Bridge loans are common in commercial real estate. When a buyer wants to purchase a property that needs to undergo renovation or is not yet producing income, he likely won’t be able to secure a permanent mortgage. That’s where commercial bridge loans come in.
What Is a Commercial Bridge Loan?
A bridge loan is short-term, temporary financing a borrower can use between acquiring a commercial real estate property and securing permanent financing. You would use a bridge loan when a commercial property is not yet fully optimized or stabilized. In these situations, the property likely would not qualify for permanent financing from a bank. Bridge loans usually have short closing times, high interest rates — generally 6% to 11% — and are backed by collateral.
Bridge loans allow buyers to close a deal quickly. Depending on the lender, typical closing time ranges from one week to two months. Some lenders can close in 24 hours. Generally, the faster the deal, the higher interest rates you can expect to pay.
Typical terms for a commercial bridge loan usually range from three months to three years. A borrower will secure a loan for the period of time they expect it will take to optimize their property and secure permanent financing with lower interest rates. For example, a person might secure a one-year bridge loan to bring his property from 50% to 85% occupancy.
5 Common Uses of Commercial Bridge Loans
Because traditional lenders generally require optimized income on commercial real estate property, you’ll likely need a short-term loan any time a property requires major renovation or rehab.
1. When There’s No Income on Your Property
If you’re buying vacant property that is not yet producing income — or the income isn’t optimized — you’re going to need a bridge loan. Bridge loan lenders are willing to take on riskier deals because they charge much higher interest rates than traditional lenders do.
2. When Tenant Occupancy is Not Optimized
A traditional lender will generally consider stabilized occupancy at 85%. If you’re buying an apartment complex and you plan to fill the vacancies, you’d use a bridge loan to cover the time it’ll take to optimize the property.
3. When You’re Buying and Flipping a Property
If you’re buying a commercial property with plans to renovate and resell, you’ll likely have to take out a commercial mortgage bridge loan. The same is true when you want to make renovations to increase the income the property can produce.
4. When Speed is Key to Closing a Real Estate Deal
In some situations, you may want to take out a bridge loan so you can close a deal faster and negotiate a better offer — even if you qualify for traditional financing.
5. When a Traditional Lender Falls Through Last-Minute
In situations where you have already put down a deposit, and last-minute problems come up with permanent financing, you may be able to use a bridge loan to save the deal.
Commercial Bridge Loan Requirements
Requirements will vary by how quickly you want to close the deal and the type of property you’re buying. There are usually fewer requirements for bridge loans than there are for permanent financing. Here’s what you can expect:
- Appraisal: Lenders will want to see the market value of the property.
- Borrower’s credit score: Most bridge loan lenders will be looking for at least a 680 credit score, Malcolm Turner of Castle Commercial Capital told Leverage.com. They’ll also want to see that the borrower hasn’t had personal or business bankruptcies in the last three to five years, he said.
- Liquidity: This will vary, but lenders generally want to see you can show liquidity of at least 10% of your loan.
- Rent Roll (if it applies): Where it applies, the lender will want to see a rent roll for a multifamily unit, retail, office or other types of property.
Where to Find Bridge Loan Lenders for Commercial Real Estate
There are multiple factors to consider when applying for bridge loan financing. The type of property you’re buying, how much time you have to close, and where you’re located are all factors that will determine which type of bridge loan best fits your deal. Here are some of the main types of bridge loan lenders out there, as well as examples of the deals they’ve funded.
1. Private Debt Funds
Private debt funds are the most common lenders for commercial real estate bridge loans, Jonny Rahimi, Senior Broker at Lev Capital, told Leverage. They generally can get higher leverage and LTC and will be a bit more expensive.
- Madison Realty Capital is a real estate private equity firm based in NYC with offices in Los Angeles and Dallas. The firm funded a $32.5M loan for a mixed-use redevelopment on Thompson Street in New York for the borrower to install elevators in the building, upgrade and refurbish the units. The borrower refinanced MRC’s mortgage once these renovations were complete.
- W Financial is a commercial real estate private debt fund that focuses on bridge loan lending. Their deals range from $1 million to over $50 million, and their typical time frame to close a deal is two to three weeks.
Banks aren’t traditionally thought of as bridge loan lenders, but some do offer the service. In fact, many people may overlook banks as bridge loan lenders where they could offer more competitive interest rates than other lenders. Banks also have an incentive to work with customers long term, Solomon Garber, senior vice president of business development at Northeast Bank told Bisnow.
- Northeast Bank offers bridge loans for commercial real estate projects of up to $20 million, with terms between 12 and 36 months. The bank funded a $9.5M dollar 24-month loan to refinance high-cost debt on a 90% occupied office building in the Greater Chicago area.
3. Government Agency Lenders
Government agency lenders may offer more conservative bridge loans to finance multifamily properties. These lenders are licensed under government-sponsored enterprises, including Fannie Mae, Freddie Mac or The U.S. Department of Housing and Urban Development (HUD). A bridge loan might be required if your property is at 85% occupancy, for example, and you need it to get to 90% over three months for it to qualify for an agency loan, Rahimi said.
“I might go to that Fannie Mae lender, and because we need six months until we’re officially allowed to close, they’ll put it on their balance sheet and offer me a bridge product that will get me to that point, and then we’ll refinance.”
- Arbor Realty Trust is a Fannie Mae licensed lender focusing on multifamily properties that offers bridge loans with an $8M minimum loan amount and a one to three-year term (with the option to extend).
A Bridge Loan Can Make or Break a Real Estate Deal
Although bridge loans are common in commercial real estate, many investors are not aware of all the possibilities when it comes to this type of financing. From private debt funds to government agencies, there are lots of options for bridge financing, and these loans can make it possible to secure a deal when the door to a permanent mortgage is closed.