A bridge loan is a short-term real estate loan with a term typically between 6 months to 3 years. These loans can, in the right circumstances, be very advantageous, so it's best to completely understand how they work. By the end of this article you'll learn why bridge loans exist, who they're best suited for, and the costs surrounding such a loan.
What is a bridge loan?
The primary purpose of this type of commercial mortgage is to give property investors time to complete a task---such as improving the property, finding a new tenant, or stabilizing the cash flow on the property. Bridge loans can also be used for quick closing on a commercial real estate purchase, to retrieve real estate from foreclosure, take advantage of a discounted payoff opportunity or to resolve a short term issue affecting the property.
Why are bridge loans needed?
Investors typically turn to bridge loans to provide flexibility in the timing of a deal. For example, even though an asset you'd like to acquire might qualify for a long-term loan, you may have to close in a period shorter than what your lender is capable of. A bridge loan can also provide flexibility if your lease-up is not complete or for rehab and construction assets. Often times, bridge loans have a more flexible prepayment schedule or a shorter lockout period.
How quickly can this type of loan close?
Bridge loans allow the borrower to close in a shorter time frame than otherwise required for traditional permanent loans. This could be as short as two weeks versus more traditional 45-60 days. Some lenders might provide a bridge-to-permanent loan program and many will close without requiring a new appraisal.
What's the difference between a bridge loan and a "hard money" loan?
A hard money loan is an extreme type of bridge loan. Borrowers resort to hard money loans in instances where the property or the borrower has severe credit issues, undesired property types such as land and typically when the most probable exit is a sale and not a refinance. While mainstream bridge lenders are yield driven, hard money lenders underwrite a loan-to-own scenario.
What does it cost?
Bridge loans are typically more expensive than permanent loans due to the flexible nature of the instrument. In a scenario where you need to close quickly on a cash flowing, stabilized, multifamily property the cost of the loan can be only marginally more expensive than getting an agency loan; somewhere in the low 6% range. Other commercial bridge loans based upon the strength of the asset and sponsor can range from 7%-13% inclusive of fees and points. Most bridge loans are floating rate and based off of 1 month LIBOR (currently ~0.25%).
How are they taken out?
Bridge loans are typically paid back when the property is sold or refinanced with a traditional lender. Converting a bridge loan to a permanent loan can occur once the borrower's creditworthiness improves, the condition of the property is improved or completed, net cash flow is increased, or an environmental impediment is removed that allows a permanent or subsequent round of mortgage financing to occur. Many lenders will impose a minimum interest as a prepayment penalty, but some groups like Credit Unions typically have no prepayment penalties.
What is a "recourse" versus a "non-recourse" loan?
"Recourse" typically refers to a personal guaranty from the principals of the borrower in case of default and the subsequent inability of the lender to recoup all the monies owed under the note and deed of trust. The recourse requirement depends on the lender and property type. Recourse will be a requirement from banks, credit unions, hard money lenders and any deals relating to construction or land. Non-recourse loans are available primarily from debt funds. Even in non-recourse situations the principals will have to guarantee carve-outs for certain events such as misappropriation of funds, theft or environmental liability.
What situations would a bridge loan work in?
There are several scenarios where a bridge loan can be useful, such as:
- Multifamily---Needing stabilized income prior to getting a government loan
- Retail/Office---Signing a big lease prior to permanent loan
- Land---Getting entitlements, approvals prior to construction loan
- Hotel---Stabilizing RevPAR for at least a year prior to permanent loan
- Auction---Closing in 14 days prior to traditional financing
If you have any questions about whether you qualify for a bridge loan and at what rate/terms, please us at our New York City office.
Adam Horowitz, Principal 212-493-5400
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