- Commercial bridge loans are a short-term financing solution that's widely used within the real estate industry. Real estate developers and investors use these loans to "bridge" a gap when purchasing or renovating a wide array of properties. Even businesses in other industries may take out a commercial real estate bridge loan if they purchase a new property.
Commercial Bridge Loan Highlights
Eligible Properties: Multifamily, Office, Retail, Hospitality, Industrial, and Student and Senior Housing in strong markets
Loan amount range: Minimum $1,000,000
Interest Rate: 5% or higher over index
Loan Term: 12 to 36 months. Extensions are possible
Amortization: Generally Interest-only with some exceptions
Maximum LTV: 780% of cost (LTC). Max stabilized LTV can vary, but generally up to 75%
Recourse: Non-recourse except industry-standard "bad act" carve-outs.
Prepayment: Minimum Interest period
Loan Exit: Permanent or takeout financing
Advantages of Commercial Bridge Loans
- Faster Underwriting: This makes it possible to close escrow faster. Being able to close faster might make this loan option attractive compared to other offers.
- Credit Requirements: Since commercial bridge loans are underwritten primarily on the basis of a property's value and business plan, the credit requirements for these loans are much less stringent than the requirements for traditional long-term mortgages. Sponsors who have bad or poor credit may still be able to obtain this type of loan.
- Interest-Only Available: This allows developers to make interest-only payments while stabilizing a property, and defer the remainder of the loan balance until a property is sold or refinanced.
Disadvantages of Commercial Bridge Loans
- Short Term: Bridge loans aren't available for long terms, such as beyond three years. A more traditional loan is needed to obtain a longer term to maturity.
- Higher Interest Rates: Higher than those of long-term, traditional loans. Paying higher interest can add up over time, although the total interest over a short-term time frame may be minimal.
- Higher Fees: Origination, exit, and extension fees for these loans may be higher than fees for other loans.
What Are Commercial Bridge Loans?Commercial mortgage bridge loans provide short-term financing that can bridge gaps between other payment or financing solutions. These loans are characterized by their short maturities and the role the property value and business plan play in underwriting the loans. Most loans have terms between six months and three years, and their underwriting is based primarily on the as-is and as-stabilized values as well as the value-add business plan.
What Situations is Commercial Bridge Loan Financing Well-Suited For?Commercial real estate bridge loans are available for virtually any type of property, and their features make these loans well-suited for several different situations:
Renovating Properties: Real estate investors frequently finance properties with unamortized commercial bridge loans, which are paid back in one lump known as a "balloon payment". A loan provides capital for purchasing and renovating a property, and the loan can be paid off when the property is sold or refinanced.
Investing in Properties: Property investors may initially finance the purchase of a high-demand property and later transfer the financing to a traditional mortgage. Underwriting for these loans usually takes less time than obtaining a traditional mortgage, allowing investors to close on a property more quickly.
Moving a Business: Businesses that are relocating may use a commercial bridge loan so that they can purchase a new property before selling their current one. This eliminates the risk of having a purchase fall through after a purchase and sale agreement has been executed, which can leave a business without facilities.
Financing With Poor Credit: Sponsors who have poor credit may be able to qualify for a commercial bridge loan even if they can't get a traditional long-term commercial real estate loan.
What Terms Do Commercial Real Estate Bridge Loans Offer?Commercial real estate bridge loans aren't regulated by a state or federal agency in the same way that standard mortgages are, and they offer flexible terms as a result. Most of these loans are originated for six months to three years, and they may be amortized (principal and interest paid in monthly installments) or interest-only (paid in a single lump at maturity). Interest-only monthly payments are widely available, and Interest rates can be variable or fixed.
Loan-to-value (LTV) ratios range between 65 and 80 percent, with the higher maximums usually reserved for more desirable properties owned by experienced sponsors. The borrowed amount can be tens of millions of dollars, or it can be less than $1,000,000. The duration and amount borrowed may also affect the maximum LTV allowed.
What Features Do Commercial Real Estate Bridge Loans Come With?As noted, the two primary features of commercial real estate bridge loans are their:
Short Duration: The short duration of these loans makes them ideal for bridging gaps between other purchasing or financing solutions. They can be used to finance a property that's only held for a few years or a few months, or they can serve as interim financing until a long-term mortgage is secured.
Property Basis: The value of the financed property, as well as the value-add business plan serve as the primary basis for underwriting. This simplifies the underwriting process and gives sponsors that otherwise might not be able to secure financing access to a loan option.Along with these, commercial bridge loans are often non-recourse loans and can be set up so that monthly payments are for only the interest incurred. Non-recourse loans prevent borrowers from being held personally liable in the event that the loan isn't repaid. Interest-only loans are commonly used for short-term purchases of property.