When you’re looking to purchase a commercial real estate property that is not yet stabilized or optimized, you’ll likely need a commercial bridge loan to finance your deal. Interest rates on bridge loans are higher than traditional loans, but buyers use them as short-term solutions so they can optimize their property and then apply for permanent financing.
What Is a Bridge Loan?
A bridge loan is a temporary loan that will bridge a commercial real estate investor from acquisition to securing permanent financing. Bridge loans for commercial real estate are available primarily through private debt funds, as well as some banks and government agency lenders. Fortunately, bridge loans don’t take long to get.
These loans are used when a buyer is not yet able to secure permanent financing on a commercial real estate property — the building might need to undergo renovation, or tenancy may not be stabilized, for example. When a buyer can’t secure permanent financing, he can use a bridge loan until he qualifies for a long-term loan with lower interest rates.
What Is the Average Interest Rate on a Bridge Loan?
The interest rates on bridge loans are higher than they will be for permanent financing because the lender is taking on a bigger risk. Interest rates for bridge loans range between 6% to 11%. On average they fall between 7% to 8%. Currently, bridge lenders are aggressively dropping rates to 4%, and under 3% in some cases.
There are many different types of bridge loans. Interest rates vary depending on the type of deal, closing time and the buyer’s financial standing.
“There are bridge loans where you can close in one day, or a few months,” said Jonny Rahimi, a financing expert at Lev. “All of that is going to determine the interest rate. Some investors might have to close on a property within two weeks. There’s less due diligence, a riskier deal, and it’s going to command a higher interest rate.”
As a general rule of thumb, it’s helpful to think about bridge loans in terms of three different categories.
Transitional Bridge Loans (Also Referred to as Interim Bridge Loans)
Interest rates on traditional bridge loans will average 3.5% to 4%. This type of loan “is almost like a hybrid between a permanent and bridge loan,” Rahimi said.
This financing is used often in multifamily units when there’s already cash flow on the property. Someone might leverage this type of loan on a multifamily unit that is 85% occupied, with a goal to get it up to 90%. Transitional bridge, Rahimi said, loans are cheaper, usually non-recourse and longer-term (around three years).
Bridge Loans From Private Debt Funds
A bridge loan from a private debt fund could offer interest rates between 7% and 8%. These loans can typically close within a couple weeks. For example, Brooklyn Bridge Capital, a real estate investment and equity firm, offers interest rates between 7% and 12%. Tideway Capital Group, a commercial mortgage lender, has rates between 8% and 12%.
Hard Money Loans
A hard money loan is a type of bridge loan for a much riskier deal. Interest rates for hard money loans range on average from 10% to 18%. These loans don’t have as many requirements, but they’re a lot more expensive. When multiple disadvantages occur at once — a buyer with bad credit wants to purchase distressed property, for example — these high interest loans might be the only option.
What Are the Current Interest Rates on a Bridge Loan?
The global pandemic has changed the landscape of commercial real estate. As a result, interest rates for bridge loans for specific properties have varied in certain ways.
“For multifamily buildings, and for industrial buildings, I’d say, if anything, the interest rates are slightly lower or similar to pre-COVID,” said Desmond Holzman-Hansen, a former Capital Markets Analyst at Lev.
After all, people still need a place to live. Warehouses are also getting more traffic from people ordering more packages from home due to COVID.
Bridge loans for office buildings, on the other hand, have become more expensive.
“There’s a lot of lenders who believe the office scene is going to change permanently, where a lot more people are going to work from home,” Holzman-Hansen said.
Some buyers have turned to bridge loans post-COVID in situations where interest rates on long-term financing have increased, Holzman-Hansen added. For example, a buyer might be able to secure financing from a bank with an interest rate of 6%, whereas before COVID the interest rate would have been 3% or 4% on the same loan. In situations like these, a buyer might make use of a two-year bridge loan, hoping that in the coming years these rates will return to what they were pre-COVID.
How Bridge Loan Interest Rates Impact Your CRE Project
There are certain factors to consider when it comes to higher or lower interest rates on a bridge loan. In general, you’ll want to make sure you understand how different interest rates will impact your overall budget.
“I would say the most important thing to keep in mind is to budget sufficient interest reserves or have enough excess cash flow to provide some cushion in the event of any surprises, such as cost overruns or delays — depending on whether it’s a construction deal or cash-flowing project,” Holzman-Hansen said. “It’s also necessary to weigh the risk involved in the business plan against the level of leverage used.”
More Bridge Loan Costs to Consider
When you’re looking for a bridge loan, the lender will ask you for a number of items.
“Typically people in a bridge situation are looking for capital quickly, so it’s a little bit more expensive for the closing costs,” Desmond Holzman-Hansen said. It’s important to budget for these costs, as they can add up quickly.
- Appraisal: A commercial appraisal of a property will generally cost a few thousand dollars, and will vary depending on the size of the property.
- Credit reports and background checks: You’ll want to budget for the credit report and background check lenders will run
- Phase I Environmental Assessment is a document that states the current and historical uses of the commercial real estate property. If the report comes back with questions about the property that need to be further investigated, there will be a separate process and fees to consider for a Phase II Environmental Assessment.
- The appraisal, third-party reports and Phase I Environmental Assessment are often packaged by vendors in a pack of three, and the fees for the package range from $15,000 to $20,000.
- Origination fees: A lot of the time there are lender fees associated with bridge products, and these tend to be higher than other types of loans. Holzman-Hansen noted, “I’ve seen them go as high as 3%. It’s typically 1% to 2%”.
Is a Bridge Loan Right for You?
Bridge loans are typically geared toward special situations. For example, a developer is building a new property, and he thought it would take two years but had to pause construction for one year due to COVID, and has run out of time.
For example, if a borrower’s loan expires with their current lender, he may need to seek out a bridge loan just so he can pay back his current lender and buy himself some time until he can secure more permanent financing.
A bridge loan may not always be the right solution. “I would say, in any situation where you have an asset that’s stabilized, as in, you have an office building that’s performing well with low vacancy, or a multifamily building that’s fully leased up, then it’s probably more advantageous to take long-term money,” Holzman-Hansen said.
Interest Rates on Bridge Loans Depend on Your Deal
Interest rates on a bridge loan can impact your overall budget. Given recent changes in commercial real estate lending post-COVID, interest rates on commercial real estate bridge loans have seen some change. For properties such as warehouses and multi-family units, rates have declined, whereas for office spaces they’ve increased. The right loan for your deal, and the interest rate you can expect to pay on a bridge loan, will vary significantly on the type of deal you’re looking to make, how much risk it entails and your financial standing.