Debt Term Sheet Checklist for Non-Core Acquisitions
The rate is the least important number on a term sheet. A clause-by-clause checklist of the terms that decide what happens when the business plan slips.
Sponsors compare term sheets on rate and proceeds. Those are the two terms that matter least when something goes wrong, and in a non-core market something going wrong is a scheduling problem you cannot solve by selling.
Work through the following before signing. The questions are ordered by how much damage the answer can do.
1. Term and extensions
- What is the actual maturity date, and how does it compare to your honest business plan — including the delays you have experienced on comparable assets?
- How many extension options, and for how long each?
- What are the extension conditions? Almost always a minimum DSCR or debt yield at the test date. An extension you cannot qualify for is not an extension, and the conditions are usually tested at the moment things are hardest.
- What does each extension cost? Fee, a new rate cap, sometimes a principal paydown.
- Is there a springing maturity triggered by another event?
If your plan is 30 months, a 36-month term with two conditional 12-month options is not a 60-month loan. Underwrite the hard date.
2. Rate structure and hedging
- Fixed or floating? If floating, what index and what spread?
- Is there a floor? Index floors quietly raise your effective rate.
- Is a rate cap required, at what strike, for what term, and who pays?
- What does the cap cost to replace at extension? Budget the forward price, not today's.
- Does the deal clear DSCR at the cap strike? If not, the cap is decoration. See floating vs fixed rate structures for thin-liquidity CRE.
3. Recourse
- Full recourse, partial, or non-recourse?
- What are the carve-outs? Standard "bad boy" carve-outs cover fraud, misappropriation and voluntary bankruptcy. Some lenders extend them into a full recourse trigger on events that are not misconduct — a transfer, a mechanic's lien, or in aggressive versions an insolvency you did not choose.
- Is there a burn-down? Recourse that falls away on hitting a performance milestone is worth negotiating for.
- Who signs? A guarantee from you personally is a different instrument from one from an entity.
Read the carve-outs with a lawyer. This is the clause most likely to convert a bad deal into a personal problem.
4. Covenants and testing
- What financial covenants apply — DSCR, debt yield, LTV, net worth, liquidity?
- How often are they tested, and on what look-back? A trailing-three-month test is far more sensitive than a trailing twelve.
- Is there a cure right? How many times can you cure, and how — cash sweep, paydown, equity contribution?
- What is the consequence of a breach? Cash trap, springing recourse, default, or lender control over leasing decisions.
A cash trap in the middle of a lease-up removes exactly the capital you need to complete the lease-up. Understand the trigger precisely.
5. Reserves and holdbacks
- What is escrowed at closing — taxes, insurance, replacement reserves, capex, interest?
- How are capex holdbacks released? Draw process, inspection requirements, timing. A slow draw process on a renovation is a working-capital problem.
- Is there an earnout tied to achieving stabilised NOI, and are its tests realistic?
- Is there an interest reserve, and does it cover the period your plan actually needs?
6. Prepayment and exit
- What is the prepayment structure — lockout, step-down, yield maintenance, defeasance?
- When does an open window begin?
- What does an early payoff actually cost at year two, three and four? Ask for the number, not the formula.
- Is the loan assumable, on what conditions and at what fee? In a thin market, an assumable low-rate loan can be the most valuable feature of your asset at sale.
7. Transfer and structure
- What ownership changes require consent? Thresholds are often lower than sponsors expect and can catch an ordinary LP transfer.
- Can you add a preferred equity partner later, or does the loan prohibit it? This forecloses one of your gap-funding options at maturity.
- Is mezzanine or secondary financing permitted?
- What are the SPE and single-purpose requirements?
8. Sizing constraints
- Which of LTV, DSCR and debt yield produced this loan amount? Ask directly. The binding constraint tells you what will move proceeds at refinance.
- What debt yield floor is stated, and does it change at extension?
- What is the amortisation schedule? Interest-only maximises cash flow and maximises your maturity balance — see how to underwrite refinance risk in non-core markets.
9. Costs and process
- Origination and exit fees.
- Third-party report costs — appraisal, environmental, engineering, seismic where relevant — and who orders them.
- Legal costs, including the lender's, which you will pay.
- Deposit, and what portion is refundable if the lender does not close.
- Is the term sheet binding on the lender? Usually not. Ask what conditions could still change the terms, and get committee status in writing.
10. The lender itself
In markets with few lenders this belongs on the checklist:
- Do they hold the loan or sell it? Who will you actually be dealing with in year three?
- What is their track record on extensions and modifications when a sponsor hit trouble?
- Are they still active in this asset class and market? A number of regional banks reduced commercial real estate lending between 2023 and 2025. See local bank debt vs agency debt in emerging markets.
- Who is the decision-maker, and have you met them?
The one-page summary to produce
Before committee, reduce every term sheet to the same page:
| Item | Lender A | Lender B |
|---|---|---|
| Hard maturity date | ||
| Extension conditions and cost | ||
| Recourse and burn-down | ||
| Binding sizing constraint | ||
| DSCR at cap strike | ||
| Covenant test and cure right | ||
| Prepayment cost at year 3 | ||
| Assumable? | ||
| All-in closing cost | ||
| Rate |
The rate goes near the bottom deliberately. On a five-year hold, 25 basis points is real money and a maturity you cannot meet is the whole deal.
What to do next
- Stress the coverage assumptions with DSCR sensitivity design for smaller lending pools.
- Check the sizing floor against what debt yield floor works in tertiary markets.
- Track who is lending using the debt availability tracker by secondary market type.
General information, not legal advice. Have counsel review any term sheet before you sign it.
Sources
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