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.
As 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. Assets America® arranges CMBLs starting at $5 million. Since BLs require less documentation than conventional commercial loans, they are a good choice for opportunistic purchases that require quick closings.
Effective Use of a Bridge Loan
Using CMBLs effectively requires speed, precision, expertise and a properly formulated exit strategy. Assets America® works with its 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, a CMBL allows the project to progress rapidly. Higher interest rates make a properly formulated exit strategy a critical factor in the successful use of CMBLs.
How A Commercial Loan Broker Can Help
To make the best use of short-term bridge financing, you’ll need a financial partner who is clued into your specific objectives. What you don’t need is a sales rep who’s trying to force your commercial financing project into a pre-defined underwriting box. Here at Assets America®, we represent our clients rather than one specific lender. In other words, we are free to formulate targeted commercial real estate loan transactions between you and our well-funded private and institutional capital sources. When speed and precision are vital, our second-to-none personal service and extremely high closure rate provide a monumental advantage.
We broker high-end, commercial bridge loans for many types of properties, including, but not limited to:
CMBLs 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, CMBLs 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.
Certain other 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 the borrower’s 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 the typical lender origination fees for commercial mortgage bridge loans are usually 2% to 4%.
- 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. In other words, the borrower must pay 6 to 12 months of interest payments as a minimum, less the amount of 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: Some BLs are non-recourse with “bad-boy” carve-outs. In other words, borrowers with a turbulent credit history may have to submit to a recourse clause. However, BLs are recourse in most cases.
- Reserves: Potential lenders may require up-front reserves 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: A BL typically requires a first mortgage lien and assignment of rents.
- Markets: CMBLs are available nationwide for 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: A 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.
Video – The Debt Service Coverage Ratio (DSCR)
Bridge Financing Risks
The goal of a CMBL is to provide interim financing as a stepping stone to permanent commercial financing. When necessary, Assets America® funds 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 relatively uniform features across the market. Specifically, this means 50% – 60% LTVs. However, we can go higher in many cases, depending on the assets and other collateral.
The key is that 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
Since CMBLs are principally for large-scale projects. Accordingly, the most important qualifiers are the annual net operating income and the debt service coverage ratio (DSCR). This holds true for total gross income minus your tax and insurance obligations. However, it should also account for utilities, repairs, maintenance costs, and vacancy factors. Your net annual operating income will need to cover a minimum of your BL carrying costs.
Another important consideration is that BLs usually cannot exceed the total net worth of the applicant. CMBL lenders look at financial statements on all principals and guarantors. With this information, they determine the collective net worth of all applicants. Lenders often require that 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 flow of capital from our funding sources to your project, not to maximize our lenders’ profits. We cannot understate the importance of finding the right BL.
CBL providers evaluate borrower creditworthiness, but only to a limited extent because the loans are asset-based. Some typical borrower qualifications for commercial bridge loans are:
- Minimum Credit Score: While there is no definitive minimum credit score for a bridge loan, most $10+ million bridge loans require a relatively decent credit score, preferably above 720.
- Net Worth: The lender will want to see a 1:1, or better, net-worth-to-loan-amount ratio. For instance, if a borrower has a net worth of only $5 million, the change that he’s going to be able to close on a $40 million commercial loan is slim to none. This ratio, however, can lessen as the loan size increases.
- Documentation: Lenders require a fair amount of documentation, including:
- Credit report
- Tax return
- Financial statements from the previous property owner
- Rent rolls
- Lease schedules
- Detailed construction budget (if the bridge loan is a construction loan)
- Exit strategy
However, the scope of bridge loan documentation is less than that of bank loans. Accordingly, a bridge loan can close much more quickly. We have closed BLs from application to closing in as little as 12 calendar days.
Exit Strategies for a Bridge Loan
Commercial bridge loans are short-term, so a viable loan exit strategy is essential. Typical exit strategies for commercial bridge loans include sale of the property, refinancing, or cash payoff. Whichever exit strategy you choose, you need to provide a clear, actionable roadmap in the loan application documentation. Assets America has a reputation for providing clients with a tangible, strategic advantage when preparing loan exit strategies.
By nature, CBLs 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 the bridge loan via the sale of the property, refinancing, or cash redemption from another source. We have built our reputation on providing our clients with a tangible, strategic advantage compared to our competitors.
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.
Bridge Loan Terminology
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 for long-term mortgages when the borrower needs financing for one of several reasons. Usually, the loans enable major renovations and repairs. They also come in handy when a property has low occupancy rates or the borrower needs time to raise their credit score before securing permanent financing. Call us at 206-622-3000 if you have a particular situation that may warrant bridge financing.
How much financing can Assets America® provide?
We offer CMBLs starting at $5 million with no upper limit.
What is an open bridge loan?
An open bridge loan does not have an established exit strategy, nor a specific repayment date. Because they are riskier for both lenders and borrowers, they have higher interest rates to match.
What is a closed bridge loan?
A closed bridge loan has an established exit strategy and a specific repayment date. Clear exit strategies produce more 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 CMBLs provide rapid financing solutions, potential borrowers can often receive a decision with 48 hours. However, we sometimes reach an initial decision over the phone in minutes. Borrowers then receive a formal loan offer within two weeks and financing begins within four weeks.
Can I attain financing with poor credit?
Possibly. If potential borrowers have sub-par credit, they may counterbalance their application 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.
Where can I find answers to other queries regarding commercial bridge loans?
If you’re serious about attaining commercial mortgage bridge financing, speak to a professional with over 30 years of experience.
- First, read how The Bridge Loan Market is Surging Nationwide according to the National Real Estate Investor.
- Secondly, read about the increased popularity of the bridge loan in the article Bridge Loans Rising from the CCIM Institute, a premier provider of commercial real estate education.
- Thirdly, Forbes has a helpful article on The Evolution Of Commercial Real Estate Debt Financing.
- For the best blogs providing resources and tools for commercial real estate, check out Property Metrics, Real Massive, America’s Commercial Real Estate Show, and Globe St.
- Finally, use a Commercial Loan Calculator to create a hypothetical amortization schedule.
Assets America® Provides Bridge Loan Money
Assets America® has a proven track record of meeting our client’s transactional and financing needs. Our approach combines market and business knowledge with proven expertise in closing. We have a network of long-term, productive relationships with well-funded capital sources and private decision-makers. Whatever your commercial financing and business objectives, our attention to detail provides a substantial advantage in securing optimized and custom-tailored loans from large, private bridge funding to institutional investors to government-sponsored entities.
In conclusion, if you are looking for bridge financing at highly competitive rates, turn to Assets America® for professional expertise. Assets America® is well versed in commercial mortgage bridge loan risk. Our goal is to provide our clients with a low transactional risk commercial financing structure alongside a seamless, focused experience. This is the Assets America® difference.
For more information about securing and funding a bridge loan for your large commercial real estate project, please contact us today at (206) 622-3000!