In simple terms, a bridge loan is a short-term, interim commercial mortgage loan that is sometimes necessary to "bridge" a funding gap that can exist while 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 her bank can't close her purchase loan for 3 months, she needs a 90 day bridge loan to get her deal done. Or an investor might be selling a building to raise cash that is needed right away, but it's going to take at least 6 months to market and sell the building. A bridge loan is the answer.
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Bridge financing is time sensitive lending that, almost always, needs to be arranged and closed quickly. Commercial real estate property owners, investors and developers must pay-up for the speed and efficiency that bridge lenders can provide. Rates on bridge capital start at around 10% and, depending on the perceived risk in the loan, can top out at 15% or a little more. If lenders and brokers add origination points a bridge loan can be very pricey indeed. Yet, commercial real estate bridge lending is a huge business with volumes counted in the hundreds of billions of dollars. Investors understand that, although costly in absolute terms, a bridge loan is much less expensive than taking on a partner who will demand 50% of the project forever, and a-heck-of-a-lot less expensive than losing their deal altogether.
Banks, Wall Street and other large institutional lenders are not effective in the bridge lending space. They tend to be highly regulated and highly bureaucratic. By the time a conventional lender could arrange a bridge loan any opportunity would be long gone. In-point-of-fact the slowness of institutions is the reason bridge loans are in such demand. Effective bridge lending is usually accomplished by private, unregulated financial firms such as hedge funds, private equity groups, mortgage pools and other private lenders.
These unique funding sources answer to no one but themselves, they can make decisions on-the-spot and close multi-million dollar deals in just days.
Bridge loans are short term loans typically between 9 & 18 months long and rarely more than 36 months. They are generally structured as simple interest only loans with the principle due in-full at maturity. They are underwritten based on the equity that exists in the collateral property and are not credit or balance-sheet driven.
The first and most important factor in obtaining a bridge loan is knowing where to go to get one. If you need bridge capital you won't have time to shop around and research lenders. The clock will be ticking and you'll likely have only one shot at saving your deal. The best strategy is to develop relationships with lenders and professional commercial mortgage brokers before you need one, so they'll be there when you do.
After a lender has been identified you'll need 4 things to get the loan; credibility, equity, a payment strategy and an exit strategy.
Bridge lenders are highly sophisticated financial pros who like to work with other seasoned professionals. Short term loans arranged on-the-fly are risky endeavors, they are a privilege granted to credible investors with proven track records of success.
Bridge loans are essentially equity loans. It is imperative that the collateral property be worth more than the loan balance. Each lender will have their own parameters but none will write 100% LTV interim financing in today's credit environment.
A legitimate, verifiable debt service plan is nearly as important as equity. It is not enough that investors say they can and will make payments, they must prove it. If the property being financed or the borrower can not document sufficient income to make the mortgage payments, then an interest reserve can be arranged if the lender and borrower agree and there is enough equity in the property to support a larger loan. In an interest reserve scenario, the bridge lender either loans the investor more money to make interest payments, or takes the interest out of the original loan proceeds. The proceeds 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 paramount importance when seeking a bridge loan commitment. Bridge loans are short-term, opportunistic loans. The financiers who originate and fund them want to know exactly how they will be paid back and when. The two most popular and viable exits are to secure replacement financing or to sell the collateral. Because of the relatively short time horizons that bridge loans cover, an investors exit must be well under way even before you seek the bridge debt. It's not enough to say you will sell the target building, a bridge lender wants to hear that you have sold the target building and it's going to close on such-and-such a date. You can't get away with telling a bridge lender that you are going to get a permanent loan, you'll need to show them the term sheet from the bank and convince them that the deal will close.
Bridge loans make the commercial real estate world go' round. They are used for construction or other budget short-falls, to buy out departing partners, to rescue projects from foreclosure, to pay estate taxes and even to settle nasty divorce cases. There are as many reasons for bridge loans as there are commercial buildings in a city. Like ports in a storm, they are most welcome sites to those who need them.
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