In simple terms, a bridge loan is a short-term, interim
commercial mortgage loan that is sometimes necessary to "bridge" a
funding gap that can exist while arranging and closing more permanent
financing or other financial transactions. For example if an investor is
closing on an apartment building in 3 weeks and her bank can't close
her purchase loan for 3 months, she needs a 90 day bridge loan to get
her deal done. Or an investor might be selling a building to raise cash
that is needed right away, but it's going to take at least 6 months to
market and sell the building. A bridge loan is the answer.
Bridge
financing is time sensitive lending that, almost always, needs to be
arranged and closed quickly. Commercial real estate property owners,
investors and developers must pay-up for the speed and efficiency that
bridge lenders can provide. Rates on bridge capital start at around 10%
and, depending on the perceived risk in the loan, can top out at 15% or a
little more. If lenders and brokers add origination points a bridge
loan can be very pricey indeed. Yet, commercial real estate bridge
lending is a huge business with volumes counted in the hundreds of
billions of dollars. Investors understand that, although costly in
absolute terms, a bridge loan is much less expensive than taking on a
partner who will demand 50% of the project forever, and a-heck-of-a-lot
less expensive than losing their deal altogether.
Banks, Wall
Street and other large institutional lenders are not effective in the
bridge lending space. They tend to be highly regulated and highly
bureaucratic. By the time a conventional lender could arrange a bridge
loan any opportunity would be long gone. In-point-of-fact the slowness
of institutions is the reason bridge loans are in such demand. Effective
bridge lending is usually accomplished by private, unregulated
financial firms such as hedge funds, private equity groups, mortgage
pools and other private lenders.
These unique funding sources
answer to no one but themselves, they can make decisions on-the-spot and
close multi-million dollar deals in just days.
Bridge loans are
short term loans typically between 9 & 18 months long and rarely
more than 36 months. They are generally structured as simple interest
only loans with the principle due in-full at maturity. They are
underwritten based on the equity that exists in the collateral property
and are not credit or balance-sheet driven.
The first and most
important factor in obtaining a bridge loan is knowing where to go to
get one. If you need bridge capital you won't have time to shop around
and research lenders. The clock will be ticking and you'll likely have
only one shot at saving your deal. The best strategy is to develop
relationships with lenders and professional commercial mortgage brokers
before you need one, so they'll be there when you do.
After a
lender has been identified you'll need 4 things to get the loan;
credibility, equity, a payment strategy and an exit strategy.
Bridge
lenders are highly sophisticated financial pros who like to work with
other seasoned professionals. Short term loans arranged on-the-fly are
risky endeavors, they are a privilege granted to credible investors with
proven track records of success.
Bridge loans are essentially
equity loans. It is imperative that the collateral property be worth
more than the loan balance. Each lender will have their own parameters
but none will write 100% LTV interim financing in today's credit
environment.
A legitimate, verifiable debt service plan is nearly
as important as equity. It is not enough that investors say they can and
will make payments, they must prove it. If the property being financed
or the borrower can not document sufficient income to make the mortgage
payments, then an interest reserve can be arranged if the lender and
borrower agree and there is enough equity in the property to support a
larger loan. In an interest reserve scenario, the bridge lender either
loans the investor more money to make interest payments, or takes the
interest out of the original loan proceeds. The proceeds are held in an
account and payments are deducted from the account when due. Interest
reserve accounts are managed by third parties such-as trustees or
attorneys. If the loan is paid off early any balance in the interest
reserve is released to the borrower.
An exit strategy is of
paramount importance when seeking a bridge loan commitment. Bridge loans
are short-term, opportunistic loans. The financiers who originate and
fund them want to know exactly how they will be paid back and when. The
two most popular and viable exits are to secure replacement financing or
to sell the collateral. Because of the relatively short time horizons
that bridge loans cover, an investors exit must be well under way even
before you seek the bridge debt. It's not enough to say you will
sell the target building, a bridge lender wants to hear that you have
sold the target building and it's going to close on such-and-such a
date. You can't get away with telling a bridge lender that you are going to get a permanent loan, you'll need to show them the term sheet from the bank and convince them that the deal will close.
Bridge
loans make the commercial real estate world go' round. They are used
for construction or other budget short-falls, to buy out departing
partners, to rescue projects from foreclosure, to pay estate taxes and
even to settle nasty divorce cases. There are as many reasons for bridge
loans as there are commercial buildings in a city. Like ports in a
storm, they are most welcome sites to those who
need them.
By
Glenn Fydenkevez
Commercial Mortgage Loans - All About Bridge Loans - What They Are, What You'll Need to Get One
![Commercial Mortgage Loans - All About Bridge Loans - What They Are, What You'll Need to Get One]()
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