What Is a Bridge Loan?
A bridge loan is a short-term loan that is designed to fund real estate transactions. Typical use of a bridge loan is an “acquire and improve” strategy in which a commercial developer uses the proceeds to purchase distressed property (or a property owned by a distressed borrower), and then improves that property. Once rehabilitated, the property can be flipped to another owner or can be retained for commercial rental income or owner occupancy.
As an interim loan, a commercial mortgage bridge loan provides financing until long-term arrangements can be made. A bridge loan differs from conventional construction loans, in that bridge loans are asset-based, with higher interest rates, shorter terms, and easier access.
Whereas construction loans are typically sourced from banks, a bridge loan is usually sourced from private money investment funds, private lenders. Assets America® arranges commercial mortgage bridge loans starting at $5 million. Since bridge loans 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
Utilizing commercial mortgage bridge loans 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 and a bridge loan (aka commercial mortgage bridge loans, bridge loans, bridge financing, construction bridge loans, etc.) are often a necessary tool for those looking to quickly take advantage of a new opportunity. If you desire to maintain your place in a sale chain, purchase commercial real estate below market value or fund commercial property development, a commercial construction bridge loan, sourcing short duration funding, a commercial bridge loan allows the project to progress at a much more rapid pace. Higher interest rates make a properly formulated exit strategy a critical factor in the successful utilization of commercial mortgage bridge loans.
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, meaning that 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 provides a monumental advantage.
Frequently Asked Questions
Assets America® brokers high-end, commercial bridge loans for many types of properties, including, but certainly not limited to:
Commercial mortgage bridge loans may be used 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.
A bridge loan, also known as commercial mortgage bridge loans, bridge loans, bridge financing, construction bridge loans, private money loans, and hard money loans, have certain well-defined characteristics. The details vary among lenders, but the overall profile of a bridge loans follows.
Bridge loans are usually interest-only loans, and common practice is to refinance a bridge loan 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, commercial mortgage bridge loans require a larger percentage of borrower equity than do commercial construction loans. This helps protect lenders from the higher risk associated with commercial mortgage bridge loans. Because a bridge loan is asset-based, it requires less underwriting than do other real estate loans, and therefore can be approved, and most importantly funded, much more quickly than a typical commercial real estate loan.
The proceeds from a bridge loan can be put to work in various ways beyond construction. These can include acquisition, rehabilitation, stabilization, additions, higher occupancy rates, repurposing or other purposes. Raw land can be purchased with bridge loan funds as long as the land is to be improved (i.e., infrastructure, subdivision, etc.). Commercial mortgage bridge loans can also be applied to properties already owned by the borrower so that they can be improved and refinanced.
Certain other considerations factor into the decision to apply for a bridge loan. For example, a commercial mortgage bridge loan is a good alternative if long-term financing is not available, due perhaps to the borrower’s poor credit rating or insufficient net worth. Successful use and repayment of a bridge loan can serve to boost the borrower’s credit rating, making other types of loans more accessible. A bridge loan is also used 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. Once the property is rehabbed, the commercial mortgage bridge loan is taken out with long-term financing.
Terms for Bridge Loans
A bridge loan typically matures in 12 to 18 months, although longer terms are available for additional fees. Bridge loans are typically interest only with interest rates 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%.
Other terms include:
- Prepayment Penalties: Some commercial bridge loans have no prepayment penalties, while other lenders insist upon some sort of prepay penalty. Often, this can be a 6-12-month lock out, meaning that the borrower is obligated to 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 might be just a straight 1% to 2% of the remaining mortgage balance if prepaid within certain defined intervals.
- Post-Rehab Valuations: Sometimes, the size of a bridge loan is determined by its post-rehab value. Otherwise, the loan size is based on the current value of the property.
- Recourse/Non-Recourse: Some bridge loans are non-recourse with “bad-boy” carve-outs, that is, borrowers with a turbulent credit history may be required to submit to a recourse clause. However, in most cases, bridge loans are recourse.
- Reserves: Up-front reserves may be required for operating expense shortfalls, tenant improvements, leasing commissions, and other reasons. Ongoing reserves may be included for insurance, property taxes, and replacement of building components.
- Security: A bridge loan typically requires a first mortgage lien and assignment of rents.
- Markets: Commercial mortgage bridge loans 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, no minimum
- DSCR: Typically, no minimum debt service coverage ratio, but some lenders require a DSCR of at least 1.20.
Bridge Loan Risks
The goal of a commercial mortgage bridge loan is to provide interim financing as a stepping stone to permanent commercial financing. And 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. While commercial real estate bridge loans tend to have relatively uniform features across the market (50% – 60% LTVs – although we can go higher in many cases, asset-based and backed by other collateral), the key is that closing within 10-30 days of a term sheet are common. Used correctly, bridge loans provide companies seeking longer-term financing with a substantially greater degree of flexibility. A bridge loan, of course, has higher rates, higher fees in the form of points, and shorter terms (though we can do terms as long as 3-years depending upon the specific deal) than standard commercial real estate loans.
Commercial mortgage bridge loans also generally 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 commercial mortgage bridge loans are principally for large-scale projects, one of the most important qualifiers in the eyes of potential lenders is the Annual net operating income and the debt service coverage ratio (DSCR). This is not only for total gross income minus your tax and insurance obligations, but also accounts for utilities, repairs and maintenance costs as well as vacancy factors. Your net annual operating income will need to cover a minimum of your bridge loan carrying costs.
Another important consideration is that a bridge loan is typically not permitted to exceed the total net worth of the applicant. Commercial mortgage bridge loan lenders will look at financial statements on all principals and guarantors and will determine the collective net worth of all applicants. Lenders will often require that you demonstrate appropriate cash reserves to cover key contingencies, such as replacement reserves on apartment complexes. The lender may alternatively choose to hold back a portion of the commercial bridge loan proceeds as an interest rate reserve in order to service monthly interest payments while the subject property is not generating cash flow. We do not believe in making our clients run unnecessarily complex administrative obstacle courses, as our goal is to facilitate the flow of capital from our funding sources to your project, not to maximize our lenders’ profits. The Importance of the Right Bridge loan cannot be understated.
Commercial bridge loan providers evaluate borrower creditworthiness, but only to a limited extent, since these 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: The lender will require a fair amount of documentation, including the borrower’s credit report, tax return, resume, financial statements from the previous property owner, rent rolls, lease schedules, budget, detailed construction budget if the bridge loan is to be used as a construction loan, schedule and very importantly, the exit strategy. However, the scope of bridge loan documentation is less than that for bank loans, and a bridge loan can close, much, much more quickly. We have closed them from application to closing in as little as 12 calendar days, for real.
Exit Strategies for a Bridge Loan
Commercial bridge loans are short-term, and 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 built a reputation for providing our clients with a tangible, strategic advantage when preparing commercial bridge loan exit strategies.
Commercial bridge loans are, by their nature, a short-term solution and having a viable bridge loan exit strategy in place at the outset is a foundational part of the application process. Whether the bridge loan will be redeemed via the sale of the property, refinancing or cash redemption from another source, the exit strategy should provide a clear, actionable roadmap. 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, the market is dominated by private money funds. These are managed funds of money 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 regarding reserve requirements, due diligence and so forth, and thus 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
Online Resources for Bridge Loans
- Read how The Bridge Loan Market is Surging Nationwide according to the National Real Estate Investor.
- Continue reading 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.
- 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.
- Use a Commerical Loan Calculator to create a hypothetical amortization schedule.
Assets America® Provides Bridge Loan Money
Assets America® has a proven track record of ensuring that we meet our real estate owners’, and other asset classes, transactional and financing needs. Our approach combines market and business knowledge with proven expertise in closing, and a network of long-term, productive relationships with well-funded capital sources and private decision makers. Whatever your commercial financing and business objectives, commercial mortgage bridge loan, or other types of commercial real estate loans, or commercial financing, our attention to detail gives us a substantial advantage in securing optimized and custom-tailored, commercial bridge loans from large, private bridge funding to institutional investors to government-sponsored entities.
When you are looking for bridge loan financing at highly competitive rates, turn to Assets America® for the professional expertise you need. Assets America® is well versed in commercial mortgage bridge loan risk and is therefore ideally positioned to procure exceptional commercial mortgage bridge loans. 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!