If you’re into making money via real estate investments, I’m sure you’ve heard about commercial bridge loans, but what are they and how can you benefit from them?
A commercial bridge loan is a financial investment vehicle which allows you to borrow funds to finance a commercial property that’s in need of significant recovery. It’s a short-term loan, available until funds for the property are recovered through refinancing or sale. Commercial Bridge Loans are especially popular amongst investors who are not yet capable of getting a loan from the bank.
Difference Between A Commercial Bridge Loan From Other Loans?
First of all, a commercial bridge loan is strictly for commercial purposes only. They are not intended for primary residences. Commercial bridge loans, also known as commercial real estate bridge loans, are used to finance purchases of commercial property when a borrower isn’t able to get traditional financing. However, there are many other loans which can be applied to commercial purchases.
So, these are some differentiating factors that might cause someone to get a commercial bridge loan:
- The percentage of occupants of the property has to be very low
- The borrowers’ credit score is sub-par
- The time-frame for permanent financing is not suitable
- Ownership is incomplete
The typical time-frame for paying back a commercial bridge loan is from 6 months to 36 months. Typical properties in which commercial bridge loans are used for includes:
- office buildings
- multifamily apartment complexes
- retail properties
- Single Family homes for resale
The loan amount in a commercial bridge loan is based on what the property will be worth after the renovation has been completed (known as ARV or After-Repair-Value), not the initial value of the property.
Are You The Right Candidate For a Commercial Bridge Loan?
Are you an investor or thinking about investing in the commercial real estate but the property that you’re interested in buying is in poor condition, neglected, has a low occupancy rate, or maybe all three of these?
If you’ve answered yes to these questions, then you’re the right kind of candidate for a commercial bridge loan. Usually, properties in these conditions are listed on the market below the usual value. The commercial bridge loan will finance up to 70% of the after-repair-value of the property.
Because commercial bridge loans are asset-based, even if you have a credit score that is below that which is needed to secure a permanent finance option, you can possibly secure a commercial bridge loan.
Also, if you need financing quick and are not able to get permanent finance in time, a superb alternative is the commercial bridge loan. If you’re interested in purchasing raw land for the purpose of developing commercial real estate, then the commercial bridge loan is also a viable option. You have to understand opportunity costs when dealing with bridge loans. You may pay a higher rate, but you are able to jump on an opportunity when the opportunity presents itself. You usually can’t do this when dealing with an institution like a bank that has to do a full underwriting on not just the project but your whole financial scenario. This has a tendency to take longer than the time you have to take advantage of the opportunity at hand.
Commercial Bridge Loan: Terms, Rates & Fees
|Loan Amounts||$1 Million – $40 Million (or higher)|
|Loan Terms||6 Months – 3 Years|
|Loan-To-Value||Up to 80%|
|Interest Rates||6 Month LIBOR + spread of 4.5-5.5|
|Origination Fee||1.0% – 6.0%|
|Closing Cost||Origination fee + Small Underwriting Fee|
|Prepayment Penalty||N/A or several months interest|
|Turn-Around Time||2.5 weeks – 5 weeks|
What Are The Risks With Commercial Bridge Loans?
So, I’m sure you’re thinking there must be a catch here. Well, I’m happy to tell you there isn’t any. Why? Because the commercial bridge loan is riskier to the lender than a typical permanent loan and the time to pay back the loans are shorter also.
In the traditional loan structure, the lender calculates the terms of the loan based on the loan-to-value (LTV) but in the commercial bridge loan, it is calculated on the after-repair-value (ARV).
This means that the fund provided by the commercial bridge loan is based on speculation that the property will be renovated to a point where the occupancy rate will increase dramatically from where it is at the moment. Also, with the short time period to pay back the commercial bridge loan, it brings an added risk to the lender.
Before creating the commercial bridge loan, the lender must consider the property value now, and the overall real estate market to properly make projections on what the property will be valued when it’s fully renovated and sold, refinanced or rented.
Commercial bridge loans, because of the nature of the loan has extremely varied term structures based on the particular loan.
Interest rates for commercial bridge loans are usually based on the six-month LIBOR index, plus a spread of about 4.5-5.5 points, but this varies based on the loan term structure. These loans are usually interest-only and not amortized.
Commercial Bridge Loan Requirements
|Cash Reserves||Usually 3-6 month interest reserve, Rehab costs not financed by a loan|
|Documentation||Credit Report, Background Check, schedules of leases, income and expense reports, executive summary, action plan and renovation costs|
Experience matters when it comes to securing a commercial bridge loan. This type of loan is typically issued to those that have substantial experience in fix and flip properties or have renovated and rented properties on the market. Your experience can impact the interest on the loan and the size also.
Commercial bridge loans require you to have a sufficient cash reserve to cover likelihoods concerning the terms of the loan. The lender will sometimes require you to have 3-6 months reserves for the interest payments of the loan. They also may require you to have reserves for the rehab costs that are not financed by the loan.
When it comes to your credit score, although it plays a significant part in other financing vehicles, when it comes to the commercial bridge loan, it’s not as significant. A credit score of about 650 is preferred but some lenders will go down to 600 depending on the experience level of the borrower. The main reason for this score, however, is to make sure that it is feasible for the borrower to refinance the loan once the property is performing. We call this the take-out and it will usually require the borrower to have at least a 650 credit score.
Documents can be broken down between personal and property.
- Credit Report
- Background Check (done by lender)
- Income and expense statements
- Action Plan
- Exit Strategy
- Renovation Cost
After submitting your documents, the appraisal process begins. Sometimes the lender will require an actual appraisal, but sometimes a “brokers letter of approval” from a licensed professional real estate broker who has experience in these types of deals is only required. Usually, the lender will set this up and it will take far less time and will be less costly. A survey is also usually required on the property.
Finding the Right Commercial Bridge Lender For You
If you’re in the process of investing in a commercial renovation project or thinking about investing in a commercial fix and flip property, a commercial bridge loan may be the best option for you.
Our team is ready to creatively look at your situation and come up with a solution that can take your business or investment to the next level of profits. Our 25+ years of advanced underwriting experience can get you what you need!
Before you even start looking at your next investment property, make sure to check in with us at ICA first by calling us at 1-800-975-1691.