Origination, exit and unused-commitment fees

A commercial financing quote can contain fees calculated on several different balances. An origination fee may reference the commitment, an unused fee may track undrawn availability and an exit fee may reference principal repaid or another defined amount. Two identical percentage labels can therefore produce different cash requirements.

Before comparing offers, create a fee ledger with one row for each obligation. Record its name, governing clause, percentage or fixed amount, calculation base, accrual period, payment trigger, funding source and any conditional credit. Keep estimated third-party expenses in separate rows so they are not mistaken for lender revenue or treated as fixed commitments.

Read the basis before the rate

The Block 40 agreement dated June 1, 2022, Section 2.8.1, provides one historical example of an exit fee with a conditional refinancing credit. It is not evidence that another lender offers the same credit or uses the same fee base.

For each proposed fee, ask which event makes it earned and which event makes it payable. Those dates need not coincide. Also identify whether a partial repayment triggers a proportional fee, whether an acceleration changes the calculation and whether a refinancing credit is contingent on using a particular institution. These are extraction questions for the actual offer and documents, not assumptions to supply from a market average.

A commitment is a maximum financing obligation subject to conditions; funded principal is the amount advanced and outstanding. Do not charge interest on an undrawn amount merely because a separate unused fee applies. Conversely, do not remove a financed fee from principal if it was actually advanced on the borrower’s behalf.

Worked exhibit: one commitment, three fee bases

Assume a hypothetical $6 million commitment with $4 million initially funded. A 1% origination fee is paid in cash at closing on the entire commitment. A 0.50% annual unused fee accrues actual/360 on undrawn availability. A 0.75% exit fee applies to the principal repaid at final payoff. These are invented terms, not current market pricing.

Assume the undrawn balance remains $2 million for 90 days, then a $1 million advance reduces it to $1 million for the following 180 days. At day 270, the borrower repays the $5 million funded balance and cancels the remaining commitment. No amortization, partial repayment, interest reserve or fee capitalization is assumed.

The fee total excludes interest and all unlisted transaction expenses. Dividing $102,500 by the $6 million commitment gives 1.7083%, but that is not an annual borrowing rate. It ignores the different dates, the changing funded balance and the separate interest cash flows.

Test the feature being negotiated

Suppose the borrower can reduce the unused commitment by $1 million at closing while preserving the same feasible draw plan. If origination is recalculated on a $5 million commitment and the unused amount is $1 million for the first 90 days, then zero thereafter, origination becomes $50,000 and the unused fee becomes $1,250. The exit fee stays $37,500. Total specified fees fall to $88,750, a $13,750 saving.

That saving has a tradeoff: there is no remaining $1 million contingency availability. Before negotiating a lower commitment solely to reduce fees, compare the project’s remaining needs and the conditions to draw. Availability that cannot be used under realistic scenarios may have little value; available contingency liquidity can be consequential even if it remains undrawn.

Now suppose the original $60,000 origination fee is withheld from the $4 million initial advance instead of paid separately. Net closing cash becomes $3.94 million while principal remains $4 million under this assumption. The fee has not disappeared. If the borrower needs $4 million of usable closing cash, another $60,000 source is required unless the commitment and approved advance increase.

Model credits and uncertain costs honestly

Enter a proposed fee credit as a separate conditional item with the evidence needed to earn it. Run one scenario with the credit and one without. An oral expectation about future financing should not reduce the present cash requirement. Confirm whether a credit can exceed the future fee, expires, transfers to an affiliate or survives a loan sale.

For an economic comparison, use dated net advances and payments, including interest, fees and principal, over the same holding period. A cash-flow yield can aid comparison, but identify the compounding convention and excluded costs; do not label it a statutory APR without confirming the applicable legal framework.

The decision record should preserve both the dated cash ledger and the contingent obligations that do not yet have a reliable price. A lender-confirmed payoff estimate, draw schedule and fee definition can turn a promising quote into a comparable transaction. Adding percentages without their bases cannot.