The glossary of terms in commercial real estate (CRE) lending is packed with synonymous and unique terms not typically found outside the arena of commercial real estate lending, and often mis-used by practitioners within the industry, as well as those bumping up against CRE lending in their respective tangential industries, e.g., CRE real estate licensees, escrow officers, and surveyors, appraisers, etc. A couple of the offenders are “term sheet” and “commitment letter”.
I come across borrowers regularly who are in escrow and think they have, or will, secure a loan as soon as they get a term sheet, aka, letter of intent (LOI), letter of interest (also LOI), or proposal letter. This is certainly not the case. After the bullet points (large fonts & bolded) in the LOI, typical wording may read:
Lender’s commitment to process, not a commitment to fund, is subject to our review of all documents requested and is subject to our satisfaction that all requirements are met.
There will typically be a fee required to begin underwriting, i.e., clear th
e requirements. After a listing of the requirements, there will be wording like:
If requirements are met, lender will furnish terms and conditions of the loan to be made, subject (again) to 3rd party reports, inspections, and “other factors” that may cause the loan terms to change, or be rejected.
Many (but not all) lender reps (BDOs, Relationship Managers, etc.) allow the borrower to believe that if they accept the LOI they have locked the loan on the terms shown, and secured it by payment of the underwriting fee. The lender’s objective at the time is to get something signed & a fee collected to get the deal off the street.
The Commitment Letter is the next step in the process. This is typically issued after some/most of the underwriting is done, but still has some contingencies to be removed, most often 3rd party reports, e.g., appraisals, environmental reports, etc. Acceptance of the Commitment Letter calls for an additional payment to the lender. Depending on the type of loan and specific lender, some contingencies are cleared as part of satisfying the LOI, and some are deferred until the Commitment Letter is accepted.
A commitment letter is just a stronger term sheet – fewer contingencies remaining. The loan terms and conditions, including the rate, will not be fixed (committed to) by the lender until all contingencies are cleared and a final Commitment Letter (often a revised Commitment Letter from the initial Commitment Letter) is issued and accepted. From that time,
closing may be 2-5 days. (Time to draw docs & coordinate with escrow.)
Yes, when applying for a commercial real estate loan you’ll invest some money in the process without an assurance of a loan being done.
At Counsel Mortgage we source from lenders nationwide, and have a broad understanding of what “is” means. Even if you have a local buyer/borrower, seller and an Arizona property, your best loan may be from a lender in any of the other states. Borrowing local may be convenient and comfortable, but may not be your best loan source.
When going to a lender to apply for a loan do you feel it’s a one-sided conversation – they ask and you answer. They offer their qualifications to provide your loan are, “we’ve been around for over a hundred years and have assets over a bazillion dollars”. When we circle interest for a loan on your behalf we qualify the lender for the loan, as well as help them understand the pertinent features of the transaction and you as the borrower. We find it works better that way!
For specific representation, give us a call at Counsel Mortgage.
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Counsel Mortgage Group®, LLC
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Michael Green is a Commercial Loan Originator for the Counsel Mortgage Group®, LLC.
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