Imagine that you’ve found the perfect office building to acquire
, but won’t have the cash to close until your current property has sold
. Or maybe your renovation project is taking longer than anticipated
to complete, but your balloon loan is coming due in the next few weeks.
In situations like these and others, commercial real estate investors and developers turn to bridge loan financing to raise cash fast
. In this article we’ll discuss how bridge loans work
and how bridge loans serve as an alternative form of financing for commercial real estate.
Related: Ultimate Checklist for Buying Commercial Real Estate
Defining Commercial Bridge Loans
As the name implies, a bridge loan ‘bridges’ or ‘fills the gap’ between a short-term loan used for work s
uch as new construction or redevelopment and more permanent long-term financing
. In some markets bridge loans are also known as interim financing
, gap financing
, or swing loans.
A bridge loan allows the borrower to pull cash out of the property to pay off an existing loan or settle other debt obligations
. Bridge loans can also be used to help a commercial real estate investor cover part of the cost of acquiring a new property
and entice the seller
with a quick close of escrow.
Commercial real estate bridge loans:
- Are short term, usually between three months up to three years
- Have relatively high interest rates and fees
- Usually are fast to fund
- Backed by collateral such as real estate
- May be issued by banks, private lenders, and alternative lenders such as debt funds
The Difference Between Bridge Loans and Traditional Loans
Some of the key differences between bridge loans for commercial real estate
and traditional loans
Closing time frame
Waiting for a traditional loan to be underwritten and processed can cost valuable time
and create missed opportunities
. By contrast, the closing time frame for a bridge loan
can be three weeks or less
. A commercial real estate bridge loan allows an investor to move quickly
when time is of the essence, then arrange permanent financing after the bridge loan closes.
Qualifying for a real estate bridge loan
can also be easier
than being approved for a longer-term loan
. While bridge loan lenders may have credit score minimums
, they will also consider loan qualification factors
such as debt-to-income ratio (DTI)
, the borrower’s track record
and other assets
, and the viability of the investor’s business plan
, and future refinancing
and payback plans.
Fees and interest
for the faster loan funding and easier qualification
of a bridge loan
is that the fees and interest rates are more expensive compared to a traditional loan
. Closing costs
associated with commercial bridge loans typically include appraisal and escrow fees
, title policy costs
, and administration and loan origination fees
. Interest rates vary based on the borrower
, and specific loan terms
but generally range above the prime rate
for a traditional loan.
Use of loan
A bridge loan lender is more willing to dig deeper into a borrower’s plan to acquire, upgrade, or reposition a property
and evaluate the investor’s track record of success
for similar projects. On the other hand, a traditional lender prefers to finance the property after the renovation is done
and the building is leased
up. Commercial real estate bridge loan lenders
are willing to be more flexible
with how the bridge loan is used
in part because of the shorter loan term.
Unlike a traditional commercial lender
, bridge loan lenders
normally want the loan to be paid off quickly
. A commercial real estate bridge loan does not have a prepayment penalt
y, with payback periods
generally ranging from three months
to one year or more
. Real estate investors can benefit by paying off a bridge loan early
without incurring fees
or other penalties.
Do you want to find out more about how to find success in the commercial real estate investment industry? Check out the top-quality resources offered by Feldman Equities today for more information.
Understanding How Commercial Bridge Loans Work
Commercial bridge loans
by the lender to meet the specific needs of each borrower
. Financing fees
and interest rates
for a bridge loan are normally greater
than with a traditional loan, but funding is faster
and the loan terms and conditions are more flexible.
The loan-to-value (LTV)
of a commercial bridge loan is between 65% and 80% of the property’s appraised value
. If a building is being renovated
, the lender will use loan-to-cost (LTC) which takes into consideration capitalized capital expenditures.
Common bridge loan scenarios
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- Take advantage of an immediate opportunity to acquire a property then refinance with a more affordable long-term traditional commercial real estate loan.
- Use a commercial real estate bridge loan to acquire a new property before the current one is sold, such as a business needing to expand or downsize.
- Make improvements to attract tenants willing to pay higher rents and increase long-term gross rental income to make qualifying for a commercial bank loan easier.
- Stabilize an office building so that the long-term cash flow and debt obligations will qualify for a traditional loan.
Things to Look for in a Commercial Bridge Loan
There are two things to look for in a commercial real estate bridge loan
1. Funding timeframe
While traditional lenders
are normally slow to fund
, the funding timeframe for a commercial real estate bridge loan
can be a few weeks or less
. Investors who need to fund quickly to acquire a property or jump-start a repositioning project
may find a bridge loan the ideal short-term solution.
A good bridge loan
for commercial real estate
will offer the borrower the option to increase the loan balance during the loan term
for the purpose of paying for capital improvements
, tenant improvements
, or leasing commissions
. The advantage from a borrower’s perspective is that unlike traditional loans which fund all the proceeds in an up-front lump sum
, borrowers can draw down on additional proceeds when and if needed
. This helps to reduce
and keep interest payments
to a minimum.
Pros and Cons of Commercial Bridge Loans
While there are advantages
to a bridge loan for commercial real estate there are also some potential drawbacks t
o be aware of as well:
Pros of a commercial bridge loan
- Offer immediate funding to acquire a property or satisfy an existing obligation.
- Faster funding time frame makes a commercial bridge loan an ideal solution when time is of the essence.
- Bridge loan lenders are more willing to think outside of the box, with less focus on a borrower’s credit score and more attention paid to the viability of the acquisition or renovation project.
Cons of a commercial bridge loan
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- Property being borrowed against must be used as collateral for a commercial bridge loan, putting the entire investment at risk in the event of a
- Other property of the borrower used as collateral may also be at risk if payment on a bridge loan is not made on time, though unsecured bridge loans are available for the right borrower.
- Higher fees, both up front and upon repayment, can create cash crunches for the borrower.
At some point every commercial real estate investor needs to think about borrowing money
. While traditional long-term loans
are the go-to source for capital
, they aren’t always the best
commercial real estate loan choice. Short-term bridge loans are an alternative source of funding
that commercial real estate investors and developers use to raise capital quickly
, with loan terms customized
for the specific needs
of the borrower
and the lender.
Would you like to learn more about the dos and don’ts of how to find success in the commercial real estate investment industry? Take a look at the resources offered by Feldman Equities today to find more information.
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