How to Compare Commercial Loan Term Sheets & Financing Proposals
When sourcing commercial real estate debt, sponsors frequently receive multiple term sheets from competing banks, debt funds, CMBS conduit desks, and life companies. Comparing financing proposals based solely on the headline interest rate is a critical mistake. A thorough term sheet analysis evaluates the Effective Cost of Capital, fee structures, ongoing covenants, and execution certainty.
Indicative Underwriting Matrix
Term sheets are non-binding indicative proposals. Only a formal Loan Commitment Letter issued after credit committee approval legally obligates the lender.
Calculating the True Effective Cost of Capital
A lender advertising a 6.25% note rate may appear superior to a competitor offering 6.75%. However, calculating the true Effective Annual Cost (EAC) requires factoring in all ancillary expenses:
1. Upfront & Exit Fees: Origination points (1.0%–2.0%), lender legal fees ($15,000–$40,000), administrative underwriting fees, and exit fees (1.0% upon payoff).
2. Escrow & Reserve Requirements: Substantial upfront interest reserves, deferred maintenance holdbacks, and monthly replacement escrows tie up borrower capital, reducing effective yield.
3. Amortization vs. Interest-Only: A 3-year interest-only term conserves operating cash flow, often providing higher net returns than a lower rate with immediate principal amortization.
Evaluating Lender Execution Certainty and Re-Trading Risk
The greatest hazard in commercial debt sourcing is "re-trading"—where a lender issues an aggressive term sheet to win the business and collect a $15,000 deposit, only to downsize loan proceeds or widen the spread weeks later during credit committee review.
To protect against re-trading, ask the lender three critical diligence questions: Has this loan been pre-screened by the Chief Credit Officer? Does the term sheet reflect signed credit committee approval? What specific conditions could cause proceeds to be downsized during underwriting?
Frequently Answered Financing Questions
Verified answers to common borrower and broker inquiries regarding loan sizing, guidelines, and execution.
Is a commercial loan term sheet legally binding on the lender?
No. A commercial loan term sheet is a non-binding indicative proposal outlining intended terms; only a formal Commitment Letter issued after full credit committee approval binds the lender.
Borrowers should verify whether term sheets have been reviewed by senior credit officers before wiring non-refundable expense deposits.
Submit Financing Scenario →What is lender re-trading in commercial real estate financing?
Re-trading occurs when a lender changes loan terms (lowering loan proceeds, increasing interest rates, or adding recourse) late in diligence after the borrower has spent money on third-party reports.
Working with reputable institutional capital providers and experienced commercial mortgage brokers minimizes re-trading risk.
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