In nearly every commercial loan transaction, borrowers are required to reimburse lenders for their costs and expenses in connection with the loan, including legal fees incurred by lender's counsel. While this obligation is standard market practice, the magnitude of these costs has been rising steadily as inflationary pressures continue to impact professional services industries. These rising costs are creating a meaningful financial burden that borrowers must anticipate and manage. In one recent transaction in which Harvest represented a borrower, the lender's counsel's fees exceeded over four percent (4%) of the multimillion-dollar loan.
Several factors are driving the increase in lender-side costs and expenses, the most significant of which are:
- Escalating hourly rates. Lenders often hire large national or international law firms and other third-party consultants. These large law firms continue to raise billing rates year after year, particularly for partners and senior associates handling complex finance transactions. With lender legal rates often exceeding $1,000 per hour, legal fees rack up quickly, particularly with multiple attorneys working on a loan file.
- More complex deal structures. Multi-tranche facilities, mezzanine layers, intercreditor agreements, and structured finance arrangements demand more extensive drafting and negotiation. This has led to increased legal expenses. In the office sector, forbearance agreements and other workouts also increased complexity, leading to even more legal expenses.
- Expanded due diligence. Lenders and their counsel are conducting increasingly thorough – and therefore time consuming – reviews of title, survey, environmental, zoning, and organizational documents in part to address increasing regulatory pressures (such as the recent FINCEN requirements that were imposed and then rescinded).
- Distressed assets require more due diligence. In the aftermath of the COVID-19 pandemic, many commercial real estate assets faced one form of distress or another. These troubled assets require lenders to spend even more time to take a deeper dive into the physical aspects of a property.
- Rising third-party costs. Title insurance premiums, survey fees, environmental report costs, and appraisal fees have all increased, adding to the overall expense burden on borrowers.
The cumulative effect can be significant. On a mid-market commercial real estate loan, borrowers may find themselves responsible for $75,000 to $200,000 or more in lender legal fees alone, before factoring in title, survey, and other third-party costs. Nowadays, it is not uncommon to have lender legal fees alone be well in excess of $100,000. For smaller transactions, these fees can represent a disproportionate percentage of the loan amount.
Fortunately, below are practical steps borrowers can take to manage and mitigate these rising costs:
- Negotiate fee caps or budgets early. Address lender's counsel fee expectations at the term sheet stage, before the commitment letter is signed. A negotiated cap or "not-to-exceed" budget provides cost certainty. While lenders are very reluctant to agree to such caps, having an early discussion about legal fee caps sets early expectations that the borrower will not write a blank check to lender's counsel and is a helpful anchor point in the event a fee reduction needs to be requested prior to closing.
- Engage experienced borrower's counsel early. Retaining knowledgeable borrower's counsel at the start of the transaction streamlines negotiations, reduces back-and-forth, and helps identify cost issues before they escalate.
- Limit reimbursement to "reasonable" fees. Ensure loan applications and loan documents include language restricting reimbursement to reasonable and documented out-of-pocket costs, and specify which categories of expenses are reimbursable (i.e., a prohibition on the reimbursement of in-house legal fees).
- Maintain organized due diligence materials. Providing well-organized documentation to lender's counsel from the outset reduces the time spent on review and follow-up, directly lowering fees.
- Push for preferred lender’s counsel. Where lender relationship dynamics permit, requesting that lenders select from law firms that the borrower or their counsel have previously worked with can help reduce fees as such law firms may already understand the borrower's overall corporate structure and pain points in loan document negotiation.
- Request billing updates. While lender's counsel need not provide itemized invoices to borrowers because time entries are covered by the attorney-client privilege in most states, borrowers should request periodic billing updates to not receive a surprise bill amount.
By addressing expense reimbursement obligations proactively (ideally at the term sheet stage), borrowers can establish guardrails that protect against runaway costs while preserving the lender relationship. As transaction complexity and regulatory burdens continue to grow, disciplined attention to these issues is no longer optional; it is an essential component of sound deal execution.