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.
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.
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.
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.
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.