Pros and Cons of Bridge Loans for Commercial Property

David Cohn

As its name suggests, commercial bridge loans are transitional loans that allow borrowers to get the funding they need for their project until they can obtain refinancing or a get more permanent loan.A bridge loan can be a handy financing tool for CRE investors who have sufficient equity in their current property. In a general sense, this temporary loan acts as a stopgap measure that can help an investor better position themselves and their property for a more attractive funding solution later on.

What are bridge loans used for?  

These short-term loans essentially allow commercial real estate owners to borrow against their equity in their existing CRE asset to buy another piece of commercial property. Once they have secured the new property, their previous property is then sold, and the funds are used to pay off the bridge loan.In some situations, borrowers need bridge funding to pay for commercial property improvements. The goal is to improve the usefulness and attractiveness of a property to increase its overall value. In other cases, the money from the bridge loan is also used to re-tenant a commercial property.Are you interested in applying for a bridge loan for your next project? Then it’s essential to understand its advantages and disadvantages. Knowing the pros and cons of bridge loans for commercial properties will help you make a more informed decision before you commit.

Pros of bridge loans

There are many advantages to commercial bridge loan financing. Here are some of the major ones:

Pro #1: Quick financing

A bridge loan can provide quick and relatively easy access to money. This allows commercial real estate investors to negotiate with confidence and close deals quicker. With a bridge loan, it’s possible to acquire the property you want to buy at any time because a lack of liquid cash does not limit you. Let’s say that you want to buy a commercial property worth $1 million and have applied for traditional long-term financing. The problem is that many other investors also cover this property, so the risk of someone else snatching it is very high. What do you do in this situation? Obtaining bridge loan financing is a feasible option. Once your long-term loan is finally approved and released, you can use the money to pay off the bridge loan. The great thing about bridge loans for investment properties is that they can be funded in as fast as 3 to 5 days if necessary. Do note that owner-occupied bridge loans take a bit longer—about 2 to 3 weeks—because lenders have to follow additional federal regulations. But this is still so much faster than loans from institutional banks that may take months to be approved.

Pro #2: Flexible terms

Bridge loan arrangements are much more flexible because private lenders make them. Unlike traditional lenders such as banks, private commercial bridge loan lenders are often more open to negotiations and don’t have stringent conditions.

Pro #3: No need for a high credit score or a good credit history

Commercial real estate investors with less-than-stellar credit ratings may still qualify for bridge loans. Similarly, CRE investors who have gone through financial difficulties such as foreclosures or bankruptcies are also eligible. This is because bridge loan lenders accept applicants based on their credit score and history. They are more concerned about the value of the commercial property in question.

Pro #4: Better purchase offer

A bridge loan can allow a CRE investor like yourself to offer an all-cash payment for a property you’re interested in. This may increase the likelihood of your offer being accepted.Let’s face it. Most sellers will choose an all-cash offer instead of one that is contingent on another property selling. From a seller’s point of view, contingent offers are weak and carry many inherent risks. After all, there’s no guarantee that the buyer’s current property will sell quickly and at the expected price.With a bridge loan, you can completely change the situation and offer the seller an all-cash deal or a sizable down payment. You can take your offer from being weak (contingent on selling your current property) to very strong (can pay right away in cash).

Pro #5: Loan against listed property

It’s possible to obtain bridge loans against properties that are listed for sale. This is not an option in traditional financing. Most institutional lenders—especially banks—won’t consider a loan against commercial properties that are currently listed in the market. They don’t want to go through the lengthy process of reviewing, underwriting, and funding loans only to have them paid off within just a couple of months.

Pro #6: No income documentation requirement

Another great thing about bridge loan lenders they said they don’t ask for income documentation. This type of financing is available for everyone—not just property investors but also self-employed individuals, retirees, and unemployed individuals for as long as to have equity in their current property.

Disadvantages of bridge loans

Depending on your particular situation as a borrower, you might find some drawbacks to commercial bridge loans. It’s important to consider them as you decide whether to use this type of financing solution or not. Here are some things to think about:

Con #1: Higher interest rates

Bridge loans usually carry higher interest rates compared to conventional loans. Because the money’s lent in anticipation of a future inflow of cash—which is not guaranteed—the lender is taking a higher risk. That said, borrowers only have to pay the loan for a short term (usually 12 months are less). This means that the overall interest paid won’t be substantial in most cases.

Con #2: Risk of the reduced sale price of current property

If your existing commercial property takes much longer to sell, you might be forced to slash its price to satisfy your obligations to your commercial real estate bridge lender. In a sense, when you choose a bridge loan, you are betting that your collateral will sell quickly at the price you had initially expected.

Con #3: Higher transaction costs

Bridge loan origination fees are expressed in points, likely in the 1.5 to 3 range depending on the scenario and lender. As a borrower, you also have to shoulder standard property transaction fees, including recording, notary, escrow, and title insurance fees.

Con #4: Higher monthly payments

Because a bridge loan is a form of short-term financing, the monthly payments are substantial.

Con #5: Exit strategy requirement

Borrowers who cannot secure long-term financing by the end of the bridge loan term may run into difficulties. This is why it’s crucial to have a clear exit plan. If you’re unsure about your ability to execute your short-term strategy within the time allotted, perhaps you should think twice about taking out this type of transitional loan.

The final verdict

In many cases, the pros of bridge loans offset the cons. This type of financing may be a good choice for commercial real estate investors who need access to quick funding to close a deal in a highly competitive market.