Whether representing lenders or borrowers, real estate finance attorneys’ engagement on a new loan transaction typically begins with review of a signed term sheet. As the first step in a commercial real estate financing transaction, lenders and borrowers negotiate loan term sheets intending to outline the terms and conditions of the proposed transaction. Since such term sheets are generally issued by the lender prior to a thorough analysis of the asset and its sponsorship, subsequent due diligence and underwriting may reveal certain facts that make a lender unable or unwilling to enter the transaction on the previously delineated terms.
Lenders may be compelled, following thorough diligence, to reduce proceeds, change loan pricing or increase required reserves, for example, leaving the potential borrower to choose whether to enter into loan documents inconsistent with the initial proposed terms or seek other financing. Borrowers, faced with new terms that may make the pending transaction unworkable (sometimes leaving the sponsorship up against hard deadlines on a property purchase or loan maturity date), frequently allege that the revised terms give rise to a claim for damages against the lender.
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