How to Read a Lender's Term Sheet (And Spot What's Missing) The fields most borrowers don't read carefully — and what they reveal.
Published May 2026 · Rag Tyme Enterprises Filed under: Capital Access
A client forwarded us a term sheet last month. Multi-family acquisition, $3.2M loan request, four-page term sheet from a regional bank.
The client was excited about the rate — 6.85% fixed for five years, 30-year amortization. Compared to the other offers they'd received, this looked materially better.
We read the term sheet differently.
The rate was fine. The amortization was fine. What concerned us were three other fields: the recourse provision, the prepayment language, and a debt service coverage covenant buried on page three.
Recourse: the bank required full recourse for the entire loan term. Most commercial lenders offer partial-recourse or non-recourse on stabilized assets above a certain size. Full recourse meant the client's personal balance sheet was on the line for the entire $3.2M for the full five years — not just during a construction or lease-up phase.
Prepayment: the term sheet had a 5-4-3-2-1 prepayment penalty (5% in year 1, 4% in year 2, etc.). That meant if the client wanted to refinance in year 3 — which is likely as rates potentially move — they'd pay $96,000 in prepayment penalty.
Covenant: the bank had a 1.25x DSCR maintenance covenant tested annually based on trailing twelve-month NOI. If the property's NOI dropped below the covenant threshold for any twelve-month period during the loan term, the bank could call the loan or impose additional conditions. The property's pro forma DSCR was 1.32x — too thin a cushion to be safe.
We renegotiated all three points before the client signed. The final term sheet was at a slightly higher rate (6.95%) but with non-recourse above stabilization, a softer prepayment structure, and a more reasonable covenant (1.15x DSCR with a 6-month cure period). The total economic value of those changes far exceeded the 10 basis points of rate difference.
That's the work. The rate is rarely the most important variable on a term sheet. The rate is what most borrowers look at first. The differences that matter are usually elsewhere.
The fields we read carefully
A commercial term sheet has 20-40 distinct provisions depending on the deal. Most borrowers read 6-8 of them carefully. We read all of them, but the ones that determine whether the deal is actually good (versus appearing good) are these:
Recourse. Full recourse, partial recourse, non-recourse with bad-boy carveouts. The recourse structure determines what's at risk if the deal goes wrong. For larger deals and stabilized assets, partial recourse or non-recourse should be standard. Lenders frequently start with full recourse and negotiate down if asked.
Prepayment provisions. Step-down, yield maintenance, defeasance, or open. Step-down (5-4-3-2-1 or similar) is common and predictable. Yield maintenance and defeasance can be much more expensive depending on rate movement. Open prepayment is the borrower's friend. The structure matters most if there's any plausible scenario for early refinance or sale.
Covenants. Debt service coverage ratio maintenance, loan-to-value maintenance, occupancy minimums, net worth requirements, liquidity requirements. Each covenant is a potential default trigger. Negotiating realistic cushions and cure periods is essential.
Reserves. Tax and insurance escrows, replacement reserves, lease-up reserves, debt service reserves. Reserves are real money locked up by the lender. The amount and the release conditions matter.
Cash management. Springing lockbox, hard lockbox, or no cash management. Hard lockbox means all property revenue flows through a lender-controlled account before reaching the borrower. This is increasingly common on larger deals and dramatically changes the borrower's operational flexibility.
Carveouts and indemnities. Standard non-recourse carveouts (fraud, willful misconduct, environmental, etc.) are normal. Non-standard expansions of the carveouts can effectively convert a non-recourse loan into a de facto recourse loan.
What's missing from term sheets — by design
Lenders write term sheets to optimize their own positions. Several things are commonly absent from term sheets and need to be raised by the borrower:
Assumability. Most term sheets don't address whether the loan can be assumed by a future buyer. If you might sell the property mid-term, assumability is valuable to your future buyer and improves your sale price.
Subordination rights. If you want to layer additional capital (mezzanine, preferred equity, second mortgage) later, the senior lender may need to consent. The framework for that consent should be in the term sheet, not negotiated in a crisis later.
Future advance provisions. For value-add deals, the ability to draw additional capital for capital improvements without refinancing the entire loan can be very valuable. Term sheets rarely include this proactively.
Release prices for partial sales. For portfolio or multi-property deals, the release pricing for selling individual properties matters significantly. Lenders often start with formulas that maximize their position and need to be negotiated to fair market terms.
Casualty and condemnation. What happens if part of the property is destroyed or taken by eminent domain. Default provisions on these events vary widely.
The negotiation reality
Term sheets are negotiable. Most borrowers don't negotiate them aggressively because they don't know what to negotiate. Lenders know this and write term sheets accordingly.
The 80/20 of effective term sheet negotiation:
Always negotiate the recourse structure on stabilized commercial assets above $1M. Even moving from full recourse to partial recourse with a stabilization burn-off creates material value.
Always negotiate covenant cushions. Tight covenants are lender preferences, not absolutes. Reasonable cushions are usually available with a written request.
Almost always negotiate prepayment terms when there's any plausible scenario for early refinance. The difference between a 5-4-3-2-1 step-down and yield maintenance can be hundreds of thousands of dollars on a mid-sized loan.
Often successfully negotiate reserve requirements, especially replacement reserves and lease-up reserves on stabilized properties.
Sometimes successfully negotiate the rate itself, but generally less leverage here than on structural terms.
Where we add value
Most clients we work with on Capital Access deals can read a term sheet for the obvious provisions (amount, rate, amortization, term). Fewer can identify the structural provisions that matter more. And almost none have the relationship leverage to renegotiate them effectively.
Our value:
Reading the term sheet against the full lender market for that product. A 1.25x DSCR maintenance covenant is standard at some lenders and aggressive at others. We know which is which.
Identifying what's negotiable. Some provisions are sacred to lenders. Others move with a simple request. The difference is experience.
Carrying the negotiation. The client doesn't have to be the bad guy. We do the back-and-forth on the structural provisions and bring the client a final term sheet that's substantially better than the first one.
Compared to what most borrowers leave on the table — typically $40-200K of economic value on a mid-sized commercial deal — the work is materially accretive.
If you have a term sheet in hand and you're not certain you've negotiated it correctly, send it to us. The First Take is the front door.
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