Commercial Loan Commitment Letter vs Term Sheet: Key Differences
In commercial real estate lending, navigating the transition from an initial Term Sheet (or Letter of Intent) to a formal Loan Commitment Letter is critical. Confusing an indicative non-binding term sheet with a legally binding commitment letter can lead to missed closing deadlines and lost acquisition earnest money deposits.
Key Financing Parameters & Standards
Institutional Market Reference
Term Sheet StatusIndicative, non-binding expression of interest; subject to full underwriting and credit committee approval
Commitment Letter StatusLegally binding contract executed after full credit committee sanction and third-party diligence
Exclusivity ClauseBorrower agrees not to seek financing from other lenders for 30 to 60 days upon signing term sheet
Key ContingenciesAppraisal value, Phase I ESA clearance, structural PCA, and background KYC approval
Lender Revocation RightsCommitment letters contain strict expiration dates and material adverse change (MAC) clauses
* Term sheet provisions regarding fee reimbursements and exclusivity are legally binding even if the loan terms are non-binding.
Term Sheets / LOIs: Indicative Sizing and Negotiation Frameworks
A Term Sheet (or Letter of Intent) is issued early in the financing process by a loan officer or broker. It outlines proposed terms: estimated loan proceeds, interest rate spread, amortization schedule, term length, prepayment penalties, and required covenants.
Crucially, a term sheet is non-binding on the lender regarding the loan terms. It represents an invitation to underwrite the deal. However, two sections are legally binding upon execution: (1) The Borrower’s agreement to fund the expense deposit; and (2) The Exclusivity Clause prohibiting the borrower from shopping the deal elsewhere during due diligence.
A formal Loan Commitment Letter is issued only after the lender’s internal credit committee has reviewed the complete underwriter credit memo, MAI appraisal, Phase I environmental report, and borrower credit background.
The commitment letter represents a binding contract. If the borrower satisfies the itemized closing conditions (clean title, executed leases, organizational resolutions), the lender is legally obligated to fund the loan. Borrowers typically pay a non-refundable commitment fee (0.5% to 1.0% of the loan amount) upon signing.
Material Adverse Change (MAC) Clauses and Closing Contingencies
Even a binding commitment letter contains protective lender contingencies. Key conditions include: (1) Appraisal verification that the property meets minimum LTV and Debt Yield hurdles; (2) Absence of any Material Adverse Change (MAC) in property cash flow or tenant occupancy; and (3) Satisfactory lender legal document execution.
Frequently Answered Questions
Common Questions About Commercial Loan Commitment Letter vs Term Sheet: Key Differences
Direct, transparent answers regarding underwriting standards, documentation, and process.
Term Sheet vs Commitment
Is a commercial real estate term sheet legally binding?
Direct Answer
No. The loan financing terms in a term sheet are non-binding and subject to credit committee approval. However, provisions regarding expense deposit reimbursement and lender exclusivity are legally binding.
A term sheet is an agreement to underwrite, not a binding promise to fund capital.
Commitment Letters
What is a commercial loan commitment letter?
Direct Answer
A commitment letter is a legally binding contract issued by a commercial lender after formal credit committee approval, legally obligating the lender to fund the loan once closing conditions are satisfied.
Borrowers pay a commitment fee (typically 0.5% to 1.0%) upon executing the commitment.
Lender Re-Trading
Can a commercial lender change loan terms after issuing a term sheet?
Direct Answer
Yes. Because term sheets are non-binding, lenders can adjust loan proceeds, interest rate spreads, or reserve requirements if the appraisal values the property lower than expected or due diligence uncovers deferred maintenance.
Term adjustments during underwriting are commonly referred to as "re-trading."
Connect with our commercial underwriting team. We provide prompt indicative pricing, leverage sizing, and lender placement strategy upon scenario review.
