Post-pandemic, Texas commercial real estate is on the rebound. Texas is number one for population growth in the U.S., growing over 16% between the 2010 and 2020 census.
What Is a Bridge Loan?
A commercial bridge loan is short-term financing that helps a commercial property owner bridge the gap between the purchase and the monetization of the asset. It’s essentially a hard money loan; the cash you need to convert your commercial real estate property into a cash flow machine while arranging more permanent lender financing.
A bridge loan is based on the future view of the asset you’re buying, not it’s cash flow. It’s also different than a mezzanine loan where you would give up a portion of your company in the form of equity rather than using the building as collateral. If you’re considering a bridge loan vs. a mezzanine loan, the bridge loan has a lot of positives.
Pros and Cons of Using a Bridge Loan for Commercial Property in Texas
Before taking out a bridge loan for your commercial property in Texas, you need to weigh the pros and cons.
On the positive side, commercial bridge loans:
- are based on property value rather than cash flow. This quality makes bridge loans ideal for new construction after receiving a construction loan and for turn-around projects, as rather than being based on debt-to-income, it’s based on loan-to-value (LTV).
- have a faster closing time due to limited underwriting analysis.
- offer flexibility for cash. Depending on the structure of the loan and what you specify in your application, you can use a bridge loan to fund payroll or pay for remodels as a draw.
- offer higher leverage. Traditional loans are limited to 65% of the purchase price. Bridge loans in Texas can go up to 80 or 85% of the purchase price, freeing up more of your cash for other projects.
However, commercial bridge loans are not without their drawbacks. On the negative side, bridge loans have:
- Significantly higher interest rates
- Payoff requirements of three months to three years, depending on the structure of the agreement.
How Does a Bridge Loan Work in Texas?
In most states, bridge loans for commercial real estate work similar to bridge loans for homeowners. Homeowners can use the equity in their existing home as a source of funding to obtain a mortgage and buy a new home. This collateral allows them to move forward before their current home sells.
However, section 50 of the Texas constitution makes it difficult for homeowners to do this. Texas regulations won’t allow the borrower to list the primary home for sale until the home equity line of credit, also known as a HELOC or home equity loan, is closed.
There are no such restrictions on commercial bridge loans in Texas.
In fact, bridge loans in Texas work the same as everywhere else in the country. And they work quite well.
According to Rob Beardsley, head of acquisitions and capital markets for Lone Star Capital, bridge loans have been instrumental in building their asset base in Texas.
“Loan Star Capital focuses on deals that don’t qualify for any other kind of financing (other than bridge loans),” Beardsley said. “We invest in properties that need substantial repositioning and renovation. The lender becomes more of a partner in the deal, and buys into your vision to convert the property.”
“Bridge loans are a common source of financing for turnaround projects and distressed assets in Texas,” Van Marcke said. “When you have a tight window to close and need financing fast to make a purchase, bridge loans fill the gap.”
4 Ways to Use a Commercial Bridge Loan in Texas
There are multiple ways to use a commercial bridge loan in Texas. These are just some of the ways you can leverage this financing tool to grow your commercial book.
1. Pay Off an Existing Loan
You can use a bridge loan to pay off an existing mortgage that’s coming due, if the markets do not support your ability to get traditional financing. For example, retail developments in Texas are not currently popular with traditional banks, due to COVID-19 slowdowns. A developer can get a short-term bridge loan to pay off debts. Then, when market conditions turn more favorable, that borrower can pursue traditional financing.
2. Secure Rapid Financing to Close on a Distressed Commercial Property
Distressed properties that are not producing income can be tough to finance with a traditional loan. However, a bridge loan can be secured rapidly.
3. Fund Renovations on a Commercial Property
This is one of the most common uses of a bridge loan in Texas. For example, Lone Star Capital has employed bridge loans to purchase low-occupancy apartment complexes in desirable neighborhoods. The apartments are then renovated and marketed to build occupancy.
Additionally, you’re only paying interest on the funded portion of the cash that’s coming out for the renovations.
4. Provide Short-Term Financing
Commercial financing for a fix and flip can be hard to find. Bridge loans provide the short-term financing to buy a property in value-add condition with the intent of making improvements and flipping the property.
Commercial Bridge Loan Lenders in Texas
Commercial bridge loan lenders in Texas are plentiful, according to both Van Marcke, with Edge Capital, and Beardsley, with Lone Star Capital.
Van Marcke recommended that buyers shop around, compare lenders and read the fine print on financing fees. “There are hundreds of bridge lenders. Pick the right one for your deal. What’s their track record? What are they like to work with? That can make the difference in your deal going smoothly.”
Bridge lenders in Texas are still careful about the quality of the environment they’re investing in.
“Underwriting standards remain high,” Beardsley said.
A qualified brokerage, such as Lone Star, Edge Capital or Lev Capital, can connect you with the right lender and ensure you receive a fair deal.
What to Include in Your Application for a Bridge Loan in Texas
To secure a bridge loan for your commercial deal in Texas, you’ll need your potential lender to buy into your business plan.
That’s because bridge loans are less about the current value of the investment property and more about future performance and growth opportunity. So in addition to facts and numbers, you’ll need to explain your vision for the project.
Your business plan should include:
- Current and future use of property
- Occupancy rates (current and projected)
- Team members
- Funding uses
- Cash flow projections, including how you’ll pay off the debt
- Exit strategy: what happens at the end of the loan period
- Market studies
After reviewing your application, the lender should know why this project makes sense, in this location, at this time. Answering those questions is key to securing your financing.
Texas: Open For Business
Texas’ growth and positive business environment make commercial investment there appealing. Commercial bridge loans bridge the gap in financing and give you flexible options for your project.