How to (Quickly) Compare Commercial Mortgage Term Sheets
Commercial mortgage term sheets all share the same basic structure. The format will vary from different lenders, with some taking up literally just one sheet, while others can include multiple pages of description. With term sheets from large financial institutions, you can tell that their term sheet template has been tailored by expensive lawyers who feel the need to justify their fees by adding a lot of language and description around each deal point.
If you’re fielding multiple term sheets, the goal is to pull out key information that you can use to compare them “apples to apples”. Here are the key terms to look for to quickly draw comparison between two or more term sheets.
Key terms to compare
Net Loan Proceeds
You can also call this the Loan Amount, but Proceeds usually take fees, reserves, and closing costs into account, so it’s really a net value where Loan Amount is gross. Whether you’re acquiring or refinancing an asset, starting here is important because it determines how much cash you are putting in or taking out at the close of the transaction.
Now that you know the size of your loan and the flow of cash at closing, looking at amortization will tell you how fast that loan is expected to be paid down. If a lender offers you 30 year amortization, that means it would take 30 years to pay off the loan completely in equal installments.
This is the ongoing cost of using this lender’s capital. Check whether it is fixed or floating. You may also see a fixed rate loan where the final interest rate will be determined at a later date, like at the loan commitment, based on a predetermined index and spread.
Knowing the Loan Amount, Amortization, and Interest Rate will also allow you to calculate the expected monthly payments on the loan, and, if you’ve projected out Net Operating Income already, you can now project your own monthly Cash Flow.
While Amortization is the rate at which the loan is paid down, the Loan Term determines when the full amount comes due (“matures”). Most commercial loans come due within a 10 year period, with any unpaid principal balance due on the maturity date.
A full recourse loan is one that the borrower is responsible for paying back in full, even if there is a default and bankruptcy for the property. Non-recourse loans leave no liability for the borrower in the case of a default. Compare the Recourse provisions between term sheets to understand what you’re personally responsible for as a borrower in the event the property’s net operating income can’t cover loan payments.
If you want to exit a loan before the maturity date by paying it back in full, there may be a financial penalty to doing so. A lender charging a Yield Maintenance prepayment penalty will want to be compensated according to the interest they could have charged you for the life of the loan, but it’s increasing common to see a predetermined prepayment penalty schedule. Some lenders will give you an option between different prepayment structures, so it’s always worth negotiating this point if it’s something hampering an otherwise competitive term sheet.
Deciding on the best loan
There are still more points outlined on a typical term sheet for a commercial mortgage, but the above give you enough information to compare between them for most deals.
There’s no such thing as the perfect loan. But you can find the right loan for your deal. If multiple loan offers truly are comparable and would all accomplish your business plan well, then don’t just take numbers at their surface. What is your main investment goal? To increase your equity over the life of the loan? To maximize your initial cash flow? If you’re using StackSource, we calculate those metrics for you based on your own NOI and exit (sale or refinance) assumptions: