Definition
A term sheet is the document that translates a lender's preliminary underwriting into a specific proposal: the loan amount, interest rate or pricing spread, term and any extension options, amortization structure, required reserves, key covenants, fees, and closing conditions. It is typically issued after an initial review of the deal but before full underwriting and due diligence begin, serving as the framework both parties negotiate around before drafting the far more detailed and legally binding loan agreement. Most substantive terms in a term sheet are explicitly non-binding, meaning either party can walk away if due diligence reveals new information, though certain provisions are typically binding immediately upon signing, most commonly a good-faith deposit or application fee, an exclusivity or no-shop period during which the borrower agrees not to solicit competing offers, and confidentiality obligations. Sponsors should read every term sheet carefully before signing, since accepting one, even though most terms are non-binding, often commits real money in the form of a deposit and forecloses the ability to shop the deal to other lenders during the exclusivity period, even if the final loan terms shift somewhat during underwriting.
How It Works
After a lender's initial review of a loan request, whether based on a preliminary package or a brief conversation, the lender issues a term sheet reflecting the terms they would offer subject to full underwriting and due diligence. The borrower reviews it, often negotiating specific points such as leverage, rate, extension options, or recourse before signing. Once signed, the borrower typically pays a deposit to cover third-party report costs and formally engages the lender's underwriting process, which includes ordering the appraisal and other due diligence items. As due diligence progresses, if findings differ materially from what was assumed when the term sheet was issued, such as a lower appraisal or a discovered title issue, the lender may propose revised terms, sometimes called a re-trade, which the borrower can accept, negotiate further, or reject and walk away from, typically forfeiting only the non-refundable portion of any deposit already spent on due diligence.
Example
For example, a lender issues a term sheet for a $9,000,000 bridge loan at 9.5% interest, 24-month term with one 12-month extension option, secured by a $75,000 refundable deposit and a 30-day exclusivity period. The sponsor negotiates the extension fee down from 0.50% to 0.25% before signing. During due diligence, the appraisal comes in at $12,000,000, supporting the requested leverage, and the deal closes on the originally negotiated terms roughly six weeks after the term sheet was signed, with the $75,000 deposit credited toward closing costs.
Why It Matters
The term sheet stage is where a sponsor has the most negotiating leverage, since it occurs before the lender has invested significant time and cost in full underwriting, and before the borrower has committed to exclusivity or paid a substantial deposit. Understanding which provisions are binding and which are not helps sponsors negotiate confidently and avoid unpleasant surprises, such as losing a deposit or being locked out of shopping the deal elsewhere if the lender later proposes less favorable terms during underwriting.
In depth
Reading What Is Binding Versus What Is Not
A term sheet's most consequential provisions are often the shortest ones on the page. A deposit clause, an exclusivity or no-shop period, and a confidentiality obligation typically bind the borrower immediately upon signature, even while pricing, leverage, and structure remain explicitly subject to underwriting. Sponsors sometimes focus their negotiating attention on the rate and miss that the exclusivity period, often 30 to 45 days, prevents them from shopping the deal to a competing lender during that window even if underwriting reveals the original lender's terms have softened.
A carefully drafted term sheet states plainly which sections are binding, but not every lender's document does this clearly, so sponsors should ask their attorney to flag binding provisions explicitly before signing rather than assuming the entire document is a non-binding proposal. When a document is ambiguous about which provisions survive a decision to walk away, sponsors should request written clarification rather than assuming the safer, more limited interpretation applies.
How Multiple Term Sheets Compare Across Lenders
Comparing term sheets from different lenders requires looking past the headline rate to the full package, since two proposals with similar pricing can differ substantially in leverage, reserve requirements, recourse scope, and fee structure. A lower rate paired with a larger required interest reserve or a stricter liquidity covenant can produce less net proceeds to the borrower than a slightly higher rate with lighter reserve requirements, making an apples-to-apples comparison harder than it first appears.
Sponsors evaluating competing term sheets often build a simple comparison table covering rate, leverage, term and extension options, reserve requirements, recourse, and total fees, since a side-by-side view surfaces tradeoffs that reading each document in isolation tends to obscure. This comparison exercise often reveals that the lender with the most aggressive headline rate is not actually offering the most favorable overall economics once every term is accounted for.
Documentation and Legal Mechanics of Moving to Closing
Once signed, a term sheet typically triggers a formal engagement letter with the lender's counsel and the ordering of third-party reports, converting the preliminary proposal into an active underwriting file. The loan agreement that eventually gets drafted expands the term sheet's summary terms into full legal language covering representations, covenants, default provisions, and carveout guaranty scope, meaning the term sheet functions more as a negotiating framework than a complete description of the borrower's eventual obligations.
Sponsors should expect their attorney to review the full loan agreement against the signed term sheet closely, since a lender's standard loan document template sometimes includes provisions, such as a broader cross-default clause or a more restrictive transfer covenant, that were not specifically addressed in the summary term sheet. Flagging these gaps during the loan agreement review, rather than after signing, preserves the sponsor's ability to negotiate a change before the document becomes final and binding.
Worked Scenario: Comparing Two Competing Term Sheets
As an illustration, a sponsor receives two term sheets for a $7,000,000 acquisition loan. Lender A offers 8.75% interest, 65% LTV, and a $400,000 interest reserve requirement. Lender B offers 9.25% interest, 70% LTV, and no separate reserve requirement. On the higher-leverage Lender B proposal, the sponsor needs roughly $350,000 less equity at closing due to the higher advance rate, even though the rate runs 50 basis points higher, illustrating why comparing net proceeds and required equity, not just rate, determines which term sheet is actually more favorable for a specific sponsor's capital position. The comparison illustrates a broader pattern: sponsors who model required equity alongside rate, rather than ranking offers by rate alone, more often select the term sheet that actually fits their available capital.
Negotiation Points Before Signing
Sponsors have the most leverage to negotiate a term sheet's terms before signing, since signing typically commits a deposit and forecloses shopping the deal elsewhere during the exclusivity period. Once a deposit is paid and the exclusivity period begins, the sponsor's practical ability to push back on unfavorable terms narrows considerably, even though most of the term sheet remains formally non-binding until closing.
- Whether the deposit is refundable and under what circumstances
- The length of the exclusivity or no-shop period
- How re-trade scenarios are handled if diligence changes assumptions
- Extension option terms and associated fees
- Recourse scope and specific carveout guaranty triggers
H Equities
H Equities issues clear, detailed term sheets for its bridge, mezzanine, and preferred equity offerings, outlining pricing, structure, and conditions upfront so sponsors can evaluate a proposal before moving into full underwriting. Learn more
Frequently Asked Questions
Is a term sheet legally binding?
Most substantive terms, like rate, leverage, and structure, are non-binding and subject to change based on full underwriting and due diligence. However, specific provisions such as deposit requirements, exclusivity periods, and confidentiality clauses are typically binding immediately upon signing. Sponsors should ask their lender directly which specific provisions are binding before signing.
What is a re-trade?
A re-trade occurs when a lender proposes revised terms after the term sheet is signed, usually because due diligence revealed information, such as a lower appraisal or weaker financials, that differs from what was assumed when the original term sheet was issued.
How much detail should a good term sheet include?
A thorough term sheet should specify loan amount, rate or pricing spread, term and extension options, amortization, key covenants and reserves, recourse structure, fees, and closing conditions, giving the borrower enough detail to meaningfully compare offers from multiple lenders. More detail upfront reduces the chance of a significant re-trade once formal underwriting begins.
Related Terms
Lender Due Diligence
The lender's own underwriting investigation into a property, sponsor, and loan request, conducted independently of and in parallel with the borrower's own due diligence process.
Loan Covenants in Commercial Real Estate
Contractual obligations in a loan agreement that require or restrict specific borrower actions, such as maintaining minimum liquidity or DSCR, throughout the life of the loan.
Non-Recourse Loan
A loan where the lender's only recourse in default is the mortgaged property itself, without a personal guarantee against the borrower's other assets.
Sponsor in Commercial Real Estate
The individual or company that sources, structures, manages, and operates a commercial real estate investment, also known as the general partner (GP) or operator.
Bridge Loan in Commercial Real Estate
A short-term loan (typically 6-36 months) used to "bridge" the gap between acquiring or repositioning a property and securing permanent financing.