Term Sheet

How a term sheet works

A term sheet is the first written offer in a commercial loan. You give a lender or broker a summary of the property, your financials and what you want to borrow. If the deal fits, the lender sends back a short document that says what it would be willing to lend and on what terms. Lenders also call it a proposal letter, an indication of terms or a conditional commitment.

The point of the document is to let both sides decide whether to continue before either spends serious money. Underwriting a commercial loan means an appraisal, environmental review, title work, a property condition report and legal fees. A term sheet lets you see the structure first, and it lets the lender confirm you will go forward before it orders those reports.

It is not an approval. It is built on the information you gave, assumes that information is accurate, and is conditioned on the lender's review of everything else. The amount can shrink if the appraisal comes in low or the income does not verify.

What a term sheet usually contains

• Parties and property: the borrowing entity, the guarantor, the property and its use.
• Loan amount and sizing: a dollar figure or a maximum, often limited by the lesser of LTV, DSCR and debt yield tests.
• Interest rate: fixed, or floating over an index such as SOFR with a spread. Many term sheets show an indicative rate that is not fixed until you lock. See rate lock.
• Term, amortization and any interest-only period: see loan term vs. amortization.
• Fees: the origination fee (see points), any exit fee, and an estimate of third-party costs.
• Prepayment: a prepayment penalty schedule, a lockout, yield maintenance or defeasance.
• Recourse: whether the loan is full recourse, limited, or non-recourse with carve-outs such as bad boy carve-outs, and who must sign the guaranty.
• Extension options: the number, length, fee and tests. See extension option.
• Reserves and escrows: taxes, insurance, replacement and leasing reserves. See escrow and impounds.
• Conditions and expiration: required reports, closing conditions, and, on some term sheets, a date after which the offer lapses.

Binding or non-binding

A loan term sheet is normally written to be non-binding on both sides: the lender is not obligated to lend, and you are not obligated to borrow. That is why it can be revised more than once before both sides sign it.

“Non-binding” does not always mean every line is non-binding. Term sheets sometimes include provisions meant to be enforceable, which may include confidentiality, exclusivity (you agree not to shop the deal for a period), and your agreement to pay certain costs or a deposit. Whether a term sheet binds anyone depends on its wording as a whole, and a term sheet that mixes “non-binding” wording with a clause that reads as binding can end up in a dispute. Before you sign, find any sentence that says you shall or agree to something and ask what it commits you to.

Term sheet vs. commitment letter vs. letter of intent

	Term sheet	Commitment letter
When issued	Before full underwriting	After underwriting and credit approval
Binding on the lender?	Generally no	Yes, subject to its stated conditions
Binding on you?	Generally no, except specific clauses	Fee, deposit and expense obligations may apply even if the loan does not close
Can terms change?	Yes, as diligence finds facts	Only as the letter allows
What you do next	Negotiate, then sign to start diligence	Satisfy conditions and close

A letter of intent is a different document. In a loan, the term most often shows up on the purchase side, where a buyer offers a price and terms to a seller, and in business acquisitions. Because lenders label these documents differently, ask which provisions are binding rather than relying on the title.

If a seller needs proof you can finance the purchase, a term sheet shows the lender is interested but is weaker proof than a commitment letter, because the lender has not yet approved the loan.

Worked example: comparing two term sheets

You are buying a $2,000,000 property with a $1,400,000 loan (70% LTV). Two lenders send term sheets with the same 25-year amortization and 5-year term. The figures are assumptions for illustration. Payments come from the commercial mortgage calculator.

	Lender A	Lender B
Rate	7.00%	6.75%
Origination fee	1.00% = $14,000	1.50% = $21,000
Monthly payment	$9,895	$9,673
Annual payments	$118,739	$116,073
Interest paid, years 1–5	$469,965	$452,488
Balance at year 5	$1,276,270	$1,272,122

Lender B charges $7,000 more up front and saves about $222 a month, roughly $2,665 a year. The extra fee is repaid by the lower payment in $7,000 ÷ $222 ≈ 31.5 months, about 2.6 years. If you hold the loan five years, B is ahead by about $6,329 in cash ($222.15 × 60 months, minus the $7,000 extra fee), and it also leaves you owing $4,148 less at year 5. Counted as interest, that is $17,477 less interest paid minus the $7,000 fee, or about $10,477, which includes the benefit of the lower balance. The 31.5-month break-even above counts cash only; if you also count the lower balance, the two loans come out about even near month 24. If you expect to sell or refinance in about two years, the two loans cost about the same once you count the lower balance, so A is ahead only on cash paid out, and what each lender's prepayment terms would cost you on that exit decides it.

That is the real use of a term sheet: it does not tell you which loan is better until you put your expected holding period next to the fees and the exit costs. The same break-even logic is in our points entry and the refinance break-even calculator.

Where it fits in the loan process

The usual order is: you submit the deal, the lender issues a term sheet, you negotiate and sign it (and sometimes pay a good-faith deposit), the lender orders third-party reports and underwrites, its credit approval process decides, a commitment letter is issued, and then the loan documents and closing follow. Lenders generally follow a similar order, though how detailed the term sheet is and how quickly each step moves varies by lender and loan type. A non-binding term sheet does not guarantee a loan.

Why lenders care

For the lender, a term sheet is a way to filter and price deals before it spends staff time and your reports budget. It also sets expectations. A lender that knows you will take the quote with its prepayment terms is more willing to start underwriting, and one that sees you are shopping may sharpen the pricing or ask for exclusivity.

It also protects the lender from surprises. Statements in the term sheet are tied to the facts you gave. If the rent roll, the net operating income or the ownership structure turns out different, the sizing can change. Give the lender accurate numbers at the start, and keep your documents consistent (see what lenders look at).

What to check before you sign

• Is the rate fixed, indicative or floating? A rate that “floats until lock” can move before closing.
• Recourse and carve-outs. What triggers full recourse, and does the guaranty cover the whole loan or a share?
• Prepayment. Get the schedule or formula in writing, and run it for the year you expect to exit.
• Third-party costs and deposits. Who pays if the appraisal is low, and what is refundable?
• All-in cost. Add fees, reserves, legal costs and the replacement of any hedge to the rate. A lower rate with higher fees is not automatically cheaper.
• Extension terms, if the loan is short-term. See extension option.
• Expiration and exclusivity. If the term sheet states how long the terms are open or bars you from talking to other lenders, know the dates.
• Timeline. Compare the promised closing date with what is realistic for the loan type. Our bridge loan page shows closing in 14–30 days for that product.

How to negotiate

Negotiate while the lender still wants the deal and before you pay for reports. Ask for the changes that matter over your actual holding period: a step-down prepayment schedule instead of yield maintenance if you may sell early, a cap on third-party costs, limited rather than full recourse if the property can support it, and extension options sized to your business plan. Have more than one term sheet in hand when you can. A competing offer is the strongest argument you have, and it is easier to compare when you build the same table for each lender, with rate, fees, recourse, prepayment, extensions and conditions.

Once you sign, lender changes during underwriting are harder to resist, because you have often paid for reports and signed a purchase contract.

Common mistakes

• Treating it as approval. Borrowers sometimes remove purchase contingencies or commit non-refundable money once a term sheet arrives. The lender has not approved anything yet, and the loan can still shrink or fall through in underwriting.
• Comparing only the rate. Two term sheets with different fees, reserves and prepayment terms cannot be ranked by rate alone. Build the all-in comparison.
• Signing exclusivity without a deadline. If the lender delays, you cannot move to another one. Ask for a date after which exclusivity ends.
• Skipping the legal read. The term sheet is short, but the recourse, indemnity and expense-reimbursement language in it carries into the loan documents.
• Waiting too long to ask for changes. After reports are ordered and the contract clock is running, you have less leverage than you did before you signed.

What it means for you

Treat a term sheet as a starting offer, not a closing guarantee, and do not remove purchase-contract contingencies or release a deposit because you hold one. Read it as the preview of the loan documents: the terms you let pass here are the terms you will live with. To see what a lender would send for your deal, send us your property and numbers, and we can compare terms across lenders on the same checklist.

Sources: general commercial lending practice as described in published guidance from commercial lenders and law firms on term sheets and commitment letters (Poyner Spruill, “A Refresher on Term Sheets and Commitment Letters”; Property Metrics, “How Term Sheets Work for Commercial Real Estate Loans”; StackSource, “Typical Structure of a Commercial Mortgage Term Sheet”; c-loans.com, “Term Sheets”). Terms vary by lender and loan. Rates, fees and the comparison above are assumptions for illustration, with payments and balances calculated by the site’s commercial mortgage calculator. This is general information, not legal advice.