Bridge Loans
A bridge loan is defined as a short-term real estate loan that gives the property owner time to complete some task - such as improving the property, finding a new tenant and/or selling the property. The typical commercial property bridge loan has a term of one to two years, although many commercial bridge loan lenders will grant the owner the option to extend his loan for six months to one year for a fee of between a half-point point to two points.
My own private money commercial mortgage company, Blackburne & Sons, makes bridge loans with a term of 15 years! There is, of course, no prepayment penalty.
Bridge loans are more expensive than permanent loans. In a market where a commercial property borrower might be able to obtain a 6% permanent loan, he might have to pay LIBOR plus 3.5% to 7% (6-month LIBOR is 2.61% as of 10/18/18), plus a point or two, for a bridge loan from a commercial real estate opportunity fund.
Most large bridge loans ($3 million or greater) are written on a floating rate basis, tied to one-month LIBOR or 6-month LIBOR. LIBOR stands for the London Inter-Bank Offer Rate, which is the rate that European banks lend funds to each other. It is similar to the U.S. federal funds rate.
Commercial property bridge loans are typically paid off when the owner places permanent financing on the property, after the improvements are completed and the new tenant(s) move into the property. Because of their short term nature, most bridge loans have no prepayment penalty.
Example:
Suppose Bob inherits an older, rundown office building from his father. Because the property has been allowed to deteriorate by his ailing father, the property is half-vacant and commands very low rents. If Bob tried to refinance the building today, he might only qualify for a $400,000 new loan based on today's cash flow.
Bob might therefore apply for a $700,000 new bridge loan to pay off the existing $250,000 first mortgage and to pay for $450,000 in improvements. After Bob has replaced the roof, repainted the building, retextured the walls, upgraded the electrical and HVAC systems, and recarpeted the property, he might be able to fill the entire building with new tenants paying twice as much in rent. When the new tenants move in, Bob might be able to refinance his bridge loan for $1,300,000, put $500,000 in cash in his pocket, and still have a $3,000 per month positive cash flow. This would be a great use for a bridge loan.
There are all kinds of bridge lenders. Many banks will make bridge loans if the borrower has excellent credit and a large financial statement. The problem with obtaining a bridge loan from a bank is that the bank is likely to be very slow, and any bridge loan from a bank has to be a very low risk deal.
A great many renovation and releasing projects are a bit more speculative and need to be made by opportunity funds specializing in bridge loans. An opportunity fund is defined as a special fund set up to make high-yield commercial real estate loans requiring special expertise and understanding. Opportunity funds make what we in the industry call "brainer deals", as opposed to no-brainer deals, which are deals that are so simple and straight-forward that even a child could understand them. The kinds of investors who invest in opportunity funds are pension plans, endowment trusts, wealthy private trusts and some REIT's.
If the borrower has less-than-average credit, a modest financial statement, and/or little commercial real estate experience, or if the deal is small (less than $2 million), the borrower may have to go to a hard money bridge lender. Hard money bridge lenders are lenders who make loans based primarily on the equity in the property.
Most hard money lenders are going to be very concerned about the exit strategy because they want to be paid off promptly in one or two years. An exit strategy is how the borrower plans to pay off his bridge lender. If you are the borrower or the broker, you must be prepared to provide a very convincing exit strategy to your bridge lender. This is a very important subject to most bridge lenders. An example of a good exit strategy is to fix up the building, lease it out, and then obtain permanent financing. A less welcome strategy is to simply list the the property and then pray like crazy that some buyer miraculously appears.
Blackburne & Sons is an example of a private money or hard money bridge lender. We are not worried about an exit stratgy because we happily make 15-year bridge loans. We would be quite content to have your deal remain on the books for the entire term.
If you're bankable, you can apply to 700 different banks, opportunity funds and other commercial property bridge loan lenders by completing this short commercial mortgage mini-app. Use of C-Loans application system is free. Please click here to apply.
