One of the functions of a lender is to assist its borrower with the computation of the true project costs involved in a particular transaction. This amount allows the lender to determine how much of the project costs will be paid from loan proceeds and how much from the borrower directly.  If this amount is not computed correctly, the end result may be a very unhappy borrower at the closing table, who has to bring additional funds to cover project costs that were not accounted for in the original project cost computation.  To avoid this scenario, lenders should make themselves aware not only of possible lender fees that may be charged at closing, but of transactional costs that may be incurred by the borrower as well.

Some common loan costs include origination fees (non-SBA guaranteed loans), SBA guarantee fees (SBA guaranteed loans), appraisal fees, and environmental report fees.  Depending upon the lender, additional costs, such as search costs, site visit fees, courier fees, appraisal review fees, packaging fees, tax monitoring fees, legal fees, and recording costs, may need to be included in the project cost computation.

With respect to recording costs, being cognizant of state law variations is important, as taxes may need to be paid in order to record lien documents. Currently Alabama, the District of Columbia, Florida, Georgia, Kansas, Maryland, Minnesota, New York, Oklahoma, Tennessee and Virginia all collect some form of recording taxes.  Additionally, there may be certain counties that collect recording tax, even if it is not a statewide requirement (i.e. New Orleans, Louisiana).  There are also frequent changes in state statutes that can directly affect recording costs.  For example, on July 10, 2014 the Governor of Pennsylvania signed Act 126 into law, which, among other things, raises the cost for recording a document in any Recorder of Deeds Office in the Commonwealth by $10.00.

If the loan transaction involves the purchase of commercial real property, lenders must ensure that title costs are included in the project cost computation.  Title costs typically include the premium for any owner's and/or lender's title insurance policies being purchased, as well as  recording fees, notary fees, document preparation fees, and wiring fees.  Transfer taxes are another consideration in real property purchase transactions.  In certain states, the Borrower may be responsible for a portion or all of the real property transfer taxes due upon the sale.  The real estate  purchase agreement should be reviewed to determine who is responsible for payment of such real property transfer taxes, which are often split between the parties.  The purchase agreement should also be reviewed for any other payment obligations at closing (i.e. prorations for property taxes, rents, inventory or utility payments), as these amounts may also need to be included in the project cost computation.

By being aware of all lender fees and transactional costs that are incurred in a particular transaction, lenders will be better able to ensure that adequate funds have been built into the transaction and will avoid unpleasant surprise which can jeopardize their loan closings.

For more information on project cost computation, please contact Janet at jdery@starfieldsmith.com or at 267-470-1189.