Commercial Loan With an Increasing Exit Fee

You will recall that an exit fee is just like a prepayment penalty, except that the borrower owes the exit fee whether he pays the loan off early, exactly on time, or late.  

I was reading one of George Smith Partners' tombstones last night, when I ran into this description of a $7.4 million bridge loan that they had just closed:

"The loan is structured with an increasing exit fee in lieu of an upfront lender origination fee to minimize upfront costs and incentivize the Borrower to execute the business plan in a timely manner... After an initial 12 month spread maintenance period, the exit fee is 1.33% for months 13 through 24, increasing to 1.66% for months 25 through 30 and 2.00% for months 31 through 36."

Huh.  I had never heard of an increasing exit fee before.  It makes sense.  It lights a fire under the borrower's tush to hurry up and pay off the loan.

By the way, a tombstone is an annoucement of the successful closing of some financial deal, like the taking a company public or the closing some large loan or bond issue.

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