Commercial Bridge Loans
What is a Commercial Bridge Loan
It is a short-term loan that can range anywhere from 6 months to 3 years. It is considered interim financing for an investor until permanent financing can be established or until the next stage of financing is obtained. When a commercial bridge loan reaches maturity or when the asset has been improved, permanent financing is typically put in place and often referred to as a “take-out” loan since it pays off the commercial bridge loan debt.
When is a Commercial Bridge Loan used
A commercial bridge loan is often used when time is of the essence, and the investor needs to complete the purchase and close quickly. It can be used to re-position a property through a debt buy-back, to make a transitional purchase, to turnaround a management distressed property where tenant lease-up is needed, to acquire a property with rehab needed or to acquire a property with nearly completed new construction.
Here is a potential commercial bridge loan financing scenario: Say an investor has purchased an office building previously occupied by a single tenant for $10 million. The property is in great condition and located in a business corridor with great demand for additional office space. After extensive due diligence, it’s been determined that the property will be valued at $28 million after $5 million in renovations is completed. The renovations will take ten months to complete and an additional two months to get at least 90% occupied. With a commercial bridge loan, the investor will collateralize the subject property for $15 million. This will cover the purchase plus renovations and lease-up period. Once the property is cash flowing and minimum DSCR is met for permanent financing, the investor can refinance the property based on the $28 million renovation valuation.
What are typical financing terms
One typical aspect of commercial bridge loan financing is that it tends to cost more than conventional commercial mortgage loans. This comes about as a result of the way financing is structured to mitigate the greater built-in risk. Commercial bridge loans typically come with a greater number of points (i.e. fee equal to 1% of loan amount), a higher interest rate and additional costs that are amortized over a shorter period.
Circumstances may also require the need for cross-collateralization along with a lower LTV as a way to mitigate lending risk. Common financing terms offered provide a commercial bridge loan for no more than 3 years with 2-4 points charged and a LTV ratio anywhere from 65% to 80% based on appraised value. Commercial bridge loans normally don’t have any prepayment penalties and allow interest only payments.
These loans are typically paid off when the property is refinanced with permanent financing, the property has been improved or completed, the property is sold or when a specific change has occurred that allows another round of financing to take place. The interest rate on a commercial bridge loan will typically float based on an index with a margin.
The index is a base rate commonly taken from the WSJ Prime Rate or the LIBOR Rate. The margin is normally a percentage above the index. Using today’s Prime Rate of 4.0%, a loan with Prime plus 1.25% will establish an interest rate of 5.25%. Since a commercial bridge loan is a floating interest only loan, the associated interest rate will change accordingly as the index rate changes.
Highrise Investment Group is a premier capital provider poised to deliver financing for your commercial bridge loan needs. Our loans are structured from the start with the end in mind. They are designed to carry you through the transition period of temporary financing to permanent financing. Our goal is to provide you with a low cost of financing that will achieve your target ROI, which is fast, efficient, seamless and transparent.
Bridge Loan Terms
|Eligible Locations:||Real estate projects located throughout the U.S., Canada, UK and Caribbean|
|Property Types:||Office, retail, industrial, mobile home park, hospitality, golf course, marina, special use, mixed use, multifamily, senior housing, student housing, condominium and STNL|
|Security:||First mortgage lien on the subject property|
|Loan Sizes:||$4 million to $100 million plus (larger loans sizes considered on a limited basis for highly attractive opportunities)|
|LTC/LTV:||Up to 85% of cost and appraised value|
|Recourse:||Recourse and Non-recourse (subject to underwriting), with standard carve out guarantees and completion guarantees
on construction loans
|Closing Time:||1 to 6 weeks from application and deposit remittance|
|Interest Rate:||Market oriented Prime and Libor based floating rate|
|Debt Service:||Interest only during the primary term|
|Loan Term:||Typically 1 to 3 years with extension options available|
|Loan Fee:||1-3% of loan amount|
|Exit Fee:||0% to 1% of loan amount|
|Reserves/Escrows:||Real estate taxes, insurance, replacement reserves, and mortgage interest (as may be required)|
|Underwriting:||Emphasis on equity capital funded in connection with loan, asset quality, value creation business plan,
market analysis, and sponsorship
|Expense Deposit:||$5,000 processing fee (may vary depending on transaction); Expense deposit sufficient to cover third-party, legal
and out-of-pocket expenses
|Third Party Reports:||MAI Appraisal, Phase I environmental and other reports as may be relevant and/or required (feasibility, property condition etc.)|