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Commercial real estate 101: A primer on term sheets

On Behalf of | Jun 24, 2020 | Real Estate Transactions |

The commercial real estate market in Florida is in the midst of a change. The current coronavirus pandemic has accelerated trends that were already in the works: delivery and take-out services are soaring, telemedicine offerings are thriving and more and more employers are embracing the work from home mentality. This will likely translate to long-lasting changes to commercial real estate buildings. Office designs, for example, may shift to include increased individualized space and greater ventilation to help provide a safe working environment.

Entrepreneurs that are looking to take advantage of the current marketplace and embrace these changes are wise to have a basic understanding of the process before taking on a new project. One area to become familiar with before beginning negotiations: term sheets.

What is a term sheet?

A term sheet is a document that outlines the amount a potential lender is willing to commit to a project if the borrower is willing to commit to the terms outlined within the document. It is a starting point and generally not a legally enforceable document. In addition to basic information about the borrower, lender, amount of the loan and interest rate the term sheet also includes performance covenants. Performance covenants are the lender’s expectations. For example, the lender may require the borrower to get permission before taking out any additional loans.

The borrower can negotiate a proposed term sheet to better ensure their interests are protected. Once negotiations are complete, the parties complete a commitment document — which is legally enforceable. With this document in hand, the entrepreneur can move forward with a project with the needed financial backing in place.