investment property are can become substantial, often reaching tens of thousands. If you’re purchasing an investment property, here’s a breakdown of the various commercial property closing costs you can expect.
Flat-Fee Commercial Property Closing Costs
The simplest commercial real estate closing costs are flat-fee expenses that remain relatively standard across all investment properties. These include title insurance, appraisals, environmental reports, processing/underwriting fees, and credit checks.
Title Search and Title Insurance: $2,500 – $15,000
The title company will conduct a title search to confirm that the property’s title is clear, and they’ll provide insurance in case an issue does arise (which is highly uncommon but potentially devastating). The same company often provides title insurance to multiple parties in a deal.
Plan on paying between $2,500 and $15,000 for title insurance. The fee is usually included in a property’s closing costs.
Appraisal Cost: $1,000 – $10,000
An appraisal by a qualified third party will almost certainly be required. The valuation is a hard requirement for all federally regulated lenders, and it’s commonplace among private lenders. The cost of an appraisal is affected by a property’s location, type, and size, and appraising multiple properties within a portfolio will multiply this cost.
Environmental Report Cost: $2,000 – $6,000+
An environmental report that analyzes both the land and building will also be required. The report comes in two phases, with the second only being completed if necessary. A Phase 1 Environmental Report will cost between $2,000 and $6,000, and a Phase 2 Environmental Report will add to this expense. Phase 2 is only required if the property doesn’t pass the initial phase, but you should budget for both in case the second is required.
Additionally, environmental remediation is often also required if a Phase 2 report is needed. These remediations can have large price tags, but they might be negotiated between the buyer and seller.
Processing/Underwriting Fees: $500 – $2,500
Lenders will charge processing and/or underwriting fees, which cover employees’ time spent working on a loan. This should be clearly delineated, and it’s often collected upfront as a non-refundable deposit.
Credit Checks: $100 – $1,000
Every major stakeholder that is part of the organizational chart will have to undergo a credit check. The cost of credit checks, therefore, increases as more investors take equity in a property.
Value- and Size-Based Commercial Property Closing Costs
Several closing costs are determined by the value and/or size of a commercial property. These include origination points, mortgage broker’s fees, and inspections.
Origination Points: 0 – 2+%
The profit that lenders make on a loan itself primarily comes in the form of interest and origination points. Whether origination points are charged depends on the type of loan and lender. This is where shopping and knowing all your options become important.
Some lenders originate loans at “par,” which means that the loans come with no origination fees and the lender only earns revenue from the interest charged. Credit unions and banks frequently have origination fees between 0.25 and 0.5 percent. Private lenders might have fees of 2 percent or higher. All percentages are based on the amount borrowed.
Mortgage Broker’s Fees: 0 – 2%
You’ll only pay a commercial mortgage broker fee if you use a broker or a commercial loan marketplace to help secure financing, but it’s often worth paying this fee in order to get the assistance and multiple options. Fees for mortgages are generally in the .5 to 1.0% range, and depending on the loan product may have no fee.
Inspection Costs: $0.03 – $0.10 per Sqft
Lenders will usually require an inspection in order to ascertain the condition of a property, and it’s often a good idea to have an inspection regardless of any lending requirement. An on-site inspection will determine the safety, security, and necessary repairs on a property.
Inspection costs vary depending on the type and size of an asset, but budget between 3 and 10 cents per square foot.
Legal Costs for Commercial Property Closing
In addition to all of the aforementioned fees, there are also legal fees to be paid when purchasing a commercial investment property. The lender and you will each have legal fees, and you’ll end up covering both. There also may be miscellaneous expenses.
Lender’s Legal Fees: Varies
The expense associated with a lender’s legal fees is based on multiple criteria and varies. Property size, property location, execution type, and attorney’s rates can all impact this expense. These can range anywhere from a few thousand dollars if borrowing a small amount from a local lender to a $15,000-plus commercial mortgage-backed security (CMBS) loan.
Your Legal Fees: Varies
Your legal fees will also vary, and they’ll be affected by many of the same factors as a lender’s legal fees. Expect your fees to be lower than the lenders, because the lender must actually draft the loan documents. Still be prepared to pay a sizeable amount for attorneys, however.
Miscellaneous Expenses: Varies
Miscellaneous expenses are usually nominal compared to some of these other costs, but you never know exactly what you’ll want to pay for when conducting due diligence. A small expense could give you more information on a potentially vital question. Reserve some readily available funds to pay for expert consultants, unexpected trips to see a property, or other costs that might arise throughout the purchasing process.
Don’t Blow Your Budget at Closing
Commercial property closing costs are a major expense to budget but don’t spend everything you have at closing. Budget for all of these expenses and keep additional cash reserves available. Property investors must be able to quickly resolve issues should they arise, and lenders frequently require borrowers to retain a certain amount of liquidity. Having additional cash on hand will help ensure you’re ready for whatever might come next after closing.