In simple terms, a bridge loan is a short-term, interim business mortgage loan that is sometimes needed to “close” a financing gap that may exist by 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 his bank cannot close on its purchase loan for 3 months, he needs a 90-day bridging loan to close the deal. Or an investor might be selling a building to raise the cash he needs right away, but it will take at least 6 months to market and sell the building. A bridging loan is the answer.
Bridge financing is a time-sensitive loan that almost always needs to be arranged and closed quickly. Commercial real estate owners, investors and developers must pay for the speed and efficiency that bridge lenders can provide. Bridging principal rates start around 10% and, depending on the perceived risk in the loan, can be as high as 15% or a little higher. If lenders and brokers add origin points, a bridging loan can be very expensive. However, commercial real estate bridge loans are big business with volumes running into the hundreds of billions of dollars. Investors understand that, while expensive in absolute terms, a bridge loan is much less expensive than hiring a partner who will demand 50% of the project forever, and much less expensive than losing the deal entirely.
Banks, Wall Street, and other large institutional lenders are not effective when it comes to bridging loans. They tend to be highly regulated and highly bureaucratic. By the time a conventional lender could arrange a bridge loan, any opportunity would be gone. In fact, the slowness of institutions is the reason bridge loans are in such high demand. Effective bridge loans are generally obtained by unregulated private financial companies, such as hedge funds, private equity groups, mortgage groups, and other private lenders.
These unique funding sources answer to no one but themselves, can make decisions on the spot and close multi-million dollar deals in just a few days.
Bridge loans are short-term loans, usually between 9 and 18 months and rarely more than 36 months. They are typically structured as simple interest-only loans with principal payable in full at maturity. They are written based on the equity that exists in the collateral property and are not based on credit or balance sheet.
The first and most important factor in obtaining a bridging loan is knowing where to go to get it. If you need bridging capital, you won’t have time to shop around and research lenders. The clock will keep ticking and you will likely only have one chance to save your deal. The best strategy is to develop relationships with professional commercial mortgage brokers and lenders before you need them, so they’re there when you need them.
After a lender has been identified, you will need 4 things to get the loan; credibility, fairness, a payment strategy and an exit strategy.
Bridge lenders are highly sophisticated financial professionals who like to work with other experienced professionals. Short-term loans arranged on the fly are risky endeavors, they are a privilege bestowed on credible investors with a proven track record of success.
Bridge loans are essentially home equity loans. It is imperative that the collateral is worth more than the balance of the loan. Each lender will have their own parameters, but none will write 100% LTV provisional financing in today’s credit environment.
A legitimate and verifiable debt service plan is almost as important as equity. It is not enough for investors to say they can and will make payments, they must prove it. If the property being financed or the borrower cannot document sufficient income to make the mortgage payments, an interest reserve may be arranged if the lender and borrower agree and there is sufficient equity in the property to support a further loan. big. In an interest reserve scenario, the bridge lender lends the investor more money to make interest payments, or takes interest from the original loan proceeds. Earnings 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 utmost importance when looking for a bridging loan commitment. Bridge loans are short-term opportunistic loans. The financiers who originate and finance them want to know exactly how and when they will be paid back. The two most popular and viable ways out are to secure replacement financing or to sell the warranty. Due to the relatively short time horizons that bridge loans cover, investor exit should be well underway even before seeking bridging debt. It’s not enough to tell you willpower sell the target building, a bridge lender wants to know that you have sold the target building and will close on such-and-such a date. He can’t get away with telling a bridge lender he’s going To get a permanent loan, you will need to show them the bank’s term sheet and convince them that you will close the deal.
Bridge loans make the world of commercial real estate go round. They are used for construction or other budget deficits, to buy out departing partners, to rescue projects from foreclosures, to pay estate taxes, and even to settle nasty divorce cases. There are as many reasons for bridging loans as there are commercial buildings in a city. Like ports in a storm, they are welcome places for those who need them.