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A term sheet is a non-binding document issued by a commercial real estate lender that outlines the proposed terms of a loan. It is the first formal indication that a lender is interested in funding a deal and serves as the blueprint for everything that follows: underwriting, commitment, and closing. Term sheets are typically issued after a lender has reviewed the initial deal package but before full underwriting begins, sitting in the critical gap between "we're interested" and "we're committed." For brokers, the term sheet is where a deal starts to become real.
What a Term Sheet Includes
Term sheets vary by lender, but most cover the same core elements. Here is what you should expect to see and what each section means for the deal.
Loan Amount and Structure
The proposed loan amount, often expressed as a range or tied to a maximum loan-to-value (LTV) ratio. The structure section specifies whether the loan is senior debt, mezzanine, or a combination. For SBA 504 deals, this section details both the bank first mortgage and the CDC debenture portions.
Interest Rate
Stated as a fixed rate, a floating rate tied to a benchmark (SOFR, Prime, or Treasury), or a range. Term sheets issued early in the process often quote a rate range rather than a locked number. The final rate is typically set at commitment or closing, depending on the lender and lock provisions.
Loan Term and Amortization
The loan term is how long before the loan matures. Amortization is the schedule over which the loan is repaid. These are usually different in commercial real estate. A typical structure might be a 10-year term with 25-year amortization, meaning the borrower makes payments as if the loan were 25 years, but the remaining balance comes due as a balloon payment at year 10.
Prepayment Terms
How much it costs to pay off the loan early. This section is critical and varies dramatically by lender type. CMBS lenders typically require defeasance or step-down prepayment penalties. Banks may offer more flexibility with declining penalties or even open prepayment after a certain period. The prepayment structure directly affects the borrower's exit options, so read this section carefully.
Recourse
Whether the loan is non-recourse (secured only by the property) or recourse (the borrower is personally liable). Most CMBS and agency loans are non-recourse with standard carve-outs (also called "bad boy" guarantees) that trigger personal liability for specific actions like fraud or voluntary bankruptcy. Bank loans may require full or partial recourse.
Escrows and Reserves
Requirements for the borrower to set aside funds in escrow accounts for property taxes, insurance, tenant improvements, leasing commissions, or capital expenditures. Some lenders require replacement reserves, where the borrower deposits money monthly to cover future capital needs. These escrows reduce the borrower's available cash flow, so they are worth negotiating.
Closing Conditions
A preliminary list of what the lender will require before funding. This typically includes satisfactory appraisal, environmental assessment (Phase I, sometimes Phase II), title insurance, survey, borrower financials, and often a DSCR minimum and debt yield floor. The term sheet version is usually high-level. The detailed conditions come in the commitment letter.
Fees
Origination fee (typically 0.5% to 1.0% of the loan amount), application or processing fees, legal fees, and any good-faith deposit required to proceed. Some term sheets also reference third-party costs like appraisal and environmental reports that the borrower is responsible for whether the loan closes or not.
Term Sheet vs Commitment Letter vs LOI
These three documents represent different stages in the lending process. Confusing them leads to misaligned expectations.
| Document | When Issued | Binding? | Level of Detail |
|---|---|---|---|
| Letter of Intent (LOI) | Very early, often before any analysis | Non-binding | High-level interest, minimal terms |
| Term Sheet | After initial deal review, before underwriting | Generally non-binding | Core terms spelled out, some conditions |
| Commitment Letter | After underwriting is complete | Binding (with conditions) | Full terms, detailed closing conditions |
In practice, some lenders skip the LOI stage entirely and go straight to a term sheet. Others use the terms interchangeably. The important distinction is between the term sheet and the commitment letter. A term sheet means "we want to do this deal on roughly these terms." A commitment letter means "we will fund this loan if you meet these specific conditions."
How to Read a Term Sheet Like a Broker
When a term sheet lands on your desk, resist the urge to jump straight to the interest rate. Rate matters, but it is only one component of the total cost and risk profile. Here is how experienced brokers evaluate term sheets.
Look at the prepayment structure first. A borrower who gets a great rate but is locked into a five-year defeasance requirement may end up paying far more than someone with a slightly higher rate and a simple 1% prepayment penalty. Exit flexibility has real economic value.
Check the recourse language. "Non-recourse with standard carve-outs" sounds clean, but the devil is in the carve-out list. Some lenders include aggressive carve-outs that effectively make the loan recourse in all but name. Compare carve-out language across term sheets and push back on anything overly broad.
Review escrow and reserve requirements. Lenders who require large upfront reserves or monthly replacement reserve deposits reduce the borrower's effective cash flow. Compare the actual cost of reserves across competing term sheets.
Pay attention to conditions and outs. Phrases like "subject to satisfactory completion of due diligence" give the lender significant flexibility to change terms or walk away. The more specific the conditions, the more reliable the term sheet.
Negotiating the Term Sheet
Everything on a term sheet is negotiable until the commitment letter is signed. The leverage a borrower has depends on the quality of the deal, the competitive landscape, and how much the lender wants the business.
Brokers who present competing term sheets from multiple lenders have the strongest negotiating position. When a lender sees that two competitors have quoted 6.75% with no recourse, they are more likely to sharpen their pencil. This is one of the core advantages of working with a broker rather than going to a single lender directly.
When structuring the deal package, include all the information the lender needs to issue a competitive term sheet upfront. Incomplete packages lead to wider rate ranges, more conditions, and slower turnaround. The cleaner the initial submission, the tighter the initial terms.
For a deeper look at how different lender types approach commercial deals, see the commercial loan products guide.
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Try Janover Pro →This content is for informational and educational purposes only and does not constitute financial, legal, tax, or investment advice. Janover Pro is a technology platform that connects commercial mortgage brokers with lenders. Janover Pro is not a lender and does not make lending decisions. Loan terms, rates, eligibility, and availability are determined by individual lenders and are subject to change without notice. Consult qualified financial and legal professionals before making financing decisions.
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