As published in Scotsman Guide's Commercial Edition, November 2011.
From 1999 through 2007, commercial mortgage brokers were seemingly at the top of their game. Many brokers made an impressive amount of money -- more than they ever had before. When the bottom fell out of the market in 2007, the banks were no longer lending. Many brokers were out of a job and had no money. By the beginning of 2010, some had lost everything.
One lending sector has appeared to do well despite the market turmoil, however -- private bridge lending. Many mortgage brokers and bankers who work with private bridge lenders continue to close loans successfully for their clients.
For brokers still seeking a new niche to get through the tough market, understanding how private bridge lenders work may be what you’re looking for.
When it comes to bridge lending, some brokers may be skeptical; many equate bridge lending with hard money, which historically has a less-than-favorable reputation, high interest rates and inflexible terms.
Bridge lending isn’t necessarily hard money, however. In today’s market, it is easier to find private bridge lenders with reasonable interest rates, albeit generally higher than a 30-year fixed mortgage. Higher rates are to be expected because these are short-term loans that are meant to bridge a financial gap for borrowers.
In a sense, many of today’s private bridge lenders are between institutional lenders and hard money.
By understanding what private bridge lenders seek from a deal in terms of property types and locations, as well as, documentation, brokers can determine if this type of funding is right for their clients.
What private bridge lenders want
In the current market, private bridge lenders typically are looking for commercial and residential properties in “A” -- or prime -- locations, such as coastal or high-end areas. This is because if a borrower gets into trouble or if the lender has to foreclose, the property’s value more likely will be stable because of its location.
Some major property types that private bridge lenders seek include the following:
Real estate owned (REO) properties
Restaurants and hospitality
It is important to keep in mind that most private bridge lenders have a niche. Some might focus on the hospitality industry, while others might specialize in industrial properties or gas stations. This is why bridge lenders often are complementary to, more than competitive with, each other and other lending institutions.
In addition, they typically seek deals that have a low loan-to-value ratio (LTV) and that have strong borrowers or sponsors, as well as tenants.
Value-added properties also are attractive to private bridge lenders. These properties’ values tend to appreciate after improvements or rehab. In addition, they often will finance REOs, short sales, refinances and distressed assets.
Essentially, private bridge lenders want to help borrowers, developers, banks, private funds and other real estate owners reposition their debts to current market value. They may provide lines of credit for REO flippers, as well as “horizontal apartments” -- aka houses leased for a long-term hold and underwritten as apartment buildings.
Private bridge lenders also may provide capital to broken condo projects and unfinished construction, which helps free up capital in the secondary markets for the unwinding of commercial mortgage-backed securities (CMBS) loans.
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