📈 3 Critical Items on Every Lender Term Sheet

Term sheets are like snowflakes - no two are the same!

You found a potential multifamily deal so you reach out to a lender and ask them what specific terms they can offer you. After a few days, the lender emails you back with what is known in the industry as a term sheet.

Simply defined, a term sheet is a document that outlines the general structure under which the lender would be willing to extend credit. You will quickly see that term sheets can be very complex and have a lot of information.

Here are 3 critical items I look for on every term sheet:

1. Loan Amount

The loan amount (AKA proceeds) is the exact amount of money the lender is willing to loan you based upon their analysis and credit policy. This could be less than what you originally asked for.

The lender could determine the loan amount based off a number of factors including debt service coverage ratio, debt yield, loan-to-value, or more (I'll explain these in a future issue).

Confirm with the lender exactly when these proceeds are being paid out. The more proceeds you receive up front, the better.

2. Fees

As a commercial real estate investor, you need to understand exactly what fees the lender is charging you (and ultimately your investors).

The most common are origination fees. This is an upfront fee charged by a lender to process a new loan application. These are typically 1% (100 bps) of the loan amount but can sometimes be less on larger deals upwards of $30MM.

Pro tip: Origination fees can be negotiated. But don't tell them I told you so!

Other fees you may come across are underwriting, loan document, and application fees. Just be aware of what fees you are being charged and make sure to ask if these will go towards the purchase price or if they are a sunk cost.

3. Covenants

A lender may include certain conditions on the term sheet to make them more comfortable providing the loan. Financial loan covenants are designed to mitigate lender risk and to provide an early warning sign.

Example: "Borrower agrees that the Project is to maintain a DSCR of 1.25 or higher tested quarterly. This covenant is measured on a trailing twelve-month basis starting on 1/1/24."

By signing the term sheet, you as the borrower are agreeing that you will (or will not) do something outlined in the covenants. Failing covenants can result in the lender putting your loan in default status.

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Until Next Saturday,

Justin

Speaking of term sheets, here are 3 financing and lender contacts to add to your rolodex. We have had great success with:

• Larry Wilemon, Walker & Dunlop, [email protected]

• Daniel Friedman, Angel Oak, [email protected]

• Ryan Duff, Arbor, [email protected]