What Is A Bridge Loan?

A bridge loan (BL) is a short-term loan for funding real estate transactions.  Borrowers typically use bridge loans for an “acquire and improve” strategy. Here a commercial developer uses the proceeds to purchase a distressed property (or a property owned by a distressed borrower). Once rehabilitated, the owner can sell the property or retain it for commercial rental income or owner occupancy. 

An interim loan, a commercial mortgage bridge loan (CMBL) provides financing while the borrower waits for long-term arrangements. A bridge loan differs from conventional construction loans because bridge loans are asset-based. They also have higher interest rates, shorter terms, and easier access.

While banks typically source construction loans, a bridge loan usually comes from private money investment funds and private lenders. we arrange CMBL starting at $5 million. Since bridge loans typically require less documentation than conventional commercial loans, they are a good choice for an opportunistic purchases that require quick closings. 

Effective Use Of A Bridge Loan

Using CMBL effectively requires speed, precision, expertise and a properly formulated exit strategy.  We work with clients, its borrowers, to save them time, money and reduce transactional risk.

Commercial property investment is a complex, multi-faceted process. Bridge loans (also called commercial mortgage bridge loans, bridge loans, bridge financing, and construction bridge loans) are often a necessary tool for quickly taking advantage of a new opportunity. If you want to maintain your place in a sale chain, purchase commercial real estate below market value or fund commercial property development, CMBL allows the project to progress rapidly.  Higher interest rates make a properly formulated exit strategy a critical factor in the successful use of CMBL

Property Types

We broker high-end, commercial bridge loans for many types of properties, including, but not limited to:

• Multifamily
• Hotels
• Mixed Use
• Office Buildings
• Shopping Centers
• Industrial
• Storage
• Hospitals

CMBL are applicable for most types of commercial real estate, including properties that are in default, have an inadequate lease rate, need substantial rehabilitation, or that are not likely to stay on the market for long.

Bridge Financing Characteristics

A bridge loan has certain well-defined characteristics. They are usually interest-only loans, and common practice is to refinance a  BL with a take-out loan (i.e., a long-term, permanent mortgage).  Bridge loans are asset-based, meaning they are fully collateralized, either with the property that is the subject of the loan, and/or other in combination with additional assets as required by the funding source.  As detailed below, CMBL require a larger percentage of borrower equity than commercial construction loans.  This helps protect lenders from the higher risk associated with commercial mortgage bridge loans.  Because bridge financing is asset-based, it requires less underwriting than other real estate loans. For this reason, it can receive approval and funding much more quickly than a typical commercial real estate loan.

You can use BL proceeds in various ways beyond construction. These include acquisition, rehabilitation, stabilization, additions, higher occupancy rates, repurposing or other purposes.  You can purchase raw land with BL funds as long as the land will be improved (i.e., infrastructure, subdivision, etc.).  Commercial mortgage bridge loans also apply to properties already owned by the borrower. Then the borrower can improve or refinance the property.

Other Considerations

Certain considerations factor into the decision to apply for a BL.  For example, a CMBL is a good alternative if long-term financing is unavailable, due perhaps to the borrower’s poor credit rating or insufficient net worth. The successful use and repayment of a bridge loan can serve to boost borrowers credit rating, making other types of loans more accessible. You can also use bridge financing when the details of a project and or the management team are not yet specified, but the developer wishes to acquire the property before someone else beats him to the punch. Distressed properties that banks will not finance are a natural fit for bridge loans.  Upon rehabilitation, the commercial mortgage bridge loan is taken out with long-term financing.

Terms For Bridge Loans

A BL typically matures in 12 to 18 months, although longer terms are available for additional fees.  Bridge financing is typically interest-only. Interest rates range between about 8.99% to 14% (fixed or variable), and typical lender origination fees for commercial mortgage bridge loans are usually 2% to 4%.

Additional Terms

• Prepayment Penalties:  Some CBLs have no prepayment penalties, while other lenders insist upon some sort of prepay penalty. Often this can be a 6-12-month lockout, the borrower must pay 6 to 12 months of interest payments minimum, less the interest already paid for prepaying early. Alternatively, the prepayment penalty can be a straight 1% to 2% of the remaining mortgage balance if prepaid within certain defined intervals.
• Post-Rehab Valuations:  Sometimes, the post-rehab value determines the size of a BL. Otherwise, the current value of the property determines the loan size.
• Recourse/Non-Recourse: BL may have non-recourse and bad-boy carve-outs. In other words, borrowers with troubled credit history may have a recourse clause.  However, BL are recourse in most cases.
• Reserves: Potential lender may require up-front reserve for operating expense shortfalls, tenant improvements, leasing commissions, and other reasons. Ongoing reserves may become necessary for insurance, property taxes, and replacement of building components.
• Security: BL requires a first mortgage lien and an assignment of the rents.
• Markets: CMBL available primary and secondary Metropolitan Statistical Areas. Tertiary markets are evaluated on a case-by-case basis.

Commercial Bridge Loan Metrics

Lenders evaluate certain metrics when underwriting bridge loans, including:

• LTC: The maximum loan-to-cost ratio is usually around 80%.
• LTV: loan-to-value maximum ranges from 60% to 75% of the property’s after-repair value
• Debt Yield Ratio: Typically, there is no minimum debt yield ratio.
• DSCR: Typically, no minimum debt service coverage ratio, but some lenders require a DSCR of at least 1.20.

Bridge Financing Risks

The goal of CMBL is provide interim financing as a stepping stone to permanent commercial financing. When necessary, we fund construction bridge loans for large multifamily apartment projects, retail shopping centers, and a host of other commercial real estate market segments. Commercial real estate bridge loans tend to have 50%-60% LTV, depends on assets and other collateral.

Closing within 10-30 days of a term sheet is common. BLs provide companies seeking longer-term financing with a substantially greater degree of flexibility.  Of course, a bridge loan has higher rates, higher fees in the form of points, and shorter terms than standard commercial real estate loans. That said, we can do terms as long as 3 years depending upon the specific deal.

Generally, commercial mortgage bridge loans rely on take-out financing such as permanent debt or the eventual sale of the subject property, the availability of which may not always be assured.  However, we are experts at securing just the right bridge loan financing terms for the specific project and its specific needs, requirements and often its deadlines.

Borrower Qualifications For Commercial Mortgage Bridge Loans

Bridge Loan Rates

CMBL are for large-scale projects. Accordingly, the most important qualifiers are annual net operating income and the debt service coverage ratio (DSCR). Total gross income minus tax and insurance, and utilities, repairs, maintenance costs, and vacancy factors. Your net annual operating income needs to cover minimum of your BL carrying costs.

Additional Qualifications

Another consideration is BL usually cannot exceed the total net worth of the applicant. CMBL lenders look at financial statements for all the principals and guarantors. With this information we determine the collective net worth of all applicants. Lenders often require you demonstrate appropriate cash reserves to cover key contingencies, such as replacement reserves on apartment complexes.

Alternatively, the lender may hold back a portion of the commercial bridge loan proceeds as an interest rate reserve. This will service monthly interest payments until the subject property generates cash flow. We do not believe in making our clients run unnecessarily complex administrative obstacle courses. Our goal is to facilitate the capital from our funding sources to your project, not to maximize lenders’ profits. We cannot understate the importance of finding the right BL.

Borrower Creditworthiness

CBL providers evaluate creditworthiness, only to a limited extent because loans are asset-based. Some typical borrower qualifications for CBL are:

• Minimum Credit Score: While there is no definitive minimum credit score most $10+ million bridge loans require decent credit score, above 720.
• Net Worth: The lender will want to see a 1:1, or better, net-worth-to-loan-amount ratio. For instance borrower has net worth of only $5 million, the change that he’s going to be able to close a $40 million commercial loan is slim to none. This ratio, however, can lessen as loan size increases.
• Documentation: Lenders require much documentation, including:
• Credit report
• Tax return
• Resume
• Financial statements from the previous property owner
• Ren
• Lease schedules
• Budget
• Detailed construction budget (if the bridge loan is a construction loan)
• Schedule
• Exit strategy

However, bridge loan documentation is less than bank loans.n Accordingly, bridge loan can close more quickly.  I've seen application to closing in  10 days.

Exit Strategies For A Bridge Loan

Commercial bridge loans are short-term, so a viable loan exit strategy is essential.  Typical exits for bridges are, sale of property, refinance or payoff.  Whichever exit you choose, you need roadmap in loan application. documentation.  Assets America has a reputation for providing clients with a tangible, strategic advantage when preparing loan exit strategies.

CBL are a short-term solution.  A viable BL exit strategy at the outset is a foundational part of the application process. The borrower may redeem bridge loan at sale of the property, refinance or cash. 

Sources Of Commercial Mortgage Bridge Loans

Banks rarely engage in the commercial bridge loan market.  Rather, private money funds dominate the market. They come from accredited investors and institutions that invest in real estate projects and commercial real property.  Private money funds do not have to observe bank regulations. Examples include reserve requirements, due diligence and so on. Accordingly, they provide substantially more flexible lending to developers seeking a bridge loan.

ARV (After-Repair-Value)

A property’s estimated value after completion of all repairs and upgrades. ARV is used to develop suitable exit strategies

Amortization

The process of paying off a debt over time via incremental payments of principal and interest; literally “to kill off” the loan principal

Asset-Based Loan

A loan that uses accounts receivable and inventory and other balance sheet assets as collateral

Asset Class

A group of investments with similar characteristics, that also function similarly and are subject to similar market forces

Conduit Loan

Commercial mortgage backed security

DSCR (Debt Service Coverage Ratio)

Also called the "debt coverage ratio" (DCR), it is the ratio of cash available for debt servicing to interest, principal, and lease payments

Defeasance

A means by which borrowers can be released from a mortgage by substituting a portfolio of U.S. Treasury backed securities for collateral

Exit Strategy

The method by which a venture capitalist or business owner intends to get out of a debt or loan

LIBOR Index

The “London Interbank Offered Rate” is an index used to determine the cost of various variable-rate loans, including in the US; it can be found in the Wall Street Journal

Non-Recourse Loan

A type of loan secured by collateral, typically property, where the borrower is not personally liable in the event of default.

Origination Fee

A type of loan secured by collateral, typically property, where the borrower is not personally liable in the event of default.

Transactional Risk

The risk associated with unfavorable moves in a currency between the time a deal is agreed and the time the deal is settled

Yield Maintenance

A type of prepayment fee that lenders impose on borrowers to reimburse the lender for any loss of interest caused by prepaying a loan

FAQs For Commercial Bridge Financing

What is bridge financing?

These financing packages are short-term commercial real estate loans, lasting typically between 6 months and 3 years.

Why do borrowers use commercial mortgage bridge loans?

Bridge loans substitute long-term mortgages when the borrower needs financing fast. Usually, loans enable renovations and repairs. They come in handy when a property has low occupancy rate or borrower will need time to raise credit score before securing long-term financing.  if you have situation that warrants bridge financing.

We offer CMBL starting at $10 million with no limits.

What is an open bridge loan?

An open bridge loan doesn't have established exit, nor repayment date. Because they're riskier for lender and borrower, they have higher interest rates.

What is a closed bridge loan?

A closed bridge loan has an established exit and specific repayment date. Clear exits produce favorable interest rates.

What kinds of property can I use bridge loans for?

Bridge financing may apply to numerous types of real estate:

• Storage Units
• Hospital Buildings
• Hotel Buildings
• Industrial Parks
• Master Planned Communities
• Mixed-Use Development
• Multifamily Properties
• Office Buildings
• Shopping Centers

How long does it take to acquire bridge financing?

Because CMBL provide rapid financing solutions, potential borrowers can often receive 48 hour decision. However,  we sometimes reach an initial decision over the phone in 15 minutes. Borrowers receive a formal offer within two weeks and financing begins within four weeks.

Can I obtain financing with poor credit?

Possibly. If potential borrowers have less than good credit, they may reduce risk with significant equity or collateral and a solid, highly-feasible exit strategy.

What can I expect in terms of bridge loan rates?

Often rates hover close to 2% more than their long-term counterparts. However, the rates primarily depend upon LTV, equity, and the exit plan.