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3.8 FEES

Fees represent a further element of the lender's remuneration and a cost for the borrower. The most common arc:

• Arrangement Fee;

• Commitment Fee;

• Agency Fee;

• Syndication Fee;

• Prepayment and Cancellation Fee or Early Repayment Fee.

The Arrangement Fee is a form of early remuneration[1] which is paid by the borrower to cover the loan organization activity prior to initial drawdown and is calculated as a percentage of the total loan negotiated.

The Commitment Fee is equivalent to a percentage of the loan agreed upon which is not used, and must be paid to the bank (in general every quarter) from the time when the agreement is concluded. The Commitment Fee shall accrue from the date of this agreement and is payable in arrears on the utilization date.

The Agency and Syndication Fees are paid by the borrower as consideration for arranging the loan and for loan syndication activity. They are generally paid regularly (on an annual basis) or up-front to the arranging bank.

The Early Repayment Fee, which may naturally be waived by the bank, is required in return for the borrower's right to repay the loan in advance: this fee, which is specified under contract, is calculated as a percentage of the principal repaid early. This is a clause which benefits the debtor since under loan agreements, the repayment term for the amount drawn down is deemed to be set in favour of both parties, which means that the debtor may not redeem an obligation to repay the loan over a particular period of time without the bank's approval. Payment of an early redemption fee therefore performs the function of indemnifying the bank, which will be remunerated both for the risks and charges resulting from the redemption of the loan facility, as well as for the fact that it will no longer receive regular remuneration for its financial intermediation (through the loan spread), which essentially amounts to its remuneration for the activity carried out.

The following is an example of common clauses.

• Arrangement Fee

• The Borrower shall pay to the bank an Arrangement Fee in the amount equal to....

• Prepayment and Cancellation fee

• The Borrower must pay to the bank a prepayment and cancellation fee on the date

of prepayment of any part of the Loan and on the date of cancellation of any part

of the Total Commitments.

• The amount of the prepayment and cancellation fee is:

• if the prepayment or cancellation occurs on or before (Date), 2.5% of the amount prepaid or cancelled;

• if the prepayment or cancellation occurs after (Date) but on or before (Date), 2% of the amount prepaid or cancelled;

• if the prepayment or cancellation occurs after (Date) or before (Date), 1.5% of the amount prepaid or cancelled;

• if the prepayment or cancellation occurs after (Date), 0.5% of the amount prepaid or cancelled.

• Commitment Fee

• The Borrower must pay a Commitment Fee computed at an annual rate of 50% of the margin on the undrawn, uncancelled amount of the lender's commitment.

Loan and bank fees

FIGURE 3.6 Loan and bank fees

In order to calculate the overall cost of a loan, it is necessary to calculate the IRR on the comprehensive stream of cash flows which takes account not only of drawdown and principal repayments, but also of all the other costs (e.g. financial charges, taxes, and fees).

In Figure 3.6 an example of loan fees is presented.

The actual cost of the financing is calculated using the internal rate of return formula and it also represents the actual return for the lender. Due to the various fees it is higher than the agreed interest rate only.

  • [1] Normally it is paid at the closing of the financing agreement and for this reason is also referred to as an up-front fee.
 
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