Term Sheet

A term sheet is a mostly non-binding summary of the principal terms a lender is prepared to offer on a commercial real estate loan: amount, rate, term, amortization, recourse, covenants and conditions. It precedes the commitment letter and the loan documents.

Formula

What a term sheet does

A term sheet converts a conversation into something a borrower can act on. It sets out the shape of the loan clearly enough that the borrower can compare it against competing quotes, take it to a partner or an investment committee, and decide whether to spend money on third-party reports.

It sits between the initial quote and the commitment letter. A quote is indicative and easily withdrawn. A term sheet reflects a real credit read. A commitment letter is the binding offer issued after full credit approval, subject only to stated conditions.

What it contains

Loan amount and structure, including any holdback or earnout, and the loan-to-value or loan-to-cost constraint it was sized against.
Interest rate: fixed or floating, the index and spread, any floor, and whether the rate is locked or subject to reset at closing.
Term and amortization, including any interest-only period and the resulting balloon.
Recourse: full, partial, or non-recourse with carve-outs, and who the guarantor is.
Financial covenants: minimum DSCR, minimum debt yield, maximum LTV, and sponsor liquidity and net worth tests, with the testing frequency.
Reserves and escrows: taxes, insurance, replacement, tenant improvement and leasing commission, and any interest or debt service reserve.
Prepayment: lockout, yield maintenance, defeasance, or a step-down schedule, and any open window before maturity.
Conditions precedent: appraisal, environmental report, property condition report, survey, title, insurance, and satisfactory review of leases and borrower financials.
Fees, deposit and expiration date.

What actually binds

The economic terms are non-binding, and term sheets say so directly. A handful of provisions usually are binding, and borrowers should read for them: the expense deposit and the borrower's obligation to pay third-party costs whether or not the loan closes; confidentiality; and, on some sheets, exclusivity, which prevents the borrower from shopping the deal for a stated period.

Signing a term sheet therefore commits real money and, sometimes, optionality. It does not commit the lender to fund.

Why issuing speed matters commercially

On a competitive acquisition the borrower is working against a contract clock, and the lender who puts credible terms in front of them first shapes the deal. Everyone who follows is negotiating against that structure rather than proposing their own.

The constraint is rarely the drafting. It is the work upstream: spreading the rent roll and operating statements, running the sizing, checking the deal against credit policy, and forming a view on the sponsor. A lender who compresses that work issues on a different clock than one who does not, and on contested deals that difference decides who gets the loan.

Where term sheets go wrong

The recurring failure is a term sheet issued ahead of the analysis, on assumed income rather than spread actuals. When diligence corrects the numbers, the loan resizes, and the lender has to reprice or reduce proceeds on a deal the borrower has already planned around. That conversation costs more relationship capital than a slower, accurate sheet would have cost in days.

The second is silence on a material term. A sheet that omits the prepayment structure or the recourse carve-outs is not a comparison a borrower can actually make, and the gap surfaces in loan documents when leverage has shifted.

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