How do I read a commercial loan term sheet?
To read a commercial loan term sheet, check 6 things closely: the all-in rate including any spread or margin, every fee (origination points, application fees, third-party report costs), the prepayment penalty structure, what conditions remain before closing, whether and when the rate locks, and the term sheet's own expiration date. Comparing 2 term sheets side by side only works when you convert everything, including fees, to the same basis, such as total cost over your expected hold period.
The 6 things to check
| Item | What to look for |
|---|---|
| Rate | Is it fixed or a spread over an index? What is the index doing right now? |
| Fees | Origination points, application fee, underwriting fee, legal fee estimate, third-party report costs |
| Prepayment | Step-down, yield maintenance, defeasance, or none, and for how long |
| Conditions to close | What still needs to happen: appraisal, environmental, entity docs, insurance, specific underwriting conditions |
| Rate lock | Does it lock now, at application, or only at closing? What happens if rates move before then? |
| Expiration | How long is this term sheet good for, and what happens if you need more time? |
Converting to a comparable number
Two term sheets with the same headline rate can cost very different amounts once fees and prepayment terms are included. A useful approach: estimate total cost over your realistic hold period, including all closing fees and any prepayment penalty you would actually pay if you sold or refinanced at your expected time, then compare that total, not just the rate.
Watching for hidden costs
- Application fees that are separate from origination points and due upfront, sometimes non-refundable regardless of outcome.
- Legal fee estimates that are too low, with the actual bill running much higher at closing.
- A rate that is not actually locked, floating until closing in a rising rate environment.
- Escrow or reserve requirements buried in the conditions section that add to your cash needed at closing.
Understanding the conditions section
This section lists what still has to happen before the loan can fund. Read it for anything unusual: a specific tenant estoppel, a required paydown of other debt, a minimum liquidity requirement you may not currently meet, or a specific insurance requirement that could be expensive.
Asking the right questions before signing
- Is this rate locked, and if not, when does it lock and what protects me if rates rise?
- What is the total of all fees, not just the origination points?
- What would I owe if I paid this off or sold in year 2? Year 5?
- Is there anything in the conditions list I cannot currently satisfy?
- What happens if the deal does not close by the expiration date?
A worked comparison
Lender A: 7.5 percent, 1 point, no prepayment penalty. Lender B: 7.0 percent, 2 points, 3-year step-down penalty. On a $500,000 loan held 3 years, Lender A costs roughly $118,750 in interest plus $5,000 in points = $123,750. Lender B costs roughly $110,000 in interest plus $10,000 in points, plus if sold in year 3 a 1 percent step-down penalty of $5,000 = $125,000. Nearly identical once the full term sheet is read, despite very different headline rates.
How CommFi handles it
Our lending desk reads every term sheet the network produces and translates it into total cost over your expected hold before presenting it, so the comparison is already done. It funds direct when it fits, and when the desk searches a database of 7,000+ lenders, competing term sheets are normalized to the same basis for you. Zero upfront fees.
Related reading
Related questions
- What should I check first on a commercial loan term sheet?
- The all-in rate, all fees, the prepayment structure, remaining conditions to close, rate lock terms, and the expiration date.
- How do I compare two term sheets with different rates and fees?
- Convert both to total cost over your expected hold period, including fees and any prepayment penalty you would actually pay.
- What hidden costs should I watch for in a term sheet?
- Separate application fees, underestimated legal fee estimates, a rate that is not actually locked, and escrow requirements buried in the conditions section.
- Is the rate on a term sheet locked?
- Not always. Check specifically whether it locks at term sheet signing, at application, or only at closing.
- What happens if a term sheet expires before I close?
- Usually the lender either extends it, requires a new application, or reprices based on current market conditions. Check what the term sheet itself says about expiration.
Property developer and licensed appraiser. 22+ years in real estate: TIC conversions, multi-unit redevelopments, mixed-use, fix and flips, commercial DSCR.