Bridge Financing Loans
“Bridging Financing Loans Secured By Commercial Real Estate Can Be Highly Effective Sources of Capital”
A bridge loan of any type is a short term loan where there is a specific amount of money required for a specific period of time where the repayment event for the loan is well enough established to allow a lender to have confidence in it.
Specific to this discussion is the issuing of bridge financing loans that are secured by real estate security.
This is an important distinction because a bridge loan can be secured or unsecured, and when the security is non real estate based, the process for getting comfortable with the deal and providing an approval is going to take a lot more time and money in most cases as compared to a bridge loan secured by a real estate mortgage.
In reality, term based financing facility of less than two years is some form of bridge loan where funding is required for a short period of time either to be repaid in fully during the time period from monies earned, or to be repaid by a longer term financing facility in the future.
Bridge financing is rarely the lowest cost or preferred source of financing, but it is utilized because it can be put in place in the time you have to work with as compared to other lower cost financing options you could qualify for if time was not limited in some way.
Real estate security backed bridge mortgages are one of the most popular forms of short term borrowing for a number of the following reasons.
- Capital generated from a real estate bridge loan does not typically have to be used to acquire or improve property allowing equity in real estate to utilized for a wide variety of other purposes.
- Loan Underwriting is very straight forward as the focus is more on the loan security versus the use of funds. Bridge lenders can many times utilize existing appraisals and environmental reports provided that they still adequately represent the property. This one aspect of bridge lending can not only save you money on third party reports, but the time it takes to get them completed which in many cases is the single largest time delay item with a commercial mortgage application.
- Bridge deals can be completed in a manner of days with the average deal getting completed in 10 to 15 business days from time of application to loan advance.
Most Bridge Financing Solutions Are Not Provided By Banks
This also tends to be a secondary or alternative mortgage lending product due to the need for the deal to be completed quickly. While an application may very well qualify for financing with a conventional lender, the deal may not be able to get in place fast enough to meet a deal deadline.
Lenders that participate in this are of the commercial mortgage market know that their competitive advantage is speed over cost and if they cannot move quickly within their own team, they won’t get many funding opportunities.
As a sub prime or private mortgage solution, the cost of financing is going to be a bit higher that what you’re bank may give you in an equivalent mortgage amount for. But compared to the money you are trying to make, value you’re trying to retain, or cost you’re trying to avoid, the incremental cost of financing is usually trivial by comparison.
Bridge financing facilities can be completed as 1st, 2nd, or even 3rd mortgages, provided there is enough equity in the property to cover off the incremental capital being advanced
In order to get this type of short term loan in place quickly, a property owner will need to have all their documentation in order including old appraisals, property tax assessments, title searches, and other ownership and lien related information.
Bridge loans of under $2,000,000 have the most potential funding sources. That being said, financing sources that participate in bridge lending represent a very small percentage of the overall sub prime and private mortgage market space. So its always important to make sure you’re applying to someone who is capable to providing the financing you’re looking for in the time you have to work with.
Bridging amounts above $2,000,000 are certainly available, but they’re will be fewer lenders interested in the deal due to loan size, and it’s likely going to take more time to get funding in place as more lender due diligence typically accompanies larger deal size.
Exit Strategy Also Key To Deal Speed
The more straight forward the exit strategy to repay the bridge loan, the easier it will be for a lender to make a decision in your favor.
Exit strategies for these types of deals are basically 2 sided.
On the one side is the borrower’s plan to repay and on the other side there is the security position the lender will be able to fall back on if the exit event as proposed does not materialize in a timely fashion, causing the loan to not be repaid when due.
So when a strong and easily understood and verified borrower exit strategy is linked to a low loan to value on the property being pledged as security, the lender is going to be able to get comfortable with the deal a lot faster than if those things are not in place.
Typical Bridge Financing Terms
As mentioned earlier, most commercial mortgage terms of two years or less can be classified in one way or another as a bridge loan.
In 90%+ of cases, bridge financing requests are for one year or less.
Most lenders will charge interest only payments on a monthly basis during the loan term. Depending on the lender, interest can be prepaid with the mortgage funds if cash flow is not available to service the loan.
Terms can sometimes be extended, once again depending on the lender. Extensions typically will incur incremental lender fees.
Prepayment options will once again be lender specific and range from fully open to fully closed with the middle ground of being fully or partially open after a certain number of months.
The stronger the deal, the more likely the terms can be structured in your favor. That being said, when time is of the essence, it can be dangerous to try and get the perfect deal or best deal, and end up not getting funds in place in the time required. Bridge loans in many, many cases are “bird in the hand” type scenarios where the best deal is the one that you can get into place the fastest.
The cost of financing will be influenced by loan to value, mortgage security position, location, type of property, and so on.
We have a number of sub prime and private mortgage lenders that provide bridge loans. By definition, a bridge lender is someone who can make a decision quickly and is working with a mortgage brokerage, lending staff and counsel that can get things completed quickly. Without this type of back shop commitment to bridge deals, lenders and brokers can waste your time trying to get something in place.
Another important point regarding bridge financing is that it is typically accessed through mortgage brokers and agents that work with suitable lenders.
Sub prime and private mortgage lenders tend to work through broker channels for their deal flow and rarely have their own retail presence to deal directly with commercial property owners.
If you’re in need of bridge financing and have equity in a property to provide as security and sound exit strategy for repayment, then I recommend that you give me a call so we can quickly assess your situation and outline relevant options available to you from our lending sources.
The initial assessment comes at no cost and is typically done over the phone.
Documentation to support the deal is only requested if we can see a potential funding path to explore that you want us to pursue further on your behalf.
If the deal is straight forward, many times we are able to get lender interest within 24 to 48 hours. Larger, more complex deals can take more time to explore.
The keys for us is to accurately understand your situation, capital requirements, and timelines so we can quickly determine if we can assist you or not.