Bridge loans: The best financing tool for some difficult situationsBrian Opertbridge loans, loan options, unconventional
People who invest in income-producing commercial real estate are
often required to manage some challenges that impact the situation.
They may include the following:
*Change of use
*Poor physical condition
*Lack of adequate seasoning
*Incomplete financial reports
*Debt buy-down opportunity
*Chapter 11 Bankruptcy filing
*An immediate need to refinance due to a maturing loan
Or, as a purchaser, they see the opportunity to make a below
market acquisition, thereby creating new value if financing can be
arranged quickly. In any of these situations, a bridge loan may be
the best, and, perhaps, the only option. Here is a quick look at
some bridge loan basics:
Definition of a bridge loan
A bridge loan is a short-term loan on a property that, for a
variety of reasons, does not (yet) qualify for a conventional or
permanent loan. Bridge loans are generally risky for the lender,
since the property, which is the primary collateral, as a result of
the various problems, may not be sufficiently stabilized, and
revenues are therefore not yet reliable. The short list above
illustrates some of the more obvious problems, although the "hair"
on the deal will range widely. The problems that plague the loan
may involve the property, the borrower, or the transaction itself.
Often, the problems involve a combination of all three.
A bridge loan is usually secured by a lien on a property,
supplemented by a lien on a property's revenue stream-the net
operating income-as well as any other significant assets. The
security is usually in the form of a first mortgage lien on the
fee, an assignment of leases and rents, as well as a pledge of the
ownership/partnership interests. Most bridge loans are also full or
partial recourse to the borrower, individually, as an additional
guarantor. The cash equity invested in a project, along with the
willingness of owners and investors to guarantee the loan, is
obvious evidence of their faith in the success of a project.
Bridge loans can also be made on properties that are not
producing income, yet. If, based on market information and borrower
credentials, the short-term lender can be convinced of the ultimate
success of a project (and thereby a satisfactory exit strategy),
loans may be made on properties that do not have a revenue stream.
For example, a subdivision for single family home development, a
condominium for sale or other property conversion, or similar
commercial transaction. In some cases, a bridge loan may be for
completion of failed construction, or ground-up new
The net operating income (NOI) for a bridge loan may be determined
differently from that for a conventional, or permanent, loan. The
bridge may not require institutional levels of management fees,
often four to six percent, but may permit a lower percentage
charged in the instance of an owner-operator during the bridge loan
term. It is unlikely that the bridge lender will require a
set-aside for reserves for replacements or other later scheduled,
capital improvements (assuming the requirement is not immediate).
However, routine utility costs, contracted expenses,
administration, repairs, maintenance, real estate taxes, and
insurance are included in the calculations for a bridge loan's
Bridge loans may range from three months to three years. Usually,
they have a term (balloon) of a year, and are sometimes renewable
for a second or third year. In most cases, there is a single
closing for the initial term, but additional fees are charged for
each renewal or extension.
Bridge loans are more expensive than conventional loans, often
pegged at prime plus six to eight points, interest only, without
amortization. Interest payments can be monthly, quarterly, or on
any schedule that suits both parties. In some cases, the excess
cash flow from the property, after operating and fixed expenses,
and interest on the debt, may be "swept" monthly. All of the excess
is applied to rapidly reduce the principal. This procedure ensures
that the bridge loan's principal balance, at the end of the term,
will be low enough for a permanent loan pay-off.
Typical loan amounts
A bridge loan seldom leverages the property as highly as does a
conventional loan, usually 50% to 65% Loan To Value for a bridge,
as compared to 70% to 85% LTV for a permanent loan. The higher risk
involved with a bridge loan is the reason for the lower LTV. The
usual maximum bridge LTV is 65% to 70% of the appraised and/or
market value, whichever is lower. Since this is at the low end of
the LTV range for most properties, it is expected that the amount
of the conventional loan should take out the remaining principal
balance of the bridge (if the property is properly leased, managed
and maintained during the term of the bridge loan). There is no
"lowest" loan amount, since, in addition to private companies,
there are many individuals in the short-term lending business who
will make very small loans. The highest loan amounts are based on
the overall quality of the deal, which is likely to interest major
institutional lenders who make loans in the hundreds of
Points for bridge loans range from three or eight percent, and can
be higher. Since these are risky loans, lenders require a high
return to justify this underwriting. Sometimes, an investor will
finance all, or a portion, of the points and other closing costs.
This depends on the maximum loan amount and the application of loan
funds. Therefore, a borrower must be able to afford to pay for
third party expenses, legal and closing costs, as well as the
points that are not financed.
Bridge loans usually must run the full initial term. The lender
wants the yield that was originally calculated at the time of
underwriting, and a prepayment will cut into this yield. Therefore,
there will usually be a penalty for an early repayment, which
maintains the lender's yield.
By definition, bridge loans are temporary and are of relatively
short duration. They require an exit strategy that pays off the
loan balance and associated costs. Exit plans may include selling
the property. A conventional mortgage loan in a sufficient amount
may be secured. Parts of the property may be sold, with the
proceeds used reduce the bridge loan's principal balance, with the
remainder then refinanced conventionally. Funds from other sources
may be used to pay down the loan principal on an accelerated basis,
like lot or condo sales. In addition, a combination of the above
may be employed to ensure that the bridge loan is repaid within the
agreed upon term.
Bridge lending and borrowing are not for the faint hearted.
There is unusual pressure, a significant although calculated gamble
and often significant upfront costs involved. It is a serious
business for both parties. But when the variables come together to
permit a bridge loan to close, both the lender and borrower can
realize substantial financial gains that could not have been
achieved in the conventional loan marketplace.
Brian Opert is a partner with Sterling Partners Capital LLC,
and may be contacted at (203) 256-9068 or by fax at (203)