Term Sheet
A non-binding document outlining the key terms and conditions under which a lender is prepared to make a commercial real estate loan. Term sheets typically include proposed loan amount, interest rate or pricing, term, amortization, LTV and DSCR requirements, recourse provisions, prepayment terms, reserve requirements, and closing conditions. Borrowers often solicit multiple term sheets to compare options. A signed term sheet typically triggers a good-faith deposit, exclusivity period, and formal underwriting.
Related Terms
Underwriting
The process by which a lender evaluates the risk and determines the terms of a proposed commercial real estate loan. Underwriting involves analyzing the property's income and expenses, market conditions, borrower financial strength, and collateral value. Lenders stress-test assumptions including vacancy, rental growth, and interest rate scenarios. The underwritten NOI, which may differ significantly from the borrower's pro forma, determines the maximum loan amount through LTV, DSCR, and debt yield constraints.
Spread
The margin added to a base index rate (such as SOFR or Treasury) to determine a loan's interest rate. For example, a loan priced at "SOFR + 250" has a 2.5% spread over the SOFR index. Spreads reflect credit risk, property type, leverage, and market conditions. Lower spreads indicate more favorable pricing.
LTV (Loan-to-Value Ratio)
The ratio of a loan amount to the appraised value of a property, expressed as a percentage. For example, a $7 million loan on a $10 million property has a 70% LTV. Lower LTVs represent less risk to lenders and typically result in better rates. Maximum LTVs vary by lender type: life companies (55-65%), CMBS (up to 75%), and agencies (up to 80% for multifamily).
DSCR (Debt Service Coverage Ratio)
A measure of a property's ability to cover its debt obligations, calculated by dividing Net Operating Income (NOI) by annual debt service. Lenders typically require a minimum DSCR of 1.20x to 1.35x, meaning the property generates 20-35% more income than needed to pay the mortgage. Higher DSCRs indicate lower risk and may qualify for better loan terms.
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