What is the soft commitment trap on a CRE loan and how do sponsors avoid it?

How the trap forms and how to avoid it

How the trap forms: at term-sheet stage, the borrower has 6 to 12 LOIs and substantial leverage. Once the term sheet is signed, the placement firm typically thanks the other lenders and closes the file. Then during diligence, the winning lender raises an issue (appraisal short, MAC concern, structural retrade), and the borrower has no fallback because all the alternates have moved on.

What soft commitment actually means: the lender's loan officer or relationship manager has indicated at desk level that credit committee will approve, but the formal commitment letter has not been issued. There is no contractual obligation behind a soft commitment; the lender can change its mind without breach.

Defense step 1: maintain at least one credible alternate through commitment-letter signing and credit-committee clearance. Some sponsors maintain alternates further (through closing) at the cost of some lender goodwill.

Defense step 2: structure the term-sheet exclusivity to start at a defined milestone, e.g., exclusivity begins on credit-committee approval, not on term-sheet signing. This preserves the right to engage alternates during the highest-risk diligence period.

Defense step 3: build the relationship with two or three alternate lenders to the point that they will turn around a fast quote if the primary deal collapses. The placement firm's value here is being able to make those calls credibly on short notice.

Defense step 4: read the term-sheet exclusivity language carefully. Lender draft is broad (no other lender contact during exclusivity); push for narrower language that allows continued contact for follow-on opportunities and that drops exclusivity if the lender misses defined commitment milestones.