Borrowers Need To Interpret Term Sheet Contingencies Correctly To Have Realistic Expectations
Kenneth Minors
Investment Officer and Real Estate Consultant at Minors Real Estate Advisors
Too many people are misinterpreting term sheets. I am going to talk about how to understand certain terminology in term sheets better. A term sheet IN ITSELF DOES NOT NECESSARILY GUARANTEE FUNDING BUT PROVIDES CONTINGENCY REQUIREMENTS TO CONSIDER FUNDING POTENTIALLY BY THE LENDER.
Here's an example of what can be on a term sheet that many think guarantees funding but doesn't necessarily.
"ABC Lender's conditional funding proposal for office building with purchase price of $15,384,615 that request loan amount of $10 million (65% LTV) for the acquisition of office building named "INSERT NAME" located "INSERT ADDRESS" is subject to the following:"
1. "A fully signed purchase and sales agreement (PSA) by buyer and seller."
2. "Completion, review, and approval of PSA, a MAI certified appraisal and its findings, and the same with a property inspection appointed by ABC Lender. ABC Lender will consider other factors such as title and escrow reports and market research studies to judge the viability and credibility of whether the conditional funding proposal should be executed upon or not. All of this is subject to approval of ABC Lender."
3. "Borrower will contribute 35% of purchase price ($5,384,615) as down payment towards the designated acquisition."
4. "Upon signing this document, the borrower is required to pay $120,000 for inspection and appraisal fees to ABC lender's bank account."
Notice nothing here says the funder guarantees a loan even if ALL 4 requirements are performed.
It is clause 2 that gives more control to the lender. Read it carefully!!!!
Clause 2 says completion, review, and approval of PSA, property inspection, MAI appraisal, and their findings. IT DOES NOT SAY IF THE PROPERTY APPRAISES FOR 65% LTV or higher. If it did, ABC lender would be binded into funding it without other variables to consider. This is how a lender can back out of a deal sometimes even a day before a scheduled closing with a signed and fully executed requirements on a term sheet.
I hope this illustration helps to interpret certain confusing common clauses on term sheets.
Investment Officer and Real Estate Consultant at Minors Real Estate Advisors
5 å¹´FYI, the people who always want 100% funding are the most ignorant on this. These people than say they were scammed. In order to be fair and balance, I recognize there are fee scammers that just take the money and run. They don't schedule any due diligence of any type such as property inspection, appraisals, legal work etc. However, there are legitimate capital providers that do fund deals subject to their approval of the due diligence. If you pay funds and within a reasonable amount of time no appraisals, property inspection, legal, or any other type of due diligence takes place, that definitely can be consider a scam unless a very intelligent reason can explain otherwise which I currently can't think of. If a proof of funds from a financial institution can be shown to show that the lender has the funds fantastic.? However, proof of funds don't guarantee funding like I said over a week ago.? It just shows the liquidity is there if underwriting requirements are met and passed by the funder.