Bridge loans work well in many deal scenarios, but commercial mortgage brokers often hesitate to use them to their full potential. Today, bridge-financing sources have expanded to include insurance companies and hedge funds with a national reach. The uses for bridge financing also have increased along with its availability.
Commercial mortgage brokers now have clear opportunities to use this larger bridge financing network to keep their quiver of products full. For virtually any request, you can find the right lender with the right product to meet the specific needs of your borrower.
Bridge loans, which are transitional, short-term products, are primarily intended to get the borrower to the finish line. The finish line for these investors is the profit. The faster an entrepreneur can make a profit, the sooner they can get to the next deal. And the faster a mortgage broker and lender gets that entrepreneur to the finish line, the better their chance of repeat business. Creating repeat customers is what all commercial mortgage brokers and lenders should strive to do.
Bridge loans, which are transitional, short-term products, are primarily intended to get the borrower to the finish line. The finish line for these investors is the profit.
Common uses
Bridge loans have many uses in today’s commercial and residential real estate marketplace. A family may take out a bridge loan to purchase a new home prior to selling their existing home. In the commercial real estate realm, a bridge loan can be an effective tool for the entrepreneur who is looking to capture an opportunity that may be especially time-sensitive.
A borrower may have the experience, financial strength and creditworthiness to approach a conventional lender for capital, but the paperwork and time involved to get a bank to commit to a loan often means the opportunity will be lost. Many entrepreneurs, for example, need to move quickly when they find an opportunity to acquire a well-located asset at an excellent price.
The typical deal involving a bridge loan requires decisiveness on the borrower’s part and responsiveness on the lender’s part. Fortunately, many private lenders are well positioned to move quickly and help an entrepreneur capture an opportunity that a traditional lender may let slip, due to all the hurdles they must overcome.
Aside from transactions that require speed, bridge or transitional funding also is useful for value-add opportunities where the property owner wants to increase cash flow by making improvements. Often, value-add deals involve an underperforming property with low cash flow. The entrepreneur presents a business plan with the intent to increase the property’s income. Traditional lenders tend to be reluctant to move forward on these deals as they prefer to focus their evaluation on current cash flows. As a result, private lenders have found a niche in providing higher overall leverage for borrowers to renovate or reposition these properties.
Many private lenders understand value-add investments and can provide capital for an acquisition as well as funding the expense of the anticipated improvements. Let’s assume, for example, that your entrepreneur has identified a well-located multifamily-housing investment but the property is older and has some deferred maintenance.
Such a scenario is a prime candidate for bridge funding from a private lender. Many banks won’t consider this loan proposal because the income stream is likely to be disrupted while the property improvements are being made. The private bridge lender can make it work for a borrower who has reduced net operating income during the renovation phase.
Many bridge loans from private lenders, for example, will be interest only. In some cases, the private lender will allow the borrower to defer the interest payments for the entire term of the loan. The typical multifamily investor would much prefer to pay back the deferred interest at the end of the loan, once the project is completed. At this point, the property can either be sold for a profit or refinanced through a conventional lender with attractive terms via Fannie Mae or Freddie Mac.
Financing landscape
Although bridge lenders typically can move more quickly and have more flexible underwriting than a bank, don’t assume that some details can be skipped. You can expect to fill out a detailed application form that spells out your client’s income, assets and liabilities. Make sure that you keep all relevant third-party reports readily available, and have a copy of the purchase-and-sales agreement, if applicable.
Also, keep your client’s financial information at the ready. Before you approach a lender, make sure your client has realistic expectations as to the loan size, structure and cost of funds. Armed with the above information, many private lenders can give you a quick approval or denial over the phone.
Bridge loans tend to have higher rates and fees than conventional financing. The terms will vary by lender, location and asset class. Some private lenders will have higher rates but fewer lender points, while others will be the reverse. In any case, all reputable private lenders will disclose their rates and fees in a term sheet so that you and your borrower can make an educated decision on whether or not a bridge loan is appropriate for their project. For most borrowers looking for the next deal, the question usually boils down to “how much will I lose if I do not capture this opportunity?” rather than “how much do I have to pay for the capital?”
In the current low interest rate environment, there are many options for bridge funding, especially in the value-add space. Previously, small and nimble private lenders dominated the bridge lending landscape. Now larger players, such as insurance companies and hedge funds, have raised capital and developed programs specifically for bridge lending.
This is not to say that bigger is necessarily better. It may take longer to secure a loan when working with a large nationwide lender. This is where the knowledgeable commercial mortgage broker is worth their weight in gold. It takes skill to navigate the many options available to the borrower in 2020 and beyond. You need to partner with the right bridge lender who will provide not only deal certainty but also faster closing times so that your client can profit.
