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Bridge loans are, in many regards, sustaining the capital markets. They are used for construction or other budget shortfalls, to buy out departing partners, to rescue projects from foreclosure and to capitalize on distressed-asset sales proactively. The list of reasons for bridge loans is continually expanding as bridge lenders adapt to the markets' demand.
When reviewing loan requests, bridge lenders want to see a few critical items. Brokers submitting deals to these lenders on their clients' behalf should ensure that their loan-application packages contain the following items:
Executive summary: Seasoned bridge lenders review at least 10 to 20 loan requests a day. As such, submitting a quality executive summary is invaluable because it may be the only chance a loan has to get the attention it needs. Include a clear and concise description of the property, the proposed transaction, the exit strategy and the borrower to increase the likelihood of getting a deal past the lender's initial review.
Pro forma: Provide as many as five years' projected cash flow. In most cases, a bridge lender will commit to a deal based on the transaction's forward-looking merits. By definition, a transaction requiring a bridge loan cannot support long-term debt. Accordingly, bridge lenders will be attracted to a pro forma that, based on reasonable assumptions, demonstrates there will be enough cash flow for takeout financing as a primary exit strategy.
Historical financials: As applicable, provide two to three years' cash flow in the form of a detailed profit-and-loss statement. For transactions that are not new construction, forward-looking pro formas usually are only relevant when compared to past performance.
Sources and uses: A sources-and-uses statement is an often-overlooked item in many loan packages. A refined borrower or mortgage broker always will provide a sources-and-uses statement for the proposed loan. It should quantitatively answer several questions for which a lender will need answers. These questions involve the amount of money requested, the borrower's proposed equity contribution and use of the loan proceeds. Providing this fundamental information in the loan-request package could make the difference between whether it is considered or disregarded.
The number of borrowers seeking bridge loans has increased. The market's illiquidity has driven transactions to bridge lenders that before spring '07 would have qualified for longer-term, cheaper financing from a broader range of lending sources.
With the capital markets showing signs of thawing out, traditional lending sources and new lending sources, such as recently formed debt funds, are starting to issue quotes and loan commitments.
Nevertheless, the integral role that bridge loans play in the world of commercial finance will continue, and the key aspects of a properly polished loan package will remain fundamentally the same.
Erik L. Dowling
is a vice president with Strategic Capital Solutions LLC, an international real estate merchant-banking company that offers value-added bridge, mezzanine and equity financing to entrepreneurs, developers and companies. Prior to joining Strategic Capital Solutions, Dowling was a director with Holliday Fenoglio Fowler LP, one of the largest and most-successful commercial real estate capital intermediaries in the country. Reach him at (212) 379-1250, ext. 109, or email@example.com.
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