Closing costs are the fees and expenses paid to complete a real estate transaction, separate from the purchase price itself. They typically include items such as loan origination fees, title insurance premiums, recording fees, legal costs, appraisal fees, and prorated property taxes. Both buyers and sellers can incur closing costs, though the split varies by market convention and negotiation.
In commercial real estate transactions, closing costs tend to be more complex than in residential deals, often involving lender legal fees, environmental report costs, and third-party underwriting expenses tied to the size and structure of the financing. Sponsors typically build projected closing costs into a deal's initial capitalization, since underestimating them can strain reserves or reduce the equity actually available for the business plan. For investors, reviewing how closing costs are budgeted offers a useful check on how carefully a sponsor has underwritten a transaction from the outset.
Further reading: The Lightstone DIRECT Opportunity Whitepaper
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