An internet search tells me that the average weight of a sheet of paper is 0.1696 ounces. That means that a commercial mortgage term sheet, which is typically two pages long, would physically weigh about one-third of an ounce when printed.

But what is the real weight of a term sheet?

A friend in the industry recently shared a situation with a commercial lender in which the sponsor (that is, the borrower) signed an initial term sheet, but then the terms later changed three times before closing. At the last change in terms, the lender was told “pardon me if I don’t put much stock into your term sheets”. In this case, the term sheet wasn’t worth the paper it was printed on.

If this can happen, then what exactly is a commercial lender promising when they issue a term sheet?

Term Sheets vs Commitment Letters

The answer, unfortunately, is nothing. When a commercial mortgage lender issues a term sheet to a borrower, they are promising nothing.

This is different from a Commitment Letter, which actually ties a lender into a deal that they must then close and fund, with few exceptions. Commitment letters are typically given much later in the process once a lender completes most of their due diligence, and the final loan structure is approved by a credit committee.

It’s important to note that this isn’t a two-way street. While a lender hasn’t promised to lend by issuing a term sheet (or application), a borrower is still expected to “commit” to a lender once they sign that term sheet or application and fund an escrow account in order to complete due diligence. While not a legal commitment to take the loan offered by the lender, most commercial lenders treat term sheets and applications this way. If an average lender learns that they’ve been just one of multiple term sheets or applications signed by the borrower concurrently, they’ll reject that borrower’s application outright.

Nature of a Commercial Mortgage “Re-Trade”

I’m sure I just gave someone PTSD by putting “re-trade” in such big letters. But as mentioned above, lenders aren’t promising anything by issuing a term sheet to a borrower. That means they can change the terms of the prospective loan later. When a change in terms occurs after a borrower has agreed to the term sheet, that’s a re-trade on terms, or simply called a re-trade.

All private lenders are trying to win that soft “commitment” from the borrower to go with their term sheet at the exclusion of other lenders early in the process. Sometimes a re-trade comes about due to negligence (not properly vetting a deal up front), or circumstance (market conditions changing rapidly). The most unscrupulous of them use this step as “bait”, as they intend to re-trade the deal while issuing their term sheet.

Why are Re-Trades Becoming More Prevalent?

So far in 2022, we’ve seen the US Federal Reserve raise the Fed Funds Rate three times. Inflation is at a multi-decade high, and now there’s a silly debate raging about the definition of “recession” since the US is meeting most traditional economic definitions. In short, the economy has changed since last year, and that has meant a disruption in the capital markets.

In times like these, many private lenders who rely on outside investors or the bond market in order to liquidate or securitize their lending positions are finding that between the time they offer terms to a borrower, and the time they are to close the same loan, market dynamics have made that loan unprofitable, or less profitable to originate. This may be due to poor planning on the lender’s part, and often this risk is not communicated to a prospective borrower.

Times like these reveal a few things about the hundreds of private lenders who operate in the commercial mortgage space:

• Who is really a “direct lender” - if the deal’s approval is beholden to an outside party, like an investor or loan buyer, that lender is not as “direct” as they may advertise.
• Which lenders have integrity - there are legitimate reasons for a re-trade, such as learning new information about a deal or borrower during due diligence. However, “this isn’t as profitable as I would prefer” is not a valid reason for a re-trade. Few private lenders understand this.

Protecting Your Deal From Re-Trades

Avoid lenders who regularly re-trade

Certain lenders are simply more apt to re-trade deals. At StackSource, there is a fairly long list of lenders we will never recommend to a client because we know they cannot or do not honor their term sheets at a high enough rate. Many of our banned lenders have been found to be unethical, while some are simply incompetent. Working with an honest and experienced Capital Advisor is one of the best ways to avoid bad lenders, but it’s not the only way.

Look beyond the numbers of a term sheet, and find ways to test that lender’s reputation. Have you requested a reference from another borrower? Does your professional network have any intel on who you are working with? Does their organizational structure look like a true lending institution, or a couple of brokers playing “direct”?

Identify and work your deal champion

Your main point of contact at the lender’s organization is often not the final decision maker when it comes to final loan approval. However, they are most likely your deal champion, so you need to arm them with the right information and earn their trust, in order for them to advocate for you internally.

It’s good practice to explicitly ask your deal champion how credit approvals work with their company. Is your term sheet already “blessed” by a credit committee prior to being issued? Has it at least been seen by the appropriate senior decision makers?

Run an efficient process

Get information in on time! The more the lender has to chase a borrower for information to keep the underwriting process moving forward, the more problems can be created. Slow information gathering can also move any re-trades that do happen later in the process, closer to the closing date when a borrower has fewer options about what to do about the re-trade.

Have a backup plan in place

If you have never closed a loan with a particular lender before, or even if you have, identifying a backup plan is prudent. This backup plan may be another reliable lender that can close quickly in case your chosen lender changes the deal or negotiating an extension with the seller of a property in the case of an acquisition.

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