A project finance term sheet (TFS) is a financial instrument that documents the terms of a contract between a lender and a borrower. The TFS is used by lenders as a means of securing an agreement on financial terms and conditions for a loan that has been made available to the borrower. When the borrower provides satisfactory documentation and the lender agrees with the terms stated, the lending company can issue a TFS. This document is a form of escrow, which allows the lender to receive the funds required by the borrower, and establishes a credit line that can be used in a variety of different loans.
Before an agreement to sell or purchase a property can be completed, a TFS is prepared. In most cases, the lender will agree to provide the borrower with the funds that the property will require to complete the transaction. The amount of the funds depends on the value of the property and how the sale or purchase is structured.
The term sheet and the final documents are a legal agreement between the lender and the borrower. Each party will submit the documents to the other, and both have the ability to object to the deal. An agreement on the terms of the sale or purchase is usually reached at this time. In this document, the lender will provide a breakdown of the funds to be provided by the borrower, as well as an agreement on the payment schedule and other agreements.
In some cases, a TFS may not be required. In this case, the transaction may be completed without the lender providing any funds to the borrower. If the seller fails to fulfill the obligations of the agreement, the buyer can ask the seller to settle the debt. However, if the seller fails to fulfill the obligation, the buyer can usually take possession of the property. In order to complete the sale or purchase, the buyer will have to pay the seller a fee that is based on the value of the property and includes costs of the legal process and the attorney fees of the seller.
When a new agreement has been made, the owner will need to prepare and sign a similar TFS. This document is basically a formal version of the agreement that was initially signed. It is important to note that the TFS does not resolve all of the issues that were discussed during the sale or purchase process. Rather, it provides the information needed to complete the transaction. The relationship between the seller and the buyer is covered, as well as other forms of financial obligations that are agreed upon.
When the terms of the TFS are settled, it is important to continue to have updated documentation available to the lending company. As mentioned earlier, the TFS is also referred to as an escrow agreement, which allows the lender to continue receiving funds without the borrower meeting all of the terms of the agreement. The use of an escrow agreement helps to ensure that all parties are satisfied with the agreement before proceeding with the sale or purchase.
This project finance term sheet example illustrates how the documents used in the project finance agreement may be one of several agreements that must be established prior to the sale or purchase of a property. Understanding the many types of transactions involved in this process will help to ensure that each party understands the document that is being used to describe the agreement.