A term sheet sets the terms you’ll negotiate and close against. Here’s a line-by-line read — and why the lowest rate isn’t always the best deal.
A term sheet is a lender’s written summary of the loan it’s prepared to offer. It’s usually non-binding, but it sets the terms you’ll negotiate and close against — so reading it carefully, and comparing offers line by line, is where good outcomes are won or lost. The lowest rate isn’t always the best deal once the rest of the structure is on the table.
The lines that matter
Loan amount. The proceeds offered, often shown alongside the LTV, LTC, DSCR, or debt yield used to size it. Check which constraint drove the number.
Interest rate. Fixed or floating. Floating rates are quoted as a spread over an index (for example, SOFR + 250 bps). Watch for rate locks, floors, and caps.
Index and spread. For floating-rate loans, the index moves with the market; the spread is fixed. A rate cap may be required, at a cost.
Amortization. The schedule used to compute the payment — commonly 25 or 30 years — which may be longer than the loan term.
Term / maturity. When the loan comes due, often 5, 7, or 10 years, usually with a balloon payment of the remaining balance.
Interest-only period. Any months of interest-only payments before amortization begins. IO vs. amortizing
Recourse vs. non-recourse. Whether the borrower is personally liable beyond the collateral. Non-recourse loans still carry “bad-boy” carve-outs for fraud, bankruptcy, and similar.
Reserves and escrows. Required holdbacks for taxes, insurance, replacement reserves, tenant improvements, leasing commissions, or interest during lease-up. These reduce net proceeds.
Prepayment terms. How costly it is to pay off early — yield maintenance, defeasance, or a step-down penalty (for example, 5%-4%-3%-2%-1%). This matters enormously if you might sell or refinance.
Fees. Origination, application, legal, and third-party costs (appraisal, environmental, engineering). They add up.
Conditions and covenants. Closing conditions, ongoing financial covenants, reporting requirements, and any DSCR or occupancy tests the borrower must maintain.
Why two term sheets are hard to compare on rate alone
A loan that’s 25 basis points cheaper can be the worse deal if it carries lower proceeds, full recourse, onerous prepayment, or heavy reserves. Real comparison means normalizing all of it: net proceeds after reserves and fees, the true cost of capital including prepayment flexibility, and the structure’s fit with your hold and exit plan.
Remember: a term sheet usually isn’t a commitment
Most term sheets are non-binding indications, subject to underwriting, appraisal, and committee approval, and terms can change before closing. That’s exactly why running a competitive process matters — competing term sheets give you both leverage and a fallback if one lender retrades.
How Mercury helps
We solicit multiple term sheets, normalize them so you’re comparing real economics rather than headline rates, and negotiate the structure — not just the price — through to closing, where we’re licensed or exempt. Discuss your financing scenario.
Frequently asked questions
Is a term sheet a loan commitment?
Usually not. Most are non-binding indications subject to underwriting and approval. A formal commitment comes later, after diligence.
What’s the most overlooked part of a term sheet?
Prepayment terms and reserves. Both can quietly cost far more than a small difference in rate, especially if you sell or refinance early.
Should I accept the first term sheet I get?
Not without comparison. A competitive process typically produces better terms and protects you if a lender changes its offer before closing.