The term sheet binds you, not the lender

A term sheet feels like a deal. It has a rate, a loan amount, a term, a signature line, and a lender who seems eager. It is not a deal. It is, almost always, a non-binding outline that commits the lender to nothing about the loan itself, while binding you to the parts that cost you money: an exclusivity period, a deposit, and a promise to pay the lender’s expenses whether or not the loan closes. The document that actually binds the lender is the commitment letter, and even that is bound only to conditions the lender writes and the lender judges. Understanding which piece of paper obligates whom is the first moment in the lifecycle where borrowers lose leverage without noticing.

A term sheet binds you to a deposit, exclusivity, and expenses, and binds the lender to nothing. The commitment letter binds the lender, subject to conditions the lender controls.

The term sheet: binding on you, not on them

Most commercial loan term sheets state plainly that they are not a commitment to lend. What they do bind is a short list of provisions the lender cares about: exclusivity, so you cannot shop the deal elsewhere for a period; a good-faith deposit, often applied to closing costs and often at least partly nonrefundable; and expense reimbursement, so that the lender’s third-party costs, the appraisal, the environmental report, its counsel, are yours to pay if the deal dies. The lender can walk away for any reason. You can too, but the deposit and the expenses are the price of walking. So the term sheet is not the moment you have a loan. It is the moment you have committed money to find out whether you will get one.

This is also the last moment your leverage is intact. Before you sign a term sheet, every term is open and every other lender is available. After you sign it, exclusivity closes the alternatives and the deposit anchors you to this lender. The terms that matter most in this pillar, the carve-outs, the guaranty scope, the prepayment regime, the covenants, should be settled in principle here, because this is where you can still say no cheaply.

The commitment letter: binding, subject to conditions

The commitment letter is the lender’s binding agreement to make the loan, and it is real, but it comes with conditions precedent that the lender writes and largely judges. A satisfactory appraisal. A clean environmental report. Clear title. Acceptable estoppels from the tenants. No material adverse change in the borrower, the property, or the market. A complete authority package proving the entity is real and empowered. Any of those can fail, and when one does the lender is released and you have spent the deposit and the expenses. The commitment shifts the risk from “will the lender agree” to “will the conditions be met,” and several of those conditions, the appraisal above all, are outside your control.

The rate lock and the retrade

Two things happen between commitment and closing that reshape the deal. A rate lock, if you buy one, fixes the rate against market movement for a window, usually for a fee or a deposit that is forfeited if you do not close. And a retrade: the lender’s conditions produce information, a low appraisal, a wrinkle in the environmental report, a tenant who will not sign an estoppel, and the lender uses it to reprice or resize the loan. A low appraisal shrinks the proceeds mechanically, and a lender that has you under exclusivity with a deposit in hand is negotiating from strength when it proposes the smaller loan. The retrade is the second leverage shift in the lifecycle: the lender learned something, and you are too far in to walk cheaply.

What to do at this stage

Read the term sheet for what it binds you to, not what it promises you, and negotiate the deposit’s refundability and the expense cap before you sign it. Settle every consequential term in the term sheet, because the commitment letter will not reopen them and the loan documents will not either. Understand each condition precedent in the commitment as a way the lender can leave, and manage the ones you can influence, the estoppels and the authority package, early. And treat a rate lock as a bet with a forfeitable stake. The term sheet is where the loan is actually decided. Everything that follows is execution, and execution only ever tightens.