📈4 Most Important Sections of a Term Sheet

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Author

Justin Goodin
February 03, 2024

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Before making any offer to purchase a commercial multifamily deal, it’s important to understand your debt terms. Receiving a preliminary term sheet from a lender can let you know exactly what to expect, so you don’t run into any surprises later on.

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 the 4 most important sections of a commercial real estate 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.

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. Origination and other fees can be negotiated.

 

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 1/1/25."

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.

4. Prepayment Penalty

A prepayment penalty is a fee charged to borrowers if they attempt to repay their loan early. When a lender issues a loan, they typically want to lock in their profit for a certain amount of time. The prepayment penalty is a way to compensate them for their financial loss if the loan is paid off early.

This information is usually specified on the term sheet. If not, clarify with the lender exactly how the prepayment penalty works.

👋 Do you have an active deal and need the best possible financing terms? Reach out to Larry Wilemon with Walker & Dunlop. Our team has transacted with Larry several times and we highly recommend his services!

Larry Wilemon, [email protected]

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