Definition
A term sheet is a concise document (or email-style summary) that outlines the key economic and structural terms of a deal before parties spend time and money drafting definitive legal agreements. In real estate, term sheets are commonly used for acquisitions, financings, joint ventures, and syndications.
Term sheets are usually non-binding except for a few provisions (like confidentiality, exclusivity, or expense reimbursement) if those are explicitly stated.
What a Term Sheet Typically Includes
For acquisitions (purchase terms)
- Purchase price and deposit/earnest money
- Due diligence period and deliverables
- Closing timeline and extension options
- Financing contingency (if any) and lender requirements
- Prorations, credits, and seller concessions
- Representations and warranties (high-level)
For debt financing (loan terms)
- Loan amount (or LTV/LTC), term, and amortization
- Interest rate (fixed/floating), index/spread, and floors/caps
- Recourse and guarantees (including “bad boy†carveouts)
- Fees (origination, exit, legal, reserves)
- Covenants (DSCR, debt yield, net worth/liquidity tests)
- Prepayment (yield maintenance, defeasance, step-down, open period)
For partnerships / syndications (equity terms)
- Equity raise amount and minimum investment
- Ownership splits between GP and LP
- Preferred return (if any) and distribution frequency
- Waterfall tiers and promote/carry structure
- Fees (acquisition, asset management, construction management, disposition)
- Major decision rights, reporting, and removal/“key man†provisions
Why It Matters
Term sheets reduce friction by forcing alignment on the few variables that truly drive outcomes. A clear term sheet helps prevent “deal drift†later, when legal documents are drafted and money is already being spent.
How Investors Use Term Sheets
- Negotiate leverage and risk: lock the important loan terms before underwriting confidence fades.
- Compare offers apples-to-apples: multiple lenders or JV partners can be evaluated consistently.
- Speed up execution: avoid redlining full legal docs before economic alignment exists.
- Set guardrails: ensure the “real deal†matches the model (price, reserves, fees, covenants).
Example
A buyer submits a purchase term sheet that proposes a $12.0M price, a 30-day due diligence period, a $200k earnest money deposit, and closing in 45 days, subject to receipt of standard seller deliverables (leases, financials, service contracts). Once accepted, attorneys draft the purchase and sale agreement consistent with these headline terms.
Common Pitfalls
- Assuming it’s fully non-binding: some clauses may be binding if explicitly stated.
- Too vague on economics: unclear waterfalls, fees, reserves, or rent credits create later conflict.
- Ignoring “definitionsâ€: terms like NOI, cash flow, or capex can be defined differently across parties.
- Missing conditions: financing, approvals, deliverables, and timelines are often where deals break.
- Not reflecting reality: if a term sheet can’t be executed as written, it wastes time and credibility.