What Are Commercial Mortgage Bridge Loans and How Do They Work?
July 06, 2018
Commercial bridge loans can be a real estate investor’s life line in the right situations. Click here to learn what they are and how they work. That way, you’ll know if it’s the right type of loan for your commercial real estate project.
As the field of commercial real estate has developed, new forms of financing have developed alongside it to fit nearly every scenario. One such loan that formed to fit the real estate industry’s needs is the commercial bridge loan. Commercial bridge loans are a way for investors to take advantage of an investment property without large amounts of capital upfront. Learn more about this unique type of financing and how it can help your business. Read on for a comprehensive guide.
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What are Commercial Mortgage Bridge Loans?
Bridging the gap is the intention of a commercial mortgage bridge loan. When you aren’t able to obtain permanent financing, use a bridge loan. The most common scenario for this type of loan is when an investor is buying a property that needs extensive renovations.
For instance, let’s say you find a commercial office building that has a great location and strong potential. However, the building is in disrepair. So the sale price is $5 million instead of the $8 million that you expect it’s after repair value (“ARV”) to be worth.
A bridge loan can provide the funds for the $5 million purchase price as well as the expected renovation costs — let’s say it’s $2 million. Your bridge loan would be for a certain percentage of your $7 million loan-to-cost (“LTC”).
The bridge loan provides the capital you need to invest in the short-term. After about a year, you’ll complete the renovations. Then you’ll sell the building for $8 million. After that, pay back the bridge loan and keep the remainder as your profit. Not a bad deal!
Another common use for a commercial bridge mortgage loan is for investors who can’t yet obtain the permanent financing they need.
Let’s use the same property from above. Perhaps you have the cash in hand for the renovation. But, say you have poor credit. Or for some other reasons, you simply aren’t able to close on a traditional commercial mortgage for the $5 million purchase price.
In this case, a commercial mortgage bridge loan could provide the $5 million you need. And, it could have a short payoff term, such as 18 months. After you are able to secure a permanent mortgage, you will use those funds to payoff the bridge loan.
The obvious advantage to a commercial mortgage bridge loan is that it opens doors you wouldn’t otherwise be able to access. As an ambitious business-owner, there are few things worse than missing out on a huge opportunity, simply for timing’s sake.
However, a bridge loan also offers a very quick loan process. Permanent financing can take much longer to close. In the real estate business, just a day or two can make the difference. This is especially true when you’re competing with multiple buyers. The fast turnaround time of a bridge loan can help you seize the right opportunities, when they come along.
The only true disadvantages of a commercial mortgage bridge loan arise when businesses use them outside of their intended purpose.
First, a bridge loan is not meant for borrowers who don’t have sufficient capital to invest. Calculate your loan-to-cost by adding the property’s current value to the expected cost of renovations. Most lenders will loan a maximum of 65-70% of this amount. Therefore, you need to have enough capital to invest upfront.
Second, a bridge loan is not meant to be a permanent financing option. While it is sometimes possible to extend your bridge loan, these loans have higher interest rates. It’s understandable, because of the high risk involved for the lender. However, the interest rates for commercial mortgage bridge loans make them impractical and unwise unless used properly.
Third, you should only take on a bridge loan if you have the income to make the payments during the interim. Some borrowers see that a bridge loan will provide the capital they need for their investment. And as a result, they jump in too quickly.
You never know exactly how long your renovations will take or exactly how long a sale will take. Be sure to evaluate your finances to ensure that you can make the loan payments until you get the financing you need or your sale is completed.
Finally, commercial mortgage bridge loans also tend to have higher transaction costs. They’re not meant to be an alternative to traditional financing, but rather to cater to a select set of circumstances.
Tips for Businesses Seeking a Commercial Mortgage Bridge Loan
If you’re thinking about getting a commercial mortgage bridge loan for your business, there are a few tips you should follow.
First, determine all the fees up front. As we mentioned above, these bridge loans can carry higher transaction fees than other types of financing. Some lenders load on unexpected fees when you’re already in the borrowing process. Be sure to ask for all the fees in writing before you get started.
Second, make sure there are no early repayment penalties. Especially with the high interest rate, you don’t want to pay on a bridge loan longer than necessary. While early repayment penalties aren’t mandatory for bridge loans, it’s best to be informed.
Third, do plenty of market research to ensure that you’re making a smart investment. You don’t want to invest in a neighborhood that is on a downward trend. But some investors get swept up in the excitement of what seems to be a great opportunity. It’s always best to remember the basics about doing your homework prior to making a commitment.
How to Apply for a Commercial Mortgage Bridge Loan
Commercial mortgage bridge loans can be a great way for real estate investors to get in on an opportunity. This is especially when they’re used for they’re intended purpose. Like any other business decision, it just takes some research to ensure this is the right move for your company.
If you’re ready to apply for a commercial mortgage bridge loan, contact our commercial lending experts today!