A commercial loan term sheet is the first document in the process that contains real numbers, and it is also the document borrowers read fastest and understand least. Most of the attention goes to two lines: the loan amount and the rate. The lines that decide whether the deal survives underwriting sit further down the page, in the prepayment paragraph, the recourse carve-outs, the reserve schedule and the list of conditions precedent.
This guide walks an illustrative term sheet line by line, in the order a lender usually presents it, and explains what each entry commits you to. The figures shown are placeholders used to demonstrate structure, not quoted terms. Loan approval, terms, leverage, closing timelines and funding remain subject to lender underwriting, transaction structure and eligibility requirements.
What a term sheet is, and what it is not
A term sheet is issued after a credit officer reviews a summary package: property description, rent roll, trailing operating statements, a purchase contract or payoff figure, and a sponsor bio with a personal financial statement. It sets out the structure the lender will take to full credit approval. Two things follow. Every number in it is conditioned on an appraisal, an environmental report and often a property condition assessment not yet ordered. And while most of the document is non-binding, a short list of clauses binds the moment you countersign.
The anatomy of a commercial loan term sheet
The table below is an annotated sample. The middle column shows the form a lender typically uses; the right column is what that entry actually decides. Entries are illustrative placeholders, not quoted terms.
| Line item | Illustrative entry | What it determines |
|---|---|---|
| Borrower | Single-purpose entity to be formed, holding no other assets | Whether you form a new LLC, and whether other entity debt is quarantined |
| Guarantor | Named principals above a stated ownership threshold | Who signs personally, and whether a passive investor is pulled in |
| Loan amount | The lesser of a dollar figure, a percentage of value, a percentage of cost, and the amount a minimum coverage test supports | Your real proceeds. The lowest of the four tests controls, and it is rarely the figure printed first |
| Collateral | First deed of trust, assignment of leases and rents, UCC filing on fixtures | What the lender can reach, including equipment or a franchise |
| Interest rate | A named index plus the lender’s quoted spread, fixed or floating, with a stated lock point | Whether the rate sets at application, commitment or closing, and who carries movement between |
| Term | Years to maturity, sometimes with extension options and conditions | When you must repay or refinance, and what buys more time |
| Amortization | A schedule often longer than the term, sometimes after interest-only | Your payment, and the balloon balance left at maturity |
| Prepayment | Yield maintenance, defeasance, a step-down schedule, or lockout then an open window | What an early sale or refinance costs |
| Recourse | Non-recourse with carve-outs, partial recourse, or full recourse | Whether your personal balance sheet is exposed, and under what conduct |
| Reserves | Monthly deposits for taxes, insurance, replacements, tenant improvements and leasing | Cash that leaves the property monthly and never reaches distributions |
| Covenants | Coverage and leverage tests, reporting deadlines, transfer restrictions | What defaults you without a missed payment |
| Cash management | None, springing, or hard lockbox from day one | Whether the lender can intercept revenue on a trigger event |
| Conditions precedent | Appraisal, environmental report, property condition assessment, survey, title, estoppels, insurance, credit approval | The critical path, and what to order first |
| Expenses and deposit | Good-faith deposit applied to third-party costs, refundable only if unused | Money genuinely at risk on signature |
| Exclusivity | A period in which you agree not to shop the transaction | Whether a backup lender can stay warm |
| Expiration | The date by which the sheet must be countersigned | How long you have to compare alternatives |
Amortization versus term
These two lines are read together or not at all. A ten-year term on a thirty-year amortization is not a thirty-year loan; it is a ten-year loan with a large balance outstanding at maturity. Work out that balloon figure before signing, because it, not the monthly payment, sets your refinance risk. Where interest-only later steps up to amortizing payments, check that projected net operating income still clears the coverage covenant on the higher payment.
Prepayment
Prepayment language decides what your exit costs. A step-down schedule declines annually and models easily. Yield maintenance compensates the lender for lost interest and can be expensive when benchmark rates have fallen since closing. Defeasance substitutes securities for the property as collateral, with its own cost and timeline. Ask two questions of whichever structure appears: is there an open window before maturity, and is the loan assumable by a qualified buyer.
Recourse and the carve-outs
Non-recourse rarely means what borrowers assume. The standard carve-out guaranty makes named principals liable for losses caused by specific conduct: fraud, misapplication of rents or insurance proceeds, waste, unpermitted transfers, unpaid taxes and environmental liability. A second category springs the whole loan to full recourse, usually on a voluntary bankruptcy filing or an unpermitted subordinate lien. Read that paragraph as closely as the rate line.
Reserves, covenants and cash management
Reserves reduce distributable cash flow from month one. Tax and insurance escrows are near universal; replacement reserves are stated per unit or per square foot per year; tenant improvement and leasing reserves appear wherever leases roll before maturity. A coverage covenant measured quarterly on a trailing twelve-month basis can be tripped by one large repair or a single vacancy, and the usual consequence is a cash management trigger rather than default. Confirm the cure right, the cure period, and whether an equity contribution counts as a cure.
Which clauses bind you the moment you sign
- The expense deposit, and your obligation to pay third-party costs whether or not the loan closes.
- Exclusivity, which prevents a parallel process with another lender.
- Confidentiality, which can restrict what you share with a seller or an equity partner.
- Any indemnity covering the lender’s investigation and due diligence costs.
Exclusivity is worth negotiating hardest. If the period runs past your financing contingency, you can reach the end of it with no loan and no time to place a backup. Ask for it to lapse automatically if credit approval has not issued by a stated date.
Ten questions to work through before you countersign
- Which sizing test produced the loan amount, and what happens if the appraisal lands below the contract price?
- Does the rate set at signing, at commitment or at closing?
- What is the projected balance at maturity under the stated amortization?
- What does an early payoff cost in year one, year three and the final year?
- Is the loan assumable, and what does the lender require of an assuming buyer?
- Which carve-outs trigger loss recourse, and which spring full recourse?
- What monthly reserve deposits are required, and do any cap out?
- How is the coverage covenant measured, how often, and what is the cure right?
- What triggers cash management, and what releases it?
- Which third-party reports must the lender order?
Items one, three and four read together tell you whether the structure fits your hold period. If you intend to sell in year four and the prepayment structure runs to year seven, the sheet is wrong for the business plan whatever the pricing looks like. An experienced commercial real estate lender, or an intermediary comparing sheets side by side, surfaces that mismatch before the deposit is spent.
How term sheets are actually negotiated
Credit officers expect a response, not silent acceptance. The items that move most readily cost the lender little: the interest-only period, the timing of a rate lock, the burn-off of a replacement reserve, the definition of a covenant cure, and the exclusivity window. Leverage and the coverage test move least, since credit policy sets them. Send one consolidated markup rather than a drip of asks, and support each request with a fact from the file: a trailing twelve-month statement showing stable collections, a lease abstract showing a long-dated tenant, a schedule of completed capital work. Where a bank quote is compared against a bridge structure, confirm both sheets define net operating income the same way, or the two commercial real estate loan proposals are not measuring the same deal.
What this means for your deal
Treat the commercial loan term sheet as a structure document, not a price quote. Before the deposit leaves your account, model three things: the balloon balance at maturity, the cost to exit in the year you actually intend to sell or refinance, and the coverage covenant tested on the stressed payment rather than the initial one. If all three work, the pricing conversation is worth having. If one fails, no amount of spread negotiation repairs the structure.
The edit that most often protects a borrower is procedural: end exclusivity inside your financing contingency, and keep a second lender current on the file until full credit approval issues. Mission Valley Capital reviews term sheets across a network of local banks, national banks, correspondent lenders, alternative lenders and private-money sources, where the comparison usually turns on structure rather than pricing. Loan approval, terms, leverage, closing timelines and funding remain subject to lender underwriting, transaction structure and eligibility requirements.
What to do with this
- Understand the testKnow what the lender is measuring before you try to pass it.
- Apply it to your dealRun your own numbers through the same sequence.
- Fix what fails earlyProblems found before application are cheaper than problems found at closing.
- Bring it to usWe will tell you how the market is actually treating this today.
Related reading
The technical detail behind the products on this page.
Frequently asked questions
Is a commercial loan term sheet legally binding?
Most of it is not. The sizing, pricing and structure sections are expressly conditioned on full credit approval and on third-party reports not yet completed. A short list normally binds on countersignature: the expense deposit, exclusivity, confidentiality and any indemnity for the lender’s due diligence costs. Read those four paragraphs first, since they create obligations whether or not the loan closes.
What is the difference between a term sheet, a letter of intent and a commitment letter?
A term sheet or letter of intent is issued early, from a summary package, and reflects a credit officer’s view of structure. A commitment letter follows full credit approval and receipt of third-party reports, and lists the remaining closing conditions. Terms most often change between the two, because the appraisal and property condition report by then produce numbers the original sheet only assumed.
Can the loan amount change after I sign the term sheet?
Yes. The stated amount is usually the lesser of several tests, including a percentage of appraised value, a percentage of total cost and the amount a minimum debt service coverage requirement supports. If the appraisal lands below the purchase price, or underwritten net operating income falls short of the offering package, the binding test changes and proceeds fall.
How long should I expect a term sheet to stay valid?
Term sheets carry an expiration date for countersignature and, separately, an outside closing date. Both are negotiable and both should be checked against your purchase contract. If the sheet expires before your contingency date, or the outside closing date sits after your contractual close, fix that gap in writing before signing.
Take the next step on this deal
Tell us where you are in the process. We will tell you what underwriting needs next and how long the remaining steps usually take.
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Mission Valley Capital10234 Rayford Drive Unit 100
San Diego, CA 92026
Contact
(844) 347-1070(858) 304-3204 · (858) 304-3198
info@missionvalleycapital.com
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California Finance Lenders License #60DBO-57763
Commercial finance company. Financing subject to applicable lender underwriting and transaction requirements.
Loan approval, terms, rates, leverage, closing timelines and funding remain subject to lender underwriting, transaction structure and applicable eligibility requirements. Mission Valley Capital operates under California Finance Lenders License #60DBO-57763. Nothing on this page is an offer of credit, a rate quote, or a commitment to lend.
