| Detail | Explanation |
|---|---|
| Also called | Letter of intent (LOI), indicative terms, application letter |
| Binding? | Business terms usually are not. Deposit, expense, and exclusivity clauses often are |
| Comes before | Full underwriting, third-party reports, credit approval, and the commitment letter |
| Best time to negotiate | Before signing, while other lenders are still in play |
What does a commercial loan term sheet include?
Most lender term sheets run 3 to 10 pages and follow a similar order. The headline economics come first, followed by the structure, the reserves, and the conditions the lender needs satisfied before it will fund.
- Borrower entity, guarantors, and the property securing the loan
- Loan amount and the tests that can reduce it, such as loan-to-value, debt service coverage, or debt yield
- Interest rate or spread, the index, any floor, and how the rate is set at closing
- Term, extension options, and amortization or interest-only period
- Origination and exit fees, the good faith deposit, and who pays third-party costs
- Recourse, carve-out guarantees, and any completion guarantee
- Prepayment terms such as yield maintenance, defeasance, or a step-down schedule
- Reserves, cash management, financial covenants, and reporting requirements
- Conditions to closing, including appraisal, environmental, property condition, and title
Is a term sheet legally binding?
The loan terms in a term sheet are usually expressed as nonbinding. The lender has not finished underwriting, and most term sheets say plainly that the lender has no obligation to lend until it issues a commitment or signs loan documents. The borrower is also generally free to walk away from the economics.
Several provisions commonly do bind the borrower once signed. These include the obligation to pay the lender's third-party and legal costs, the deposit and its refund terms, confidentiality, and any exclusivity or no-shop period. Wording varies by lender and by loan, so read those sections closely and have counsel review them if the deposit is large or exclusivity is long.
What should a borrower negotiate at the term sheet stage?
Leverage is highest before signing, while the lender still competes with others. Terms that are hard to change later include recourse and guarantee scope, the prepayment structure, extension conditions, reserve sizing, cash management triggers, and the tests that can cut proceeds after the appraisal comes in.
It also pays to ask what could move between the term sheet and the commitment letter. A term sheet that sizes the loan on the sponsor's pro forma can shrink once the lender runs its own numbers. Running the deal through the loan sizing calculator first shows which constraint is likely to bind.
How does a term sheet differ from a commitment letter?
A term sheet reflects the lender's view before credit approval. A commitment letter follows approval and states the terms the lender has agreed to fund, subject to listed conditions. Borrowers who treat a term sheet as a commitment risk ordering reports, locking in a closing date, or releasing other lenders too early. Capital Partners collects and compares term sheets on permanent loans, bridge loans, and construction loans. Submit a deal to see competing terms on a property.
Common questions
Can a lender change the terms after I sign a term sheet?
Yes. Because the business terms are usually nonbinding, a lender can resize the loan or change pricing after underwriting, appraisal, or credit committee review. The commitment letter is where terms become firmer.
Do I lose my deposit if I walk away from a term sheet?
It depends on the wording. Many term sheets let the lender keep the portion spent on reports and legal work, and some treat part of the deposit as nonrefundable once signed. Check the refund language before you sign.
Should I get more than 1 term sheet for a commercial loan?
Comparing several term sheets is common and shows how lenders differ on proceeds, recourse, prepayment, and reserves. An exclusivity clause can limit that, so sign one only when you are ready to commit to a single lender.
What is the difference between a term sheet and an LOI for a loan?
In commercial lending the 2 names are used interchangeably. Both summarize proposed loan terms before full underwriting.
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