Bridge Loans

Bridge loans are short-term loans that are used to "bridge" the gap between the purchase of a new property and the sale of an existing property. These loans are used to provide interim financing and allow real estate investors to quickly close on a property purchase without having to wait for the sale of their current property. Bridge loans are typically secured by the existing property, making them a high risk option for lenders. The terms of bridge loans are typically shorter than traditional loans, often lasting anywhere from six months to two years, and they typically come with higher interest rates. Due to the high risk involved, bridge loans are often used as a last resort by real estate investors who are unable to secure traditional financing.
Get Financing

About Bridge Financing:

Bridge loans are used when a commercial property is not yet fully optimized or stabilized and can fit a wide array of scenarios. These loans allow investors to purchase or build a new property, perform substantial rehabilitation, or access capital to close on an opportunity while they await a more permanent financing solution. Many bridge lenders will offload the risk of these loans through a Collateralized Loan Obligation (CLO) which allows them to maintain liquidity and make additional loans. These loans typically feature floating interest rates and high leverage points while not paying down any of their principal balance. This allows the sponsor the flexibility to make capital improvements to the property and increase the property's value in relation to the condition in which it was purchased. These loans lack a necessity for analysis of income currently generated on a property but instead look at the as-stabilized value of the asset at the end of the loan term, once property upgrades have been made. Bridge loans have an abridged closing timeline and boast much more flexible and less strict requirements than alternative funding from a bank.

How do Bridge Loans Work?

Bridge loans are intended to be short term financing until long-term financing is secured. Bridge financing gives owners the ability to reposition and stabilize their property, requiring a clear exit strategy upon the bridge loan’s completion. Apartments, industrial, medical, retail, self-storage, and other property types all qualify for a bridge loan. Bridge loans are processed quickly, providing the funding that some businesses desperately need to cover operating costs. The application, approval, and actual funding process is faster than traditional bank financing.  

After borrowers apply, financing will enable the borrower to meet their required payments relatively fast. Prior to accepting the loan, lenders will normally evaluate the property by utilizing the after-repair value; then, they will offer a loan amount that is usually around 70% to 80% of the property’s value. Interest rates on commercial real estate bridge loans are typically from 6% to 11%, with non-bank lender rates normally ranging from 7% up to 30%.  

For borrowers with poor credit, the lender may ask for collateral prior to providing the loan. The terms and conditions offered to a borrower by a bridge lender are dependent on the lenders’ flexibility, but bridge loans typically carry a higher interest rate on average and are more expensive than other loan types. On the borrower's side, this may subject them to potential default risk.  

Terms of a Bridge Loan:

  1. Max LTC can go up to 90%
  1. Term lengths can range from 12 to 36 months
  1. Amortization: Interest-only, self-amortizing, or a combination of both
  1. DSCR depends on the program, ranging from 1-1.6
  1. Can be non-recourse and recourse, having standard carve outs for: fraud, bankruptcy, environmental, and misuse of funds.

Benefits of Bridge Financing:

Bridge loans are a quick way to get financing to cover immediate payments or business projects. They typically have a faster process for application, approval, and the receipt of funds than a traditional loan from the bank.

Considerations of Bridge Financing:

There are several considerations when requesting a bridge loan. Prior to beginning the process, it is best to consider the following list and your business's financing needs/level of urgency.  

  1. Properties that qualify for bridge funding include, but are not limited to, properties in transition, ground-up developments, and heavy value-add projects.
  1. Bridge financing is often more expensive than other forms of financing – it comes with higher interest rates and higher fees than other loan types.
  1. This is a result of the speed of financing  
  1. As an expensive financing method, bridge loans can subject the borrower to a higher risk of default.
  1. Late payments from the borrower can result in high fees from the lender
  1. If the borrower finds themself in a situation where they are unable to get a traditional permanent financing solution, they may be unable to exit the bridge loan.

When is a Bridge Loan Paid Back?

Bridge loans are typically paid back when the commercial property is sold, refinanced, or the property is completed and leased enough to receive permanent mortgage financing. Typically, bridge loans must be paid back within one to three years. The structure of a bridge loan may vary, but commonly, these loan types have a balloon payment at the end of the term. This means that the full amount is due by a specific date.

Transaction Types

Let’s stay in touch

Thank you! You’ve been added to our Newsletter
Oops! Something went wrong while submitting the form.