The Usefulness of Commercial Real Estate Bridging Loans

Understanding commercial real estate bridging loans can seem complicated, but it really isn’t. If someone wants to buy a commercial property and needs time to complete some tasks like improving the property, finding a tenant or selling the property, commercial real estate bridging loans can make this possible.

Typically, these loans are planned with terms of six months to one year. However, sometimes the lender gives the owner the option to extend this loan for an additional six months to a year. The fee for this extension is usually between ½ point and 2 points. This type of loan can be thought of as a “funding bridge” that takes place between the acquisition and development of a property and the period leading up to the forgiveness of a permanent, traditional take-out loan.

They can be useful in situations where a borrower wants to buy a commercial building and is eligible for an SBA loan. However, the traditional SBA loan is tied to one year of successful business. The borrower gets the money to fund the project by arranging for the seller to match thirty percent of a property’s purchase price. The borrower then secures a commercial real estate bridging loan for the remaining portion of the loan. The loan allows the borrower to purchase the property and build a good, solid operating history that qualifies it for conventional, long-term financing.

Commercial term loans cost less than commercial bridging loans because commercial real estate bridging loans are designed for the short haul only. They are usually paid off whenever the property owner receives permanent financing. This is the case when new tenants move in or improvements have been made to the property. These loans usually have no prepayment penalties.

Banks sometimes grant loans in cases where a borrower has a large cash reserve and an excellent credit history. There are many different types of commercial loans. One is called an “opportunity fund.” This is a special fund created to provide high-yield commercial real estate loans. This type of loan requires special understanding and expertise. Real estate financing experts refer to these as “no-brainer deals”. This means they are straight-forward trades that are so simple that even a financial novice could understand them. Typically, the types of people who invest in opportunity funds are those with endowments, retirement plans, private endowments, and some REITs.

If a borrower has a loan that isn’t great, doesn’t have a lot of money to pay off a commercial property, and has little or no commercial real estate experience, that person may need to go to a “hard money bridge loan” lender. These types of lenders offer commercial real estate bridging loans based on the equity of a specific property.