The Real Cost of Being "In Process": How Rate Locks, Diligence Timelines, and Conditional Approvals Create Basis Risk Between Term Sheet and Funding

The Gap Where Deals Live and Die

A sponsor receives a term sheet. Rate is locked. Leverage is set. Economics feel certain. Then, across weeks or months, the world between signature and funding becomes a minefield: interest rates move, appraisals come in soft, lender diligence uncovers exceptions, or sponsor liquidity tightens. The term sheet promised certainty. The funding process delivers something else entirely: conditional capital, whose terms shift with each new finding.

This is the structural reality of being "in process." It is not a temporary friction. It is a permanent feature of capital formation in illiquid markets, and it creates basis risk that sponsors often underestimate until it costs them.

Rate Locks and Market Drift

A rate lock is a binding promise with an expiration date. Most lenders lock rates for 30, 45, or 60 days from term sheet. The lock itself is contingent: it holds only if diligence results remain within band, appraisals hit target value, and sponsor liquidity remains stable. If any condition breaks, the lock breaks with it.

The structural problem: rate locks are pegged to a specific moment in time, but diligence is a process, not an event. A 60-day lock assumes diligence completes in 45 days and closing occurs before day 60. In practice, diligence windows slip. Lender legal requests additional documents. Third-party reports (Phase I, engineering, seismic) take longer than expected. Appraisal disputes require re-inspection. By day 55, diligence is still "substantially complete," but not closed. The lock expires. The lender reprices or the lock expires and the sponsor faces the market rate on a new lock.

This is not an accident. Lenders structure rate locks this way deliberately. The lock is a binding offer, but only if the sponsor performs on schedule. Diligence slippage is interpreted as sponsor friction or hidden issues, both of which justify repricing. The sponsor bears the cost of the gap between the lock term and actual closing speed.

Conditional Approvals and Moving Targets

A term sheet lists conditions precedent to funding: appraisal at value, Phase I with no Phase II trigger, sponsor liquidity above X, no material adverse change, environmental clearance, insurance availability, title insurance with no exceptions, zoning confirmation. Each condition is binary on paper. In practice, each is a negotiation.

An appraisal comes in 5 percent below value. The lender does not reject the loan outright. Instead, the lender "will consider" a lower advance, higher rates, or additional reserves. The sponsor now faces repricing under pressure, with limited optionality. Walk away and lose the rate lock and weeks of diligence. Renegotiate and accept worse terms.

Title insurance discovers an easement or lien the sponsor did not disclose. Again, not a hard stop. Instead, the lender will fund "subject to" the exception, but reserves the right to increase rates or tighten covenants if the exception creates operational friction later. The sponsor is funding a loan whose true terms are still in flux.

This is path dependence in capital markets. Once diligence begins, the sponsor has sunk time and legal costs. Walking away is expensive. Renegotiating is faster than re-marketing to a new lender. The lender knows this. Conditional approvals are tools for capturing surplus from the sponsor once the sponsor is locked in.

Diligence Timelines and Sponsor Execution Risk

Lenders underwrite two separate timelines: their own diligence timeline, and the sponsor's execution timeline. If these do not align, basis risk emerges.

A lender's diligence is parallel: appraisal, Phase I, engineering, title, legal review all happen at once. A sponsor's execution is sequential: the sponsor must gather documents, coordinate with property managers, respond to lender requests, provide legal opinions, and manage third-party vendors. Lenders assume 2 weeks for appraisal. In practice, appraisals take 3 to 4 weeks if the property is nonstandard or if comps are sparse. The lender's timeline slips into the sponsor's execution window.

More insidiously, lenders often structure their own diligence with built-in hold points. Legal review is "substantially complete" pending sponsor responses to exceptions. Underwriting is "pending final asset management review." These hold points are not failures. They are normal process. But they extend the clock beyond what the term sheet promised.

The structural constraint here is asymmetric information. The lender does not know how long sponsor execution will take until it happens. So the lender builds in a buffer (the rate lock term) and prices the risk of overrun into rates and reserves. Sponsors who close fast get the rate lock price. Sponsors who slip pay for the repricing.

The Repricing Economics of Uncertainty

When rate locks expire, diligence conditions fail, or timelines slip, lenders do not simply walk away. They reprice. The repriced loan reflects the new information discovered during the process, plus the sponsor's reduced negotiating power.

A sponsor locks a 5.5 percent rate on a 65 percent LTV loan. Diligence reveals that stabilized cash flow is 8 percent lower than underwritten. The lender will not fund at 65 LTV and 5.5 percent. Instead, the lender offers: 5.75 percent at 62 LTV, or 5.5 percent at 60 LTV, or a higher reserve requirement. The sponsor picks the least bad option, because the alternative is to start over with a new lender and lose the rate lock entirely.

This repricing is rational for the lender. The lender's cost of capital and risk profile have not changed. But the sponsor's actual risk profile has changed, revealed through diligence. The repricing captures that change.

For sponsors, the lesson is structural: there is no true rate lock in illiquid markets. There is only a rate lock conditional on a perfect diligence process that completes on schedule and produces no surprises. The moment conditions deviate, the lock is conditional. The repricing that follows is not a lender overreach. It is a natural response to new information and sponsor execution risk.

What I'm watching next

• How lenders are shortening diligence windows and rate lock terms in response to higher cost of capital. This pushes repricing risk earlier in the process and compounds sponsor execution pressure.
• Whether sponsors are beginning to price "being in process" risk into their underwriting by assuming repricing and building contingency into their equity plans. This is a structural shift from assuming locks hold to assuming locks will be tested.
• How secondary lenders and balance sheet lenders are using diligence slippage and conditional approvals as a competitive lever against institutional lenders. Shorter timelines and fewer hold points are becoming a differentiation point in a capital-constrained market.