By Michael L. Shelton

Do you know whats in your commercial real estate loan term sheet? Whats missing that should be there? The commercial real estate financing process usually begins with a loan term sheet. Your capital planning will be impacted by this document.

Its important for the commercial real estate finance executive to understand the risks and benefits of the proposed financing. The term sheet contains many primary loan terms but there are numerous ancillary terms that will show up in the loan documents. The term sheet and the loan documents can have an adverse impact on your borrowing experience if not documented correctly.

Here are seven important terms in a commercial real estate loan term sheet. Get these right for a better borrowing experience:

Loan amount: Will the loan provide enough funding? How will you cover a potential shortfall in funds if the loan amount is reduced prior to closing? Many times the banks initial underwriting gives them comfort that the requested loan amount is achievable but a shortfall can upset your capital planning.

Interest rate: Pricing, or the interest rate, can be based on several different indexes. Prime, LIBOR and U.S. Treasury swap rates are just a few of the most common benchmarks. Rate floors are used by lenders in a low or falling rate environment to provide a minimum profit level and protection against anticipated future market rate hikes. The interest rate is typically quoted as a spread over the index and for fixed rate loans may not be known until the loan closes.

Maturity: Typical bank construction financing carries one or two one-year extension options for a small annual fee with some performance hurdles. A fixed rate loan may have a longer term but does not have extensions. The extensions give peace of mind if something in the development phase or operating phase goes wrong including changes caused by market forces beyond your control.

Collateral: Pay close attention to what the lender grabs in the loan documents. Theyll try to get all of the borrowers assets including cash in accounts. The term sheet and loan documents may include a spreader clause which captures all new borrower owned property as collateral after the loan is recorded.

Repayment: Be aware of the penalties assessed for early repayment. Defeasance or yield maintenance are standard calculations to preserve the lenders yield. Amortization during the loan term reduces the repayment risk for the lender. A shorter amortization period will have bigger monthly loan payments. Ask for a 25 or 30 year amortization schedule during the fixed rate period.

Closing costs: The origination fee and the legal bills will typically be the biggest closing costs. Some lenders pad their profit with administrative fees such as document preparation fees and servicing fees. Dont get blindsided by the legal bills. Maintain close control over the time the lawyers spend on the phone with each other and always ask for a copy of the time and charges sheet from both sides after closing.

Guarantees: The loan repayment guaranty is a way for the lender to mitigate lending risk. Be very careful about signing a personal guaranty for a commercial real estate loan. Youll be putting your personal assets at risk. Your commercial real estate Finance and personal capital planning is at stake. Other guarantees to watch for include a construction completion guaranty and environmental indemnity.

While Ive tried to cover the major issues there are many small details not typically covered in a term sheet that will appear in the loan documents. When the term sheet is signed it becomes very difficult to renegotiate those terms in the loan documents so its critical to know what you are getting and giving in the executed term sheet. Finally, find a competent attorney to represent you in the borrowing process, make sure you have adequate finance staff and expertise on board, and seek professional tax advice before borrowing.

Michael Shelton is President and CEO of Shelton Business Services, LLC providing executive coaching and management consulting services.