Ask most developers to compare two loan term sheets and they’ll start with rate, move to leverage, and stop there. I understand why — rate and leverage are the two numbers that are easy to compare across offers, and they drive the headline return math in a pro forma. But in twenty years underwriting and closing construction and bridge financing, the deals that actually got us into trouble, or that we walked away from at the last minute, were almost never about rate. They were about covenants.
The covenants that actually bite
A few show up in almost every negotiation we run. Debt yield covenants, which can force a partial paydown or trigger a cash sweep if in-place NOI dips below a threshold — punishing precisely during lease-up, exactly when you can least afford it. Springing recourse provisions, which convert a loan you thought was non-recourse into a personal guarantee the moment a covenant trips, often for reasons that have nothing to do with actual default risk. And completion guarantees with no carve-out for force majeure delays that are entirely outside the sponsor’s control — a permitting delay, a materials shortage, a labor strike.
None of those show up in the headline rate. All of them show up in the outcome when a project doesn’t go exactly according to the pro forma — and no project ever does exactly.
A 25 basis point rate difference is a rounding error next to a springing recourse trigger you didn’t read closely enough.
How we actually compare term sheets
We build a covenant scorecard alongside the rate comparison for every financing decision across the platform: reserve requirements, reporting cadence and cost, cross-default provisions to other platform debt, prepayment penalties, and the specific triggers for recourse, sweep, or default. We then model the covenant package under a stress case — a six-month construction delay, a softer-than-underwritten lease-up — not just the base case. A loan that looks cheaper in the base case can be dramatically more expensive, or simply unworkable, in the stress case, and the stress case is the one that actually determines whether a sponsor survives a difficult stretch with the asset intact.
This is also, frankly, where a General Counsel who understands real estate capital structures — not just contract law generally — earns their seat at the table on every financing decision we make. Eric and I review every term sheet together before it goes to the investment committee, specifically because the legal read on covenant enforceability and the financial read on covenant consequence need to happen in the same room, not sequentially.
Rate matters. It’s just not where the real cost of capital lives. Sponsors who learn to read the covenant package with the same rigor they apply to the rate will find themselves in fewer forced conversations with their lender at exactly the moment they can least afford one.
