Simply put, a bridging loan is a short-term commercial mortgage loan that is sometimes required to “bridge” a financing gap that may exist while more permanent financing or other financial transactions are arranged and completed. For example, if an investor closes an apartment building in 3 weeks and their bank cannot close their purchase loan for 3 months, they will need a 90-day bridging loan to close their deal. Or an investor sells a building to raise money that is needed immediately, but it will take at least 6 months to market and sell the building. A bridging loan is the answer.
Bridging loans are time-sensitive loans that almost always need to be arranged and completed quickly. Commercial real estate owners, investors and developers are paying for the speed and efficiency that bridge lenders can provide. Interest on bridging capital starts at around 10% and can be as high as 15% or slightly more depending on the perceived risk of the loan. When lenders and brokers add origin points, a bridging loan can become very expensive indeed. Still, commercial real estate bridge lending is a huge business worth hundreds of billions of dollars. Investors understand that a bridging loan, while costly in absolute terms, is a lot cheaper than taking on a partner who will demand 50% of the project forever, and a hell of a lot cheaper than losing your deal altogether.
Banks, Wall Street and other large institutional lenders are not effective in providing bridge loans. They are usually highly regulated and very bureaucratic. By the time a traditional lender could broker a bridging loan, any opportunity would be long gone. In fact, the slowness of institutions is why bridging loans are in such high demand. Effective bridging loans are usually made by private, unregulated financial firms such as hedge funds, private equity groups, mortgage pools, and other private lenders.
Accountable to no one else but themselves, these unique funding sources can make decisions on the spot and close millions of dollars worth of transactions in just a few days.
Bridging loans are short-term loans that are typically between 9 and 18 months and rarely longer than 36 months. They are generally structured as simple interest rate loans, the principle being fully due on maturity. They are written based on the equity existing in the hedged item and are not credit or balance sheet driven.
The first and most important factor in obtaining a bridging loan is knowing where to get one. When you need bridging capital, you don’t have time to shop around and research lenders. The clock is ticking and you probably only have one chance to salvage your deal. The best strategy is to develop relationships with lenders and professional commercial mortgage brokers before you need one so they are there when you need them.
After a lender is identified, you need 4 things to get the loan; Credibility, equity, a payment strategy and an exit strategy.
Bridge Lenders are sophisticated finance professionals who enjoy working alongside other experienced professionals. Short term loans arranged on the fly are risky ventures, they are a privilege bestowed on credible investors with a proven track record.
Bridging loans are essentially equity loans. It is imperative that the property used as collateral is worth more than the loan balance. Each lender will have its own parameters, but none will offer 100% LTV interim financing in today’s lending environment.
A legitimate, verifiable debt service plan is almost as important as equity. It’s not enough for investors to say they can and will make payments, they have to prove it. If the property to be financed or the borrower cannot show sufficient income to pay off the mortgage payments, an interest reserve can be arranged if the lender and borrower agree and there is sufficient equity in the property to support a larger loan. In an interest reserve scenario, the bridge lender either lends the investor more money to make interest payments or collects the interest from the original loan proceeds. Proceeds are held in an account and payments are debited from the account when due. Interest reserve accounts are managed by third parties such as trustees or lawyers. If the loan is repaid early, any credit balance in the interest reserve is released to the borrower.
When looking for a bridging loan commitment, an exit strategy is paramount. Bridging loans are short-term, opportunistic loans. The lenders who generate and fund them want to know exactly how and when they will be repaid. The two most popular and viable exits are securing replacement financing or selling the collateral. Due to the relatively short time horizon covered by bridging loans, an investor’s exit must be well underway before they apply for the bridging loan. It’s not enough to say you will sell the target building, a bridge lender wants to hear that you have sold the target building and will close it on such and such a date. You can’t tell a bridge lender it’s you walk To get a permanent loan, you need to show them the bank’s term sheet and convince them that the deal will go through.
Bridging loans are getting the commercial real estate world moving. They are used for construction or other budget constraints, to buy out partners, save projects from foreclosure, pay inheritance taxes, and even settle awkward divorce cases. There are as many reasons for bridging loans as there are commercial buildings in a city. Like havens in a storm, they are welcome places for those who need them.