The short answer
A term sheet proposes a loan's economics and structure. Apart from a few clauses such as confidentiality, expense reimbursement and exclusivity, it leaves both sides free to walk away. A commitment letter is the lender's agreement to make the loan once stated conditions are met, issued after credit approval.
Reliance separates them in practice. A borrower can plan an acquisition around a commitment whose conditions are objective. A term sheet tells the borrower where the lender intends to go.
How do a term sheet and a commitment letter compare?
The move from term sheet to commitment is where credit approval happens, where diligence conditions become explicit and where the deposit starts paying for real work.
| Question | Term sheet | Commitment letter |
|---|---|---|
| Binding effect | Generally non-binding, with binding clauses for confidentiality, expenses and exclusivity | Binding on the lender once accepted, subject to its conditions |
| Credit approval | Usually still ahead | Obtained, and the conditions reflect it |
| Conditions | Broad and indicative | Specific and listed |
| Deposit | Sometimes collected, to fund early reports | Collected, and spent amounts are generally nonrefundable |
| Deadlines | An expiration for acceptance | An acceptance deadline and an outside closing date |
| What the borrower can rely on | The lender's intended terms | The loan, if the conditions are met |
What happens between the term sheet and the commitment?
The signed term sheet starts underwriting. The lender collects the borrower's financial package, visits the property, reviews the sponsor, and often orders the appraisal and environmental report with the deposit. Underwriting then tests the proposed terms against the actual numbers.
The file goes to credit committee or an approval authority. The approval can match the term sheet, change it, or add conditions the term sheet never mentioned, such as a larger reserve or a guaranty. The commitment letter then reflects the approved version.
Borrowers should read the commitment against the term sheet line by line. Changes made during approval show up as small edits in long documents, and the time to discuss them is before acceptance.
What is in a commercial loan term sheet?
A term sheet covers the economics and structure the lender is prepared to underwrite. Expect these items.
- Amount and sizingThe loan amount, with maximum loan-to-value and minimum debt service coverage constraints.
- PricingThe rate or the index and spread, plus origination and exit fees.
- Term and amortizationThe maturity, any extension options and the amortization schedule.
- PrepaymentLockout, yield maintenance, defeasance or step-down prepayment terms.
- Recourse and guarantiesWhether the loan is non-recourse, the carve-outs, and who guarantees what.
- ReservesTax, insurance, replacement, tenant improvement and leasing reserves.
- Process termsThe deposit, expense reimbursement, exclusivity and the date the offer expires.
What is in a commitment letter?
A commitment letter restates the approved terms and adds the conditions the loan must satisfy before funding. Typical conditions cover acceptable third-party reports, title and survey, insurance, entity and authority documents, legal opinions, satisfactory leasing, and the absence of any material adverse change in the property or the borrower.
The letter sets two dates: a deadline to accept it and an outside date by which the loan must close. It spells out the fees earned on acceptance, how the deposit is applied, any rate lock terms, and whether the commitment survives closing or gives way to the loan documents.
How does a commitment letter differ from the loan agreement?
The commitment governs the period before closing. Its conditions describe what must be true for the loan to fund. The loan agreement governs the life of the loan, and its covenants describe what the borrower must keep doing after funding, from financial reporting to debt service coverage tests.
Some commitment conditions carry into the loan agreement as ongoing covenants. A minimum debt service coverage ratio at closing often returns as a quarterly test, and a leasing condition can become an approval right over new major leases.
Many commitments state that the loan documents supersede them at closing. Borrower's counsel should confirm that every negotiated commitment term appears in the loan documents, since the commitment's protections end when that supersession clause takes effect.
Which conditions decide how firm a commitment is?
A commitment is only as firm as its conditions. A letter conditioned on an appraisal, an environmental report and documentation that are each satisfactory to the lender in its sole discretion leaves the lender wide room to decline. Objective conditions with defined thresholds give the borrower certainty it can plan around.
| Discretionary wording | Objective version |
|---|---|
| Appraisal satisfactory to lender | Appraised value supports a loan-to-value ratio at or below the approved maximum |
| Environmental report satisfactory to lender | The Phase I identifies no recognized environmental conditions beyond those listed in the commitment |
| Leasing satisfactory to lender | The certified rent roll shows occupancy and in-place rent at or above the underwritten levels |
| No material adverse change | Net operating income stays at or above a stated figure through closing |
When does the good faith deposit go at risk?
Lenders collect a good faith deposit when the borrower signs the term sheet or accepts the commitment. The deposit funds the appraisal, environmental and property condition reports and legal work that start before anyone knows whether the loan will close.
The commitment usually lets the lender keep the deposit to the extent of costs incurred, and some letters add a break fee if the borrower walks away. Borrowers negotiate for an accounting of actual costs and a refund of the unspent balance. Settle those terms before the reports are ordered.
What should a borrower negotiate at each stage?
Leverage moves as the documents progress, so the order in which points come up matters.
At the term sheet, the borrower holds the most leverage on economics and structure, because the lender has spent nothing and is competing. Rate, term, amortization, recourse, prepayment and the shape of the guaranty belong here.
At the commitment, the negotiation turns to conditions and dates. Converting a sole-discretion condition into an objective threshold is the most valuable edit available, because it makes the commitment reliable. Acceptance and closing deadlines, extension rights and deposit refund terms belong here too.
At the loan documents, the remaining points are mechanical: notice periods, cure rights, permitted transfers and the carve-out list. A structural point raised for the first time at this stage meets a lender that has already spent the deposit and set the closing date.
How do HUD and agency loans handle commitments?
Program loans add a layer. On a HUD-insured loan, HUD issues a firm commitment for mortgage insurance, and its conditions become closing requirements alongside the lender's own. Agency lenders underwrite to the Fannie Mae or Freddie Mac multifamily guides, and the agency's requirements shape the conditions the lender passes to the borrower.
The practical effect is two sets of conditions with two approvers. Track both on the same checklist, with the approving party named on each line, so the closer can see which conditions wait on the lender and which wait on the program.
How does the commitment shape the closing checklist?
Every condition in the commitment becomes a line on the closing checklist. Specific conditions produce clean lines with clear evidence. Vague conditions produce arguments at closing about whether they were met.
The OCC's Commercial Real Estate Lending handbook expects the terms of the loan documents to be consistent with the approval document and any later amendments. Tracking each approved condition to the evidence that satisfied it keeps that consistency visible to examiners.
Prodeal loads the commitment's conditions into the deal checklist, where each one carries an owner, a due date, the documents that satisfy it and notes on how it was cleared.
Questions lenders ask
- Is a term sheet legally binding?
- The economic terms of a term sheet generally bind neither side. Most term sheets state they are non-binding and carve out clauses that do bind, such as confidentiality, expense reimbursement and any exclusivity or no-shop provision. The term sheet's own language controls, so read it.
- Can a lender back out of a commitment letter?
- A lender can decline to close when a condition goes unsatisfied or a stated exit applies, such as a material adverse change clause. The more conditions depend on the lender's discretion, the more room it has, which is why borrowers negotiate for objective conditions.
- When is a good faith deposit due on a commercial loan?
- Lenders usually collect it when the borrower signs the term sheet or accepts the commitment. It is sized to expected third-party report and legal costs, and amounts already spent are generally kept if the loan fails to close.
- What is the difference between a letter of intent and a term sheet?
- Lenders use the two names loosely. Both describe proposed loan terms, and both are typically non-binding apart from specific clauses. Some lenders issue a short letter of intent first and a fuller term sheet after initial underwriting.
- How long is a commitment letter valid?
- A commitment letter sets a deadline to accept it and a date by which the loan must close. Missing either lets the lender withdraw or reprice, so both dates belong on the closing plan beside any rate lock expiration.
- Does a commitment letter survive the closing?
- That depends on the letter. Many commitments state that the loan documents supersede them at closing, and others keep specific terms alive. Counsel should confirm the loan documents reflect every committed term before the borrower signs.
- Who drafts the commitment letter?
- The lender drafts it after credit approval, often with lender's counsel. Borrower's counsel reviews and negotiates the conditions, the deadlines and the deposit terms before the borrower accepts.