How to Read a Commercial Real Estate Term Sheet

The headline loan amount is less important than the sizing tests underneath it: loan-to-value, loan-to-cost, and debt yield or debt service coverage at stabilization. Whichever test produces the lowest number is usually the one that actually governs, so a term sheet quoting 70 percent loan-to-cost is not useful if the debt yield test at the projected stabilized rate caps proceeds lower.

Ask the lender directly which test is controlling and at what stabilized income assumption, since a term sheet that only states the headline percentage without the underlying assumption can be renegotiated later if the appraisal or the lender's own model comes in lower.

Bridge loan rates are typically floating, quoted as a spread over an index like SOFR, for example SOFR plus 350 to 550 basis points as an illustration of a typical range, though actual pricing depends on leverage, asset class, and sponsor strength. Check whether the term sheet includes a rate floor on the index, since a floor changes the effective minimum rate even if the index itself drops.

As an illustration, on a $10 million loan a rate that floats from 8.5 percent to 9.5 percent over the term adds roughly $100,000 a year in interest at the higher end, which is why the floor and the spread deserve as much attention as the headline rate quoted on the first page.

Bridge loans typically run 12 to 24 months, often with one or two extension options of 6 to 12 months each, subject to a fee and performance tests like a minimum debt yield or occupancy level. Read the extension conditions carefully: an extension that requires meeting a debt yield the property has not yet reached is not a reliable safety net.

Note whether the extension fee is a flat percentage of the loan or scales with how far the deal is from meeting the performance test, since some lenders price extensions more punitively for deals that are behind plan.

A term sheet typically lists an origination fee, often 1 to 2 percent of the loan amount as an illustration, an exit fee if applicable, and a non-refundable good faith deposit due at signing that covers third-party reports. Extension fees and any unused fee on a future funding facility should also appear.

As an illustration, a $10 million bridge loan with a 1.5 point origination fee costs $150,000 at closing, plus a good faith deposit in the range of $50,000 to $75,000 due at signing to cover the appraisal, property condition assessment, and environmental report before any of those reports are ordered.

Interest reserves, tax and insurance reserves, and renovation or leasing holdbacks reduce the cash a sponsor receives at closing but protect the sponsor from running short on carry during the term. Confirm how the interest reserve is calculated, whether against the full loan amount or the projected outstanding balance over time, and how draws from a renovation holdback are released.

A reserve sized against the full committed loan amount rather than the actual projected draw schedule is more conservative and ties up more cash at closing, so it is worth asking which method the lender used before assuming the stated reserve figure is the minimum possible.

Most bridge loans are structured non-recourse with standard bad-boy carveouts for fraud, misrepresentation, voluntary bankruptcy, and similar bad acts, plus a completion or carry guaranty in some structures. Read the carveout list closely, since a broadly worded carveout, for example one that triggers full recourse for any covenant breach rather than only bad acts, effectively converts the loan to recourse in practice.

Ask whether the carveouts burn off at a defined milestone, such as stabilization or a debt yield test, since some structures release the completion guaranty once the property reaches a stated performance level.

Covenants might include minimum liquidity or net worth requirements for the sponsor, reporting deadlines, restrictions on additional debt or distributions, and leasing or renovation milestones. A covenant that is technically achievable but expensive to monitor, like weekly reporting, still has a real cost even if it never triggers a default.

Compare the covenant package against the actual plan timeline before signing, since a milestone covenant set to a date the renovation schedule cannot realistically meet creates an avoidable default risk the sponsor built into the deal at signing.

Check for a prepayment penalty or minimum interest period, sometimes called a lockout or yield maintenance period, that requires paying a minimum number of months of interest even if the loan is repaid early. Also note the term sheet's own expiration date: most expire in 5 to 10 business days, after which the lender is not bound by the quoted terms.

A minimum interest period matters most on a deal that might refinance or sell ahead of schedule, since paying it out can add a meaningful cost to an early exit that otherwise looked like a win for the sponsor.

The most common mistake is signing a term sheet and paying the deposit before checking the sizing tests against the actual appraisal and budget, only to find the loan amount shrinks once third-party reports come in. The second mistake is treating fee and rate as the only negotiable items, when extension conditions, carveout scope, and reserve mechanics often matter more to the deal's actual risk.

A third mistake is assuming every term sheet from a given lender uses the same structure; pricing and structure can vary meaningfully by asset class and deal size even within one lender's platform, so each term sheet needs its own full review.

H Equities structures term sheets for first mortgage bridge loans, mezzanine loans, preferred equity, and co-GP equity, and works through sizing, reserves, and structure with sponsors before terms are finalized. Sponsors evaluating multiple term sheets often bring them to a capital advisor or directly to H Equities for a side-by-side read before signing.