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   ARTICLE   |   From Scotsman Guide Commercial Edition   |   August 2015

Gaining on Bridge Lenders

As challengers emerge, lenders are changing pricing and loan-approval standards

Gaining on Bridge Lenders

As the market improves, challengers are giving bridge lenders a run for their money.

To stay ahead of the pack, bridge lenders are being forced to lower their interest rates and origination points, loosen documentation requirements and adopt tech-savvy application processes that shorten closing times.

Bridge financing, also known as private-money financing, has long been a mainstay of the commercial real estate world. In tough economic times like the recent economic downturn, bridge financing is often the only option for many real estate owners and investors. When markets improve, however, it becomes more difficult for bridge lenders to differentiate themselves and stay competitive — a problem many private lenders are facing today.

During the recession, it was not uncommon for bridge lenders to offer interest rates ranging between 13 percent and 15 percent, with 4 to 6 lender-origination points tacked on. Available lending leverage was also lower, and due diligence fees could be prohibitive: Maximum loan to values (LTVs) were around 50 percent, and loan terms often carried interest guarantees, prepayment penalties and even exit fees. When markets improve, however, the first thing bridge lenders usually do is reduce their pricing. This means that pass-through returns to investors are also reduced, making it harder for those lenders to raise capital.

Unfortunately, over the past couple of years, many new private lenders have opened their doors, offering more competitive terms to gain market share. This has caused the average private-loan interest rates on marketable bridge transactions to drop into the single digits; lender origination points to constrict; interest guarantees, prepayment penalties and exit fees to become less commonplace; and maximum LTVs to rise. Certainly, this has been great news for typical bridge borrowers who need fast capital at competitive terms. The improving market has proven to be a serious challenge for many bridge lenders trying to maintain market share while keeping a healthy bottom line for themselves and their investor bases.


It’s not solely new bridge lenders and sliding returns that make it more difficult to remain competitive. Nonconforming and small-balance commercial real estate lenders are now moving in to claim market share as well. With the return of the securitization market, nonbank lenders are once again making a run at small commercial deals (usually classified as loan sizes from $100,000 to $5 million), the bread-and-butter revenue for many bridge lenders. And small-balance lenders generally offer better rates than bridge lenders,  flexible underwriting (such as stated-income loans and credit scores down to 600) and more favorable compensation for brokers.

Yet, let’s be candid: During the downturn, bridge lenders became spoiled with many borrowers carrying A or A- classifications, as well as 700-plus credit scores and desirable collateral in primary or secondary markets. Loans to these borrowers were dramatically lower in risk and more lucrative than those of just a few years earlier. Not surprisingly, nonconforming and small-balance commercial real estate lenders are now working hard to reclaim that clientele. Local and regional banks that were previously sidelined are again vying for that loan, and for deposit business, too.


Five years ago, private lenders could not have foreseen the additional competition that tech-based crowdfunded lenders now bring to the game. Gaining ground are new commercial real estate, private lenders that aggregate their funds from small investors, as well as from Main Street institutions. They deploy capital quickly, and in a much different form than that of traditional bridge lenders.

Similar to the way many merchant cash-advance finance companies or private business lenders work, these new tech-based lenders handle the entire loan process online with minimal documentation, few third-party reports, and at a lower cost of borrowing (often involving little or no out-of-pocket cost). There are no loan committees, and no waiting for individual investors to mail checks in; everything is transacted via risk-based algorithms and at the push of a button. Although only a handful of commercial real estate lenders currently employ this system, you can be assured it’s a sizable wave in our future.

There’s no way around it: With challengers at all corners, the traditional bridge lender — one that analyzes each page of a loan package, presents it to a loan committee and then returns a decision only after intricate due diligence has been completed — could well go the way of the dinosaur.

Staying in the game

Can the traditional bridge lender stay in the game? My answer is: Yes. But a few things need to happen first.

To begin with, bridge lenders’ margins must continue to contract, and underwriting criteria need to expand.

Look at it this way: If a small-balance lender is willing to make the same loan that a bridge lender will, but at 7 percent instead of 11 percent, which lender do you suppose will win the borrower? By the same token, small-balance commercial lenders considering borrowers with B and C credit scores and underwriting with no tax returns are pushing private bridge lenders back to D and E credit borrowers, and forcing those lenders to pare back their documentation requirements.

Finally, private lenders seeking to service bridge-loan customers will need to get more tech-savvy, if they want to compete. Are you advertising quick closes and ease of execution, yet still requiring clients to mail in original documents and e-mail large PDF packages? Are you expecting borrowers to pay you thousands of dollars in out-of-pocket costs that your cyber competition no longer requires? If so, your days may be numbered. 


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