Why It Matters
You pay a commitment fee before closing to secure your financing. Once a lender issues that commitment letter, they've reserved capital and locked your rate — they can't redeploy those funds elsewhere. The fee pays for that reservation, and in most commercial deals it's non-refundable the moment it's paid.
At a Glance
- What it is: A fee paid at commitment letter issuance — before closing — to lock loan terms and reserve lender capital
- Typical range: 0.25%–1.0% of the loan amount for stabilized commercial loans; 0.50%–2.0% for construction and bridge financing
- Non-refundable: In virtually all commercial transactions, the fee is forfeited if the borrower fails to close — regardless of reason
- Standby variant: On credit facilities and construction lines, a standby fee charges against the undrawn balance for capital kept available but not yet borrowed
- Not the same as origination: Origination fees are only charged at close — commitment fees are charged whether or not you close
- Formula: Commitment Fee = Loan Amount × Fee Percentage
Commitment Fee = Loan Amount × Fee Percentage (typically 0.25%–1.0%)
How It Works
What the lender is actually committing to. When a lender issues a commitment letter, they're making a contractually binding promise: fund this borrower, at this amount, at this rate, on these terms, before this expiration date. Capital earmarked for your deal can't be deployed elsewhere. If market rates rise between commitment and closing — which on a 12-month construction commitment is entirely plausible — the lender funds at the locked rate and absorbs the difference. The commitment fee compensates for that rate lock risk and tied-up capital.
Three fee structures, depending on loan type. The upfront commitment fee is the most common: paid at commitment letter issuance, typically 0.25%–0.50% on permanent stabilized loans and 0.50%–1.0% on value-add or bridge transactions. The standby fee — also called an unused fee — works differently. On a construction loan with a $3.2M draw facility, you might only draw $800K in month one. The lender still holds the remaining $2.4M in reserve. A standby fee of 0.125%–0.50% per year charges against that undrawn balance, compensating the lender for kept-ready capital. Construction commitments warrant higher fees than acquisition loans because the commitment period is longer — often 12 to 24 months — and the rate lock risk is correspondingly larger.
What causes forfeiture and how borrowers can structure around it. Most commercial commitment letters state the fee is "earned upon issuance" — full stop. If you don't close by the expiry date, the fee is gone. Common triggers: financing contingencies the borrower controls, failure to satisfy title conditions, or simply missing the deadline. Borrowers can negotiate protections upfront: request the commitment fee credit toward origination at close (some lenders agree), negotiate a paid extension option — the right to extend the period by 30–90 days for an additional 0.125%–0.25% fee — and ensure the commitment period is realistically sized to your deal timeline. A 60-day commitment on a deal with 45-day due diligence leaves no margin.
Real-World Example
James is under contract on a 24-unit apartment building in Memphis at $2.87M. He secures a $2.15M commercial loan commitment at 6.25% fixed for 10 years. The lender charges a 0.50% commitment fee — $10,750 — due within five business days.
Three weeks in, the Phase I environmental report flags a petroleum storage issue from a former dry cleaner nearby. The seller contests the findings, and due diligence stretches to 55 days. With 20 days left on the commitment clock and title still unresolved, James calls his lender to request an extension.
The lender agrees for an additional 0.125% fee — $2,688. James pays it. Title clears on day 68, and he closes with a week to spare. Total commitment costs: $13,438. The extension saved $10,750 from forfeiture for under $3,000. James builds both figures into his acquisition cost line.
Pros & Cons
- Locks your financing terms before market rates can move against you — particularly valuable in volatile rate environments
- Demonstrates seriousness to sellers; a commitment letter backed by a paid fee carries more weight than a conditional pre-approval
- Gives you a defined timeline — the commitment period forces the deal toward close with a clear deadline
- Construction fees can be included in loan budgets — many construction lenders allow the commitment fee within total project costs
- Some lenders credit the fee at close — reducing net origination cost when negotiated upfront
- Non-refundable in most commercial deals — if the transaction falls apart for any reason the borrower controls, the fee is lost
- Adds to upfront capital requirements — on a $3M loan at 0.75%, that's $22,500 due before closing, before origination, before deposits
- Standby fees compound on delayed draws — slow construction draws burn standby fees on undrawn balances, increasing true borrowing cost
- Commitment periods expire — missing the deadline forfeits the fee and may require re-underwriting at current market rates
- Not standardized across lenders — percentages, refundability terms, and extension rights vary; read the commitment letter before paying
Watch Out
- "Earned upon issuance" language is absolute: No grace period, no partial refund for deals that die in title review. Read this clause before paying.
- Commitment period must match your timeline: A 60-day commitment on a complex title situation or 1031 exchange is a setup for forfeiture. Negotiate the period at the LOI or term sheet stage — not after the commitment letter is issued.
- Standby fees compound quietly on construction loans: A $4M draw facility with a 0.25% annual standby fee on undrawn balances can add $8,000–$15,000 in financing cost over 18 months. Build it into the pro forma.
- Extension options must be negotiated before you need them: Lenders typically require extension rights to be written into the original commitment letter — not granted after expiry when you're already in distress.
Ask an Investor
The Takeaway
A commitment fee buys you something specific: a lender's contractual obligation to fund your deal at agreed-upon terms. In commercial real estate, that reservation comes at a non-refundable price. Negotiate the commitment period length and extension rights before you pay, understand the standby fee structure on construction facilities, and build the total commitment-related costs into your acquisition budget from day one.