Why Counsel Review of Your Loan Term Sheet Is Not Optional

Why Counsel Review of Your Loan Term Sheet Is Not Optional

In the current debt environment, the "standard" term sheet has become a relic of the past. As bridge lending continues to dominate the middle-market multifamily and commercial space, the variability between lenders has reached an all-time high.

While it is tempting to execute a term sheet quickly to secure a rate or a spot in a lender’s pipeline, doing so without a granular legal review can lead to "term sheet creep" where the eventual loan documents contain restrictive covenants that were hinted at in the term sheet but never fully negotiated.

Here is why having counsel at the table before you sign is critical to protecting your liquidity and your balance sheet.

The Bridge Loan Variable

Bridge loans are inherently more complex than agency debt. Because they are often structured around a value-add "business plan," lenders bake in protections that can vary wildly from one firm to the next. Counsel’s role is to ensure that the "flexibility" you are paying for in a bridge loan isn’t undermined by aggressive default triggers or hidden costs.

Negotiating Away the "Guaranty Trap"

In recent months, our firm has successfully moved the needle for clients by identifying and neutralizing specific guarantees that often hide in plain sight within a term sheet. Executing a term sheet with these items included makes them significantly harder to remove during the formal document phase.

Key areas where we have recently secured wins for our clients include:

Eliminating Loan Out-of-Balance Guarantees: Many lenders require the sponsor to personally guarantee any "gap" if the project costs exceed the budget. We work to limit this to a "carry" or "completion" obligation rather than a pure capital call, protecting your personal liquidity.
Rebalancing Prepayment Guarantees: Bridge lenders often seek to protect their yield with heavy exit fees or minimum interest requirements. We have successfully restructured these to make these solely an entity obligation and not a personal guarantee of the sponsor.
Removing Interest Reserve Replenishment Guarantees: A common "gotcha" in bridge lending is the requirement for the sponsor to personally guarantee the replenishment of an interest reserve if it runs dry before the loan matures. We aim to keep these obligations "non-recourse" to the individual, keeping the risk tied strictly to the asset.

The Power of "No" at the Term Sheet Stage

Once a term sheet is signed and a deposit is paid, your leverage as a borrower drops significantly. The lender’s legal team will treat the term sheet as the "law of the deal." By engaging counsel early, you transform the term sheet from a lender’s wish list into a balanced roadmap that protects the sponsorship group.

Disclaimer: This article is for informational purposes only and does not constitute legal advice or create an attorney-client relationship. Every transaction is unique, and you should consult with legal counsel regarding the specific terms of your financing.