You have been shopping your commercial real estate deal to lenders for weeks. Finally, a term sheet arrives in your inbox. Before you sign it and celebrate, you need to understand exactly what you are agreeing to, because the terms you accept now will follow you through closing and beyond.
A commercial loan term sheet is the lender's initial proposal outlining the key financial and structural terms of your loan. Think of it as the blueprint for your entire financing arrangement. Every line item, from the interest rate spread to the recourse provisions, directly impacts your returns and risk exposure. Getting this step right can save you tens of thousands of dollars over the life of your loan.
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This guide walks you through every section of a commercial loan term sheet, explains what each term means in plain language, shows you which terms are negotiable, and highlights the red flags that experienced borrowers never ignore.
What Is Included in a Commercial Loan Term Sheet?
A commercial loan term sheet typically runs one to five pages and summarizes the business terms a lender is willing to offer. While every lender formats theirs differently, the core sections remain consistent across the industry.
The most common line items include the loan amount, interest rate and type (fixed or floating), loan term and amortization schedule, loan-to-value (LTV) ratio, debt service coverage ratio (DSCR) requirement, recourse or non-recourse structure, prepayment penalty provisions, reserve requirements, fees and deposits, and closing conditions.
Here is a breakdown of what each line item means and what you should pay attention to before signing.
Beyond these core items, many term sheets also include sections on reporting requirements, insurance covenants, environmental conditions, and leasing restrictions. For permanent loans, you will typically see more detailed covenant packages compared to shorter-term bridge loan term sheets.
According to the Tannenbaum Helpern law firm, several material terms are often excluded from initial term sheet drafts, including the specific scope of recourse carve-out guarantees, leasing rights, and rights to make indirect ownership transfers. Borrowers should request these details upfront rather than leaving them to loan document negotiations later.
One frequently overlooked section is the conditions precedent, which lists everything the lender needs before moving to commitment. Understanding these requirements early helps you prepare documents in parallel and avoid delays.
Is a Term Sheet the Same as a Commitment Letter?
No, and confusing the two is one of the most common mistakes borrowers make. A term sheet and a commitment letter serve very different purposes in the commercial loan process, and understanding the distinction can protect you from costly misunderstandings.
A term sheet is a preliminary, generally non-binding document that outlines proposed loan terms. It signals the lender's interest in your deal but does not obligate them to fund the loan. A commitment letter, by contrast, is typically a binding agreement issued after the lender has completed due diligence and formally approved your loan.
The key practical difference is this: a term sheet gives you a roadmap for negotiations, while a commitment letter gives you certainty that funding will happen if you meet the stated conditions. As noted by the MPL Law Firm, the commitment letter is "quite different in tone and content" from a term sheet and "is intended to be a legally enforceable document."
Here is why this matters for your deal timeline. When you are under contract to purchase a property, your seller and their attorney will want to see a commitment letter, not a term sheet, as evidence that your financing is secured. A term sheet alone does not provide the same level of assurance.
If you are working with a CMBS or conduit lender, the distinction becomes even more important. CMBS term sheets often include rate lock provisions and application deposits that can make them feel more binding than traditional bank term sheets, but they still carry conditions that must be met before the lender is truly committed.
For a deeper look at what happens between the term sheet and closing day, see our guide on the commercial loan closing process and timeline.
How Do You Negotiate a Commercial Loan Term Sheet?
The term sheet stage is your strongest opportunity to negotiate favorable terms. Once you sign the term sheet and the lender moves into due diligence and document preparation, your leverage decreases significantly. Here is a strategic approach to negotiating effectively.
Get multiple term sheets. The most powerful negotiation tool is competition. When you have two or three term sheets from different lenders, you can compare offers and use competing terms as leverage. A borrower with options will almost always get better terms.
Prioritize the terms that matter most. Not every term carries equal weight for your specific deal. If you are planning to hold the property for three years and then sell, the prepayment penalty structure matters more than the amortization schedule. If cash flow is tight in the early years, negotiate for interest-only periods rather than fighting over 10 basis points on the spread.
Know what is negotiable. Interest rate spreads, prepayment flexibility, recourse carve-outs, and reserve requirements are among the most commonly negotiated terms. Items like the lender's legal fee requirements or third-party report costs tend to be less flexible.
Involve legal counsel early. While the term sheet focuses on business terms rather than legal language, having your attorney review it before you sign ensures you do not agree to provisions that will create problems during loan document negotiation. According to commercial real estate attorneys at Tannenbaum Helpern, there is a "balancing act in determining which terms need to be negotiated upfront in the term sheet to avoid the risk of being unable to satisfactorily negotiate them within the loan documents."
Negotiate the exclusivity period. Many lenders request a 30 to 90 day exclusivity window. Push for the shortest period possible, ideally 30 to 45 days, and make sure it includes a firm commitment letter deadline.
Request a rate lock or rate cap. Ask whether the lender will lock your rate at the term sheet stage or provide a rate cap. Some lenders charge a fee for early rate locks, but this protects you if rates rise before closing.
Use our commercial mortgage calculator to model different rate and term scenarios before entering negotiations so you understand exactly how each term change impacts your debt service and returns.
Is a Term Sheet Legally Binding?
In most cases, a commercial loan term sheet is not legally binding. It is typically structured as a non-binding expression of interest, meaning neither the lender nor the borrower is obligated to proceed with the loan on the stated terms. However, there are important exceptions and nuances that every borrower should understand.
While the loan terms themselves are generally non-binding, certain provisions within the term sheet may be enforceable. The most common binding provisions include:
- Exclusivity clauses that prevent the borrower from seeking financing elsewhere for a specified period
- Confidentiality agreements that restrict how the borrower can share the term sheet with third parties
- Good faith deposit terms that specify when deposits are refundable or non-refundable
- Expense reimbursement provisions that require the borrower to pay certain lender costs even if the loan does not close
The legal enforceability often depends on the specific language used. Courts have found that term sheets using definitive language like "the borrower shall" or "the lender agrees to" can create binding obligations, even if labeled as non-binding.
As highlighted by the Hackett Feinberg law firm, the distinction between a binding and non-binding term sheet matters significantly because "a binding term sheet may effectively lock both parties into the deal before all terms are fully negotiated." If you need clarity on recourse versus non-recourse structures mentioned in your term sheet, understanding their legal implications is critical before you sign.
The bottom line: treat every term sheet as if its provisions could be enforced, even if the document says otherwise. Have your attorney review the language before you sign.
What Comes After the Term Sheet in Commercial Lending?
Signing the term sheet is just the beginning of the commercial loan process. Here is what happens next, step by step, and how long each phase typically takes.
Step 1: Good Faith Deposit and Engagement (Days 1-3) After signing the term sheet, you will typically submit a good faith deposit ranging from 0.5% to 1% of the loan amount. This deposit demonstrates your commitment and triggers the lender's due diligence process. Make sure you understand whether this deposit is refundable if the lender decides not to proceed.
Step 2: Due Diligence (Days 3-30) The lender orders third-party reports including a property appraisal, Phase I environmental assessment, property condition report, and title search. You will submit financial documentation including tax returns, entity documents, rent rolls, and operating statements.
Step 3: Underwriting and Credit Approval (Days 20-45) The lender's underwriting team analyzes all materials and prepares a credit memorandum for their loan committee. This is the internal approval process where your deal is formally evaluated.
Step 4: Commitment Letter Issuance (Days 30-50) If approved, the lender issues a formal commitment letter with final terms. Review this carefully against your original term sheet to catch any material changes.
Step 5: Loan Document Preparation (Days 40-70) The lender's legal counsel drafts loan documents, and your attorney reviews and negotiates them. Complex deals with multiple properties or unusual structures take longer.
Step 6: Closing (Days 60-90) Once all documents are finalized, the closing agent coordinates document signing, fund transfers, title insurance issuance, and mortgage recording.
Timelines vary significantly by loan type. Bridge loans can close in as few as 2 to 4 weeks from the term sheet, while CMBS and life company loans may take 90 days or longer.
What Are the Biggest Red Flags on a Commercial Loan Term Sheet?
Experienced borrowers and commercial real estate attorneys know that certain term sheet provisions signal potential problems. Here are the red flags you should never ignore.
Vague fee language. If the term sheet says "standard closing fees apply" or "customary third-party costs" without providing specific dollar amounts or ranges, you could be facing surprise costs at closing. Always request a detailed fee breakdown before signing.
Non-refundable deposits before due diligence. A good faith deposit is standard, but it should be refundable if the lender declines to proceed after its own due diligence uncovers issues. If the term sheet requires a non-refundable deposit before the lender has even ordered an appraisal, that is a significant warning sign.
Undefined recourse carve-outs. The term sheet states the loan is "non-recourse with standard carve-outs" but does not list them. What is considered "standard" varies dramatically between lenders, and some carve-out lists effectively make the loan full recourse. See our guide on recourse vs. non-recourse commercial loans.
Excessive exclusivity periods. An exclusivity period longer than 45 to 60 days without a corresponding commitment deadline gives the lender time to tie up your deal without any obligation to close. Meanwhile, you cannot approach other lenders. The best term sheets include a commitment deadline that is shorter than the exclusivity period.
Missing extension options. If your business plan requires 18 months but the loan term is 12 months with no extension option, you could face a maturity default. Make sure the term sheet includes at least one extension option with clearly stated conditions and fees.
Rate floor provisions on floating rate loans. Some lenders include a rate floor that prevents your interest rate from dropping below a certain level, even if the benchmark rate decreases. This limits your upside if rates decline.
Broad material adverse change (MAC) clauses. If the term sheet allows the lender to withdraw the offer based on vague "material adverse changes" in the market, economy, or borrower's financial condition, the lender has an easy exit from any deal they no longer want to fund.
How Long Is a Term Sheet Valid?
Commercial loan term sheets typically include an expiration date, usually ranging from 5 to 30 business days from the date of issuance. The validity period depends on the lender type, market conditions, and the complexity of your deal.
Bank term sheets generally provide 10 to 15 business days for the borrower to review, negotiate, and sign. CMBS and conduit lenders may offer shorter windows of 5 to 10 business days because their pricing is tied to bond market conditions that change daily. Private lenders and bridge lenders often allow 15 to 30 days, though they may adjust pricing if market conditions shift during that period.
Several factors can shorten or extend a term sheet's effective life:
- Rising interest rates: Lenders shorten validity periods to avoid being locked into below-market pricing.
- Competitive deals: Properties with multiple bidders often come with shorter expiration windows.
- Relationship borrowers: Existing lender relationships and a track record of closing deals often mean more flexibility on timing.
- Market volatility: During uncertainty, term sheets may allow the lender to adjust pricing up to commitment.
If you need more time, most lenders will grant a reasonable extension. However, an extension may result in updated pricing, especially for floating rate loans tied to SOFR or Treasury yields. The smart approach is to begin due diligence preparation before you receive the term sheet so you can respond quickly.
What Fees Should You Expect on a Commercial Loan Term Sheet?
Fees are one of the most important and least understood sections of a commercial loan term sheet. Understanding the full fee picture helps you accurately compare offers and budget for your total borrowing cost.
Here are the most common fees you will encounter:
Origination fee (0.5% to 2% of loan amount): This is the lender's primary compensation for underwriting and funding the loan. It is usually the largest single fee and is often negotiable, especially for larger loan amounts or repeat borrowers.
Application or processing fee ($2,500 to $10,000): Some lenders charge an upfront fee to cover initial underwriting costs. This may or may not be credited toward the origination fee at closing.
Appraisal fee ($3,000 to $15,000): Required for virtually all commercial loans. The cost depends on property type, size, and location.
Environmental assessment ($2,000 to $6,000): A Phase I environmental site assessment is standard. If concerns arise, a Phase II can add $10,000 to $50,000.
Legal fees ($5,000 to $25,000+): Budget for both the lender's legal fees and your own attorney. Some term sheets require the borrower to pay lender legal costs even if the loan does not close.
Title insurance and recording fees (varies by state): These costs depend on your state and loan amount.
A good term sheet provides specific fee amounts or ranges for each cost. If fees are quoted as percentages, use our commercial mortgage calculator to convert them to dollar amounts based on your loan size.
What Are the Most Common Term Sheet Questions Borrowers Ask?
Can I negotiate fees on a commercial loan term sheet? Yes. Origination fees, application fees, and deposit amounts are commonly negotiated. Lenders are more flexible on fees for larger loans, repeat borrowers, and deals with strong fundamentals. Third-party costs like appraisals and environmental reports are generally non-negotiable since they are passed through from outside vendors.
Should I have an attorney review my term sheet? Absolutely. While term sheets focus on business terms, an experienced commercial real estate attorney can identify problematic language, missing protections, and provisions that could create issues during loan document negotiations. The cost of an attorney review (typically $1,000 to $3,000) is minimal compared to the potential cost of unfavorable terms locked in over a 5 to 10 year loan.
What happens if the final loan terms differ from the term sheet? Minor adjustments are normal, but if the lender materially changes key terms like the interest rate, LTV, or recourse structure after you have spent money on appraisals and legal fees, push back firmly. Some borrowers negotiate a "term sheet protection" clause entitling them to a deposit refund if the lender changes material terms.
How many term sheets should I request? Aim for two to three from different lender types (one bank, one CMBS lender, one private lender). This gives you comparison points and leverage. Be selective, as excessive shopping can create a negative impression.
What is a "good faith" or "application" deposit? An upfront payment, typically 0.5% to 1% of the loan amount, showing the borrower's serious intent. The deposit should be clearly described as refundable under stated conditions, such as the lender declining the loan after due diligence.
Do all commercial lenders issue term sheets? Most institutional lenders, banks, and CMBS lenders do. Some smaller community banks may move directly to a commitment letter for simpler deals. Regardless, make sure you have key terms in writing before committing.
Ready to Move Forward with Your Term Sheet?
A commercial loan term sheet is your first real window into the financing you will receive. Understanding every line item, knowing which terms to push on, and recognizing red flags gives you a significant advantage.
The borrowers who get the best terms come prepared: they understand their deal's strengths, have competing offers, and involve their attorney before signing. Whether you are financing a bridge loan for a value-add acquisition or locking in permanent financing on a stabilized asset, the term sheet sets the foundation for your entire loan.
Do not rush this step. Review every provision, ask questions about anything vague, and negotiate the terms that matter most to your investment strategy.
Sources: Tannenbaum Helpern Syracuse & Hirschtritt LLP, PropertyMetrics, FNRP, MPL Law Firm, Hackett Feinberg P.C.