Financing a commercial real estate investment with a commercial bridge loan can allow you to take advantage of an opportunity and see significant returns for minimal risk. Also known as bridge financing, a bridging loan, mezzanine finance, interim financing or gap financing, a commercial bridge loan is a loan that “bridges the gap” between temporary financing and a more permanent solution. With speedy application, approval and funding processes, bridge loan financing will provide immediate cashflow, so can you either meet any current obligations or purchase a commercial investment quickly. Typically, the loan will be based on the value of the property rather than the income the property generates, and will usually be backed by some form of collateral.
What you can use bridge loan financing for
Commercial bridge loans can be used for a range of different purposes, most commonly to purchase a commercial property when cash isn’t an option. For instance, you might use a bridge loan to purchase one property before selling another. Generally, they are sought by developers, real estate investors and other commercial investors to purchase a property with the intention of improving, refinancing, leasing or selling the property. Other uses include:
Completing a construction project that has run out of financing
Stabilizing a multi-family property in order to qualify for a permanent loan
Financing a subdivision until the homes are sold
Commercial bridge loans are generally available for investment properties only but cover a broad range of property types. For instance, you can use bridge capital loans to temporarily finance a multi-family property, mixed use property, commercial building, industrial building, office building, retail premises or warehouse. Additionally, there are plenty of great options for hotel mezzanine financing and condo hotel bridge loan financing.
Key things to keep in mind
Securing a commercial bridge loan can be done quickly making it an appealing choice for urgent or imminent transactions. Experienced investors usually know the best options because they may already own a property and understand the intrinsic value of the commercial real estate property better. The knowledgeable investor will understand the particular market in his/her area in the longer game of property investment. Many investors are looking at the longer term with options to buy, rehab, cash out refinance now if the time is deemed advantageous. However, this convenience often comes at a cost. For instance:
Rates and fees are high. Large bridging loans attract much higher interest rates than permanent loans. You may also face much higher orientation fees. In order to capitalize on your investment using a sliding scale figure out your total monthly costs for a commercial bridge loan against the overall value gained. In example of a commercial rehab loan or construction financing there needs to be a distinctive advantage in paying a higher premium on a short term higher rate bridge loan.
Terms are short. Expect bridge loan providers to offer you a commercial non-recourse bridge loan for around twelve months. Terms may, however, be up to three years or as short as three months. The bridge loan term is critical to your investment yield. Under budgeting for a renovation development can mean added penalties or payments in the short term bridge financing. Talk to your lender first about all the variables, possible added fees and or a longer term option. The better understanding you have with the lender in terms of options will help the bottom line strategy of making the investment with a commercial bridge loan company cost effective.
You can typically only borrow a portion of the property’s value. This is usually around 80%, though can sometimes be as low as 50%. Accordingly, you may also need some cash in order to get a commercial investment purchase over the line.
Despite these risks, using commercial bridge financing to fund investment can be a worthwhile strategy. For instance, if you’ve found a distressed property selling at a price too good to be true, a commercial bridge loan can allow you to take advantage of this opportunity by providing fast, short-term financing while you rehabilitate the property. Commercial rehab loans are often actually harder to get from your bank even if you have excellent credit. Many investors we have dealt with have experienced this frustration and utilize non bank funding for this reason.
How to find the best short-term bridge loan
As no two commercial investments are the same, no two commercial bridge loans are – or should be – the same. Accordingly, it’s important to find a seasoned bridge lender who will be able to help you with a flexible commercial bridge loan that is most suited to your needs.
A relatively niche loan, not all financial institutions offer commercial bridge loans, which means you may need to look around to find viable options. Whilst some banks do offer bridge loans, obtaining bridge funding through a bank can be difficult and time-consuming due to an extensive application process and stringent criteria. A faster, more efficient and more effective alternative is choosing a commercial hard money lender who specializes in bridge loan funding. Such commercial bridging finance lenders are often better equipped to finance your project. This is especially true if you are working with a bridging loan provider who is local to your area and can provide invaluable insight into your local market. Furthermore, a bridge loans lender can tailor the financing specifically to your needs, ensuring it is right for your project and delivers the best possible outcome.
To find out more about commercial bridge loans and whether these are the best options for you, get in touch with RSC CONSULTING LLC today.