A structuring fee is an upfront fee charged by lenders when putting together a new debt warehouse facility. It is intended to compensate the lender for the time and effort required to analyze the proposed transaction, conduct due diligence, develop credit documents, negotiate terms, and structure the facility to meet the specific needs of the borrower.
Reasons Lenders Charge a Structuring Fee
There are several reasons why lenders charge a structuring fee for debt warehouse facilities:
1. Labor Intensive Underwriting Process
Putting together a warehouse facility requires intensive upfront work by the lender, including:
- Analyzing the creditworthiness of the borrower
- Conducting due diligence on the quality of the assets being warehoused
- Developing complex credit documents and negotiation of terms
- Creating reporting requirements and performance triggers
- Tailoring the structure and terms to the borrower’s specific situation
This often requires involvement from credit officers, lawyers, risk managers, and other specialists. The structuring fee helps account for these upfront costs.
2. Short-Term Nature of Facilities
Warehouse facilities are usually short-term in nature, with terms ranging from several months to a couple years. This shortened timeline provides limited ability for the lender to recover the costs of structuring the facilities through interest income or fees over time. The structuring fee helps improve the economics.
3. Customized Structures and Negotiation
No two warehouse facilities are exactly alike, given differences in types of assets being warehoused, risks involved, and preferences of borrowers. The back-and-forth negotiation and customization requires further effort from the lender. The structuring fee recognizes these incremental costs.
Typical Structuring Fee Amounts
Structuring fee amounts tend to vary based on the size, structure, and complexity of debt warehouse facilities. However, some general industry averages include:
Commercial Real Estate Warehouse Facilities
For commercial real estate debt warehouses backing loans for property types like multifamily, industrial, retail, or office buildings, structuring fees often range from 50-100 basis points (0.50%-1.00%) based on the facility size.
For example, a $100 million facility may incur a $500,000 to $1,000,000 structuring fee. The upper end of the range applies to more complex transactions.
Residential Mortgage Warehouse Facilities
Residential mortgage warehouses backing loans for properties like single family homes or residential buildings tend to have lower structuring fees, often ranging from 25-50 basis points (0.25%-0.50%) based on size.
For a $50 million facility, this would equate to $125,000 to $250,000 in structuring fees. The percentage may be higher for first-time borrowers that require more underwriting work.
Asset-Backed Lending Facilities
For asset-backed facilities financing auto loans, equipment leases, consumer loans, or other cash-flow based lending assets, structuring fees can vary widely from 50 basis points to over 2% depending on size and complexity.
A $500 million facility may incur $2.5 million or more in structuring fees for example. Unique structures tend to drive higher fees.
In general, increases in facility size, first-time borrowers, and esoteric underlying assets backed by the warehouse correlate to higher structuring fee amounts both in dollars and percentage terms.
Structuring Fee Payment Terms
Beyond negotiated fee sizes, the timing, form, and conditions of structuring fee payments also warrant focus from borrowers. Typical payment options include:
Upfront Fee with Commitment Letter
The most common approach is for the borrower to pay 50%-100% of the agreed structuring fee promptly after acceptance of a formal commitment letter from the lender outlining the approved facility terms. This provides certainty to the lender that costs to finalize documentation will get covered. Sometimes, lenders ask for a good faith deposit and use it towards structuring fee at close.
Payment Upon Initial Funding
In some cases, particularly first time borrowers that lenders have little familiarity with, the lender may defer payment of a portion of the structuring fee until initial funding of the facility. This protects the lender against upfront costs should the borrower fail to ever utilize the warehouse line.
Periodic Advance Payments
For committed facilities that take an extended period for conditions precedent to get fulfilled prior to closing, lenders may structure periodic advance installments of the structuring fee. Examples include 25% initially upon issuing commitment letter, another 25% at signing of definitive documentation, 25% upon completion of diligence, and final 25% at initial funding. This approach allows the lender to get compensated for progress while avoiding frontloading the full fee.
Structuring Fee Letter
Payment terms often get outlined in a separate agreement referred to as a structuring fee letter. This letter lays out the timing of installments, whether portions are refundable based on closing milestones, and specifies what expenses incurred by the lender remain eligible for reimbursement beyond the base structuring fee. Getting these payment dynamics formalized upfront manages expectations.
Summary
In summary, structuring fees remain a key component of the economics for lenders providing customized debt warehouse facilities across real estate, asset based lending, and other industry verticals.
The fees compensate for intensive underwriting, legal analysis, risk assessments, and specialized structuring required to execute on these facilities. And importantly, they often represent a profit center justifying resource allocations to specialized lending groups.
However, in many cases the absolute fee amounts remain negotiable, in particular for repeat borrowers or simpler structures.