SS122: What is a Bridge Loan in Commercial Real Estate

SS122 What is a Bridge Loan in Commercial Real Estate

Welcome to Strategy Saturday; I’m Charles Carillo and today we’re going to be discussing What is a Bridge Loan in Commercial Real Estate. If you have ever researched different real estate financing options, you most likely have come across a short-term lending product called a bridge loan. In this episode, Charles discusses what a bridge loan is, when it is best utilized, along with the pros and cons.

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Talking Points:

  • When an investor wants to purchase and renovate a piece of commercial real estate, but, long-term financing is not reasonably priced or the option is not available altogether; investors might utilize a bridge loan. Bridge loans are one of the most popular financing options when investors need to close fast on a property or they are acquiring a property that requires extensive renovation and repositioning before a traditional lender will finance it.
  • What is a Bridge Loan?
    • A bridge loan is a short-term loan until the borrower is able to secure permanent, long-term financing. The bridge loan is designed to “fill the gap” between the purchase and the completion of the renovation. The term can range from a couple of months to a few years. The main benefit of bridge loans is the speed of funding.
  • What is a Bridge Loan in Commercial Real Estate?
    • Investors purchasing a; retail, office, or industrial property, with deferred maintenance and low occupancy; may finance their acquisition with a bridge loan. The higher risk associated with the bridge loan will be compensated by the value created once the renovation is completed. Investors are able to quickly close on the property; possibly finance some of the renovation expenses and reposition the property over the next couple of years.  Once the project is complete, and the property has been leased up with good, credit tenants; the investor can refinance the property with long-term financing at much better rates and terms, or sell the property to another investor.
  • What is a Bridge Loan in Multifamily Real Estate?
    • Similar to financing any other commercial property; investors are able to purchase properties requiring any level of rehab with a bridge loan. Most investors will finance medium to heavy value-add multifamily projects with a bridge loan. Once the major capital expenditures are completed and units are starting to be rented at market rates; investors can start talking to traditional lenders. Many investors will wait until their property is mostly occupied by new tenants, in upgraded units, before refinancing with permanent debt. The more units that are upgraded and rented at market rent; the higher the net operating income; the higher the property value and the higher the loan amount that investors can receive. The longer the investor has the bridge loan, however, the riskier it is, since interest rates are variable.
  • When Would an Investor Use a Bridge Loan?
    • If a property has low occupancy rates
    • The borrower does not have a strong credit profile and/or has minimal experience with the target property
    • The borrower needs to close as soon as possible
    • The borrower is unable to obtain traditional financing because of the property’s condition
    • The borrower is waiting on a future liquidity event, like selling a property they own, but, they want to purchase the new property now.
    • The property requires major renovation and repositioning.
  • What are the Advantages of Bridge Loans?
    • Flexibility – Bridge loans are some of the most flexible commercial loan products. Many aspects of the loan are open to negotiation including; interest rates, fees, the term, etc.
    • No prepayment penalties – bridge loans do not have prepayment penalties. Typical long-term commercial mortgages have hefty prepayment penalties attached. Bridge loans allow the investor to get in and get out as soon as possible.
    • Interest-only payments – interest only payments allow investors to keep their cash flow up with a bridge loan. It helps investors to reinvest cash flow into the project without having to pay the principal.
    • Funding is fast – bridge loans are one of the fastest funding financing products available to commercial real estate investors. Loans can close in days, not weeks.
  • What are the Disadvantages of Bridge Loans?
    • More expensive – bridge debt is not cheap and the rate is variable. If you purchase the property in a low-interest rate environment and rates rise; you could be hurt, unless you have purchased an interest rate cap.
    • A short-term lending solution that needs to be refinanced quickly – bridge loans rarely exceed 3-year terms. Investors need to have an experienced team who is able to complete the project on time; allowing enough time for lease-up before the bridge loan comes due.
  • In closing, it is important to be aware that bridge lenders are the hard money lender of commercial real estate. Bridge loans should only be used by experienced investors who are purchasing deeply discounted properties, where massive value is able to be created within 1-3 years.

Transcript:

Charles:
Welcome to Strategy Saturday; I’m Charles Carillo and today we’re going to be discussing what is a bridge loan in commercial real estate.

Charles:
Have you always wanted to invest in real estate, but didn’t have the time, didn’t know where to find the deals, couldn’t get the funding and didn’t want tenants calling you. Since 2006, I’ve been buying income producing properties and great locations that provide us with consistent passive income. While we wait for appreciation in the future and take advantage of tax laws while we’re waiting and unlike your financial advisor, we invest alongside our investors in every property we purchase. Check out to investwithharborside.com. If you like the idea of investing real estate, if you like the idea of passive income partner with us at investwithharborside.com, that’s investwithharborside.com.

Charles:
When an investor wants to purchase and renovate a piece of commercial real estate, but long-term financing is not reasonably priced, or the option is not available altogether, investors might utilize a bridge loan.

Charles:
Bridge loans are one of the most popular financing options. When investors need to close fast on property or they are acquiring a property that requires extensive renovation and repositioning before traditional lender will finance them. So what is a bridge loan? Well, a bridge loan is a short-term loan until the borrower is able to secure permanent long-term financing. The bridge loan is designed to fill the gap between the purchase and the completion of the renovation. The term can range from a couple months to a few years. The main benefit with bridge loans is the speed of funding. So what is a bridge loan in commercial real estate? While investors purchasing a retail office or industrial property with deferred maintenance and low occupancy may finance their acquisition with the bridge loan, their higher risk associated with the bridge loan will be compensated by the value created. Once the renovation is complete, investors are able to quickly close on the property, possibly finance some of the renovation expenses, and reposition the property over the next couple of years.

Charles:
Once the project is completed and the project has been leased up with good credit tenants, the investor can refinance the property with long-term financing at much better rates and terms or sell the property to another investor. So what does a bridge loan in multi-family real estate? Well, similar to financing any other commercial property, investors are able to purchase properties requiring any level of rehab with a bridge loan. Most investors will finance medium to heavy value, add multi-family projects with a bridge loan. Once the major capital expenditures are completed and the units are starting to be rented at market rates, investors can start talking to traditional lenders. Many investors will wait until their property is mostly occupied with new tenants and upgraded units before refinancing. With permanent debt, the more units that are upgraded in rented at market rent, the higher the net operating income, the higher the property value and the higher the loan amount the investors can receive.

Charles:
The longer the investor has a bridge loan, however, the risk here it is. Since interest rates are variable with bridge loans. So when would an investor use a bridge loan? Well, if a property has low occupancy rates, if a borrower does not have a strong credit profile and or has minimal experience with the target property the borrower needs to close as soon as possible. The borrower is unable to obtain traditional financing because of the property’s condition. A borrower is waiting on a future liquidity event like selling a property they own, but they want to purchase the new property right away and the property requires major renovation and repositioning. So what are some of the advantages of bridge loans? Well, number one is flexibility. Bridge loans are some of the most flexible commercial loan products. Many aspects of the loan are open to negotiation, including interest rates, fees, the term, et cetera.

Charles:
No prepay penalties. So bridge loans do not have prepay penalties and typical long-term commercial mortgages have hefty prepay penalties Attached bridge loans allow the investor to get in and get out as soon as possible. Next is interest only payments. Now interest only payments allow investors to keep their cash flow up with a bridge loan. It helps investors to reinvest cash flow into the project without having to pay any principle. Next is funding is fast and bridge loans are one of the fastest funding financing products available to commercial real estate investors. Loans can close in days, not weeks. So some, what are some of the disadvantages of bridge loans? Well, they’re more expensive. Bridge debt is not cheap and the rate is variable. If you purchase a property in a low interest rate environment and the rates rise, you could be hurt unless you have purchased an interest rate cap.

Charles:
Now, short-term lending solution that needs to be financed quickly, bridge loans rarely exceed three years terms, and the investors need to have experienced team who is able to complete the project on time, allowing enough time for lease up before the bridge loan comes due. And closing is important to be aware that Bridge lenders are the hard money lender of commercial real estate Bridge loans should only be used by experienced investors who are purchasing deeply discounted properties where massive value is able to be created within one to three years. So I hope you enjoyed, please remember to rate, review, subscribe, submit comments and potential show topics@globalinvestorspodcast.com. Look forward to two episodes next week. See you then.

Announcer:
Nothing in this episode should be considered specific, personal or professional advice. Any investment opportunities mentioned on this podcast are limited to accredited investors. Any investments will only be made with proper disclosure, subscription documentation, and are subject to all applicable laws. Please consult an appropriate tax legal, real estate, financial or business professional for individualized advice. Opinions of guests are their own information is not guaranteed. All investment strategies have the potential for profit or loss. The host is operating on behalf of Syndication Superstar, LLC, exclusively.

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