Basics of Commercial Real Estate Bridge Loans
WHAT IS A BRIDGE LOAN?
Bridge loans are commercial loans that “bridge a needed gap.” Bridge loans are used in situations where either the property or borrower is in a state of transition and might not qualify just yet for a conventional loan. These types of loans are sometimes used interchangeably with “private loan”, “hard money loan” or “rehab loan”. True bridge loans however fall between conventional programs and “hard money” financing. Bridge programs have a clear exit strategy, while private and hard money lending usually does not and demands higher rates and fees. HARBORWEST has spent years building relationships with reliable and experienced bridge lenders for our stable that help our clients in the following bridge situations:
Property Stabilization – High vacancy, risky leases, title issues, inspection issues
Borrower Strength – Lack of funds, open credit issues, conventional qualification
Timing Issues – 1031-exchange deadlines, escrow deadlines, current loan due
Construction – property rehab, unit renovations, expansion, ground-up construction
Bridge loans are typically funded by either a conventional lender like a bank, or a private lender like a debt fund. Bridge loans funded by conventional lenders are usually for bridge requests that barely miss the mark to qualify conventionally, and just need a hand-up to get to qualification. The exit strategy of conventional bridge lenders is typically to take out their own loan, and internally convert it to a permanent program once qualified. Situations that require a quick closing, major renovation or construction, or a blurry exit strategy is usually funded by private lenders since the risk profile is higher.
WHAT DOES A BRIDGE LOAN STRUCTURE LOOK LIKE?
There are a variety of bridge loan structures, depending on the situation and the client’s needs. A loan just for a quick close for example, might only be a 6-month term, no prepay penalty, and lower rate/fees – while a full renovation and lease-up might be 2-3 years, with more complex terms.
Maximum LTV – Maximum 75% LTV, if rehab/construction 75% - 90% LTC (cost)
Loan Term – Low as 6 months, up to 36 months, with (6)-month extension options
Amortization – Always interest-only payments, sometimes deferred (interest reserve)
Fixed Rate Period – Fixed for full term, sometimes tiered rates to incentivize payoff
Interest Rate – 5.00% - 6.50% for conventional, 6.50% - 9.50% for private lenders
Prepay Penalty – No prepay penalty, or minimum interest depending on loan term
Personal Guaranty – Typically recourse, non-recourse for larger deals or low LTV
Loan Fees – 1.50% - 3.00% loan points, plus possible reports, legal, processing fees
Timing – As quick as 5 days for private, quick close; up to 60 days for bank bridge
Construction – Draw process, interest charged as drawn, 75-90% LTV
Please contact our team at email@example.com to request a complimentary analysis and loan quote on your commercial property. We look forward to hearing from you!