COMMERCIAL BRIDGE LOANS

• What is a Bridge Loan?
• Bridge Loan Rates
• Common Loan Uses
• Bridge Loan Lenders
• How Can I Apply?
• Bridge Loan Parameters

A bridge loan is a type of loan that provides real estate investors with short-term capital to finance a transitional property. Gap and interim financing are other names frequently used when discussing this topic.

The bridge debt is secured by a first-position mortgage on a property and plays an intricate role when it comes to commercial real estate loans because it offers borrowers an opportunity to stabilize an asset by either rehabbing vacant units, increasing occupancy levels or executing an adaptive re-use business plan. The entire goal of bridge financing is to take a sub-performing property and bring it to stabilization at which point the borrower can refinance out of bridge and into a longer term fixed-rate mortgage with a more competitive interest rate.

Bridge loan rates can vary and are generally based on a spread over a specific LIBOR index.  So how do lenders determine bridge loan spreads? They are determined by underwriting various underlying factors that impact the risk profile of the loan. Some of these factors include:

• Loan-to-Cost (LTC) – Bridge lenders can loan up to 85% LTC. Lower LTC’s can produce lower spreads, therefore reducing the overall interest rate.
• Property Location – Since there is a direct correlation between loan spreads and risk, properties in stronger markets with better demographics will benefit from reduced spreads.
• Tenant Roster – A diversifed tenant roster for commercial properties can be beneficial when compared to a single-tenant asset, which creates binary risk for a lender. A tenant’s credit rating can play a role here as well – as tenants with strong balance sheets and a higher credit rating are less likely to default and are more desirable to bridge lenders.
• DSCR/Debt Yield –  Lenders typically  require a minimum debt service coverage ratio (DSCR) of no less than 1.00x for most property types. There are times when lenders make exceptions and dip below that threshold, so long as there is a fundementally strong business plan to lease up the vacant units of a property. Hotels are usually underwritten to a stricter standard due to its seasonality factor. Naturally, the higher the DSCR the lower the risk. Same applies for an underwritten minimum Debt Yield, which is more commonly used when sizing a commercial loan. Minimum Debt-Yield varies by lender and is tailored to individual transaction.
• Sponsorship Experience – Bridge loans are almost always non-recourse, with standard lender “bad-boy” carveouts. Having said that, bridge lenders compete harder for borrowers with experience in leasing, property management and general ownership.  Lenders will reduce spreads, offer lower debt-yield requirements and improved overall deal terms to beat out the competition to secure such relationships.

Bridge lenders generally fill the void when conventional lenders are reluctant to lend to certain borrowers based on their legal partnership entanglement, lower occupancy levels at the property, and any previously filed bankruptcies. There are many other reasons why short-term bridge loans make sense, some of which are listed below:

1.  Purchase of Foreclosed Asset (REO)
2.  Refinancing Maturing Loan
3.  Property With Limited Cash Flow
4.  Take Out of Construction Loan
5.  Discounted Payoff
6.  Future Funding of Tenant Improvement & Leasing Commissions (TI/LC)
7.  Foreign National Borrower
8.  Rehabilitation or Redevelopment of a Property (Adaptive Re-use)
9.  Earn Out Requirement
10.  Non-stabilized Property Without Historical Financials

It is important to understand that not all commercial bridge lenders are created equal. Each has its own geographical preference, property type niche as well as varying appetite for risk.

The largest and most active bridge lenders are generally debt funds, private money lenders and hedge funds. Conventional banks take a back seat in this space due to regulations that are imposed on these institutions when making risky loans. Unlike CMBS lenders and conventional banks that mainly loan on stabilized properties with consistent cash-flow, bridge lenders focus more on the borrower’s business plan to bring an underperforming asset to stabilization via lease-up of vacant units, rehab, redevelopment and management change for mismanaged properties. Bridge lenders have a strong emphasis on the “exit strategy” upon loan maturity date. At the end of this loan cycle, borrowers will usually have permanent financing lined up to retire the exisiting bridge debt.

Whether an acquisition or a refinance of a commercial real estate property, borrowers need to understand the true cost of the loan by factoring in lender origination/exit fees, minimum interest requirements and overall closing costs.

Applying for a commercial real estate bridge loan is easier than you think. We have an experienced team of analysts who will seamlessly underwrite the income and expense statements and draft a cash flow analysis in order to expedite a loan quote. We are with you every step of the process. You can click on the tabs below to see the information needed for a quote and submit the information via email or by calling us directly:  (212) 353-2800