How and When to Use Bridge Loans in a Commercial Real Estate Deal

Need to buy or renovate a property, but long-term loans aren't suitable? Here's what to know about bridge loans in commercial real estate.

How and When to Use Bridge Loans in a Commercial Real Estate Deal Close
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How and When to Use Bridge Loans in a Commercial Real Estate Deal

Posted by Gary Ashton RE/MAX on Tuesday, December 21st, 2021 at 8:53am.

How to Get a Good Deal on Nashville Commercial Real Estate With Bridge LoansSometimes an individual or a business wants to buy or renovate commercial real estate, but long-term financing at a reasonable rate simply isn't available. Maybe the property needs to be improved before a bank will write a traditional mortgage. Perhaps there's a loan or other funding on the horizon, but the property buyer or owner needs to act right now. If you want to be successful with Nashville commercial real estate, it's essential to use all the tools at your disposal. In the instances listed above, a bridge loan may offer the solution. Keep reading to learn how to use a bridge loan when investing in Nashville commercial real estate.

For informational purposes only. Always consult with a licensed mortgage or home loan professional before proceeding with any real estate transaction.

What Is a Bridge Loan?

A bridge loan, also known as a gap loan or gap funding, is a short-term loan that lasts long enough to either put a long-term mortgage in place or sell the property and pay off the bridge loan. It's typically six months to a year. The loan can be used either to buy commercial property or improve the property the borrower already owns. Commercial bridge loans are available for many commercial properties, including apartment buildings and retail, office, and industrial properties.

The commercial property may be a new building under construction or an existing building. The borrower might be looking to sell shortly and pay off the loan or continue owning the property as an investment.

Reasons for a Commercial Bridge Loan

There are several situations where a commercial property investor might apply for a bridge loan:

  • If a borrower is temporarily unable to qualify for a mortgage with favorable terms, they may borrow via a bridge and buy time to clear up credit issues.
  • A housing developer might use a bridge loan to finance construction, planning to pay it when the homes are sold.
  • An investor might use a bridge loan to redevelop a historic commercial property in Nashville to the point where the property becomes more valuable. The property may then qualify for a long-term mortgage, or, alternately, it might be sold at a profit to repay the loan.
  • A would-be purchaser may have a small window to close a deal and might need the money too quickly for acceptable long-term financing to be arranged.
  • There might be financing such as a Small Business Association loan which isn't going to come through for a few months.
  • The investor might be anticipating income that won't be available right away. An example might be the expected sale of an unrelated property.
  • A borrower might wish to buy raw land or demolish the current buildings and create something that they would either sell or continue to own.

Securing a Commercial Bridge Loan

Bridge loans have higher interest rates than conventional commercial mortgage rates. They're riskier for the lender as there's a greater chance of default. Sometimes that's because the property is in poor condition, and it's not clear what it will cost to remedy it or what the real estate will be worth when the job is complete. Sometimes, the borrower has credit issues and doesn't qualify for a traditional mortgage.

Bridge Lenders

Banks and other mortgage lenders write long-term mortgages. These lenders generally don't offer bridge loans. Instead, most bridge loans come from hard money lenders, individuals, or companies specializing in loans that banks are reluctant to make.

Bank loan policies don't constrain hard money lenders. They don't conform to the more stringent loan approval process that conventional mortgage lenders adhere to. Each hard money lender makes its policies about who will be approved. Banks have turned down borrowers who can often obtain a bridge loan from a hard money lender.

These lenders focus more on the value of the property than the borrower's creditworthiness. The loans are generally structured so that, if the borrower defaults, the lender will come out ahead when they take possession of the defaulted property.

Qualifying Criteria

The acceptable loan-to-value ratio (LTV), which compares the loan amount to the worth of the property, is lower than for a conventional mortgage. Banks will often lend up to 80 percent of the property's value for a traditional mortgage. They're protected not only by the value of the property but by how thoroughly they vetted the ability of the borrower to repay.

On the other hand, bridge loan providers will typically lend only around 50 percent of the value. An investor acquiring a property will generally need to put down a significant sum to make a bridge loan work.

A bridge loan for renovation or completion of a construction project will be based not only on LTV but also on loan-to-cost (LTC) and after-repair value (ARV). LTC is the loan amount divided by the construction cost. Most bridge lenders insist on an LTC of no more than 80 to 85 percent. In other words, a borrower usually can't get a bridge loan for the entire cost of the renewal project but must have other funding for at least 15 to 20 percent of it.

ARV is what the property will be worth after work is complete. It's a number that's based on an appraiser's estimate. The lenders typically won't approve more than 70 to 75 percent of ARV.

Traditional mortgage lenders usually have a clearly defined set of rules for determining interest rates. With bridge loans, the rates are higher, but there's more chance of negotiation between lender and borrower. If the borrower has a history with the lender, that rate could be lower.

When To Use a Bridge Loan in a Commercial Real Estate Deal

A commercial bridge loan may be suitable when there's a profit to be made, and there isn't a good deal on a traditional mortgage available. A bridge loan is often a high-risk, high-reward transaction for borrowers and lenders. The lender stands to earn a handsome interest rate. The borrower hopes to resell the property at a gain or secure a long-term mortgage and profitably operate the commercial property on an ongoing basis.

For informational purposes only. Always consult with a licensed mortgage or home loan professional before proceeding with any real estate transaction.


Gary Ashton

The Ashton Real Estate Group of RE/MAX Advantage

The #1 Real Estate Team in Tennessee and #2 RE/MAX team in the World!

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