If you're looking for an almost instant funding source for a commercial real estate project, a bridge loan may be the best choice.
Bridge loans are precisely what their name suggests—they "bridge" the gap until you can secure long-term and permanent financing or sell the asset for a profit.
While they use in real estate, commercial bridge loans take on many forms.
There are bridge loans for funding short-term business expenses, such as acquiring new equipment or inventory.
But in this blog, we will focus on commercial property bridge loans in particular.
This type of financing offers flexibility to CRE investors seeking short-term capital to close on deals quickly, meet current expense obligations, complete renovations on commercial real estate assets, or re-tenant a building, among other things.
For example, bridge loan funding can be used to close on a property in a tight timeline immediately.
You can also use it to renovate and quickly sell a commercial property (fix and flip).Many borrowers also turn to bridge financing to retrieve properties from foreclosure.
You can likewise use the money to re-tenant a property, stabilize its cash flow, or solve short-term issues that are affecting its profitability—such as environmental problems. In addition, many borrowers use bridge financing to grab a good deal.
At the same time, they work on improving their creditworthiness (if their low credit score is preventing them from obtaining traditional permanent debt).
Commercial property bridge loan terms typically last 2 to 3 years. The loan is paid back when the property is refinanced or sold.
Do you want to sell your existing commercial real estate to buy a new building but can't wait that long? A bridge loan may be the answer.
This type of financing gives you quick access to capital so you can close on a property you want to buy while waiting to sell your existing asset. Once your existing CRE property sells, you can then pay off the bridge loan.
By nature, a bridge loan is a short-term loan that is quick and simple to qualify for compared to traditional types of financing.
Because it offers almost instant access to funds, you can use it to take advantage of limited-time offers and discounted investment opportunities.
You don't have to miss out on attractive deals while waiting to get a permanent loan.
Of course, to enjoy this advantage, you have to work with a bridge loan lender to meet your timing objectives. Some of the best lenders can fund loans in a matter of days—often within 24 to 48 hours. They also don't require a lot of documentation.
You will usually need a deposit of at least 10% to secure the deal on a commercial real estate property sold at auction. The rest of the amount two has to be paid within a specific time frame.
The problem is that standard commercial mortgages often take several months to get approved and funded. This prevents many investors from bidding confidently and securing properties at auctions.
It doesn't have to be the case for you. When you have the backing of commercial bridge loan lenders, you can pursue opportunities knowing that you can pay for the commercial property while waiting for a traditional mortgage. Once you secure a long-term mortgage, you can use the funds to repay the bridge loan.
Did you receive an unexpected tax bill on a commercial property but don't have the funds to pay it within the deadline? Do the math and see if it makes sense to use a bridge loan to avoid having to shoulder steep penalties.
A bridge loan is often a non-recourse loan. This means that bridge lenders can only seek loan repayment through the commercial property itself.
As a borrower, you can rest easy knowing that you have no financial responsibility to pay the loan back and that the lender is not legally allowed to seek further compensation even if the property's value falls short of covering the remaining balance. This is why bridge loans can be attractive financing options in an unstable market.
Let's say you own an apartment building with 20 units and want to renovate 10 of those units to make them more attractive to better-quality tenants. You can use bridge financing to install new kitchen appliances, new flooring, granite countertops, repaint the walls, etc. Once you complete the renovations, you may raise rental rates and improve the property's cash flow.
A bridge loan can be used by a borrower who plans to purchase a retail building at a discount, hold it for a short time, and sell it. Some CRE investors use this strategy to close on discounted retail centers quickly, keep their portfolios for 2 to 3 years, and sell them when market conditions improve.
It's also possible to use a bridge loan on hotels and other hospitality properties with unstable cash flow. You can use the funds to stabilize your income before refinancing it with long-term permanent debt.
You can also get a bridge loan to fund the renovation of an industrial building to make it more in line with the market's demands. Perhaps you want to make the tenant suites larger or make rentable space more flexible to attract better quality tenants.
Most traditional lenders (particularly credit unions and banks) don't offer commercial bridge loans. You have to work with private lenders and commercial real estate funding specialists.
If you have good credit, a low debt-to-income ratio, and funds to provide equity of at least 20%, you may be able to get a bridge loan quickly.
It often makes sense to apply for this type of financing from multiple lenders.
If you get multiple proposals, take time to review the terms of each one, focusing mainly on factors such as prepayment penalties, pay-off time, and hidden fees.
Bridge financing is a flexible option that can give you access to funding immediately so you can take advantage of opportunities or cover short-term expenses.
It is more expensive compared to other loan types, but it does offer considerable benefits. Depending on your goals and situation, a commercial bridge loan may be the perfect fit for your business plan.
