How to read a commercial loan term sheet

Investor-owned commercial real estate is the setting: apartments, industrial buildings, retail, and the other income property this desk arranges. A consumer mortgage disclosure is a different world. The Consumer Financial Protection Bureau supervises covered institutions for federal consumer financial law. Its public site is about consumer finance. A commercial loan term sheet is not a consumer Loan Estimate, and the CFPB does not issue it. Do not look for consumer-mortgage protections inside a commercial sheet and assume they are there. Counsel can tell you what a specific document legally is. This essay is how a commercial mortgage arranger reads the page, not a legal opinion.

This office treats a term sheet and a letter of intent as non-binding until the lender issues a written commitment. A sheet can say 'indicative,' 'subject to due diligence,' or 'not a commitment.' Even a sheet that sounds confident is not money in escrow. Appraisal, environmental review, title, insurance, and a committee that has not met yet can all change the terms or end the file. Capital Market Funds is not a Fannie Mae DUS lender. It is not the lender issuing the sheet. If we arrange the introduction, the commitment still has to come from the capital source.

Five lines to read before you celebrate

Debt service coverage, or DSCR, is property income divided by the annual loan payment. A sheet that 'sizes to 1.25x' is using a test. It is not a promise that your income will be counted the way you counted it. What people mean by a workable ratio, without a rate, is what is a good DSCR. The DSCR calculator divides numbers you type. It does not read the sheet for you.

Loan to value, or LTV, compares the loan amount with a value. Ask whose value: an appraisal that does not exist yet, or a price in a contract. Prepayment is what it costs to pay the loan off early. Some notes use a declining percentage. Some use a formula meant to keep the lender's yield. Some, especially in a securitized loan, replace the payments with other collateral instead of a simple payoff. The glossary names those designs. The sheet should say which one applies, and for how many years you cannot prepay at all.

Recourse is who pays if the property does not. Full recourse reaches a guarantor. Non-recourse is limited to the property except for listed bad acts. Those are different promises, and the short Arizona note is recourse and non-recourse. That note is not legal advice either. Reserves are cash the lender holds back for taxes, insurance, repairs, or a renovation. A reserve is not extra proceeds you can spend. A mini-perm is a short loan after construction, with its own term and its own sheet. Do not read a mini-perm discussion as a long-term commitment.

What to ask before you rely on the sheet

Which figures are estimates, and which ones are conditions that can fail? When does the sheet expire? Does any rate hold, or is the rate 'market at closing'? Who must still approve it inside the lender? What deposit is refundable if the lender walks away? Write the answers down. A phone call that 'the committee loves it' is not a written commitment.

Craig Hoebing arranges commercial mortgages from Scottsdale under CMB-1047342 and NMLS 1445066. We will not publish a sample rate, a sample LTV, or a sample term sheet with blanks filled in. A filled-in example would be read as an offer. The lender's commitment, when it exists, is the document that binds that lender. Your counsel should read it. We are not your counsel.