A term sheet from a commercial lender is a document used when lenders express interest in extending credit to a potential borrower. It is used to outline the basic terms of a potential loan prior to fully underwriting the deal and issuing a firm commitment letter.

Keep in mind, every term sheet is different. Here’s the anatomy of a commercial real estate term sheet:

Introduction

1. Introduction: Every term sheet commences with a standard introduction. While specific wording may vary across banks, it usually expresses gratitude for the opportunity to collaborate and some minor legal language. This introductory paragraph serves as a transitions into the specific details of the proposed deal.

2. Recipient and Introduction: Each term sheet begins by addressing either the representative of the Borrowing entity or an individual with a banking relationship representing that entity.

Project Terms

This section of the term sheet can be lengthy but it is intended to outline, at a high level, specific details about the proposed loan.

1. Borrower Identification: This section identifies the borrowing entity, which is typically an LLC in the context of real estate transactions.

2. Loan Purpose: Describes the intended use of the loan funds.

3. Loan Amount: Specifies the proposed loan amount. It may differ from the Borrower's initial request based on the lender's analysis, often considering factors like credit policy.

4. Interest Rate: Outlines the proposed interest rate for the loan, indicating whether it's fixed or floating. It may also mention potential rate adjustments during the loan term.

5. Fees: States the fees associated with the proposed loan, typically including an origination fee and, occasionally, fees for specific transactions or draws.

6. Maturity (Term): Specifies the proposed loan term, often with provisions for extension options. The term aligns with the Borrower's needs and the lender's risk tolerance.

7. Payment Structure: Describes the proposed payment structure, including whether it's interest-only, with principal due at maturity, or structured differently.

8. Amortization Period: Outlines the proposed amortization period, especially relevant for loans that aren't fully amortizing. It may specify the term and amortization schedule.

9. Collateral: Details the proposed collateral securing the loan, such as a first lien mortgage on a specific property, assignment of rents and leases, and any relevant improvements.

10. Guarantor(s): Identifies individuals who will provide personal guarantees for the loan. A "joint and several" guarantee is common, meaning each guarantor is responsible for the entire loan balance, and collectively, they are accountable for repayment.

Covenants

This section outlines requirements that the Borrowing entity must adhere to during the loan term. These terms can vary from lender to lender. Here are a few examples of what to expect:

• Debt Service Coverage Ratio (DSCR): The Borrower must maintain a DSCR of X throughout the loan term, as demonstrated in financial statements and periodically checked by the bank.

• Relationship: The Borrower is required to maintain its primary operating accounts with the lender.

• Additional Debt: The Borrower cannot take on additional debt related to the collateral property without the lender's written consent.

• Subordination: Existing debts and amounts owed on the collateral property must be subordinated.

• Inspections: The bank may require property inspections before disbursing draw proceeds.

• Liquidity: The Borrower must maintain a specified level of liquidity, as evidenced by financial statements and periodically verified by the lender.

Financial Reporting

Financial reporting requirements on a commercial loan term sheet outline the Borrower's obligation to provide the lender with periodic financial statements and other financial information during the term of the loan.

These reports serve as a means for the lender to monitor the financial health of the Borrower and assess the ongoing risk associated with the loan.

Closing Items Needed

Since a term sheet only shows interest from a bank to extend credit, additional items will be needed for the bank to confirm their assumptions and get them comfortable with actually closing the loan.

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