Definition
A loan commitment (often issued as a commitment letter) is a lender document that states the lender’s intent to fund a loan on specified terms, subject to conditions. A commitment is typically more advanced than a term sheet and indicates that the lender has completed (or is close to completing) underwriting and has secured internal approvals—while still requiring satisfaction of certain closing items.
Where It Fits in the Financing Process
- Term sheet / LOI: preliminary business terms; often non-binding and subject to underwriting.
- Loan commitment: lender indicates approval and intent to fund, subject to conditions and documentation.
- Loan documents: final legal agreements (note, mortgage/deed of trust, guaranties, etc.).
- Closing / funding: conditions satisfied, documents executed, loan is funded.
What a Loan Commitment Typically Includes
- Loan amount and purpose (acquisition, refi, construction, bridge, agency, etc.).
- Interest rate structure (fixed, floating, index + spread), and any rate lock terms.
- Term, amortization, and maturity.
- Recourse (non-recourse, partial recourse, full recourse) and guarantor requirements.
- Fees (origination, points, legal, appraisal/third-party, lender reserves).
- Reserves/escrows (tax/insurance, replacement reserves, TI/LC reserves, capex/repair escrows).
- Covenants (DSCR, LTV, debt yield, minimum occupancy, cash management triggers).
- Prepayment terms (yield maintenance, defeasance, step-down, open periods).
- Conditions to closing and required deliverables.
- Expiration date (commitments are time-bound).
Conditions to Closing (CTC)
A commitment is only as good as its conditions. Common conditions to closing include:
- Third-party reports: appraisal, Phase I ESA (and Phase II if needed), property condition report, survey, engineering.
- Title/insurance: title commitment, endorsements, acceptable exceptions.
- Financial and operating review: trailing financials, rent roll, lease review, bank statements, borrower financials.
- Entity/authority items: formation docs, resolutions, good standing, signatory authority.
- Insurance coverage: policies meeting lender requirements.
- Compliance: zoning, ADA, life-safety, permits, and other jurisdictional issues (varies by property type).
- Material adverse change (MAC): no major negative change to the borrower, property, or market (wording varies).
Binding vs. Non-Binding (Real-World Nuance)
Many commitments include a mix of binding and non-binding elements. For example, you may be bound to pay certain fees or exclusivity provisions, while the lender’s obligation to fund remains conditional. Always read: what is binding, what can be changed, and what gives the lender an out.
Why It Matters
For acquisitions, the loan commitment is a major execution milestone—often required to satisfy financing contingencies and to confirm leverage assumptions in underwriting. For refinances, it confirms proceeds, timing, and covenants. For investors, understanding commitment conditions prevents “phantom leverage†that disappears late in the process.
Investor Uses
- Deal certainty: evaluate how close you are to fundable financing and what could still derail closing.
- Underwriting validation: confirm leverage metrics (DSCR/LTV/debt yield) and reserve requirements.
- Timeline management: align commitment expiration, rate lock, and purchase contract deadlines.
- Risk pricing: identify cash management triggers, covenants, and prepayment penalties that affect return.
Example
A lender issues a commitment for a $20,000,000 acquisition loan at SOFR + 275 bps, 36-month term, interest-only, with a 75% LTV max and minimum 1.20x DSCR at underwritten NOI. Conditions include an appraisal at or above value, clean Phase I, acceptable title, and a $300,000 repair escrow to be funded at closing.
Even though terms look “approved,†failure to meet a condition (e.g., appraisal comes in low or Phase I flags a recognized environmental condition) can reduce proceeds, add escrows, or kill the loan.
Common Pitfalls
- Confusing a term sheet with a commitment: they are not the same level of certainty.
- Ignoring the conditions list: most late surprises come from CTC requirements.
- Appraisal risk: value shortfalls reduce proceeds or require more equity.
- Timing mismatch: commitment expiration or rate lock deadlines can conflict with contract closing dates.
- Hidden cash needs: reserves, escrows, and lender fees can materially increase required equity.