In this article we take a look at how term sheets are used in real estate transactions and why they are beneficial.
A term sheet is a document that lists the preliminary terms and conditions of a prospective arrangement in broad terms. Depending on how you look at it, the biggest advantage and disadvantage of a term sheet is that it is legally non-binding. This means that none of the parties to a term sheet are under any kind of obligation to perform the actions. So why would someone enter into an agreement without wanting to commit to any obligation? Sometimes, when the stakes are high and the money involved is substantial, a term sheet is used as a tool of deliberate negotiation. Read more about Term Sheet Used Real Estate.
Term sheets are most commonly executed for agreements in financial markets. Usually, it is the person who is providing the funding or the money who prepares a term sheet. He or she makes a broad list of terms under which he or she is willing to finance the arrangement and what he or she expects in return not only in terms or payback but also in terms of conduct and dynamics. So when does term sheet come into the picture in the real estate market? Know More about property tax online Chennai from experts.
Term Sheet In Real Estate
As far as real estate is concerned, the financial market gets involved in real estate when it comes to loans and real estate financing. Usually when a borrower gets in touch with a lender, or a lender sees an opportunity to fund a real estate project, then he or she engages with the party to understand the details of the project. You have to check with the BBMP Property Tax Online Services to have better idea of it.
They look into the party’s decision to get involved in the project, what is the viability of the project, what kind of financing it requires etc.
Then the lender can look into their own capabilities to finance a project like this. The lender may choose to fund the full project or fund it with a consortium of lenders to share the burden of the risk. Once the lender has thought through all the details from his or her side, he prepares a term sheet with the broad details of the arrangement and shares it with the borrower.
At this stage the borrower gets an understanding of the lender’s expectations. If he or she finds that an arrangement can be worked out through a little negotiation, then the borrower engages with the lender and begins putting down his or her own terms to see if they are compatible with the borrower. Finally when both sides have reached a middle ground, they may sign the term sheet and see how it works for a few months or they may choose to sign a binding agreement right away depending on the circumstances.
Some Common Clauses In A Real Estate Term Sheet
Definitions – This is important to outline the ‘who’s and the ‘what’s of the agreement. Here the details of the parties involved are listed. Then the details of the project which is the subject of the term sheet are described. The latter is especially important to establish that the money being considered in this term sheet is specifically for that particular project and not any other project. You can even apply for Patta change online Process for Land Name alterations.
This is of course, if the lender is considering financing the project on assessing the viability of the project. It may be possible that a borrower is looking for a blanket amount to finance multiple projects in which case the lender would prefer to assess the track record of the borrower and doesn’t care where the borrower employs the money.
Amount – Here the amount of money the lender is willing to lend is mentioned here. However, if there are any conditions attached to the money, they must be reiterated here. If the money is being lent only by one financier, then the details of the money being lent by the one financier is mentioned. If there are more than one financiers to the term sheet, then the break up of each party’s amount is mentioned. Also, if the amount of money is not going to be transferred in lump sum, then the disbursement schedule should be mentioned along with the trigger points for each disbursement. If it is a time based disbursement, then the time schedule has to be put in. If it is a milestone based schedule then the milestones have to be defined and how much money will be disbursed on the achievement of which milestone needs to be put down.
Rate of interest – This clause will detail the rate of interest on borrowings. There has to be absolute clarity on the method through which the interest calculation has been made to ensure reconciliation of financial books between both parties. It has to mention if it is compounded or simple interest. It has to mention if the interest has to be calculated on a monthly basis or annual basis. It has to mention how the interest will be calculated if the project is terminated mid-way. This clarity in this clause is crucial because this is the part which is most vulnerable to dispute. In fact, if the lender can calculate the interest amount in exact numbers, then he or she should mention the calculated amount in as detailed a manner as possible.
Managing variables – Real estate projects usually work on estimates and not in absolutes. There can be delays and unexpected obstacles that may come in the way. It could be delay in regulatory permissions, weather, labour strike or any such external factor which may lead to an increase in costs. So the lender must be clear what should be done in such a situation. If the costs go up then what is the protocol the borrower must follow. This creates an uninterrupted flow of things with all contingencies being in place.
Time-period – Here, we mention the point of time after which the repayments have to begin. Usually when the amounts are large and the loan itself is being taken for the purpose of generating revenues, the repayment schedule doesn’t start right away. The borrower is given time to start generating some revenue in order to pay the borrower back. So when the lender is assessing the project report before lending, he or she should be able to tell by when the borrower can comfortably begin paying back so that there is clarity from the beginning. Also, the lender needs to be clear about what is the protocol if there are any delays and what would happen to the maturity period if there is a time delay in the project.
Repayment terms – In this section, the lender mentions the specific details of how the repayment has to be done. The dates of the repayment schedule, the mode of payment, the payment of interest, the penalty in case of a default etc. Again, this provides the borrower with clarity as to how to manage his or her expenses and revenues in a way so that the repayments are unaffected.
Conclusion
Real estate projects are not always reliable in terms of completion. There are several factors that contribute to the success of a real estate project and even if one factor goes bad, the entire project can come to a stand still. So a lender must do everything in their power to protect their interest by making sure that the terms are drafted with acute foresight and the right mitigants. At the same time, the borrower must also make sure that the term sheet gives him or her ample room to breathe and comfortably allow him to pay back the loan. Given that the lender has the right to seize the property and the project in case of a default, it is important that the terms drafted to protect his or her interests have been drafted after taking considerable perspectives into account. So it is always better to consult an expert who has ample experience with drafting agreements and term sheets of this nature. If you have any queries with regards to term sheets in real estate transactions, get in touch withVakilsearchand we will connect you with our highly experienced team of legal experts to assist you with your needs.
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