Commercial real estate appraisals can be very expensive. A borrower can easily pay $2,500 to $5,000 for an appraisal to obtain a commercial real estate loan. And then there's the toxic reports. Yikes! That's another $1,800 to $3,000. To make matters worse, there is no guarantee that the lender is even going to approve the loan.
You can easily see a borrower saying, "I will only pay for the third party reports once the deal is approved." But the lender would only respond, "I can't approve the deal until I get the results of the thrid party reports." It's a Catch-22 situation. The borrower and the lender would be at an impasse.
So how do lenders and borrower bridge this gap? It is customary in commercial mortgage finance for the lender to first issue a term sheet before asking the borrower to pay for any third party reports.
A term sheet - also known as a conditional commitment letter, a proposal letter or a good faith letter - is a written expression of interest by a lender in making a commercial real estate loan and a good faith estimate of the eventual terms.
A term sheet is not a commitment letter. It is not legally binding on the lender, but in practice it is a very positive and encouraging statement. If your borrower receives a term sheet, it generally means that his loan is going to be approved, assuming the property appraises for enough money and the toxic report comes back clear.
You, as a borrower, should never agree to pay for any third party reports until your commercial lender has issued a term sheet.
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