Commercial Bridge Loans

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When you buy a commercial property, it regularly takes time to make necessary improvements or attract right tenants. A bridge loan is a means of securing the short-term finance necessary to bridge this gap. We also offer bridge loans to small business owner who need capital for property they already own free and clear, or in which they have substantial capital.

How Do Commercial Bridge Loans Work?

A bridge loan tides you over financially through the gap in time between the purchase of a property and arrange its long-term financing. Bridge loans typically have terms of between a few months and a year, although terms can sometimes surpass a year. These are collateralized loans; you usually put up some commercial property you already owned or will shortly purchase. The provider of a commercial bridge loan will often grant borrowers based on the value of their collateral rather than on their creditworthiness. In this way, a commercial bridge loan is often easier to acquire than the standard mortgage. The proceeds from a commercial bridge loan can be apply to a property you already own, a property you wish to acquire, or both.

Here are some examples of situation in which commercial bridge loans are used:

Moving a business: You may take out a commercial bridge loan when you move your business to a new location, such as food truck, storefront or office. The bridge loan can be used for the down payment on acquiring the new property and possibly to pay off the remaining mortgage on the old property.

For example, you may wish to purchase a small, under-occupied office building for $1 million and use another $1 million to renovate it, in order to attract more tenants. Let’s assume the property would be value $2.5 million after renovation. You apply for a bridge loan from a commercial provider that agree to lend you 80% of the $2 million development cost ($1 million to buy the property, plus $1 million to renovate it), which amounts to $1.6 million.

Here’s how the math works: You then must give the remaining $400,000. The bridge loan has a term of one year. After you finish the project, you should be able to acquire a $2.5 million mortgage on the property, and use much of the proceeds to pay off the bridge loan, both the principal and interest. If you pay 10% interest, your cost for the one-year bridge loan will be $160,000, plus any origination fees, prepayment penalties and other fees.

Buying opportunity: Your Company might like to snap up a newly available property before the competition can get it. You can use a bridge loan to make the down payment and monthly payments on the new property until you can arrange long-term financing.

Rehabilitation: You might already own a commercial property that is not performing to its potential. It might need extensive renovation or a higher occupancy rate. A bridge loan can finance the remedial work, and then be replaced by long-term financing on the rehabbed property.

Credit score: If your business’ credit score is less than good, you may not be able to access long-term commercial real estate financing. Fortunately, short-term bridge financing might be offered. By making timely bridge loan repayments, you might be able to boost your credit score such that you may become eligible for long-term financing.

Commercial Bridge Loan Rates and Terms

The following table shows the average terms that apply to commercial real estate bridge loans:

 Typical Terms
Loan Amount$1 million – $20 million
Interest Rates9% – 11%
Loan Terms6 – 12 months, but longer periods are available
Loan-to-Value RatioUp to 80%
Fees
  • Origination fee: 2% – 6%
  • Appraisal fee
  • Escrow fee
  • Title fee
  • May have prepayment penalty
Repayment
  • Unamortized:
    • One-time repayment at the end of the term or sooner
    • Interest-only payments each month with a balloon payment at the end of the term or sooner
  • Amortized: Fixed monthly payments
CollateralFirst mortgage lien

 

Where to Get a Bridge Loan

You can make safe a commercial real estate bridge loan from a variety of sources, including banks, credit unions, private commercial finance companies and peer-to-peer lending platforms. It is frequently advantageous to get a bridge loan and permanent financing from the same source, as you might be able to fashion a better deal this way. If you are a rehabber, you’ll find many hard money lenders on the Internet that specialize in bridge loans to those who commercial property or flip residential property.

How to Qualify for a Bridge Loan

In general, bridge loans are granted based upon the value of the assets that serves as collateral rather than on the credit score of the borrower. To limit the financial exposure of its lenders, bridge loans are capped at 70% to 80% of the property’s value. You are expected to give the remainder as your own equity. Lenders may have other requirements for the properties, including its location and condition, and any liens it carries. In addition, the lender will also consider your history of major derogatory events–bankruptcy, foreclosures, liens, lawsuits, felonies and garnishments.

You must perform due diligence on any bridge loan offers you receive, paying attention to:

Brokerage fees: The Internet hosts many sites that broker your loan to a network of third-party lenders. The broker receives a finder’s fee, typically built into the origination fee.

  • Origination fees: Upfront fees, often called points, add to the cost of the loan. Expect fees as high as 6%. Comparison shopping may yield a loan with lower fees.
  • Prepayment penalties: All things being equal, you’d rather borrow from a lender that doesn’t impose prepayment penalties, which can get expensive. For example, one lender imposes a penalty of up to nine month’s interest if you prepay a one-year commercial real estate bridge loan. You normally want to prepay a bridge loan if you sell your existing property earlier than the term has elapsed.

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