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F is for Fees

Fees are always a massive source of debatewhen it comes to raising commercial finance.

When looking to raise commercial finance, you need to understand all of the fees that are involved, and how they/when arepaid. 

The one that normally takes most Investors/Developers by surprise is the lenders arrangement fee. Many lenders will add this to the loan, however,  some will ask for part of it upfront, and some mayask for the whole arrangement feeupfront. You need to understand how this is paidas it can be a huge surprise if you all of a sudden need to find 2% of the amount borrowed upfront. Always discuss this with the Broker upfront, as they need to understand if you are going to struggle to pay the fees upfront. It will help save time, as they will not go to Lenders that charge upfront fees. 

You also need to be aware of the Exit Fee of the loan. This can also be known as an Early Repayment Charge (ERC). You need to be aware if the Lender charges an exit fee, and the terms around this exit fee. Will they drop the exit fee if you redeem very early? Will they charge you a penalty on top of the exit fee? When is the exit fee due? Is it due on redemption, or if it is a Development Loan, is it due on the sale/refinance of each unit? 

On top of the exit fee, make sure that you understand if the Lender has any Extension Fees or Penalties that they will add to the loan if you run over the term. Also make sure that you understand if the interest rate of the loan will increase when you run over the term. Running over the term can be massively costly if the Lender is adding fees and increasing the interest payable.

As well as the Arrangement Fee and Exit Fee, you also need to be aware of Admin Fees, Legal Fees, Valuation Fees, QS Fees and Monitoring Surveyor Fees. Also make sure that you have accounted for Stamp Duty, as many people forget this, and depending on the size of the purchase, this can really hurt cashflow! 

These fees are normally paid upfront, and depending on the size of the development, they can often set you back a good chunk of cash. The QS and MS will normally be either the same person, or two people working closely together. You will normally pay a hefty fee to the QS upfront for them to have a look over your costs and make sure that they are correct. The QS is instructed by the Lender and will either be an internal QS or a panel QS. 

The MS will then charge a recurring monthly fee for the duration of the Development, and they are instructed by the Lender to monitor the scheme and ensure that all is progressing as it should be. They will also come out to the Development when you are looking to draw down a tranche of build costs from the development finance lender. They ensure that the works that you are claiming have been completed, have actually been completed. They then report to the Lender and you receive your drawdown within a week or so.