A forward commitment is a written promise from a lender to provide a loan at a future time. The forward is typically a fully underwritten loan commitment with predetermined proceeds, term, interest rate, and loan documents. Forwards are valuable instruments that extend the faith and credit of the lending institution to help borrowers manage financing risk and exposure to variable market conditions. As such, forwards include a premium cost by which the lender can purchase hedging instruments and justify the risk exposure they are required to assume by extending the pledge.
Forward commitments are most frequently used for development projects to secure take-out debt upon project completion. Locking in a loan amount and an interest rate during the construction phase helps the developer reduce the considerable risk exposure involved in any development project.